Infrastructure Ancillaries, the opportunity for VC’s and mid market PE funds:

The size and potential of the infrastructure opportunity in India is evident from the number of large Private Equity biggies who are raising or have closed infra focused funds. A look at any research report suggests that the size of the opportunity for private sector investment is anywhere from $50 to 100 billion over the next 4 years.

Despite the obvious opportunity, it hasn’t exactly been easy going for the infrastructure sector over the last few months. Nearly every listed infra company has underperformed Sensex over the last 12 months. Value locked up in real estate land banks, rising interest rates, credit crunch, FCCB redemption issues, etc have all contributed to the sectors lack lustre performance.
However, we believe that the blip is temporary and should soon regain its buoyancy, other than maybe realty linked projects. The government’s infrastructure stimulus package, coupled with monster sized infra PE funds that are being announced – IIFI, Blackstone, Morgan Stanley, etc will all contribute towards the sector’s recovery.
While the story for bulge bracket PE funds such as 3i, Actis, Blackstone, IDFC, etc is fairly obvious, we believe there is a huge opportunity for VC’s and mid market PE’s, who are perhaps not giving it the focus they should. Typical infra projects such as roads, mega power plants, ports, etc obviously will not fit into a VC’s investment mandate; however, there is an emerging ecosystem of infra ancillary companies, many of whom re extremely innovative either in their business model or technology and these are ideal VC investment candidates.
We believe that that any VC funds looking to capitalize on the India growth story should focus on the following types of opportunities –
a. Logistics – Integrated Container Depots, Container Freight Stations, Agri warehousing, etc
b. Waste Management
c. Green Infra enablers – Eg: Neureol Technologies (Remote monitoring of energy infrastructure), InnovLite (LED lighting solutions), Gensol (Carbon Credit Advisory)
d. Social Infrastructure – Innovative Healthcare, Innovative Education
e. Innovative mid sized power projects

Well, the opportunity is real, and some funds are early movers already, as seen in the examples below. We at Viedea are building a database of interesting opportunities across these sectors. Please contact us for more information on our current mandates.

Attero recycling, Delhi- E-Waste Management- DFJ/NEA- $6.3 mn-Aug-08
Doshion, Ahmedabad- Water Management-IDFC PE-$8.5 mn-Nov-07
Emergment Ventures- Carbon Credit Advisory-IDFC PE-$10 mn-Apr-08
Kam Avida, Pune-Waste Management-Peepul -$4.5mn-Aug-08
Pesco Beam Solutions, Chn-Waste Mgmnt and Alt Energy-UTI-$8 mn-Nov-08
Direct Logistics-Freight Forwarding-SIDBI -$3.5 mn-Mar-08
Expressit Logistics-Specialty courier -SIDBI-$2.0 mil-Mar-08
HHV Solar, Bangalore-Solar Energy Equipment-SIDBI, Aureos-$7.0 mn-Mar-08
Natural Bioenergy, Hyd-Biomass-SIDBI, UTI-$4.0 mn-Mar-08
Servomax, Hyd-Power Equipment-Mayfield-$3.75 mn-Mar-08
Tecpro, Delhi-Captive Power-Avigo-$5.0 mn-Jan-08

Surviving the Downturn

A lot has been said and written about the downturn across all media on how bad it already is or how bad it could get. The end analysis is that nobody has answers to these questions let alone coming up with solutions. The question then is how does one survive a downturn – the answers could be as complicated as the question itself or is it? An article in the Businessweek, has tried to map out businesses which had survived the ‘Great Depression’ and still continue to exist (and succeed). Sure Charles Darwin is smiling from somewhere!!!

Please press * to continue:

‘Indian Mobile VAS industry revenues estimated at $2bn by 2008’- Well, this is the sort of headline that overestimates the size of this nascent industry. One common practice (mistake) that most market researchers commit while trying to estimate/project the size of Mobile VAS is to include the P2P (person-to-person) SMS revenues as well. However, when one is purely looking at revenue recurring to VAS players, the number is surprisingly small.

The skewed revenue distribution is one reason to boot. The revenue from P2P SMS is entirely pocketed by the Telco’s; hence pure VAS players (except for the platform providers) do not make any money out of it. Out of the rest of services under VAS, the Telco’s continue to pocket another 60-80% of the revenues from the end user. Here’s what a recent research report by IMRB suggests in terms of revenue share.

MVAS Revenue
Telco’s 2,185-2,910 crores
Technology enabler 364-730 crores
Content Aggregator 364-545 crores
Content Owner 180-364 crores
Total (Including Telco’s share) ~3,100-4,500 crores
Total (Excluding Telco share) ~900-1650 crores
ARPU Split of Rs 250
Call charges & Rentals 90% Rs 225 Rentals, Call Charges, etc.
P2P SMS 5% Rs 12.50 This does not through to the VAS Providers
VAS 5% Rs 12.50 ~ $1 billion annualised revenue
Revenue for VASPs 15-20% of the above Rs 2 $250-350 million annualised revenue

As the tables show, the revenue accruing to the VAS players is about $200-350 Mn (Never mind that OnMobile’s turnover is ~$200 Mn). Net-net, VAS players make just Rs 2 out of Rs 250 ARPU. This turnover however, does not include the revenues of platform & software providers, which we estimate at ~$100 Mn, taking the total revenues accruing to VAS related players to about ~$300-400 Mn. But, look at the number of investments in the space, the total size is close to ~$200-300 Mn in the past few years.

A $300 Mn investment into an industry with a size of $450 Mn- seems a bit stretched? But the investment thesis is based on the growth rate estimations which are upwards of 50-70% YOY for many years to come. With ARPU’s at $6-8 a month and declining further, along with a ‘cooled off’ subscriber growth- the 70% growth mark seems like an uphill task.

The VC’s who joined the bandwagon and generally the investment community seems to have woken up to this idea. Any new VAS business plan, according to them must ‘by-pass the mobile operator’- well, that’s easier said than done. This one time ‘hot’ investment sector can now be found in the ‘deep freezer’ cabinets (There are odd investments like Telibhramha which have ‘by-passed’ the telco’s, though). So, where do we see the industry headed- when you start hearing ‘nobody’s making money in our sector’, start counting the days before you hear about an acquisition. ‘Consolidation’ is knocking at the door -and we expect that it’s about time the VAS players opened their doors.

Consolidation has already started- OnMobile acquired Voxmobili SA, a French company that provides software services to telecom companies, for $35.12 million. It acquired another company Telisma a speech recognition software product company with capabilities in 10 Indian languages and ITFinity Solutions, a company funded by stellar private investors. The management has been reiterating its intentions to buy ‘products’ to strengthen its portfolio of offerings and to acquire new technologies (e.g.: ITFinity had a strong Java client, which OnMobile wanted).

We believe that the trend will continue in the next few years and to quote OnMobile’s management – “We believe that there will be consolidation – the large will become larger, and a large number of smaller players will consolidate.” The key deal drivers will include technology, products and once steam has gathered again, the ones present in other emerging markets as well. We however believe that content will not be an important driver alone for deals in this space.

PIPEs up in the smoke?

The recent economic slowdown has taken toll on everything – pink slips are flying around, salaries have been slashed, people who have invested in stock markets have witnessed how their investment value evaporated with in a few months. Clearly, M&A and fund raising activities have slowed down and everyone feels that the present scenario might continue for a while though the recovery in India could be much quicker than that in the US.

I was wondering whether this is a good time for private equity players to pick up stakes in listed companies via private investment in public equity (PIPE) route. My thought was stimulated by a few reasons. BSE benchmark stock index has tumbled from almost 21,000 levels to 9,000 currently. Valuations across the board have become cheaper. Not just that, there are a handful of companies who had raised money through FCCBs few years ago and they have to repay some of them as maturity is approaching (conversion in many cases looks impossible unless the conversion prices are renegotiated). These companies need money. Above all, in August this year, SEBI amended guidelines for qualified institutional placement (QIP). The earlier pricing formula required investors to take an average price of six months or 15 days, whichever is higher. This was considered as a bottleneck for investments as the investors felt that this did not reflect the recent market conditions. The amended guidelines say that QIPs should be based on the average price of the shares two weeks prior to the issue. This was expected to boost PIPE deals in India. But I was surprised when I read an article on VCCircle, which stated that just one QIP has happened since April 2008.

Therefore, I went ahead to dig a bit further into PIPE deals. During 2007 when the markets were surging, the number of PIPE deals also surged unabated. A whopping $5.29 billion was invested through 63 deals in 2007. I think the institutional investors who are considered to be the most prudent, never saw a downturn in the market in the near future. But due to whatever reasons, the stock markets have collapsed by over 55% now. So, what is happening to those investments? According to an article in Financial Express, the current mark-to-market value of those investments is down 50.65% at $2.55 billion! As of the date of the article (November 17, 2008), only three deals (out of 63) were yielding positive returns. Manufacturing, IT&ITES and Real Estate have been the worst hit with over 70% erosion in value. However, Telecom and BFSI have somewhat withered the storm with less erosion in value of investments. Some investments like the one in GMR Infrastructure by a group of PE firms seem to have really gone bad. In December 2007, 10 PE firms including Eton Fund LP, T Rowe Price, Deutsche Asset Management and Citigroup had together invested Rs. 3,965 crore in GMR Infra at Rs. 240 per share. GMR Infrastructure stock was trading at Rs. 53.25 on November 28th on BSE.

So, what is the future course for PIPE deals in India? PE firms seem to be treading cautiously even though it looks like a good time for PIPE deals. In addition, even the companies may not be interested to dilute huge stake at cheap valuations at this stage unless they need money for simple survival. Hence, it’s unlikely that we would see the kind of activities witnessed in 2007 in PIPEs in spite of many positive market drivers. I always wondered why do I enter the stock market at the peak (typical retail investors’ characteristic) and lose the money immediately after that? Now, I am not the only one, I have the savviest investors with me!

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