Assets still not cheap; Sensex should be 7,5007 min read . Updated: 19 Oct 2008, 11:43 PM IST
Assets still not cheap; Sensex should be 7,500
Assets still not cheap; Sensex should be 7,500
Mumbai: After a break of almost 16 months, Baring Private Equity Partners India Ltd is set to come out of hibernation with two deals to be financed by an India-specific $600 million fund it raised last year, said managing partner Rahul Bhasin.
“We’ll invest very soon. We haven’t invested any money in 16 months," Bhasin told Mint in a phone interview from New Delhi, where he is based, adding the deals will be in the information-technology and healthcare sectors. He declined to specify the size of the deals.
The two deals come at a time when global markets are in a bear hug, and most investors are waiting for the markets to bottom out. Bhasin, who has been through several bear phases, including three in India since 1997, believes company valuations are still exorbitant, and that there still remains some downside.
Baring is credited with nurturing Mphasis BFL and Msource, which have gone from a dozen-odd people to a combined entity that employs more than 30,000 people, with an after-tax profit of Rs220.77 crore and a market capitalization of Rs3,680.14 crore.
Baring’s portfolio also includes Siro Clinpharm Ltd, the largest Indian clinical research organization specialising in late stage Phase II-IV clinical trials, and Jyothy Laboratories Ltd
In an interview, Bhasin says the company has not been waiting for the markets to correct before it sews up any deals. Baring believes in investing over a 7-10 year timeline, and simply does not do deals based on market valuations, preferring instead to help a company grow with timely infusions of cash, he says. Edited excerpts:
As a private equity (PE) investor do you see opportunities in the current turmoil that is prevailing in the stock markets?
You have to understand that private equity is a transaction which takes place with two sophisticated counter parties: a sophisticated entrepreneur and a sophisticated investor. The markets are driven more by emotions and liquidity, and more short-term factors. Whereas transactions in private equity takes place in a more rational manner among counter parties. I don’t think the markets going up or going down would have any effect.
I think the issue is we classify (as) private equity a whole bunch of entities that are not truly private equity. If you think of entire PE as an asset class there would be a lot of passive, minority PE investing in listed companies. That, to me, is you are playing the market more than anything else. That will suffer.
The two issues, if you look at the investment point of view all the investments that all the money that have gone into emerging markets through PE in the last two to three years will be hurting badly. That’s where the challenge is.
But actual private deals take valuations from certain benchmarks in the listed space as well?
They do, for people who are looking for not a partner but basically they think that when the markets are crazy they want to sell their shares at the most expensive price. Yes, those transactions will take place at crazy prices.
Our business model is to partner with an entrepreneur and build a great company over a long period of time. So the markets going up or going down does not impact our business quite as much.
Do you see an opportunity in these markets?
I don’t think assets are cheap even now. But some amount of realism might be there today.
The Sensex is more than 50% down from its highest levels…
It is also where you come from. In 2002, it was around 3,000. Six years, we have grown at an average in nominal terms of about 15%. 1f one compounds it will be in the range of 120 or 130%. If one takes this calculation, then the index should have gone to 6,000 or 6,500. Instead it reached 21,000. So we can make ourselves very happy or unhappy. All I am saying is assets even now are not very cheap.
So you still see a lower bottom for the stock market?
In 2002, average profits after tax as a percentage of sales in India was 1.77% of GDP (gross domestic product). Last year it was 6.77% of GDP. So we are off a cyclical high. The productivity in terms of your margins is likely to come down. Asset efficiency is likely to come down, which means your return on capital is going to be lower and the cost of capital is likely to be higher.
If you look at the liquidity situation globally and you look at how global capital is in India the probability of them pulling out is high and therefore I see more downside.
Do you expect the markets to reach 2002 levels?
Not that level. The real GDP has grown 15-16% a year since then, maybe slightly more. Maybe the index should be 7,500. There is nothing wrong with that.
The fact that you avoided investing in the market at its zenith must be very satisfying for you?
I don’t think we are happy or sad. At this moment, the world is going through a grave economic crisis. My job is to help build great companies and realize value for my investors while doing it. I would like price to reflect value. But I don’t want to see this illiquidity and dislocation that you are seeing everywhere. I think it is dangerous.
But we cannot get insulated from the global turmoil? Can we?
Look you have consequences, like you’ll not get capital inflows. The fact of the matter is that our entire forex reserves have been built up on capital inflows. There’s a big risk of that reversing. Of course these risks are there, if you don’t get those capital inflows the gross domestic capital formation will be lower.
There are problems that seep in because of the international trouble but what is worse is the crowding out (of) the private sector. The resource allocation within the Indian economy is getting inefficient. Crowding out the more efficient parts of the economy, and you are allocating resources to the less efficient parts and you are driving the net productivity of the economy lower. It will hurt growth.
Governments all over the world are doing this…
They have a different problem. They have a risk of a deflationary spiral. They have to monetise their economy because they are in a de-levering deflationary spiral. They have to counter the effects of that. Their issues are very different from our issues.
What do you think the regulator and the finance ministry should do?
They have to fix the fiscal deficit. The first and most important thing is we have to fix the fiscal deficit and stop crowding out the private sector.
What have you been telling your investors all this while when you hardly invested a penny in the market?
When we raised our last fund we told our investors that the macro situation is not favourable. We expect pressure on the rupee and we expect pressure on the price earning multiples that are completely out of line. We don’t think it is prudent to invest capital even today.
How do you see this affecting Indian businessmen and PE fund managers’ temperament?
The prices went up because of the monetary engines globally. My stock price has gone up because of my genius and it has gone down because of the market conditions. That’s the paradigm we are stuck in.
Do you see opportunities?
Of course there will be. We will look at it. We understand India. We know how to scale businesses. We will facilitate it.
Do you see Indian businesses in trouble?
(For) Those who leveraged themselves very severely, the good times won’t last forever. The real estate sector has leveraged itself significantly.
Do you see a shakeout in the sector?
In India you don’t see a shakeout because you don’t see an enforceability of contracts.
The bottom line is real estate prices have to come down and they have to clear at much lower rates.
What about the commodity sector? Do you see a down cycle?
I would be wary of generalizing that. In commodities one always tend to underestimate supply. In hydrocarbon sector, however, you will not see a down cycle.
Your investors must be pleased with your performance for protecting their capital during these times?
I have prevented losses. Where have I earned a lot?