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Argonaut
MD Anil Khatod says India is Shining
BY
KAVITA CHHIBBER *
India
is shining and a lot of what glitters seems to be solid gold. That was the
message conveyed by Anil Khatod, Managing Director and lead India partner
at Argonaut Private Equity, a diversified global private equity fund with
more than $3.5 billion under management.
Armed
with all kinds of information, and numbers Anil made a stellar
presentation on 19th March at the TiE monthly event in Atlanta.
So
what makes people like him so excited about investing in India?
The
answer to that, he said lay in the fact that in the past 6 years in spite
of a 25 percent market correction, the Indian sensex has provided a 27
percent compounded annual return. “When I compare that to SNP 500, or
the London Stock exchange index, you can see 2 percent for SNP 500 and 1
percent for London Stock exchange. There is relative volatility in the
numbers but that is why it is so exciting to look at these markets outside
of the mature markets.” Of course the first thing to remember when you
take on emerging markets, he cautioned, was the fact that the investment
has to be long term because these markets tend to be much more volatile
than mature markets.
Anil
quoted from the Goldman Sachs report which indicated that the Indian
economy started a transformational process from 2003. It also said that if
the fundamental structural change continues in the same vein, the country
can sustain a growth level of about 8 percent in GDP until 2020. There is
tremendous opportunity for productivity growth and at a sustainable 3 and
a half percent, India can overtake not just some other European economies
but also the US by 2045.
Since
71 percent of Indians live in villages, a huge urban migration is expected
over the next 20-30 years leading to an urbanization bonus.
In
the 1990s, the cost of capital and return on equity leveled each other off
and as a result one didn’t create a lot of value in the business. But in
the last 5 years the cost of equity has come down and the return has gone
up becoming among the highest in the world-in some areas even higher than
China since most Indian organizations had become so adept at making the
most with very little capital. From 3 percent in the 1970s to 4-6 percent
in the 1980s and 90s, India’s GDP in the last 5 years has accelerated to
about 8 and ½ percent. Labor productivity is growing and the interesting
thing is that the capital is coming from internal sources.
While
45 billion have been invested in India last year by foreign investment,
Anil pointed out that it’s just a drop in India’s trillion dollar
economy. India’s savings rate has come up to 35 percent from the days in
the 60s to early 1980s when it was about 15 percent. China’s domestic
savings rate is about 44 percent, So there is more capital that has become
available to go into the economy. There are fewer dependants in each
household and therefore more disposable income is available. In fact in
1990 the per capita income was 350 dollars. From 2000 to today, the
increase in disposable income has been close to 300 percent.
India
also has a young working force and that gives it advantage over many aging
economies including China whose one child policy will probably land its
people amongst the aging humanity by 2025. Anil Khatod said by 2016 India
is expected to overtake Italy as one of the larger economies and follow
that up by overtaking France and Germany. “ So somewhere around 2025,
you will find India in the top 6 economies in the world.”
Perhaps
the best way to learn about anything is to get hands on experience. It was
extremely enlightening to have Anil share examples from some of the
companies he had invested in and pursued closely in India, starting with
Koutons, a company that specializes in designer wear for men at a very
affordable cost. It was started by 3 brothers eight years ago and
is today the third largest retailer in India, earning 7 million in
2004 to stand at 200 million in earnings today. Starting with 27 stores,
the company is expected to open 3000 by the end of next year. It was their
impeccable organizational skill, a clear understanding of their customer
both in the rural and urban areas and efficient buying that caught
Anil’s attention and his investment.
Another
company that Anil talked about Acme Tele Power had revenue of a little
over 700,000 in 2003 and today
it has a net profit of 150 million dollars. The success story happened
thanks to a simple technology
created by Manoj Upadhyay the 32 year old newest billionaire to join the
ranks, to stabilize power as
India added 8.4 million cell phone subscribers. The green solution was
sold to Bharati Air Tel one of the largest telecom operators The company
ends up with a market capitalization of 3 billion and goes public shortly.
There
are many such success stories that have made India a financial Mecca for
national and foreign entrepreneurship.
In
India, 500 billion dollars are earmarked on infrastructure and civil
engineering has suddenly become the hottest discipline in all the IITs.
One such company the Sriram group in the south has revenue of 300 million
but an order backlog of 5 billion! Many banks are seeing resurgence as
well, said Anil as India gallops on. From struggling with non performing
assets where for example loans to farmers were not repaid, a bank that
Argonaut has invested in, in Tamil Nadu the percentage of non performing
assets has come down from 8 to 1 percent. The banks today have a much
better asset quality growing at 20-25 percent annually and trading in a
relatively inexpensive way.
Touching
on some more points, Anil talked about India’s foreign trade and foreign
exchange that had been stagnant up to the 1990s but then regulatory
pressures started to ease up, and today from near bankruptcy India has a
foreign reserve of close to 300 billion. He said that when capital markets
start functioning the governance gets better and better. He recalled the
time he first did business in India in the 1990s when he worked with
Nortel Networks and he has seen the corporate governance scene change
dramatically.
Three
four years ago IT and healthcare made up 30 percent of private equity
funding but last year they ranked 5and 9th as financial
services raced to number 1, telecom to number 2 and the manufacturing
segment to number 3. When economies thrive, the number of sectors that
begin to blossom is also bigger, he said.
So
what pitfalls to avoid when investing in India? Anil said there are some
cardinal rules that one must implement. Do a thorough background check,
hire the best teams to perform due diligence, do forensic checks if
something doesn’t look transparent. Have the company checked out for
fraud. And above all listen to your gut feel.
Anil
pointed out that in spite of all the glitz about India there is also
concern about the risks of investing there. Issues dealing with political
uncertainty with coalition governments and
politics affecting economics, labor reforms, skilled labor shortage,
commodities inflation, were raised but even then the consensus was that
India’s influence on the world will be quicker and bigger than most
people expect.
Anil
said he was happy to say that capital markets in India had finally taken a
step in the right direction-to function like world class markets. “
There is a lot more transparency.”
So
how should people participate? Anil’s advice was, that people should
invest in what India and China consume because their economies are
growing, and a large number of people with higher income are entering the
market. And with all the commodity inflation you are also better of
consuming what India and China are producing. It will keep consumption
costs low. There were many jobs in the middle and senior managements for
those who just wanted to go and look for work opportunity in India.
Anil
reiterated that he was very excited to see the fundamental structural
change happening in India and pointed out that his company’s investment
was long term-for years and not months or weeks. “ When I was growing up
in India the notion was save what you can because we don’t know what
tomorrow is going to be like. That attitude has changed. Today most
people(in India) believe tomorrow will be better.”
Nandan
Sheth, the TiE Atlanta President, along with his team, with exceptional
work done by Ashish Thakur and
support from previous President Harish Mamtani, was very appreciative of
Anil Khatod’s exhaustive presentation.
“I
am not aware of many institutional investors in the South East that can
provide a real perspective on Private Equity investing within markets
emerging markets like India, Israel and Australia, as Anil can.
He
gave a very thoughtful perspective on the opportunities and challenges in
the emerging markets that his fund invests in. His point of view was very
mature and tempered, shying away from the main stream euphoria that you
hear when analysis with zero deal experience talk about these markets.
Some
of the key takeaways from his presentation are important to synthesize:
Do
not ignore “staple” industries or “emerging” industries that
service local demand.
Do
not be afraid to diversify your portfolio. Asset allocation strategies are
fundamentally unique to each emerging mark.
Tread
with caution. Emerging markets are prone to significantly more political,
economic and inflationary risks.
Private
investors have a variety of options if they want to participate in these
emerging markets.
These
are some very insightful lessons from a practitioner that understands both
the business and cultural implication of investing in these growth
markets.”
The
response from attendees at the sold out event, inspired Nandan to invite
Anil back later in the year to
share a score card of how his portfolio had performed.
Many
drove from far away areas of Georgia to attend the event on a week day,
and comments ranged from, ‘I came from Athens GA for the presentation.
Based on this presentation I would like to make a commitment to attend as
many TiE Atlanta meetings as I can” , to “’Anil was real. He
obviously has a tremendous command of the nature of these emerging
markets”, and “I want to congratulate the TiE Atlanta team for
maintaining the highest quality possible in terms of speakers that they
have secured in 2008”. An evening that brought that made TiE shine again
in the choice of speakers, and each month’s event is something to look
forward to.
And
for the first time, the mainstream media is recognizing the real dangers
that Mike Larson and I have been warning
The
ultimate question is: Is his power enough?
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* Kavita
Chhibber is an accomplished freelance writer and media personality.
She writes for Dr Deepak Chopra's website www.intentblog.com.
She is well-known for her interviews of celebrities, authors and public
officials. But she also writes hard-hitting news articles and cover
stories for publications.
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