Eyeing non-metros for better valuations

PRIVATE EQUITY WATCH

Private Equity (PE) and venture capital (VC) funds are looking beyond the metros and the top cities in the country for firms to get better valuations.

"Valuation in the metros has become overheated and with funds chasing the same companies, it has become very competitive," said Arun Natarajan, chief executive officer, Venture Intelligence.

India-focused PE and VC funds raised close to $3 billion during the first six months of the current calendar year, according to Venture Intelligence.

A look at Tamil Nadu, which has had 82 investments amounting to $1,613 million since 2004, affirms the disbursement of funds across seven cities.

While Chennai and Coimbatore received the maximum number of deals "� 69 of $1,350 million and 9 deals of $72 million respectively, other cities such as Dalmiapuram, Kumbakonam, Tuticorin and Salem received single investments ranging from $8 million to $140 million, according to the data from Venture Intelligence.

Depending upon a company's globalisation and growth objectives, funds are invested even in companies based in the interiors. As such, KS Oils in Morena, Madhya Pradesh, secured $20 million funding in December and is now seeking a second round of funds for $30-50 million.

Timmy Kandhari, executive officer, PricewaterhouseCoopers, said, "We are in talks with companies from smaller cities such as Jamseshedpur and others in Madhya Pradesh for getting them better valuations."

"PE funds are consciously growing their portfolios to cover tier-II cities," said Prasad Gopalan, principal investment officer, International Finance Corporation (IFC), the private sector financing arm of the World Bank.

"Our loans and equity investments in tier-II cities and non-metro areas have increased from a mere $15 million in 2004-05 to close to $140 million in FY06 to $170 million in FY07," he added. IFC's investments in tier-II areas include Federal Bank in Kerala, LGB and Suguna Poultry in Coimbatore and MSPL in Hospet to name a few.

The higher valuations and growing competitiveness in metros have the Kotak Private Equity Group looking at the corporate banking relationships of its parent company in tier-II cities.

"In the last financial year, we closed three investments in non-metros, a huge growth from 2005-06 where we had no investments in the non-metros," said Nitin Deshmukh, head, PE, Kotak Private Equity Group.

While some firms have started looking inwards, the high evaluations have other firms looking outwards at south-east Asia markets as well. Electra has invested $150 million in Asia, of which India has received over 50 per cent investments in the past.

Going forward, "We would emphasise in investments in south-east Asian countries such as the Philippines, Thailand and even consider China, where we do not have a single investment," said John Levack, managing director, Electra Partners Asia.