The Hindu Business Line : ‘Promoters still expect high valuations’

I expect 2009 will not be as bad as last year. In fact, I think there is a high probability that global growth will be led by India — we have a strong domestic economy and a lot of domestic cash.

LUIS MIRANDA, PRESIDENT AND CEO, IDFC PRIVATE EQUITY

Aarati Krishnan

Sectors such as power and education offer the best opportunities for private equity investors in 2009, feels Luis Miranda President and CEO of IDFC Private Equity. Asserting that the credit crisis has not impacted the availability of funds for Indian private equity investors, he cites high promoter expectations as the key constraint to deal-making this year.

Excerpts from the interview:

As a private equity investor, do you see ‘value’ in India’s stock prices today?

The quick answer is: Yes, there is value at today’s levels. However, these valuations are unfortunately not reflected in the unlisted space.

Promoters haven’t yet substantially brought down their expectations from private equity investors.

They take the view that they would have got great valuations six months ago.

Though the stock market has fallen, things haven’t changed all that much; therefore, investors should be willing to pay more.

Companies take the view that valuations will bounce back in three years or so. But my view is that, even if we take a three-year view, the markets may not bounce back to multiples that we saw last year.

What are the deals that you did in recent months?

We have made two investments in the last three months — Deepak Cables and SE Forge, a Suzlon subsidiary, in the infrastructure space.

The power sector requires big investments over the next few years. Within that, we’ve looked at the traditional power space and renewable energy as well. However, in the traditional power sector, valuation expectations haven’t come down significantly.

Second, a lot of the investment opportunities in power generation are in the PSU space. Therefore, we are looking at smaller players in the transmission and distribution space.

A good portion of the private equity (PE) money over the last two years flowed into two sectors — IT/ITES and real estate. But prospects for these two sectors have now dimmed to some extent; so, which sectors will PE investors back now?

A lot of money that got invested in the real estate space came from overseas and a significant portion of that investment may have vanished because of the downturn. Therefore, the appetite to invest in that sector has waned. Investments will continue to happen, but the volume will come down and deals will happen on terms that are more favourable to investors.

When you look at ITES, there will definitely be some pain in the short term, with clients getting impacted. But this is not the first time the IT sector has been impacted by a slowdown.

I see marginal players getting hit badly, but the larger companies who are sitting on cash will weather it.

With the credit crisis hitting even larger companies, will PE investors switch focus from smaller or mid-sized, to larger companies? Where do you see deals materialising?

Today with market capitalisation coming down so sharply, no large company is immune from being taken over by a global private equity player.

But that’s in the mature markets. In India, we are still in a strong growth phase and the large families are still not keen to sell any significant part of their business, because they believe that big opportunities still exist.

Therefore, I see three possibilities for deals. One, cases where large companies that diversified into non-core businesses, are looking to sell that stake and raising some cash. Two, some family-owned businesses that have a problem with scaling up the business may sell out.

But that will require a substantial step-down in valuations, compared to the past.

Third, serial entrepreneurs who routinely set up and sell new businesses will continue to attract PEs.

What impact does the credit crisis have on your business?

Indian PE investors typically operate on very low leverage. They go for purely equity funded deals, so they are less impacted by the credit crunch than some global PE players. We recently closed our third fund of Rs 3,000 crore.

But companies that we have already invested in do need funds for their projects and are facing a constraint. Financial closures that we took for granted in the past, are becoming more uncertain.

We are today more careful about verifying how a company plans to raise cash to fund its future plans and factor in the risks of that not happening.

Do you see the companies where you own stakes benefiting from the recent cuts in interest rates?

Yes. But we do find that banks here are much faster to raise interest rates than to lower them. It is absurd that rates are so high over here. Banks have even lowered deposit rate and that is a sign that there is liquidity in the system. But that is not going out to the borrowers.

That is where the central bank needs to take a more aggressive stance. Part of the problem is that there is a complete lack of trust even between banks, after such large institutions went bust.

Its going to take some time for lenders to get over that phase. The irony is, deals were happening at very stupid valuations in the past, and now deals are not happening- that’s also very short sighted.

If you were asked to name two sectors that have the maximum potential for 2009, what would they be?

One would certainly be education. Of course, there are very few players of good pedigree in that space. The other sector would continue to be power, because it is domestically driven and there is a demand gap that needs to be bridged.

How will equity market perform in 2009?

I believe that in November 2009 the Indian market will be higher than where it is now. I can’t say if it will be 20 per cent higher or 40 per cent higher, but I’m sure it will be higher, once macro events such as the elections etc are out of the way.

When we had our investor conference in 2007, we had said it would be a difficult year. But we actually got it wrong! We said valuations were high and that there was too much hype and too much money chasing news.

But in 2008, the hype actually disappeared and valuations moderated; instead, the real economy took a turn for the worse. No one expected that!

2008 was a tough year. It became difficult for us to exit investments and do further deals. But I expect 2009 will not be as bad as last year. In fact, I think there is a high probability that global growth will be led by India — we have a strong domestic economy and a lot of domestic cash.

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