Actis' Donald Peck: A patient play

This is the year when it all comes together for venture capitalists and private equity funds that bought into the India story early, and never stopped believing it-through sniggers of derision from their peers and the media, troughs of disappointment as the Indian economy floundered, even extended periods of despair. Today, the men and women who run Citigroup Venture Capital International, General Atlantic Partners, Actis (formerly CDC), GW Capital, AIG, ChrysCapital, and ICICI Venture (see Everything Ventured, Everything Gained on page 62 of this issue), sport ear-to-ear smiles and not without reason. A buoyant stockmarket-it's right now in the grip of some election chills-and a maturing M&A scenario have finally begun to present opportunities for these firms to exit, and exit profitably, from companies in which they had invested. For instance, Citigroup Venture Capital International's $8 million investment in business process outsourcing (BPO) company Daksh e-Services is today worth $36 million (Rs 158.4 crore) following its acquisition by IBM. The same deal has multiplied Actis' $2 million a minimum of eight times, and increased General Atlantic Partner's (gap) $20 million (Rs 88 crore) one by around half. Ajay Relan, the head of Citigroup Venture Capital International expects to exit a few more companies this year but is "in no hurry to exit, not when companies are showing a growth of 30-plus per cent''.

A spate of Initial Public Offerings (IPOs) has also helped: AIG and GW Capital, both of which had invested in Biocon, struck gold with the company's IPO this year. GW Capital's investment in the company more than quintupled post the IPO. A bullish Vishal Nevatia, CEO of GW Capital expects to see one or two more exits this year, "through an IPO, M&A, even another private equity fund buying out our stake in these companies." The booming stockmarkets have helped even funds that made late-stage investments in companies: in September 2002, gap invested $100 million (Rs 440 crore) in software services company Patni Computer Systems for a 31.7 per cent stake; post an IPO that debuted in February 2004, that's worth approximately $170 million (Rs 748 crore). With more companies lining up IPOs, other funds are licking their chops in anticipation. Mumbai-based Infinity Ventures expects online trading company Indiabulls in which it has invested Rs 10 crore to go public sometime in June this year. Pravin Gandhi, Infinity's co-founder, sees this investment appreciating "by at least four to five times" when that happens. And the man expects to exit two more companies in which the fund has investments, e-learning company Brainvisa, and games creator Indiagames, by the end of this year, "through a strategic sale."

Even investments in publicly traded companies have paid off for some funds. Chrys Capital recently offloaded its 3.83 per cent stake in UTI Bank to a couple of foreign institutional investors for Rs 127 crore, making a profit of a cool Rs 90 crore. "The exit scenario is good," says the company's Managing Partner Ashish Dhawan. "People are starting to take their chips off the table."

That isn't just great news for VCs and private equity investors; it's also good news for companies looking for funding. The successful exits have already made the India story that much more credible. And will likely increase investor interest the next time a fund tries to raise an India-fund.

-By Priya Srinivasan

RISKS
Hedging IT

Infosys CFO Mohandas Pai: Hedge-manager

India's it sector may be booming, but it lives under the constant threat of seeing revenue projections coming unstuck because of the foreign-exchange factor. Elsewhere, companies manage this by hedging. Indian companies would like to do so too as evident in Infosys Technologies' recent request to Reserve Bank of India. Only, India's Foreign Exchange Management Act allows them to hedge only up to 50 per cent of the past year's exports (or imports), or the average of the exports (or imports) for the past three years. Worse, they can only hedge up to 50 per cent of this without documentation. Given that most such documentation does not apply to the software business, companies such as Infosys cannot hedge their for-ex earnings beyond a point. Last year, for instance, the company's forward cover was a mere $203 million dollars (around a quarter its revenues). "If regulations allow us to cover our entire net foreign exchange, we could work on a constant currency for the entire year," says an Infosys spokesperson. In the era of the strong dollar, only importers used to run for cover. Now that the worm has turned, exporters are doing so too.

-Narendra Nathan

SECOND
Waiting To Exhale
As chances of an indecisive mandate increase, India Inc holds its breath, and the bourses panic. They needn't.

There's nothing wrong with the Indian economy, at least, not just yet. The financial results of 582 firms that are out at the time this magazine goes to press show a growth in revenues (over 2002-03) of 22 per cent. Net profits have grown faster, by 47 per cent. The government's estimates suggest that the Indian economy could well have grown by around 8.1 per cent in 2003-04, and that it will probably grow by at least 7.2 per cent (NCAER's estimate) this year. The met department expects the monsoon, the most important variable in any macroeconomic equation, to arrive on time and perform adequately. The country's foreign exchange reserves are at a high of $116 billion. The manufacturing sector is looking positively sexed-up. And the domestic market looks set to boom (and bloom) like it hasn't done in the past decade. To repeat, there is nothing wrong with the Indian economy.

What Terrible Tuesday, April, 27, 2004-the day the Bombay Stock Exchange's Sensex and Business Today's own BT 50 index fell by 213 per cent and 3.78 per cent respectively, wiping out over Rs 50,000 crore in market value-indicates is a wholly unwarranted edginess on the part of investors, shakiness that India Inc. doesn't, or shouldn't, share. The stockmarket was responding to a spate of exit polls that suggested that the ruling National Democratic Alliance might not win enough seats to return to power. That was all the excuse the bears waiting to come out of hibernation needed to hammer stock prices down. Rushab Seth, the Head of Equity Funds at Kotak Mahindra Asset Management Company concedes that the stockmarket may have over-reacted. "While the market may remain volatile in the short-term, as the NDA and Congress battle it out, in the long-term, strong macro-economic fundamentals, solid corporate results, and the anticipation of a good monsoon will push them forward again." And exit polls often go wrong; in the 2003 assembly elections to four states they were famously off track in three.

No one knows when exactly India Inc. started believing that the NDA would be returned to power. It certainly couldn't have been taken in by the India Shining campaign. The government, after all, had little to do with the economy's showing. Like all coalition governments, the NDA one that ruled India between 1999 and 2004 adopted a laissez faire approach. It was quick to latch on to the boom, largely an effect of India Inc. coming to grips with the globalisation thing, and its much-vaunted Golden Quadrilateral project helped shore up the numbers of cement, steel, and construction firms, but that has remained the extent of its economic achievements. That could explain why most CEOs of Indian companies were praying that the NDA return to power, but only just. After all, the coalition had shown the rare ability to keep out of way of business. And as long as it stayed a government just-in-power, went the reasoning, that was likely to be the case. Not that the Congress' manifesto, at least the part dealing with the party's economic philosophy, alarmed anyone. It spoke of growth, development and reforms, pretty much the same thing that the BJP's did. Indeed, the dominant theme of the Congress' manifesto was, "We did it." Reforms? "We did it." The it boom? "We engendered it. The golden quadrilateral? "Well, we founded the organisation behind it, the National Highways Authority of India (NHAI)." Only, the Congress is yet to demonstrate it possesses the ability to manage a coalition if indeed, it has that.

If the exit polls have unnerved India Inc-and they have-it is because of the prevalent fear, as Ashima Goyal, a Professor at Indira Gandhi Institute of Development Studies puts it, that "the next government may be more concerned with survival than with critical decisions". And an opportunistic coalition, whether it is the BJP-plus or the Congress-plus, explains Arvind Panagariya, a professor of economic at Columbia University could scotch "the host of reforms that was expected when the NDA returned to power." Both are real concerns. The privatisation of oil majors HPCL and BPCL could be cancelled, as could those of nalco and Shipping Corporation of India. The NDA government's proposal to allow foreign direct investment in retail could be put on the back burner, and its plans to hike FDI limits in telecom and insurance scrapped altogether. There are other economic initiatives such as the open sky policy, the implementation of the value added tax regime, and the new Banking Regulation Act that seeks to bring down the government's stake in public sector banks to 33 per cent that could find themselves being consigned to the footnotes of India's economic history. Still worse, argues Subir Gokarn, the Chief Economist at credit rating agency CRISIL, the process of capital creation, which was expected to happen sometime in late 2004, could well not take place at all. "And don't look for the block-buster budget we all expected," he warns.

Messrs Panagriya and Gokarn are right to raise these fears. However, their arguments overlook some key facts: one, the economy's revival is largely built around an increasing competitiveness of Indian industry, something that is unlikely to lose its sharpness if, say, a Laloo or a Mulayam Singh Yadav becomes prime minister. Two, while key financial sector and fiscal reforms are works in progress, held up in various places in the bureaucratic pipeline, the country can well wait a few years for them without any fear of pain. And three, as proved by Mulayam Singh Yadav's more-business-friendly-than-business-friendly approach ever since the Samajwadi Party came back to power in Uttar Pradesh late last year, every political party in India, except the CPI, seems to have adopted capitalism as the best religion of them all. Socialism looks good in manifestos, not elsewhere. Now, if only the BJP and some of its key allies like the Telugu Desam Party had realised this (and, for good measure, thrown in some stuff about temples and the like in their manifestors), we may not have had to end up with a hung Parliament at all. Come to think of it, if the exit polls have got it wrong again, we still don't have to.

-By Ashish Gupta

DASHBOARD

CEO CMs
Both Chandrababu Naidu and S.M. Krishna could be ousted. What happens to India's IT and BT capitals? No one seems worried.

MARKET MOVES
The stockmarkets turn volatile in the run up to the formation of the next government, but experts say there is no cause for fear.

SMOKELESS FIRE
The Indian ad industry is set to lose Rs 400-500 crore as the ban on tobacco advertising comes into effect.

CORPORATE RESULTS
With 582 firms that have thus far declared results increasing net profit by 47 per cent, the India Inc. fairy tale continues.

Caveat Emptor?
Not really. It is time to enter the stockmarket.

On April 27, Bombay Stock Exchange's sensex plunged 213 points, its biggest fall in a day in three years, in response to exit polls that suggested that no party would win a decisive mandate in the current general elections. On May 3, again, for no particular reason, the index dipped by 70 points. This, when as Nandan Chakravorthy, the head of research at Enam Securities points out, "The India story is still intact and companies are still showing good (financial) results." However, the stockmarkets are obsessed with the elections and will likely stay volatile until the next government is sworn in. Should investors stay away? Not really, says Nimish Shah, a Director at Parag Parikh Financial Advisory Services. "Investors should use this correction (because of political uncertainty) to get in." Good idea, that.

-Narendra Nathan

BUZZ
Chemical Warfare

Net effect: Beating the bug

What do we see in the photograph?

A man demo-ing GAIL's chemically treated mosquito net, Olyset Net.

Big deal?

Quite; this is the only long-lasting insecticide treated bed netting in the world. The chemical remains incorporated in the high density polyethylene bestowing it with a five to seven-year longevity.

How did the whole thing begin?

GAIL chairman Proshanto Banerjee read a news item about Sumitomo and Exxon collaborating to make insecticide-enabled mosquito netting for parts of Africa. The Corporate Social Responsibility bug bit.

The target?

"The project can make a real difference by reducing the incidence of malaria," says Banerjee. And S. Bedi, Director, Sumitomo Chemical India sees the market for the nets at 30 million units a year. The two companies are now working out the modalities of local manufacturing and eyeing a target price of $4.5 (around Rs 198). The companies are hoping to test the product in malaria-prone areas post the monsoon.

-Supriya Shrinate