India Investment Climate

(Audience - Walton College Students)

Manish Kheterpal (Member Governing Board, Fortune Institute of International Business –FIIB

www.fiib.edu.in)

January 2012

2

Indian Economy Overview – High GDP Growth with some fiscal deficit challenges

Real GDP Growth(1)

Notes:1) Source: Goldman Sachs, IMF2) Source: Reserve Bank of India

(%)

0

2

4

6

8

10

12

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Forecast

India Fiscal Deficit as a % of GDP(2)

Economists predict the Indian GDP grow 7-8% annually over the next three years ?

4.7%

6.4%6.2%

2.7%3.5%

4.1%4.0%4.5%

5.9%

Mar-07Mar-06Mar-05Mar-04Mar-03 Mar-11Mar-10Mar-09Mar-08

After a surge in fiscal deficit in 2009 / 10, the government is expected to bring down the deficit in 2011?(%)

3

Indian Economy Overview – High Inflation environment and Currency Depreciation

Inflation – Wholesale Price Index – All Commodities(1)

Notes:1) Source: Ministry of Commerce and Industry2) Source: Reserve Bank of India

(%)

9.1%

2006 2007

6

4

2

0

2008 2009 2010 2011 2012

12

10

8

Currency Exchange Rate for 1 USD(2)

)

Inflation has been at historic high levels over the last 2 years. As of Nov 2011, the inflation was recorded at 9.1%

INR

35

40

45

50

55

2010 2011 20122005 200920042003 2006 2007 2008

The Indian Rupee has depreciated ~16% year to date Average since 2003 45.15

Max Rate (Dec 12) 53.85

4

Indian Economy Overview – Long Term Stock Market performance and FDI

Relative Performance of Global Stock Market Indices – Average Annual Return since 2003 (1)

Notes:1) Source: CapitalIQ2) Source: Reserve Bank of India

(%)

Foreign Direct Investment (FDI) in India(2)

The Indian stock market has produced an annual return of 18% since 2003

($ B)

10 mo 20112005 200920042003 2006 2007 2008

10.9%

3.4%3.3%3.6%

18.4%

MSCI Asia IndexFTSE 100S&P 500Dow Jones IndustrialsSensex

2521

27

33

1614

432

+39%

2010

5

Indian Economy Overview - Index Performance and FII Investments

Sensex down ~25% in 2011 (1)

Notes:1) Source: Yahoo Finance (6th January 2012)2) Source: Infoline

(%)

Foreign Institutional Investment (FII) in India(2)

($ B)

2011

2005 200920042003 2006 2007

20087

9 11

8

17

(13)

18

29

(1)

2010

-13

-1

6

Indian Private Equity Scenario – Private Equity Investments

PE investments sky-rocketed in the 2004 – 2007 period, peaked in 2007 ($14 B) and now still recovering from global crisis/local issues

Notes:1) Source: VC Edge; KPMG Analysis

7

Indian Private Equity Scenario – Private Equity Investments “Type”

Indian PE market is largely a “growth capital” market

Notes:1) Source: VC Edge; KPMG Analysis

8

Indian Private Equity Scenario – Private Equity Exits

PE exits peaked in 2010 but have weakened given recent market volatility and global cues…

Notes:1) Source: VC Edge; KPMG Analysis

9

Indian Private Equity Scenario – Private Equity Exit Route / Challenges

Public market continues to be the most popular exit for PE

Notes:1) Source: KPMG Sample Study and Analysis

10

Indian PE Scenario – PE Returns vs. Public Market Returns

Even though realized returns are attractive, total returns (including unrealized) are not

Notes:1) Source: VC Edge; Bombay Stock Exchange and KPMG Analysis

Gross IRRIndex

returns

Realized investments only

11

Indian PE Scenario – Returns have underperformed in the recent years

Returns have under-performed in recent years reflecting high entry valuations and lack of exit options

Notes:1) Source: VC Edge; Bombay Stock Exchange and KPMG Analysis

Page 12

India PE Opportunity – in country

Many opportunities for Growth Capital Investments…

Lot of sectors are still expected to grow at a healthy rate (10%+ EBITDA CAGR)

Given the size of market and country, companies need significant amounts of growth capital

Quality of top management (CEO & Direct Reports) generally very good

Large LBOs rare in the short term

Absence of disposals / sales by large companies in the short term

Regulatory restrictions on using debt for acquisition financing; offshore debt technology is inefficient

13

India PE Opportunity - outward

Following strong economic growth and success, Indian companies are ambitious and expanding abroad through acquisitions

Tata / Corus ($13bn) and Jaguar+Land-Rover, Birla / Novelis ($6.4bn) – structured as LBOs

Bharti winning 5th license in Sri Lanka and bidding for 3rd License in Saudi Arabia

Indian government regulations restrict amount of capital Indian Companies can invest as equity abroad

14

India Investment Climate – Opportunity & Challenges

Opportunities

Over-supply of PE capital for limited good opportunities. Why is everyone here? Differentiated strategy will still work

Public markets offers (selective) good opportunities (stocks down 25%+ in 2011) but dependent on the macro sentiment (US/Europe)

Challenges

Regulatory reforms required for PE – FDI caps, Debt in LBO’s, Taxation, Corporate Governance – expectations are low in near term

GDP growth has to be sustained - Policy reform and political stability required (7 state elections in 2012 and coalition politics?)

Interest rates rationalization can help give a boost to domestic consumption – this tool is available to Reserve Bank of India

Thanks

Manish KheterpalFortune Institute of International Business

New Delhiwww.fiib.edu.in

www.fiib.edu.in/fiib