There has been a turnaround in investor sentiment and long-term investors continue to bet on the India growth story, KKR's India head Sanjay Nayar told CNBC-TV18. "I think there is no doubt that the sentiment is better," he adds.
According to him, foreign investors love India. "The strategic investors have always liked India," he adds.
He expects the deal environment to pick up in another six months.
Nayar expressed interest in sectors such as retail and healthcare, however he ruled out investing in aviation.
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Below is the edited transcript of Nayar's interview with CNBC-TV18.
Q: Are you feeling a little better about the India story? From the government point of view, things seem to be moving? The mood seems to have changed since the Prime Minister has taken over the Finance Ministry.
A: I think there is no doubt about that. We are all listening to the news. We talk to friends in Delhi. I think there is no doubt that the sentiment is definitely better.
I think we need to see some action towards getting rid of dysfunctional politics. I think we are beginning to see a bit of that. I think there is also realisation that this is a last opportunity to get the legacy in place.
Moreover, for the country, as a whole all are issues can be resolved locally. We are not that dependent upon the external factors to an extent. So, I think combine all these things together there is a clear sentiment that lets get on with it.
There are some simple measures to be done. So, I think there is a feeling that let’s get on with it, the problems are not that huge. One step at a time, we can really get the sentiment moving again, more from a local perspective, not the foreign perspective necessarily. The local business man has to feel good about investing again.
Q: What about the foreign investor? How good is he feeling about India?
A: Foreign investors love India. That’s one reason why the (Indian) market always trade at a little bit of a premium to all emerging markets. Those are the short-term FII kind of people. The strategic investors have always liked India.
People have also made money in India. I think things like GAAR, which we know have to be done and they have to be applied, the government has been warning us about anti avoidance for many years, I think the investors should be ready for it. The only issue is the way it is being implemented and announced.
I think the steps, where the Prime Minister has put this under a thoughtful committee, revisit the way it is being implemented, give adequate notice, are all extremely positive.
I think just the way it was announced and implemented got people by surprise and the whole retrospective angle to it. So, I think people are mature they understand that. This will go very long way. But foreigners, the strategics, I think India’s next wave of growth is going to come from a lot of FDI capital, they like the market. This is a huge market, and there is a huge consumption market. Any sector you pick up is underpenetrated. The experience of all the multinationals, the foreign banks, the private companies has been so positive.
You look at the returns in this country, they have been huge in past. So, people will be positive. But they need to see the climate where you don’t scare them away, but more than that the capital can be put to work to create real assets. You need that environment now.
Q: Money is clearly not an issue, but is finding the right deals in this market becoming more difficult?
A: As the market is today, yes. But again it’s not about one or two months. I think as we look ahead and when we started talking about this, if there is a turn in the sentiment and the Indian business people begin to invest again in real assets, you will need capital. I don’t think the banks or the public markets can give you all the capital that you need because the government also needs to raise capital. So, they are going to be ahead of the curve anyway.
I think you will see a lot more demand for private capital, whether its strategic or its private equity. In that context, I think we are going to have a lot more deal making in the future. I actually wouldn’t call it deal making per se, I would say investment opportunities to really build world class companies.
In the last two three years, Indian companies have actually realised they can benefit a lot with this kind of long term capital. They need to become more competitive, more productive. So, I think there is going to be a lot more activity. The kind of activity that our asset class likes, which is get involved with the companies, help them grow, help them become better, help them become more global.
Are we seeing orders deals right now? The answer is no. But will we see three four months later or six months later even, if the sentiment changes little bit? I think the answer is yes.
| Q: Can you give us a sense of what we could see in terms of your investment outlay? What is the plan, as far as investment in India is concerned? A: We won’t obviously comment on any specifics. We don’t have any targets, we never do that. But we just look at the portfolio we have today. That’s doing pretty well. As we look ahead, I think that we will continue to look at high quality promoters, high quality managements, and good business models. Those that we can help improve further and make more productive, make more competitive and businesses that require really a long duration capital, not just a short-term exit. If I put all those together, the funnel today is not that large. But again the thesis is that if things change and Indian businesses begin to grow again, you will see the requirement for growth capital again. That’s number one. Number two, I think that we are finding a lot conglomerates today who want to look at what are non-core companies and what are core operations. A lot of them are now beginning to talk about, fine let’s see if we can get a significant investment in some of the non-core operations, can we amplify value there, can we deconsolidate a bit. So, I think you will see hopefully some bigger deals for the sector as a whole from some of the rationalisation of the structures that have evolved over the years. Third, I think you will see a bit more cross border deal making. I think that is going to be important for India. You will need the FDI from overseas. Foreigners will come in and buy into companies and so are the Indians going overseas to buy companies. I think private equity will see that being another element of deal making. That too had slowed down for sometime. Fourthly and finally, complete sell outs and buy outs, I don’t think the Indian entrepreneurs will do that. Q: Promoters do not want to sell. A: Why should they. They have built fabulous businesses, third, fourth, fifth generations, businesses that have done really well. Entrepreneurs here know exactly that risk-reward they want to take. Q: So, forget leverage buyouts, it is not going to happen in India. A: I don’t think so. I think that is a little far away. Q: Aviation space is a business that requires a huge amount of capital; it is a business that requires long gestation capital. Is this a sector that interests you? A: Not really. Actually for us it has not been a sector of interest globally. In India, whatever little I know, it is a damn tough sector. Not only are there policy issues, but just the fact that you are fixed cost when the flight takes off is so huge does not make it attractive at all, from an investment point of view. We are not experts in this sector and we haven’t done much in this Q: You had a good experience with your investments in Dalmia Cements, would you like to further that? Do you like that space? A: No comments on specifics. We like industries deriving demand from the infrastructure growth, from the housing growth. We do not comment on specific companies, but that is clearly a sector that is very interesting. I think it is poised to benefit a lot in the future. I think consolidation will happen in that sector. Q: Globally, you do not like the listed space. So, you don’t try and focus on the listed space. In India, you don’t really have much choice. Are there interesting opportunities that you are seeing in the unlisted space at this point? A: You will be surprised. Ninety five percent of our portfolio is unlisted by the way. When you say that India has a lot of listed companies, you are right. But our job is to make sure that we can work with companies go and look for deals which are unlisted. Six out of seven are unlisted companies. Unlisted opportunities today are not easy to find. But there are a lot of opportunities, when people are trying to grow the companies. A lot of Indian companies have realised that they have gone public too early. They need to get of certain size, certain scale, certain sophistication before they go public. So, we are finding a lot more private companies who want to stay private, who do not have the pressure of quarterly results, who can take the benefit of long-term capital and grow the companies to world class scale and then go public or exit at a much later stage. So, yes, you will be surprised but when you go looking for unlisted companies, you do find them. There are some high quality businesses around here. _PAGEBREAK_ Q: What about the retail space? Would this be of interest to you, given the consumption story? A: Absolutely. It will be. We have traditionally been very big investors in retail worldwide. If you look at KKR’s history that’s been one of our most dominant sector. More than capital what attracts us to that sector is that in India there is just so much to be done on running a retail business as a science and that is something we people are good at. We can bring that technology, the expertise and the experience of so many years and decades overseas to India. That really is what is attractive for us. Indian entrepreneurs know exactly what the micro market needs, they know the business model that they need. But they can benefit a lot if we can give them the other expertise not just the capital. That is something that we are attracted to. Q: Traditional retail businesses or are you open to looking an online retail businesses as well? A: No. I am talking about the traditional ones. Q: But, in India, we are suddenly seeing a spurt of online retail businesses, does that interest you at all? A: Not as yet again. We are people who like more brick and motor and can touch and feel things and can drive productivity, can drive sales. It is a little different. We are not really very big in that. Q: Would you wait for clarity on the regulatory front as far as retail is concerned? A: We have to, there’s no choice. We have a lot of dialogues going on, but I don’t think we have a choice, we should and we will wait. Hopefully, if government begins to function again and things come back on the table, this should be one of the pretty eminent reforms that we’re expecting to happen. Q: Café Coffee Day has been another strong investment on the retail side of the portfolio for you. With the kind of competition that we are seeing with international brands coming into the market, how do you see the competitive landscape changing? You got the Dunkin' Donuts and Starbucks of the world making an entry into India. A: You keep coming back to specific companies and I keep trying to avoid them. I think, in general, there is no doubt that the competitive landscape will increase. But you have to understand that the demographics are changing dramatically. Generally, people are visiting QSR restaurants a lot more. If you can in this country build impressive distribution and a supply chain that can cater to it, you can put in more products so that the people walking in can spend money not just in one product, but two or three products and you can just imagine the operating leverage you get out of the business. Q: One of the other key sectors where we are seeing a lot of private equities as well as venture capital money going in is education and ofcourse healthcare, would these be areas of interest for you? A: Healthcare, yes. Education less so right now till there’s more clarity. Healthcare I would say all aspects of it. The brick and motor, the multispecialty, the specialized delivery even I would extend and say pharmaceuticals. The secular demand and demographics are such that we can again benefit and really help the companies. Again, we have a global presence in the sector, we have global companies, and we have invested in for many years so we can bring in a lot of expertise on that as well. Q: What is the kind of average deal size that you now anticipate given the current domestic situation in India? Over the next 6-12 months if you were to a deal what is the sort of size that we could see? A: We have been very flexible on size until now, we have done small and big deals. _PAGEBREAK_ Q: And you have actually been slower on deals. A: I don’t want to comment on size as long as we find good companies, good quality businesses that really need us for more than just the money. Q: Where would you, either 25-30 million sort of range or bigger? A: No, bigger than that. So, I would say the sweet spot would be 75 plus. Q: One of the things that we are hearing from entrepreneurs, who have brought private equity in, is that the equation post 2008 crisis, when things have actually gotten tough out in the market places, the equation is now become more intrusive. We have publically heard about disagreements, legal battles as well. Does it get difficult then to not be intrusive, especially when the goings tough? A: It can. I have read of those examples. The approach that we need to all take is have a very clear understanding from the beginning, when you select the company and you select the partner you are going to work with, is what are going to be roles and responsibilities of all of us. I think have a clear set of alignment of issues that you need to tackle once you get in. If you are just going to provide dumb capital then I think any kind of question about intrusion will be seen as interference. I think that’s not how atleast we position ourselves. I am sure lot of our peers don’t do that either. All of us are here to be long term partners. But for long term partnership to exist you need to have a clear understanding of what are the things you are going to do in the next six months, one year so that you don’t wake up in the morning and find that someone is going left hand side and you are going to right hand side. Q: Have you faced a situation where expectations have now been misaligned because of what may have happened? A: No, we haven’t faced any. We have been here for a long time. We began the office three years ago, but we made a couple of investments even before that. We haven’t found that. But these things become tricky especially when you get to the point of exit. That’s when I think the most of the issues start. I think for that private equity also has to be matured enough and behave itself because you can’t be sitting in a market like this and demanding a public market exit. It’s not easy. So, I think that’s where the patience gets tested. Q: Do you see any sort of indication or signs that we are possibly going to go back into atleast revival of the IPO market? A: I think so. It goes back to the macro again. If the government begins to take a few measures, which are positive, small tax reforms, bit of subsidy, GST, you will find that the FII inflows will come in. You will see the participation by the local retail mutual funds. That’s the two big segments you need to restart the market and hopefully bit more reasonable in terms of valuations. Q: Besides the macro economic climate which you cannot control, I cannot control, as far as closing deals are concerned, what is the number one problem at this point in time? A: Valuations. Q: Still asking for sky high valuations? A: Not sky high, but there is a mismatch. There is no doubt that the mismatch has reduced. _PAGEBREAK_ Q: All these talk that post 2008 people have come back to more realistic valuations, is that pretty much talk? Do we still continue to see a lot of cream at the top, as far as valuations are concerned? A: If you look at good businesses and good businessmen, I think they are still quite demanding on what they would expect to get because they still think that there is a big public market out there. So, to give you the privilege entry into unlisted company, they would all like a premium. Why the mismatch is there? It is not about the numbers, it is about how you underwrite the future growth. Ultimately, we are all under writing a growth model. The kind of growth expectations people put down on paper, you can’t deliver all of that. It is not that they are ill-meaning or there is a mal-intention, but it is just that with the history that we know what has happened in the last three-four years and knowing being realistic even if government begins to start to work, it is going to take time. So, you can’t underwrite 20-25% growth that easily. You want to be a little bit more circumspect on what you are underwriting. The moment you do that we come up with numbers that are a little lower than what the expectations are. So, the multiples may not be different, but the underlying numbers on which you are applying the multiple those come out to be different. Once you are at the board table, you want to be comfortable about the assumptions right from the beginning. I think that is the issue. It is not about a mismatch and the way you really want to buy the businesses. Q: What is the other big challenge? A: I really don’t really see too many. I think that in unlisted companies there are much better understanding of the governance expectations from private equity and strategic. Q: Governance, transparency not an issue, not a concern? A: Even if it is not there, people are committed to improving it. That is very good. Q: But has that made you walk away from potential deals, the lack of transparency and governance. A: I would say that if we have come to the closing stage of a deal and we are walking for that reason, we did a bad job in identifying the promoter. In our case, that really hasn’t happened. But we might reject a lot of deals well in the beginning, if we think we are not getting to that kind of an end point. Q: What do you anticipate? What is the broad thinking in terms of what you would like to do over the next year? A: We do not plan like that. But the way I am seeing things happening now, I think it is going to be mid-size deals. More frequent rather than one large one that is my sense. Q: Do you believe the India pessimism is been over done? The start of the year everyone is writing India off, do you think India is back on the table, back on the radar, as far as foreign investors are concerned? A: Distinguish between the two classes of investors, short-term debt investors, equity investors and the long-term. Long-term guys are committed to the market, they see the opportunity. They will wait for the right opportunities in the right environment. I think the short-term, which is very critical by the way, I think we will have a positive sentiment moves. That will encourage the short-term flows to come back because we need to bridge the current account deficit. We had a 4.2% ending March. That is a pretty big number. We need to bridge that gap. I think the short-term flows will come back. There will be enough positive sounds coming which will attract the money to come back. But you know very quickly the valuations will become expensive. You will see that tapering off, but you might see the bond flows increase. It is interesting. Q: That is going to be perpetual challenge, it is a challenge today, when the markets are down it will be a challenge, when the markets move up as well, so the valuation challenge will always remain? A: it will always be there that is my sense. India has been a market that trades at a premium, just have to get use to it. |
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