Despite being an important source of funding, private equity investors have not benefited from the India retail growth story.

The sector is going through a difficult phase, with revenues not keeping pace with the investments made, whether in terms of new store rentals or employee. However, its not quite the end of the road yet, says Mr Sanjeev Krishan, Leader — PE, PricewaterhouseCoopers India (PwC) to the Business Line , as Quick Service Restaurants (QSR) and consumer business continue to look attractive for PE majors. Excerpts:

The retail sector in India is facing several challenges. Several players, including Mr Kishore Biyani are in a big debt trap. In this scenario, how are PE investments panning out?

The retail sector is going through a difficult phase. It has also been the sector which has seen uneasy equations between the promoter group and the investing community. It is difficult to say why that happened. Did the promoters over-promise and under-deliver?

Or were investor expectations unrealistic in the first place and the promoter group got caught in a spiral trying to meet those expectations? The big problem has been that revenues did not keep pace with the investment made, whether in terms of new store rentals or employees.

Each store needs to generate cash fairly quickly and if that doesn’t happen, the whole model would not make sense. Add to that the lack of focus on supply chain, logistics and technology has meant that a number of retail businesses have burnt cash focussing on the front-end, without having an adequate back-end. This has been a big problem. As retail businesses are part of the consumer story, they would have PE interest, but they appear to be highly circumspect on the retail segment at the moment.

Are PEs attracted towards a particular sector? Can you tell us what exactly clicks for a PE firm?

I won't say that PE's have been attracted to one sector more than the other. As a thumb rule, it depends on how they see the sector growing at that point in time and in the near future, up until at least the time of their exit.

For instance, two years ago, education was red hot, but valuation and regulatory fatigue has meant that a number of PE investors are not as upbeat on it today. However, white goods, QSRs, consumer business and the online space is likely to attract more funding, going forward.

In India, PE is just a decade old. What are the common challenges that investors face, especially while doing business with Indian companies?

Apart from the growth prospects of the investment, governance is at the top of the mind of PE investors. A ‘go-getter’ promoter with a track record would still excite, but possibly not enough to make an investment unless there is infrastructure to support and manage the growth.

At the same time, the pre-deal due diligence is getting to be more extensive. Unfortunately, some of the recent events have also made the relationship between the funds and the promoter groups somewhat ‘tense’. Trust will come back, but it requires some work and would not be immediate.

Given the current scenario, do you expect some big-ticket announcements in the near future?

I do expect there would be some mid- to large-sized PE deals in the second half of the year, particularly in the consumer centric and IT businesses. There are three reasons for this:

a) certain private equity exits by way of secondary deals, example, Genpact;

b) some well-run businesses which have financial stress are likely to find PE funds an attractive option; and

c) PE funds seem to prefer consumer-centric businesses, and avoid capital intensive core sectors. The fact that interest rates continue to be high and the IPO markets are almost dead, would also encourage private equity funds.

How far have the regulatory and policy frameworks been a challenge for PE firms in India?

These have been matters of grave concern amongst PE investors. The tax policy has been a big concern. Imagine how a financial investor would feel if he invests in a country expecting a particular tax consequence, only to realise that the consequence has changed and become more onerous, when the time to exit comes. Likewise, FDI policy has been another concern and we seem to continue to wait for changes.

Many fund managers say that the Indian market is overvalued? Is this true?

Value is a very subjective matter. Indian promoters clearly have had a very different value impression of their businesses in the past. More than 50 per cent of PE investments made in 2007 and 2008 have faced impairment challenges; however a lot of Indian promoters believe that the global meltdown on 2008 destroyed value in their businesses.

While value expectations have mellowed since, I do not think they have come down as much. The key question now is how long will this round of stress last, and will expectations sky rocket at the first signs of revival (as and when it happens).

> priyanka.pani@thehindu.co.in

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