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A little bit about me

Hi. While this blog is a part of Seed Catalyst’s website, I realised over the initial few weeks that a lot of you are first introduced to the firm via the blog rather than our home page.

So to introduce myself - I’m a business consultant working with early stage technology firms to help streamline their strategy and go-to-market approach and support them for fund raising. 

With this blog, I aim to capture key market trends that I see in the industry, the ecosystem and cross-plays in some of the more interesting and upcoming sectors, as well as cover interesting companies that I meet. 

I will also be addressing vexing and interesting valuation and deal/term-sheet structures that would be of interest to technology start-ups at various stages of their growth.

So let’s get started...

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India - the emerging story? PDF Print E-mail
Blog - Market trends
Thursday, 23 June 2011 13:22
Map shows the coverage of Bharti Airtel (an In...



Bernanke's address yesterday has once again got the economic slow-down in the US and possiblity or rather lack of QEIII into focus. So where does an investor put his money? Angel investing in the US has been seeing stellar growth, so much so that the word bubble is becoming a part of almost every blog I know.

In this context, mSolve Partners, a firm I work with frequently, asked me for my opinion on the Indian economy. The following is an article I wrote for them. Thought I'd post it here as well:

India these days brings out very mixed sentiments. From investors focused on the market, phrases like 'This is where the money is' are quite commonplace. And from western developed markets we hear phrases like 'Inflation and corruption will be the bane of India'. So what's the real story?

In summary, the Indian economy is continuing along a strong growth trajectory, However, due to head winds in terms of inflation, regulatory uncertainty, corruption etc, public markets and FDI, post a strong rebound after the credit crisis, have not reflected the same optimism be it in terms of relative valuations to the west or in absolute trajectory. Telecom and IT services specifically continue to see growth in revenues and investments and I feel this trend will continue over the near future given strong government support and definite needs. The question is which are the sectors where we will see the strongest opportunities?

A brief look at Indian numbers shows a dynamic economy which would be the envy of any of the developed markets. GDP in 2012 is expected to grow at 8.8% in real terms after growing at 8.2% in 2011. This compares with the 0.5% GDP growth of UK and 1.8% in the US.


The stock market can be a relevant indicator of positive sentiment and anticipated growth rate of an economy. However here we have an aberration. As of Dec 2010, the Indian BSE Sensex was trading at a P/E of 22.5x. Compare that with the S&P 500 which is trading at 23.3x. A comparative story in 2009 was the BSE Sensex at 22x and the S&P 500 at 20x.

The differential is bourne out by the investment trends seen in the Indian economy. Foreign direct Investment into India has decreased from a peak of $41B in 2008 to $35B in 2009 and $23B in 2010. (Source: OECD) As a percentage of GDP that has decreased from 3.3% to 1.5% in 2010.

The decline can in part be attributed to the close to 12% inflation figures and anticipated contraction in the economy driven by higher interest rates. However, what is relevant to our story is where the investment is flowing, how relevant is telecommunications in this scenario and which are the sub-sectors where the real opportunity lies? The trend for FDI flow has been as shown below:

Source: Ministry of Commerce and Industry

India's IT and services sector has a significant exposure to developed markets and hence an initial decline in revenues and valuation was anticipated. However that was counterbalanced as a greater number of firms began outsourcing functions to cheaper off-shore destinations such as India in a bid to cut costs. The telecom sector has consistently constituted around 13% of total FDI. A deep dive into the sector throws up some interesting paradigms.

Subscriber numbers have been increasing consistently. As of March 2011 wireless subscribers stood at 812 million, a growth of 2.6% over Feb 2011. To put the numbers in perspective, the largest market after India is the US at 302 million. A worrying trend on the other hand has been the decline in ARPU across the sector driven by an increase in the number of players in the market and greater competition. The situation was hardly helped by the lack of spectrum availability and the delay in issue of 3G licenses by close to three years.

As a result, even though overall telecom sector revenues have grown by close to 8% over the FY 2009-2010, the declining ARPU and lack of spectrum have had a negative impact on the sector valuations in 2010.
Some of the leading telecom operators are trading in the range of 20-24x while VAS players are 12-14x.
(Bharti Airtel – 23.2x; Idea Cellular – 23.9x; OnMobile Global Limited – 14x)

This is significantly lower than 2006 when various telecom deals saw P/E multiples of over 50x. Having said that, it continues to be higher than developed markets represented by the iShares Global Telecommunications ETF (IXP) trading at a P/E multiple of 12x.
In this scenario, before looking at any opportunity in India it is necessary to identify whether it has a greater exposure to the strengths of the sector or the potential threats. There have been three significant developments which are impacting the Indian telecom sector:

The 3G spectrum allocation is a huge boon for the sector as data revenues begin to countermand the decline in voice and SMS revenues. Operators are increasingly focusing on revenues from m-commerce and m-entertainment. VAS providers operating in a SAAS model and providing both 2G and 3G related services hope to benefit both from the growth in subscriber numbers as well as the diversity of 2G and 3G across rural and urban markets respectively. Specifically with respect to Bharti Airtel and their acquisition of the African Zain Telecom, VAS and other service providers have the additional benefit of addressing a larger market consisting of both Indian and African subscribers.

Investors are also looking for growth stories in the mobile solutions space. In the last few months, Intel Capital has invested close to $18 mil from a $250 mil India focused fund in opportunities ranging across mobile media and online solutions. Bessemer Venture Partners has raised a $1.6B fund, quarter of which is focused on Indian investments. One of their investments is the leading VAS provider, OnMobile. Over 2006-07 Sequoia raised a $700 mil India focused fund for investments across early and growth stage firms. One of their recent investments in May 2011 was $10 million in a mobile application development firm Sourcebits.
Other investments from US and Indian VCs have ranged across mobile social networks, video content platforms, video streaming platforms, gaming etc.

Banking on 3G growth, there has also been a spate of consolidation across telecom operators. To name but a few, in April 2011, Vodafone acquired the remaining 33% in their India holding from their partners, the Essar Group, for $5 billion. In 2008, NTT Docomo had acquired 26% of Tata Teleservices (TTSL) for $2.7B. They have recently invested another $180 mil for TTSL's 3G expansion.

Outsourcing of telecom infrastructure
Very early on Indian telcos began outsourcing their service requirements to outsourced management providers. This included billing, CRM, fraud management etc. Step two was the outsourcing of telecom infrastructure. Over the last 2-3 years several large PE funds have invested in outsourced telecom infrastructure firms which are a huge boon for telcos considering the diverse economic density and hence telecom requirements of the country. Telecom operators have opted to share infrastructure in rural areas, and increasingly in urban areas, rather than incurring the capital expenses on their books.

In 2008, KKR invested $250mil in Bharti Infratel for an enterprise valuation of $10-12 billion. Macquarie SBI Infrastructure Fund invested $300 mil for an 11% stake in mobile tower firm Viom Networks in August 2010. June 2010 saw GTL Infrastructure acquiring the tower assets of Reliance Infrastructure and Aircel Cellular creating an independent behemoth supplier to various telcos.

Further, in March 2010, AT&T acquired 8% of Tech Mahindra, an IT outsourcing specialist. In March 2011, UK based Apax Partners baked enterprise solutions, data warehousing and consulting specialist iGate in acquiring 65% of Indian software firm Patni Computers for $1.2B.

For the infrastructure providers it is a very profitable model as it leads to higher utilisation charges and the ability to bulk bargain with equipment vendors. The model is also leading to innovation along the lines of solar powered base stations and the like.

In recent times, there has been a spate of corruption cases against and imprisonment of key players in the Indian telecom industry as well as implicated government officials. These events have had a negative impact on the relative valuation of the sector.

However, with a clean-up of the regulatory environment, there is hope that there will be faster and more efficient allocation of additional 3G spectrum as well as the availability of 4G over the next 1-2 years. Both will work to the advantage of telecom operators. Additional services such as quad play packages and ubiquitous video services will become more wide-spread. This is an opportunity both for Indian firms as well as tech firms in the US and Europe to enter the Indian market. For example, mobile video sharing firm Vuclip has recently raised $8 million to expand into Indian and Indonesian markets. Getjar raised $25mil recently to expand their sales and marketing initiatives in Asian markets.

In summary, the Indian juggernaut continues to be a great growth story which is seeing a current valuation dip due to the negative impact of regulation and corruption. However, there are still very profitable business development prospects abounding for US and European firms across the telecommunication spectrum.

My aim is to help identify the right partnerships and business development and investment opportunities across the Indian IT and Teleom diaspora.



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