MphasiS' Rao: "It's business as usual"

Recently, Baring Private Equity Partners India (BPEP) moved into a swank new address in Gurgaon's "it corridor" near Cyber Greens. Compared to its previous digs in Connaught Place, the heart of Delhi, and given the spartan lifestyles of its two principal partners (Managing Partner Rahul Bhasin still drives around in a Maruti 800), the Gurgaon office is an indulgence. But don't expect an invitation, anytime soon, to an "office warming" party. At Baring, one of the oldest foreign private equity firms in India but now bought out by Bhasin, it's introspection time. It's still trying to comprehend how a mix of bad luck, suitor perversion and media hype turned its efforts to sell its 35.6 per cent stake in Bangalore-based it and ITEs company, MphasiS BFL, into a comic spectacle.

For, in MphasiS' abortive sale, there's a lesson for Indian it, especially the tier-II companies like MphasiS (see Indian it's Tier-II Blues on page 78). Hard-pressed to rack up growth or profits like the bigger it companies, the tier-II is stuck in an unenviable position, where it must either acquire or be acquired. (It is this dilemma that encouraged investors to haggle over price, instead of looking at the potential value post-acquisition, says Bhasin.) But why is growth a challenge for tier-II companies? A variety of reasons, but they all boil down to a relative lack of capabilities, services breadth and economies of scale. So Baring's plan now is to push MphasiS Chairman & CEO, Jerry Rao, to deliver growth by focussing on roping in more customers and offering more services to existing customers. Also, don't forget that last year, MphasiS acquired three firms, Kshema Technologies, Princeton Consulting and Eldorado Computing.

But why did Baring have trouble selling MphasiS, one of the better tier-II players, with last year revenues of Rs 766 crore and a net profit of Rs 125 crore? In a word, valuation. Baring expected, it appears, at least a premium of 25 per cent over the current price of about Rs 254. Who would be willing to pay that kind of a premium? Either a strategic buyer, to whom synergies with MphasiS would be worth significantly more, or a financial (read: private equity) investor, who could accelerate MphasiS' growth by simply getting his portfolio companies to outsource business to it. By that logic, there were only two serious suitors (one of each variety) for MphasiS. While one of them, a large Indian it company, apparently withdrew because of internal issues, the other investor (a large foreign PE firm) couldn't see itself being able to leverage its portfolio companies. The others in the fray, then, were more keen on beating down the offer price. "They were trying to nickel-and-dime; they thought we had no choice," says Bhasin.

Obviously, they were wrong. When the MphasiS sale became a media circus with daily conflicting stories on who was in on the deal and who was out, Bhasin decided to take MphasiS off the block. What about pressure from his investors? "Clearly, there wasn't any, otherwise my hand would have been forced," says Bhasin. From its $22-million (Rs 96.8-crore) investment in MphasiS, Baring has already taken out just under $8 million (Rs 35.2 crore). And according to the guidance given by Rao to analysts, MphasiS should grow its bottom line by 30 per cent this fiscal. That means about Rs 164 crore, or $37 million, in net profit. So, MphasiS is one lamb (sorry, Jerry) that Baring and its investors can afford to let fatten before it is served up on the dinner table.

-R. Sridharan

Punter's Wish?
What will they buy next?

RIL's Mukesh Ambani: Setting the market on fire

A day before reliance industries' annual general meeting (AGM) on August 3, d-street was convinced that Chairman Mukesh Ambani would announce a global acquisition, a big one, during his speech. The RIL stock promptly shot up by almost 5 per cent; the next day, Ambani mentioned that the company would consider making a global acquisition, but stopped short of spelling out a time frame or details of possible targets. A few weeks later, d-street was again abuzz that RIL would soon acquire BP's $15-billion (Rs 66,000-crore) subsidiary Innovene; this time, the stock vaulted 3.75 per cent. The company itself denied this in a note to the stock exchanges and clarified that there was no such proposal before its board of directors. RIL did not respond to an e-mail query from BT.

Meanwhile, the stocks of companies such as Saregama, Shringar Films, Radaan Mediaworks and Dewan Housing have shot up over rumours that Anil Ambani's ADAE (Anil Dhirubhai Ambani Enterprises) is considering acquiring the companies. The company's acquisition of Adlabs and amp Sanmar Life has, no doubt, fuelled such conjecture. And far from indicating that the market doesn't know where the company will strike next, ADAE's acquisition of a stake in Chennai-based Celebrity Fashions that owns the Indian Terrain brand of apparel has only increased the buzz on the Street concerning the company's next target. An ADAE spokesperson, when contacted, declined to comment. As is invariably the case in a bull market, someone, somewhere out there, is benefiting from all this speculation.

-Krishna Gopalan

The Cow Conspiracy
Another Lancet article; another allegation.

In august 2005, it dismissed Homoeopathy as nothing better than a medical system thriving on placebos. Now, in its September issue, Lancet, the world's best-known medical journal, carries an article that alleges that India may well be the birthplace of Bovine Spongiform Encephalopathy (bse), better known as the mad cow disease. The specifics: Britain imported, in the 1960s and '70s, several tonnes of carcasses and bones to turn into animal feed from India (fact); these may have contained bones of humans infected with Creutzfeldt Jakob Disease or cjd (allegation) and the disease, first noticed in cows in the 1980s may have resulted (allegation). "They (the pair of British scientists who have authored the article) have resorted to the wildest possible extrapolation without making available any scientific evidence," says S.K. Bandopadhyay, Animal Husbandry Commissioner, Ministry of Agriculture. "It's a far-fetched, preposterous and absolutely absurd suggestion."

While it is a scientific fact that there is a link between human CJD and BSE, and it is a historical one that several Hindus continue to cremate the bodies of their dead by the river Ganga, the thing about the unburnt remains of these human bodies being picked up by unscrupulous bone collectors and then finding their way into animal feed is a bit of a stretch. M.S. Swaminathan, one of the men behind India's agricultural renaissance who now heads an eponymous research foundation, would like a scientific investigation simply because this is a matter of "national interest". Vandana Shiva, Director, The Research Foundation for Science, Technology and Natural Resource Policy, a network that focusses on sustainable agriculture and development, sees a larger conspiracy. "There is a clear pattern emerging from the recent spate of foreign findings," she says. "After the assault on Homoeopathy, where India is emerging as a major exporter, comes this argument about India being the originator of CJD." Did someone say soft target?

-Kumarkaushalam

It Never Rains
A PIL, protests by employee unions and now an objection from the environment ministry.

National Textile Corporation's Finlay Mills: On troubled ground

Even as they fight the public Interest Litigation (PIL) filed by the Bombay Environmental Action Group (BEAG) against the development of mill land on the basis of a 2001 amendment to the development control rules (DCR; and the BEAG believes this has been done to reduce the amount of land that has to be given up for the development of public utilities and low-cost housing), Mumbai's mill-owners and developers who have bid for and acquired land from some of the sales that have been allowed to go ahead now face another set of challenges. Employee unions have stalled Bombay Dyeing's plans to develop its Spring Mills property; and the Union Environment Ministry claims none of the projects currently underway, both fresh developments and redevelopments, has the requisite environmental clearances.

Meanwhile, people who have booked flats in some of the proposed developments are becoming restive. "It's an emotional drain," says one buyer who has bought a flat at the Morarjee Realties-developed Ashok Towers, visibly upset about the fact that the developers blame the land-owners (in case the two are different), or that the two together blame the city corporation, the environment ministry, even BEAG. "It's the developer who is responsible to us, right?" That's right, agrees a spokesperson for Morarjee Realties. "The onus to obtain all clearances is on the developers," he says, adding that the company, despite believing that it did not need an environmental clearance (it is a redevelopment), applied for one in January 2005 and, having received the requisite consent from the state authority, is now pushing its case with the Union Ministry. Other developers affected include Godrej Properties, Seth Builders and Marathon Developers.

The drain is more than emotional, adds another buyer. "I have actually moved out of a rented house in a better part of town so that I can pay the loan-instalment comfortably and now I do not even know where I stand." "It is really unfortunate that the buyers are having to suffer," says Pranay Vakil, Chairman, Knight Frank India. "Most of these flats have been booked by professionals." Cruel as it may seem to point out, professionals who clearly hadn't heard about either the PIL or a Latin term that says Caveat Emptor.

-Priya Srinivasan

The Second Wave
A dotcom a day, but things are a trifle different from 1999.

Ten years after the beginning of the internet age, and five after the beginning of the end, dotcoms are again fashionable. Not convinced? Look at the jobs space. Three years ago, Naukri was #1, JobsAhead #2, and no one else wanted to be in the business. Today, there's Naukri, Monster, Timesjobs (not a new entrant, certainly, but it has suddenly gotten aggressive), several others, and two new ventures, Clickjobs, promoted by J. Murugavel who runs a successful matrimonials site Bharatmatrimony.com, and Bixee.com, a vertical search engine focussed on Indian job sites (see page 139 of this magazine). Still not convinced? Naukri's Sanjeev Bikhchandani is launching a real estate portal, the evocatively named 99acres.com this month. A few months back he acquired full control of Jeevansathi.com, a matrimonials site he had incubated back in 1998, and for which he now nurtures ambitious plans. For the record, Murugavel himself is readying a real estate site for launch by the end of this month. And the Mumbai-based People Interactive that runs Shaadi.com (another, you guessed it, matrimonials site) will soon launch Astrolife.com, an astrology site.

Welcome to dotcom rush hour (part II, if you will). This time, it's different. It is no longer about venture capital bankrolling business plans that look good on paper. The new dotcoms are being launched, largely, by existing dotcom entrepreneurs and are funded, not by venture capital, but by what accountants term 'internal accruals'. "We have surplus cash and we have the experience of having created an online recruitment market where none previously existed," says Bikhchandani. "So, we decided to diversify into other verticals where we think there are gaps that need to be filled." With revenues of Rs 45 crore and net profits of Rs 8.4 crore in 2004-05, Bikhchandani has the money to fund his new ventures. So does Murugavel whose Bharatmatrimony returned an estimated $1 million (Rs 4.4 crore) on revenues of $10 million (Rs 44 crore) in 2004. "There is no clear domestic #2 (to Naukri)," says Murugavel, explaining his decision to launch Clickjobs.com. Both he and Bikhchandani promise that there are more sites to come from their ventures. Will that encourage other entrepreneurs to consider the .com, .net or .co.in option? Well, stranger things have been known to happen.

-Sahad P.V.