How 2010 Marks The Beginning

How 2010 marks the beginning of a new era for Franchisors and the

Private Equity Investors

Motilal Oswal Private Equity

Rakesh Sony

Director, Motilal Oswal Private Equity

Private Equity

Franchising

Case Studies

Conclusion

Contents

Motilal Oswal Private Equity 2

Conclusion

PE emerging as an important and preferred funding source

Private Equity investments in India

280302

405

312287

300

400

500

No

. o

f d

eals

15

20

US$

bn


$2.0

$7.9

$10.6

$4.4

$19.0

$1.1$0.5$0.6$0.9 $0.0 $0.1 $0.3 $0.5 $1.25

18

80

107 110

7856 60

124

0

100

200

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

No

. o

f d

eals

0

5

10

US$

bn

What a PE/VC investor wants?

§ Potential for high profitability

Business

§ Secular businesses with established track record

§ Strong cash flow

§ Growth potential and scalability

§ Clear exit opportunities with investment horizon of 5-7 years


§ Management having a successful track recordManagement

§ Clear exit opportunities with investment horizon of 5-7 years

§ Dynamic, dedicated, ambitious team

§ Management having high integrity levels

§ Management with a vision

§ Strategic inputs in the company by representation on the board etc

Retail sector in China has witnessed good PE/VC interest

Some of the major deals which happened in the sector in 2009

Sector Company Invested Fund/Company Investments

Consumer Retail-

Supermarket Retail

Wumart Inc TPG, Legend & Hony

Capital

USD 212 mn

Electronic and

Appliance Retail

GOME Bain Capital USD 430 mn

Consumer Food Golden Han Unknown USD 42 mn


Consumer Food

Service

Restaurant Chain

Golden Han

Restaurants

Unknown USD 42 mn

Consumer Fashion

Ladies Shoes

Daphne International TPG USD 80 mn

Consumer Fashion-

Hair Accessory Retail

Guangzhaou

Meishan

Legend Capital USD 10 mn

Because of FDI restrictions PE/VC investors have shied away from investing in retail sector

PE Investment in Franchised Business

Whereas, PE has invested around 1USD

billion in franchised businesses (in the last

five years), with broking accounting for

chunk of the investments

PE investments in retail sector

22.2 20.6

96.4

172.3

61

158.4

13

9

3

12

5

3

0

20

40

60

80

100

120

140

160

180

200

US

D m

n

0

2

4

6

8

10

12

14

Num

ber

of

Deals


BFSI

Healthcare &

Life Sciences

Food &

Beverages

Education

Retail

PE investment in retail sector

has just been ~1% of total

deal value from 2004-09

0

2004 2005 2006 2007 2008 2009

0

Private Equity

Franchising

Case Studies

Conclusion

Contents


Conclusion

Franchising in India

§ Grew initially in the apparel and footwear sectors

§ Has gradually grown to cover a wide variety of sectors including food, BFSI, education, consumer durables, jewelry, books, home décor, etc

§ Rapid expansion of franchisees in non-metro locations

§ New models of revenue sharing models are introduced for franchisees


§ New models of revenue sharing models are introduced for franchisees

Franchising Models

Model Pure Franchise Management Contract Hybrid

Player Franchisee Franchisor Franchisee Franchisor Franchisee Franchisor

Input

Premises Y N Y N Y N

Interiors Y N Y N Y(50%) Y (50%)


Equipment Y N Y N Y(50%) Y (50%)

Stocks Y N Y N Y (Consignm

ent)

Management Y N Y N

Franchisee Returns

Margin on Sales Rent +% of Sales Higher of Minimum Guarantee or Margin of

Sale

What PE/VC investors looks for in a franchised businesses

§Scalable business

§Predictable cash flow

§Franchise satisfaction via sharing of economic interest

§Sustainable competitive position


§Strong training program

§Strong MIS

§Quality control of franchisees

Pros and Cons of franchised business for PE Investor

Attractive Features

§ Asset light model resulting in high ROI

§ Scalability

§ Pooling of interest

§ Less/No CAPEX for expansion thus quick expansion is possible

§ Franchise shoulder investment risk

§ Franchise business ability and understanding of local market is leveraged


Deterrents /Risks

§ Operational issues of Inventory management with products having low shelf life

§ Risk of brand dilution due to lack of operational control

§ Contract violations by franchisee

§ Loss due to competition given better terms

§ Sharing of economic interest

Private Equity

Franchising

Case Studies

Conclusion

Contents


Conclusion

Broking industry has seen the maximum investments by PE/VC investors

Motilal Oswal Securities Limited: Well Diversified Financial services company engaged in the business of stock broking, private equity, investment banking, asset management, wealth management, etc

PE Investors: PE firms New Vernon and Bessemer invested USD 27.5 mn in April 2006

Network

720

1,200

1,430

1,289 1,293

800

1,000

1,200

1,400

1,600


invested USD 27.5 mn in April 2006

Business model (for broking activity): Motilal Oswal has strong retail broking operations which are mostly run by its franchisees

Performance:- Came Out with IPO in 2007- Awarded with ‘Best Franchisor in Financial Services’ in FY 2009 by Franchising World for second year in succession

375

720

-

200

400

600

800

FY05 FY06 FY07 FY08 FY09 Q3-

FY10

Master franchising of global F&B brands in vogue in India for a while

Jubilant Foodworks Limited: Holds master franchise rights of Domino Pizza brand for India, Nepal, Sri Lanka and Bangladesh

PE Investors: JP Morgan and IPEF invested USD 11.6 mn in early 2000

Outlets

241

306

366

426

250

300

350

400

450


Business model: Only Jubilant Foods can sell pizzas under Domino’s brand in India

Performance:- Provided successful exit via IPO to PE funds with approx 4x returns- Have opened 274 stores spreading across 55 cities

130

180

-

50

100

150

200

FY07 FY08 FY09 FY10E FY11E FY12E

Koutons is a success story built on the strong franchisee model it built

Koutons Retail India: One of the largest integrated apparel manufacturing and retailing company with around 1,400 outlets across country

PE investors:UTI Ventures and Argonaut invested USD 22 mn in Nov 2006

Outlets

1,175

1,400

800

1,000

1,200

1,400

1,600


Business model:Approximately 98% of the stores in franchise model

Performance:- Came out with IPO in 2007- After PE investment , number of stores have increase almost 5-6 times 27

74

206

687

-

200

400

600

800

FY04 FY05 FY06 FY07 FY08 FY09

Private Equity

Franchising

Case Studies

Conclusion

Contents


Conclusion

Benefits of building business through a franchisee model

100% of the outlets are own

CAPEX 3,000

Year 1 Year 2 Year 3 Year 4 Year 5

Revenues 500 1,000 1,500 2,000 2,500 Gross margins 250 500 750 1,000 1,250

Other expenses 100 200 300 400 500

EBIT 150 300 450 600 750 ROCE 5.0% 10.0% 15.0% 20.0% 25.0%

90% of the outlets managed by franchisees, who pay royalty and 10% are own


90% of the outlets managed by franchisees, who pay royalty and 10% are own

CAPEX for own outlets 300

CAPEX for branding, etc 200

Year 1 Year 2 Year 3 Year 4 Year 5

Royalty 45 90 135 180 225

Revenues 50 100 150 200 250 Gross margins 25 50 75 100 125

Other expenses 10 20 30 40 50

EBIT 60 120 180 240 300 ROCE 12.0% 24.0% 36.0% 48.0% 60.0%

Gross margins of the business are assumed at 50% of sales

Other expenses have been assumed at 20% of sales

Royalty receivable from franchisees have been assumed at 10% of sales

We should see higher investments in franchised businesses in the future

§ Several unorganized sectors are becoming organized (e.g. Education);

which requires significant institutional capital

§ Improving lifestyle and income levels resulting in higher spend on branded

apparels, F&B, etc; which would require greater amount of capital to have

the reach

§ Any relaxing of FDI regulations would lead to increased investment in the


§ Any relaxing of FDI regulations would lead to increased investment in the

retail sector

Thank You

§ Q & A


How 2010 Marks The Beginning

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