The mood in the stock market may be sombre, but India still looks compelling when compared with other Asian peers.
Recently, the chief executive of a large multinational pharmaceutical company came to shop in India. Armed with a rather huge budget, he offered gravity-defying valuations to Indian promoters for their operations, but found few takers. Stock markets in India may be in a tizzy over macroeconomic imbalances and a governance deficit but the private sector seems to be having no trouble finding loaded suitors.
This episode, which created quite a buzz in the pharmaceutical industry, reiterates that global investors are hungry to own a piece of India. Irrespective of which way hot money flows, the world isn’t yet done with India. There clearly is more money chasing fewer deals in India. And this isn’t true only for the pharmaceutical industry. Foreign buyers are willing to pay hefty valuations across sectors. A recent example of this is TutorVista, which was acquired by UK’s Pearson for Rs 577 crore. The education company offers a whole suite of educational services, including online tutoring, and has revenues of Rs 60 crore. Another health insurance company, Star Health, has raised Rs 380 crore in two tranches from Sequoia Capital and ICICI Ventures in the last six months.
| Comparative study of PE ratios and GDP growth | ||
| Country | FY12 P/E | GDP Growth* |
| China (Shanghai) | 13.23x | 9.00 |
| India | 13.57x | 8.00 |
| Indonesia | 13.15x | 6.20 |
| Mexico | 14.41x | 4.00 |
| Malaysia | 17.70x | 6.30 |
| South Africa | 11.90x | 3.80 |
| * Average expected GDP growth in % for 2011, 2012 and 2013 Source: MAPE Securities | ||
Over 300 private equity (PE) funds have raised $ 5-6 billion for investing in India, which has to be deployed in the next few years. Indian companies have never had it so good. In an environment where cost of capital is an issue for the big boys, the mid-sized companies are on a roll. In fact, an investment banker claims that one children’s clothing company not only had lengthy discussions with several PE firms but also initiated paperwork with three of them for a stake sale. Evidently, he took a cheque from only one.
But this is symbolic of the scramble in the industry. PE firms are now willing to even pay retainer fee to investment banks so that they can find them suitable investible companies. Those who don’t find suitable deals often opt for PIPE (private money in public entities) deals in the open market.
After delivering 18 per cent returns last year, India’s stock markets are surely taking a break this year, but that’s precisely what it is – a break in momentum – not a reversal. According to MAPE Securities, equity markets in 2010 were positive in the US, the UK, Germany and most emerging markets except Europe and China (China Composite Index fell by 14 per cent). Global recovery is now underway in moderation.
The yields on US treasury bonds have picked up since November, implying imminent growth. While Indian markets may remain volatile as portfolio funds chase safe havens like the US dollar, commodities (oil, silver and gold), recovery in developed markets like the US still means good news for sectors like information technology, business process outsourcing, textiles and pharma, believes MAPE. A 13.57 forward P/E for FY12 isn’t expensive at all and India's GDP rates easily are better than most emerging economies. Clearly, there’s more steam left in India’s private sector.
