‘Whirlpool will launch products for premium India’

This Q&A first appeared in DNA Money edition on Wednesday, March 28, 2012.

Arvind Uppal

Despite being the world leader in home appliances, Whirlpool is yet to attain market leadership in India. Towards that end, it has introduced several new products in India recently. In three years, Whirlpool will be at the top, says Arvind Uppal, president-Asia Pacific and chairman and managing director, Whirlpool India. He shared his vision in an email interaction. Edited excerpts...

What has been your recent experience in India?
Our share price which used to be Rs17 in 2005 went up to Rs60 in 2008 and went on to touch a record high of Rs338 in November 2010, making us one of the highest profitable mid-cap stocks on the National Stock Exchange. Over the last 12-15 months, we anticipated the slowdown, and have intensified our focus on controlling costs and accelerating innovation. The launch of 160 models across six categories this season shows that we are far better prepared than anyone else in this industry. We are going for leadership even as the industry goes through a difficult period.

How has your Indian business grown? Which categories are piloting growth?
All our categories grew in topline and percentage margin during the period 2008-2011. We grew in our areas of strength — refrigerators and washers — led by some innovations like Protton (3-door refrigerator) and Ace Washstation (top-load washing machine), to name just two. However, we made exceptional progress in categories that Whirlpool has not generally been associated with - air-conditioners and microwaves.
Looking ahead, we see huge opportunity in growing our refrigerator business in 2012 on the back of some great innovation. We wish to become leaders in refrigerators in the next 18 months.

What have been your product failures? Explain the reasons.
Fortunately, we have not had any failures in the last 6-7 years. This is largely because all the products and innovations we bring to market are based on well-researched insights and consumer studies. Perhaps, the only failure we have had was the launch of oil heaters in 2008-09 when we had an unexpectedly short winter.

How do you plan to differentiate in the Indian clutter? 
Innovation, design, performance and quality will drive our brand. Our summer 2012 launches establish new benchmarks for performance — fastest ice-making and fastest bottle-cooling (in refrigerators) and removal of 15 different types of stains (in washing machines).

Why is Whirlpool tapping all price points?
To be No.1 in a country as diverse as India, it is important to understand the dynamics of our demography. For a country with over 200 million households, the size of the home appliance market is 15 million. There are many Indias within these 200 million households. There is the large ‘mass India’, a ‘middle India’ with approximately 65 million households and a ‘premium India’. Therefore, if we want to be No.1 in India, we will have to address each of these consumer segments. Whirlpool has been very strong in ‘mass’ and ‘middle India’, and while we strengthen our position there, we are widening our horizon to launch products that will address the needs of ‘premium India’. In the next 12-18 months, we expect to be leaders in refrigerators and washing machines and the No.1 home appliance company in three years.

We have the lowest penetration levels among emerging markets such as Brazil, China and countries in Southeast Asia. This is a huge opportunity for growth. India is a very large and heterogeneous market, both in terms of economic as well as social profiling. Hence, consumer insights in India need to be very local to the geographies and cannot be just country- specific.

In recent times, you have also launched invertors and water purifiers. What gives?
Water is a strategically important category in India and we want to be leaders there. We see great value creation opportunities here. As regards inverters, these are important but tactical opportunities and we will leverage our brand wherever there are such opportunities. We have tasted more than moderate success in our power accessory business.

Why has Whirlpool earmarked Rs100 crore for product innovation?
Whirlpool India has been a source of inspiration for low-cost innovation. It has won many awards for producing value-creating products with very low use of capital. With India’s increasing relevance to Whirlpool Corporation, we will be expected to innovate continuously for the benefit of our Indian arm and Whirlpool at large.

What’s your plan to develop and enlarge distribution?
We are targeting to be a company with more than 15,000 dealers across India. We are going outside the appliance trade to the specialist kitchen manufacturer channel. Air-conditioners are sold from appliance outlets as well as specialised AC trade called SSDs (sales and service dealers). Water has found its way into electric and small appliance stores. We intend to grow our store presence by 10% every year. We also have about 100 brand stores and these will also get attention and money in our channel strategy.

Blue Mountain denies buzz of deal for 42 UK hotels

This story first appeared in DNA Money edition on Friday, March 30, 2012.

If this hotel ‘block’ deal shapes up, it would measure up as a big-ticket transaction in the hospitality sector globally this year.

According to a report published in The Times, London, Blue Mountain Real Estate Advisors (BMREA), an Indian property investor, has been selected as the preferred bidder for 42 Marriott hotels across Britain after it offered almost £750 million.

The report further said the holding company for the portfolio of hotels collapsed under a heavy debt load of about £900 million, most of which was held by Royal Bank of Scotland (RBS), and a part of the Mumbai-based India Blue Mountain Group has been granted a period of exclusivity by RBS to tie up funds for the deal.

But Janak Vaswani, director, BMREA, said his company has nothing to do with the acquisition of 42 Marriott hotels in Britain and that it has not made any offer whatsoever.

“I am hearing this for the first time myself and I’d like to make it very clear that we have nothing to do with this transaction. While I’m not familiar with any other Indian company with a similar name - BMREA - I’d like to state that we are associated with India Blue Mountains Ltd, which is registered in Jersey, UK. However, I’m not familiar of any such deal being pursued by the overseas entity,” he said.

RBS could not be reached for comment. The assets on offer comprise a total of about 8,000 rooms in 42 hotels in England, Wales and Scotland. It is understood that about 40% of the portfolio’s value comes from six hotels in London. All the hotels are operated by Marriott International under a 30-year management agreement that took effect in 2006.

In fact, there has been some buzz surrounding the deal for a while now. The February 2012 report of The Times, citing sources, had talked about a host of business entities participating in this bid, which include Singapore-based RB Capital, Indian conglomerate Sahara and a ‘mysterious Pakistani family’.

At Rs 750 per kg, Tata Salt Flavoritz is India’s costliest

India’s leading salt manufacturer and market leader (64% market share in branded salt segment), Tata Chemicals Ltd has introduced a new range of flavoured salts under the banner Tata Salt Flavoritz. Besides being a unique offering, what sets this new product offering apart is the fact that these are the costliest, being sold in India. Its introduction also marks the entry of the first indigenous brand of flavoured salts in India.

Ashvini Hiran unveiling flavoured salts

Available in three flavours viz. lemon coriander, red paprika, onion garlic and an extension in the form of black ground pepper powder, the salts are available in 60 grams packs and come in attractive hour glass shaped HDPE sprinkler bottles. Each flavoured salt is priced at Rs45 per 60 gram bottle i.e. Rs 750 per kilogram.

The company’s current offerings include Tata Salt priced at Rs 14 per kilogram, Tata Salt Lite that costs Rs 21 per kg and I-Shakti available at Rs 12 per kg.

According to Ashvini Hiran, chief operating officer - consumer products division, Tata Chemicals Ltd, the company has always carried the onus of delivering differentiated value-added offerings within the salt spectrum. “Tata Salt has been trusted for consistency in taste, purity, iodine content and assurance of health. With Flavoritz, we are now adding a pinch of flavoured salt to our portfolio. The idea is to give consumers never-tasted-before blends of flavours that give a new dimension to their daily food. Flavored salt is iodised salt mixed with natural flavours that makes mundane recipes sumptuously tasty,” said Hiran.

The company officials said that an in-depth consumer research and studies were conducted to identify the flavours and arrive at an optimal product formulation for Flavoritz. “The product development journey was an uphill task which needed creating own benchmarks in terms of product stability and striking the right balance between saltiness and combination of flavours. Several combinations were tested over the year to arrive at a formulation that suits Indian palate,” said Parag Garde, assistant vice president – marketing and strategy, consumer products business, Tata Chemicals Ltd.

The company will initially make these flavoured salts available in key metros starting with Delhi and Mumbai with close to 1 lakh units. By September 2012, the flavoured salts will be sold through modern retailers and key local kirana outlets across the country.

Tata Chemicals currently enjoys a market share of 64% in the branded salts segment and the company management is targeting to increase it by 5-7% in the upcoming fiscal. The company's distribution network currently at 11 lakh outlets across the country is also likely to grow by 15% in the next 12 months. The company currently has a production capacity of a little over 8 lakh tonnes p.a. and its average monthly sales volumes is around 75,000 tonnes per month.  

A part of the $83.5 billion Tata Group, Tata Chemicals Limited (TCL) is the pioneer and market leader in India’s branded Iodised salt segment. The company also provides affordable, safe drinking water solution to the masses with the introduction of its innovative, low-cost, nanotechnology based water purifier called Tata Swach. The company currently is the world’s second largest producer of soda ash with manufacturing facilities in Asia, Europe, Africa and North America.

Accor’s Formule 1 to take on Tata’s Ginger

This story first appeared in DNA Money edition on Saturday, March 24, 2012.

Accor, the French hospitality major, is set to give fierce competition to Tata group’s budget hotel chain Ginger with the India debut of its Formule 1 hotels at Greater Noida next month.

The Asia Pacific’s largest international hotel operator plans to open 10 more Formule 1 hotels, its first low-cost offering in India, by 2013-end.

Philip Logan, vice-president, Formule 1 Hotels, India, said, “It will be the first true international budget hotel brand in the country filling the void for standardised comfort at a competitive price of around Rs2,000 per person.”

Accor said it would also unveil the concept of standard rooms with a single price for up to three people, though it did not share details as to how this pricing mechanism would work.

Michael Issenberg, chairman and chief operating officer, Accor Asia Pacific, in an earlier interaction with DNA Money, had said, “The Formule 1 hotels are positioned at the economy segment carrying the sub-`2,000 price tag for a night’s stay. These hotels will largely compete with brands like Ginger and offer limited services. The food and beverage facility in these hotels will be outsourced to third-party firms.”

Industry experts said Accor’s pricing strategy would be a game-changer in the budget segment.

“The Rs2,000 tag for Formule 1 guestrooms is quite aggressive. It would be interesting to see how Ginger counters it, as when it (Ginger) was launched as Indione back in 2003-4 it had promised a pricing of under `1,000. However, its rates increased to over Rs2,500 over the years across most locations,” said a senior official of a leading hospitality consulting firm.

Details about the cost per key (one guestroom) for a Formule 1 hotel were kept under wraps as well. But industry experts said that cost of a Formule 1 guestroom would be around Rs20 lakh, excluding land costs. The cost per key at Ginger was pegged at Rs15 lakh, including land costs.

All the Formule 1 hotels in the pipeline (12 hotels by 2015) would be owned and managed by Accor.

Florian Kohli, general manager, Formule 1, Greater Noida, said the 114 rooms at the hotel are stylish, more restful, with soft colours, rounded edges and soothing lighting, as well as extra storage space.

“The soundproof rooms come with TV, free wireless internet, quality bedding and individually controlled air-conditioning,” said Kohli.

Govt levies 30% tax on start-ups receiving angel investment

My colleague Beryl Menezes contributed to this story which appeared in DNA Money edition on Monday, March 19, 2012. 

Entrepreneurs looking to raise angel or venture capital funding for their respective start-ups will not be very pleased with a recent amendment being made to Clause 21 of Section 56 of the Direct Taxes by the finance minister. As per the new ruling, start-up companies will now have to pay tax at the rate of 30% on investments received from angel investors and non-registered venture capital funds operating in the Indian market.

Saurabh Srivastava, co-founder, Indian Angel Network (IAN) believes this clause is extremely ill advised and has probably been triggered by the 2G scam. “Unfortunately, it is the equivalent of dropping an atom bomb on a city because one criminal needs to be killed. This clause will completely kill all angel investment in the country and, with that, spell the death knell of first generation entrepreneurship that had begun to mushroom over the last few years,” he said. Indian Angel Network has thus far invested in over 30 start ups in the last 6 years.

While the clause exempts venture capital firms that are registered with the Indian regulator - Securities and Exchange Board of India - SEBI, there are a host of such investors are not registered in India and funds raised from such firms will be taxed by the IT department.

The clause however, makes a big dent on funds being raised from angel investors operating in India because none of them are registered. Actually, there is no such category with the Indian regulator that allows this set of individual (angel) investors to register.

“I have over a dozen such (angel) investments in my personal capacity but I am not a registered investor. In fact, if this clause was in existent earlier, Spectramind wouldn’t have happened and so would have a host of other entrepreneurial initiatives that have shaped up in the last decade or so,” said Raman Roy, member, Indian Angel Network (IAN). Roy was also the founder of Spectramind which pioneered the concept of business process outsourcing (BPO) in India back in 2000.

 

Ravi Mahajan, partner, tax and regulatory services, Ernst & Young India, feels while the provisions have been introduced to track black money, it would negatively impact genuine angel investors. “Only venture capitalists have been exempted from this amendment and any valuation more than the fair value will be taxed. This will adversely impact angel investors, if funding is based on valuation that IT authorities don't agree with, then the companies will have to pay the difference between the forward-looking investment by the angel investor and the valuation as assessed by the Income Tax department, as tax - even if they do not make profits on the same. This will thus become a cost funding for the small companies, affecting their profitability. Cost of tax would also lead to longer break-even time for smaller companies,” said Mahajan.

Angel investors generally act as catalysts by making available the initial capital - starting from Rs 10-20 lakh to a crore or more - to new start-ups with a good business idea. These set of investors work towards promoting entrepreneurial initiatives by providing the much needed financial support and ensure such activities continuously flourish in the country. However, various measures enunciated for small and medium enterprises (SMEs) will now come to naught because of this one clause, feels the angel investor community.

“This is because angel investment precedes venture capital investment. For VC's to fund 10 companies, we need 1,000 entrepreneurs to be funded by angels. It is common knowledge that when you fund an entrepreneur who just has an idea and not much else, the definition of fair market value cannot possibly be determined by any valuer and certainly not by a tax authority but only resides in the minds of the entrepreneur and the investor. A tax officer could legitimately see the value as close to zero, whereas any angel investor who chooses to invest will do so because he / she sees great value and would buy shares at a huge premium because they would want the entrepreneur to hold a majority of the company,” said Srivastava.

Roy added, “What the clause does now is that, when we invest as an angel in a company, the income tax (IT) officials will raise questions about its networth. Start-ups are about ideas and concepts with no assets that can be quantified as its networth in the market. Angel investors pay for the idea which is yet to take the form of a commercially viable business model. Google was created as an idea with just $10,000 and the company is worth billions of dollars now. If the same $10,000 was to be given to an entrepreneur in India now, the IT department will impose a 30% tax on the money raised.”

The angel investment community asserted that rather than giving them a tax break for making such risky investments for creation of wealth and employment - as is done by most countries in the world - the Government in effect is taxing them and therefore, encouraging them to put their monies in unproductive assets like farm houses and real estate.

Sageraj Bariya, managing partner, Equitorials, a stock market advisory, research and training firm, said that the move will be contrary to the Government's aim of providing more jobs, as this would dampen entrepreneurial aspirations. “The Government does not have the right to decide the valuation of a company, and this is certainly not the solution for the problems that arose from forward-looking foreign investor funding, like in the case of Telenor-Uninor, which now have their licenses cancelled as a result of the 2G scam. This move will make foreign private equity companies think twice about investing in India, which will curb investment opportunities.

“Additionally, smaller companies - like many small IT firms who have gone in for this mode of operation - will face problems in attracting new capital. So for example - a partnership like Infosys and OnMobile, may not happen as frequently as before, as these larger firms would cut their investments to avoid taxation. The need for small IT companies to move from a services-led to product-led category, by getting funding from angel investors will also be significantly impacted by this move," said Bariya.

The Rs 1,000 cr premium domestic appliances market is growing at 30% annually

This Q&A first appeared in DNA Money edition on Wednesday, March 14, 2012.

One of India’s largest electrical and power distribution equipment manufacturer, Havells entered the the over Rs 5,200 crore Indian domestic (home) appliance market in August 2011. The idea, according to Anil Gupta, joint managing director (JMD), Havells India Ltd, is to grab a significant pie of this business by leveraging on their existing distribution channel network. He speaks on the company's new business vertical and the way forward. Edited excerpts…

What really led Havells to enter the domestic appliances business?
Previously we were dealing in products (electrical and power distribution equipment) which never required a consumer interface. However, 6-7 years ago, we added fans and lightings to our product portfolio which gave us a consumer interface which significantly increased over the years. The new offering also resulted in building a large dealer as well as service network across the country.

We were then looking at expanding the product category further thereby allowing us to foray into the consumer segment. We also wanted to take advantage of the existing infrastructure and realised that the dealer and service network required by the domestic appliances products was very similar to what we already had in place. We thought the best way to leverage on this distribution channel was by entering the Rs5,200 crore domestic appliances market in India.

Are your products catering to the entire domestic appliances market in the country or addressing a specific segment?
We consciously decided to address the premium category which currently is Rs 1,000 crore market in the country. Interestingly, this market is growing at a very fast rate of 25-30% annually. Going by the Havells brand perception, it made more sense for us to tap the premium domestic appliances segment with related products. We are currently offering a host of domestic appliances across five categories including food preparation, garment care, home comfort, cooking and brewing. The price range is anywhere between Rs 1,000 going up to Rs10,000.

Who would your direct competitors be in the domestic appliances category?
Our products compete with brands like Philips, Panasonic, Murphy Richards etc.

How much has the company invested in this business?
A capex of Rs 150 crore has been earmarked already in this fiscal of which Rs 70– Rs 80 crore is being spent towards marketing, research and development of small appliances range in next 24-36 months.

What is the company’s strategy with respect to designing and manufacturing of these products?
We already have a large research and development (R&D) base in China, which has been designing our products snice a couple of years now. Of our entire range at present, 50% is coming out of China and the balance from India. We have not set up our own manufacturing plants and are using large outsourcing partners to make these products based on our prescribed design and quality standards. In fact, this is the first time ever that Havells has outsourced manufacturing of the products as 95% of the company's products were manufactured in-house.

Will you continue outsourcing route or plan to set up own manufacturing facilities as well?
It depends on how the volumes grow. If a particular product category requires to be done in-house, we will certainly look at the option.

What is the size of this business for Havells?
We are expecting to do more than Rs 100 crore in revenues in the first full year of operation i.e. the next financial year. The target for next fiscal will be Rs 200-odd core and eventually hitting the Rs 500 crore mark in the next 4 years.

Could you throw some light on the company's distribution network?
As far as overall business is concerned, we currently have more than 4000 distributors across the country. Of this approximately 1,500 distributors are for consumer and domestic appliances business.

How are you going about leveraging this distribution network?
We have identified various distribution channels for the domestic appliances business. To start with, we have the direct dealer network (1,200) that operates multi-brand outlets, then we have distributors (100) who sell to retailers primarily in the tier II, III cities and finally the Havells' single brand - Havells Galaxy Stores  - outlets (150) being rolled out through the franchise mode. This apart, we are also selling through 40-odd modern retail outlets like Croma, Spencers, More, Vijay Sales etc which are significantly growing across the country.

Considering the extensive range of products being offered under the Havells brand, we are looking to significantly expand the network of single brand outlets across the country. Havells Galaxy Stores will be increased to over 200 stores within a year.

Are you also planning to take the e-commerce route to retailing the Havells brand?
Although the kind of sales being generated through the online channel is extremely small right now, online shopping for such products will also increase in the coming years. Keeping that in mind, we have already started work on our e-commerce platform and will definitely launch it in the near future.

Any plans to get into the consumer electronics segment down the line?
No we don’t intend to tap that space as that business requires a completely different kind of a distribution network.

Are you also witnessing pricing pressure owing to increasing input costs?
The challenge for any good company is how to get the right quality at the right price. There certainly is a lot of focus on expanding the distribution and keeping the costs at bare minimum. Companies work on various designing concepts to reduce the cost of the product for the end customer. So while we are committed to give a high quality product, it does not necessarily mean a high cost.

Would you consider tapping the mass market segment of domestic appliances as well?
When I say premium products it is actually mass market but high quality. There is a switch happening from the low quality to high quality branded products which is why the over Rs1,000 crore market is growing at 30% odd annually.

A lot of private equity exits will happen by second half of 2012, says Archana Hingorani

This Q&A first appeared in DNA Money edition on Monday March 12, 2012.

After seeing a huge traction till the first half of 2011, the private equity (PE) market turned lacklustre in the second half. While the number of deals has gone down, the sizes too have shrunk. Archana Hingorani, chief executive officer and executive director of the BSE-listed IL&FS Investment Managers Ltd (IIML), one of the largest PE funds in India, with over $3.2 billion under management, spoke about the overall business environment for PE firms and developments within her company. Excerpts from the interview:

Q: PE exits have significantly slowed in 2011. Do you see the momentum picking up in 2012?
A: There certainly has been a slowdown in PE exits, which were looking very promising till the first half of 2011. That’s also because the market was looking very buoyant and stable between second half of 2010 and first six months of 2011. In fact, most of the exits that have happened in the last fiscal or are about to happen in the next fiscal, are all because of negotiations done in that period of 2010-11.

While some deals have already been concluded, many will happen in 2012. This is because in the second half of 2011, there was no expectation or ability to convert the exit discussions into a meaningful transaction. Having said that, the funds would have exited but most of the transactions wouldn’t have probably given the real value to the investors.

Q: IL&FS Investment Managers also made a few exits...
A: Yes. Our earliest exit in the last fiscal I can remember was Continental, which we sold to Warburg. But that was based on the work done in the first quarter of 2011. Everything takes time and it really is an amalgamation of a lot of work that has gone into negotiations prior to the deal getting announced. Even from this fiscal perspective, while we have done some partial exits, many of them are related to our real estate projects that have seen sales happening, with cash flow coming back into the business. Other than that, I don’t think there has been any significant full exit in 2011. I think a lot of that (full exits) will likely happen in the first six months of 2012 because a lot of work has already been done on them.

Q: Has the increased timeframe for concluding transactions impacted the size of the deals being discussed over a period of time?
A: I think post-2008 investment sizes have shrunk primarily on the real estate side. While we had a very large, fund and it would have been ideal to put in, maybe, 15 investments overall. That would have made the per-investment size way too large from an opportunity perspective. I’m not saying we are putting less in a transaction and asking other people to support it.

We are just doing smaller transactions because I don’t think in the real estate space - at least from a risk-return perspective - it makes any sense to put in $100 million pieces. While real estate per se needs a lot of money, the kind of transactions we are comfortable with are ideally in the $20 million to $50 million bracket. Based on our learning from the previous fund in 2006-07, we made smaller investments from the second fund, primarily because of the investment cycle; the amount of time taken for project completion is too long. The impact hasn’t been much in the growth capital (PE) side, especially because we are operating in the mid-market space and not putting $50 million or $100 million in a transaction.

Q: Is that the reason you always invest in special purpose vehicles (SPVs) and not at entity level?
A: We have never done entity-level investments and are biased to SPVs because one has a lot of clarity on the kind of the project, the cash flows, timelines and the exit pattern. This is not the case with entity-level investments because of the diversity of projects, and one is not able to understand how each underlying entity is doing. Besides, one has to significantly rely on public markets for an exit — which has timing-related issues.

There may be just one entity-level investment in Fund I while Fund II is entirely SPV investments. Besides, even at the SPV level, we are only focusing on smaller investments and will not go beyond $50 million a piece. We took a conscious call that the portfolio will become bigger and will require more management bandwidth.

Q: Among the three verticals— private equity, real estate and infrastructure — which one will see a lot of activity in 2012?
A: We see opportunities across and would happily and readily invest from all the three verticals if we have investible corpus. While there is an economic slowdown, assuming that interest rates are likely to come down, we do expect businesses to start coming back to growth stage. Now whether infrastructure investing will be slower than private equity or real estate will largely depend on what opportunities are being looked at.

The market isn’t expecting significant changes, but if the companies already have projects that were bagged 2-3 years ago, these are still under implementation and a lot of such investment opportunities are available. We would certainly be looking at investments across the sectors, and in infrastructure we see a lot of potential in waste management, ports and logistics.

On the growth (PE) side, we are looking at consumer-oriented businesses that are focusing on domestic consumption, while for the real estate vertical it will be largely the residential developments in the metros. That has been our investments theme and it hasn’t really changed in the last 2-3 years.

Q: What is the extent of investible corpus with the company as of now?
A: There is money left to be deployed in the infrastructure vertical (Standard Chartered IL&FS Asia Infrastructure Growth Fund — $658 million) to the extent of $250 million to $300 million. So around 40% of the original corpus we raised in 2008 is still available for investments. We are fully committed in the real estate fund, so there is no investible capital available. On the PE side, we were fully committed last year and have kick-started an exercise to raise a new fund. The growth fund is expected to be $300 million and we are very far away from that number as of now.

Q: When do you expect to do another fundraise for the infrastructure vertical?
A: We will do a fundraise as soon the corpus starts dwindling; this is a vertical where we will be deploying money this fiscal. While in normal circumstances, investment firms start new fundraise as soon as they have invested 70% of the overall corpus. However, the market has changed and the investor’s (limited partners) focus is more on the fund’s past performance and how well the underlying portfolio is really doing. I think that’s a right thing to do from the investor perspective, and our view is that the scenario is completely different in terms of when we want to start the fundraising cycle.

Q: Is the scenario indicating a possible change in the overall fundraising approach by PE firms in India?
A: If you look at our real estate vertical, we are 100% committed, but we have not yet gone out because we want to be fully invested. And because it is a new sector for India in terms of performance, track record, return on investor capital, it is more important to show operating / financial performance on the portfolios before going back to the LPs (limited partners) for another fundraise.

Q: By when will the next round of real estate fundraise happen?
A: We will start around June or so this year once we are fully invested. The corpus for our new real estate fund will be half the size of what the earlier fund was. This is because we have halved our investment size. If you have a large fund, portfolio management becomes a big challenge. The overall figure for this fund will probably be around $500 million vis-a-vis the $900 million we did in the earlier fund.

Q: Will the fundraise be largely from international markets or will you look at a mix of domestic and international markets?
A: We have done both in the past, but clearly the dollar approach is looking much better, especially looking at the rupee conversion rate; so we will do a 90:10 ratio in our funds.

Q: Which international markets are you looking to tap for the new fundraise?
A: It depends on the sectors largely. For instance, in real estate, the US investors have been ahead of the curve while it is the European investors when it comes to infrastructure. As we raise only $200 million-$300 million at a time, the set of investors in growth (PE) is pretty small. While there are institutions from across the world, a lot of family offices from Europe, Asia and the Middle East form part of investors in the growth fund.

Q: You think domestic high networth individuals (HNIs) are a good source when it comes to raising funds?
A: Internationally, family offices are largely HNIs to a great extent. As for Indian HNIs, the domestic market hasn’t matured to an extent that we can boast of having a family-office concept. There are a handful of them (like Azim Premji’s) currently which will morph into what are traditional family offices over time. But from a risk-return profile, is an individual investor putting Rs5-10 lakh in a PE fund the right candidate? The answer is no. This set of investors doesn’t understand how the PE business functions and the lack of awareness continues in the market. They are more appropriate for product-oriented or yield funds because that makes more sense for such investors.

Q: Could you take us through the performance of IL&FS Investment Managers’ portfolio of investee companies? Has the slowdown impacted their performances as well?
A: It will be very difficult to discuss each company. All I can say is that despite difficult times, many of our companies are growing at over 25% and there are a lot of them in the portfolio. There has been a slowdown significantly with investee companies from the older portfolio.

Q: Is any of them likely to do a fresh round of fundraise or go in for an initial public offering?
A: There are no new rounds of fundraising. However, some of them (in the waste management and infrastructure sectors) will certainly get ready for a public offering in the upcoming fiscal. Work is in the initial stages but some of them will hit the markets in the next 12 months. I feel if you have the right company which is doing well and expected to sustain future growth with a reasonable approach to valuations, then there certainly is room, and we have seen that happen with a few companies in the last few quarters.

Pride loses Biznotel Aurangabad to Berggruen’s Keys

Global billionaire investor Nicolas Berggruen’s Indian hospitality business operating under the banner Berggruen Hotels P Ltd has been appointed as the new managers of the Pride Biznotel The Aures hotel in Aurangabad. As a result of this recent development, the 4-Star property will now join the fast growing brand of Keys Hotels and has now been re-branded as Keys Hotel The Aures.

The 62 rooms Aurangabad hotel is owned by Aures Hospitality Group (AHG) that has entered into a strategic partnership with Berggruen Hotels. It is understood that the two partners will explore more opportunities across the country. The group has also initiated plans for a mixed use development comprising of 100 rooms hotel at Nashik, though it is not clear at this stage if the hotel will also be managed by Berggruen Hotels.

Located in the heart of Aurangabad the hotel caters to business as well as leisure travellers. The hotel is close in proximity to the major industrial areas of Aurangabad, and is strategically situated at a distance of 10 kms from the Airport and 2 kms from the Railway Station.

According to Rajesh Choudhary of Aures Hospitality Group the partnership with Berggruen Hotels is aimed at offering guests, a cutting edge hospitality experience. “Aurangabad is a multi-purpose destination offering pilgrim and heritage tourism besides business travel due to vibrant industry in and around the city. With Ajanta and Ellora being on the Buddhist Trail, it attracts fair amount of overseas tourists as well,” he said.

The Keys Brand currently operates its own hotels in Trivandrum, Ludhiana, Bangaluru (Hosur Road), Bangaluru (Whitefield) and manages hotels for owner partners in Lonavala, Mahabaleshwar, Chennai, Mumbai, Pune and Aurangabad. The room count currently in operation is 1127. The company currently employs 1,100 people and will have two additional Keys properties at Vishakhapatnam and Cochin. In addition, development activity is under way at Goa, Lucknow, Baroda, Kovalam, Raipur, Shirdi and Gurgaon.

Sanjay Sethi, managing director and CEO, Berggruen Hotels, said the hotel company’s plans to launch Keys Hotels in India are well underway. “We will continue to tap into a growing market of savvy travelers’ seeking good value for money and stylish surrounds, delivered by a strong management team who are experienced and at the leading edge of thinking in the hospitality market,” he said.

The hotel group’s turnover in 2011-12 from all owned and managed hotels is Rs 82 crore and by the year 2015–2016, it expects a turnover of Rs 215 crore. In addition, the company expects to operate 20 managed hotels with employee strength of 2, 500 people and a total room count of 3,500.

The newly added Aurangabad hotel has 5 categories of rooms from Executive to Club to Deluxe suite targeting the upwardly mobile corporate traveller and also provides facilities like Harry’s Bar and a multi-cuisine restaurant - Blue Cilantro. Among other facilities include a 24/7 gym, business centre, pick up and drop luxury transportation to and from the airport, banquets for specific requirements, high-tech conference rooms and seamless Wi-Fi connectivity on the premises.

Oberoi Group's VP - development, Davinder Singh joins The Leela Palces, Hotels And Resorts

Here is another senior management level movement from the Indian luxury hotel chain The Oberoi Hotels & Resorts.

Davinder Singh, vice president - development of The Oberoi Group of Hotels (EIH Ltd) has joined The Leela Palaces, Hotels and Resorts as the hotel chain's vice president for development. In his new role, Singh will be involved in all aspects of development including, site selection, design, branding, negotiating management and joint venture agreements and working with external property and financial consultants.

An avid traveller Singh holds an honours degree in economics from Punjab University, Chandigarh and has nearly 35 years of extensive business experience and specialised knowledge in the hospitality industry. He started his career with Remington Rand India Ltd as a management trainee. Subsequently, he worked as an assistant sales manager, Welcomgroup Searock, Bandra Lands End (Mumbai); sales manager - Tours, Travel House; sales manager, Hyatt Regency, New Delhi and as sales manager - tours with Mercury Travels India Ltd before joining EIH Ltd.

Rajiv Kaul, president, The Leela Palaces, Hotels and Resorts said, “Davinder joins The Leela family at a very crucial time in the expansion of the brand and we are delighted to welcome him on board. His expertise and extensive experience in Development, coupled with a reputation for excellence makes him an outstanding asset.”

Earlier Rattan Keswani president of Trident Hotels with the Oberoi Group had quit and is currently serving notice period. The market has it that Keswani is set to launch a new venture. Will have to wait till April-end / early June to know what venture is he really launching.

Film makers, distributors find a win-win formula

This analytical feature first appeared in DNA Money edition on Monday, March 5, 2012.

What decides a Bollywood film’s fate? Is it the lost-and-found formula, a hallowed star or a sizzling item number?

While these no doubt play an important role, certain rules set by distributor associations, too, can temper the boom of a blockbuster on the box-office or be a deciding factor as to whether a film will at least recover the investment.

The film fraternity—producers and distributors - claim that rules of distributors’ associations that decide the number of theatres in which a Hindi film would be screened and when the satellite versions will be out have led to losses running into crores for several decades.

However, all that is set to change.

A recent order passed by the Competition Commission of India (CCI) that curbs the power of regional theatre associations has come as a major breather to Bollywood film producers, distributors and exhibitors, who can now wring the last penny as far as the new film releases are concerned.

The film industry feels the order gives them a level-playing field.
It all started in 2010 when Anil Ambani group-promoted Reliance Entertainment decided to take the Karnataka Film Chamber of Commerce (KFCC) head on.

As per the KFCC rules, a non-Kannada movie could only be released in 21 theatres in the state. Reliance Entertainment, the distributor, however, released the film, Kites, in 46 theatres, which prompted the KFCC to ban the movie and stopped the release across the state.

Reliance Entertainment says it suffered losses of around Rs2.5 crore in Karnataka alone as it was not allowed to release Kites across the 200-odd screens in the state. Experts said theatres and multiplex chains, too, collectively lost an equivalent sum if not more because of the KFCC rules.

To avoid a similar situation for its next release, Raavan, Reliance approached the CCI, which gave an interim order before the release and the distributor was allowed to screen the film in as many theatres it wanted.

Sanjeev Lamba, chief executive officer, Reliance Entertainment, said, “We incurred huge financial losses but held our ground; and after two years, this historic order will change the business dynamics of the industry.”

Six months down the line, other producers like UTV Software Communications and Eros International joined in as some of their releases were also facing restrictions by distributor associations.

The film fraternity in the last two years has been resorting to seeking interim orders from courts every time a new film release came up. Experts say the film makers have spent a significant amount of money (believed to be in crores) towards legal expenses for this.

“While large corporate entities could possibly spend on legal costs, it is the small producer, distributor and exhibitor who continued to book revenue losses owing to the restrictions. However, the trade partners can now heave a sigh of relief,” said a top official from a large production house.

Kamal Jain, group chief financial officer, Eros International, feels the ruling will play a crucial role in curbing the non-compete environment. “The compulsion of taking membership of a regional association every time a producer is releasing a new movie meant working in a closed environment. A producer / distributor can now freely release his film without having to worry about the archaic rules and guidelines prescribed by the regional associations. It is going to be a fair play market for everyone and no association can put any restrictions on distribution and exhibition of movies anywhere in the country,” Jain said.

But how does the film market work?

The Indian film distribution market is divided into 14 circuits with each of them having a distributors’ and or exhibitors’ association. Producers and distributors are required to become a member of these associations every time they want to release a film and follow the prescribed set of rules and regulations laid down by these associations.

However, film makers claim utilisation of the cinema screen inventory in a particular region was not optimum because of these rules.

Besides restricting the number of screenings, the association also insisted the producer / distributor to follow a holdback period with respect to monetisation of content across other mediums (television, satellite, compact disc / DVD, etc), which led to under-selling of distribution or telecast rights.

Post the CCI order, Jain said the holdback terms and conditions will now be decided by business partners like IPR owners (UTV, Eros, Reliance, etc) or television channels (Zee, Sony Star, etc).
“I can certainly say that the order will significantly enhance business prospects in terms of monetising the new film content across platforms,” said Jain.

For the exhibitor fraternity, the CCI order means no restrictions on the number of shows and simultaneous release as per the film’s national release date — new Hindi films were allowed a release in Karnataka only after two weeks of its first release.

However, the CCI order does not apply on restrictions put in place by the various states for screening Hindi films. The state restrictions are not severely negative, hence not a big concern for exhibitors, experts said.

While industry players did not exactly quantify the kind of losses or the incremental revenue the fraternity could have booked, they feel it could be in the region of 5% per film.

“Taking a thumb rule average—the incremental revenue for smaller films will be less and vice-versa—the delta could be in the range of 1%-2% for the entire industry. The total film industry is in the region of Rs12,000 crore and the theatrical component roughly is 60% of the overall industry size, that is, Rs7,200 crore. Taking delta of 1-2% figure into consideration, the incremental revenue for the various stakeholders is in the range of Rs72-144 crore,” said the industry expert.

While the figure may appear small given the size of the industry, with the restrictions gone, producers / distributors / exhibitors can put together a better business plan that would enhance revenues.
“Today, India has more than 12,000 screens, but even the big blockbuster movies are released in only 3,000-odd screens. So the whole release plan can be taken to a different level now and the incremental business can be much larger than the 1- 2% being arrived at earlier,” the expert said.

Also, in a few territories, the associations would restrict the membership to only non-corporate entities and a private / public limited company could never become a member of the association.

“One had to be either a partnership or a sole proprietorship to become a member of the association. So partnering with the local guy was the only option for organised players to distribute their films in such territories before, which is not the case anymore,” said a top industry official.

While everything certainly appears hunky-dory for the film fraternity, some analysts feel that the CCI decision may not work for film exhibitors (theatres and multiplex chains).

“They will no longer be in a position to negotiate higher revenue share with film producers / distribution going forward,” said an analyst with a local brokerage.

Kamal Gianchandani, president, PVR Pictures, said, “There is a mutual agreement in place already between distributors / producers and exhibitors to share revenues in a certain manner.

All of that has already been put on paper and agreed up on. So irrespective of the CCI order, there are no concerns for a film exhibitor as far as revenue share is concerned.”

However, the CCI order certainly is a negative for a section of exhibitors who make advance payments to distributors for booking a particular film in their respective theatres. There is an industry practice wherein an exhibitor makes advance payments to the distributor for booking a picture. The advance payment is made to the distributor against the share the exhibitor will generate after the film releases.

For instance, if the exhibitor pays, say, Rs1 lakh as advance to the distributor, but his share is only Rs50,000. The exhibitor will have to recover Rs50,000 (excess advance) being paid to the distributor. If the distributor does not return the money on time, the exhibitor could then take the distributor to the association, which puts pressure on the distributor to clear the amount at the earliest.

“Now this dispute resolution mechanism will go out of the window because of the CCI order. This is because the distributor no longer has to register with the association which was the case earlier. Since the association has no jurisdiction on such disputes, the exhibitor will have no option but to go to the court to recover the money from the distributor,” said Gianchandani.

The general perception in the industry is that going to the court is a very time-consuming process and expensive proposition for such small sums. In fact, one may even end up spending more time, effort and money for it, which doesn’t make business sense.
“This certainly is a problem that will crop up in coming years which is a bit of a negative, particularly for smaller exhibitors. Though it is not something multiplex chains need to worry about,” said Gianchandani.

Similarly, any dispute between a distributor and a producer (with respect to advance payments) would earlier get resolved by these associations as the producer will not be allowed to register the new release unless he has cleared the backlog (if any). Now that the producer is not required to register, the distributor will have no option but to go to the court.

This could also mean that the commercial arrangement between producers, distributors and exhibitors is bound to change as distributors and exhibitors will have to be extremely judicious about producers and the amount of money they pay them in advance. There is no association protection now and the matter will have to be resolved in the court.

The distributor associations are planning to move the Supreme Court against the CCI order as the purpose of their existence is nullified. The procedure, however, prescribes that the associations will have to first file an appeal with the CCI and later move the apex court.

While the distributor associations and film makers battle it out in the court, new Hindi films would continue to be screened in more theatres.

The Complainant

The film fraternity comprising (Reliance Entertainment, UTV Software Communications, Eros International and FICCI Multiplex Association of India) had filed a case against distributor associations like KFCC (Karnataka Film Chamber of Commerce) for putting a restriction on the number of cinemas to release a non-Kannada film and BJMPA (Bihar and Jharkhand Motion Pictures Association) for demanding unreasonable holdbacks for registering its films.

The issue, according to the film fraternity, was that these associations barred studios from exploiting satellite and home video rights in the respective regions. This apart, studios were compelled to register films with the trade body and bend to their archaic rules. As a result, this constrained the market access of the studio for unfettered distribution of its films on non theatrical platforms.

The CCI Order

The CCI ruled that the anti-competitive behaviour of any entity needed to be condemned heavily for effective function of the market. It said that the associations were taking decisions and engaging in practices that were anti-competitive. Consequently, in February 2012, the CCI also imposed a hefty penalty on these distributor associations.

According to the CCI order, the associations will have to stop:

(a) Compelling producers / distributors / exhibitors to become their members as a pre-condition for exhibition in their territories.

(b) Discrimination between regional and non-regional films and imposing discriminatory conditions against non-regional films.

(c) Screen restrictions based on language or manner of exhibition of a film to be done away with.

(d) Holdbacks on satellite and home video, with studios are free to decide such holdbacks.

(e) Compulsory registration of films as pre-condition to release to be done away with.

Reliance Industries acquires Analjit Singh’s stake in East India Hotels

Mukesh Ambani-led Reliance Industries has acquired Max Group chairman Analjit Singh’s 3.73% stake in PRS Oberoi promoted East India Hotels (EIH) Ltd that owns and operates hotels under The Oberoi and Trident brands.

Singh’s investment firms Gaylord Impex and Pivet Finances sold all the 21,315,000 EIH shares in a bulk deal to RIL subsidiary Reliance Industries Investment and Holding Pvt Ltd at Rs90 a piece valuing the deal to Rs191.83 crore. RIL’s current holding has thus increased to 18.53% from 14.8% earlier.

The increase in RIL's shareholding in EIH however does not trigger an open offer because, in August last year, the Securities and Exchange Board of India (SEBI), raised the initial trigger threshold for an open offer, from the 15% to 25%. The market regulator also increase the open offer size from 20% to 26%.

As a result acquirers will now need to make mandatory open offer for further 26% stake from the public shareholders after buying 25% under a private sale. The minimum stake that an acquirer can now obtain in a target company after the open offer if fully subscribed would be a controlling 51%.

With Ditto TV, Zee eyes a game-changer

My colleague Beryl Menezes co-authored this story which appeared in DNA Money edition on Thursday, March 01, 2012.

Zee New Media, the digital arm of Zee Entertainment Enterprises Ltd, is set to change the way television entertainment is consumed in India.

It has introduced Ditto TV, an over-the-top (OTT) television distribution platform, to provide paid entertainment content on portable mobile devices.

Initially available in cities like Mumbai, Delhi, Pune and Bangalore, Ditto TV offers ‘live’ television channels and on-demand video content on devices including mobile phones, tablets, laptops, desktops, entertainment boxes and connected TVs.

Punit Goenka, managing director & CEO, Zee, said with Indian consumers increasingly becoming mobile, smartphones and tablets have really changed the way people work, play or view entertainment.

“The need for mobile entertainment and news has only increased over the last few years. Globally, mobile television has witnessed overwhelming reception. In fact, a recent research by Nielsen said that entertainment and mobile television is potentially showing signs of becoming the first stream of choice for the consumers,” he said.

While the company did not share any investment details, Goenka said, “We have made significant investments in this initiative and will continue doing so in the years to come. Over the next one year, we are targeting a subscriber base of one million active users for mobile TV and are aiming to capture a considerable pie of the six million active 3G audience in India. In the long term, we envisage new media division (which includes Ditto TV), contributing approximately 10% to the total revenue of Zee.”

On the business arrangement with other TV channels that are being distributed on the Ditto TV platform, Goenka said, “We have modelled our business purely on revenue share. It is very similar to what is being followed already in terms of commercial arrangements with broadcasters in the direct-to-home space.”

Ditto TV will initially offer 21 channels offering premium content across GEC, sports, lifestyle, regional, news and other genres. Consumers have a host of subscription options (prepaid cards), starting with `21 per month for a single channel, `49 per month for three channels going up to platinum pack priced as `2,499 per annum for the entire bouquet. It has entered into distribution pacts with retail channels like Croma and Vijay Sales.

Vishal Malhotra, business head - digital media, Zee, said, “We are initially launching in four cities but as 3G grows we will expand to other cities and potential rural markets. The channel offering will be increased to 100 in the next 6-8 months. In another two months, we plan to get into music and movies domain, too.”

The company sees increasing internet penetration across towns, handset manufacturers bringing in new devices with larger and better screens and social media integration increasing demand.

“We are just warming up to 3G. However, devices like tablets and smartphones being in great demand already, mobile TV is bound to see compelling growth numbers,” said Goenka.

The company is simultaneously planning to introduce Ditto TV in countries including the UK, UAE, Australia and New Zealand. It plans to roll out the service in the US in a few quarters.

Ditto TV has partnered with Siemens Communication and Media Technology to develop a strong technology platform that will offer adaptive streaming.

BSNL, Zenga and Apalya Technologies are among the few others that offer mobile TV in the Indian market.

Zenga, a free platform, has a 65-70% share of mobile TV market in India. It says its revenues grew 250% over the last year since the launch and expects it to grow two-fold annually. Mobile TV currently makes up 1% of the total entertainment space.

A Zenga spokesperson said about 90% of its revenues come from 2G users and expects 4G and LTE technologies to give a push to the segment.

Prime Focus to steer AP’s digital drive

This story first appeared in DNA Money edition on Saturday, February 25, 2012.

Prime Focus Technologies (PFT), an Indian content operations solutions provider, has secured a huge contract from The Associated Press (AP) that involves digitisation of the global news network’s unique video archive. AP is looking to take the archive to a whole new audience across the digital spectrum. The project is part of the news agency’s broader strategy of multimillion-dollar upgrade of its video business.

Ramki Sankaranarayanan, CEO, Prime Focus India, and president and CEO of Prime Focus Technologies Pvt, said the fairly large project was part of a public tendering process wherein AP had invited bids from across the globe. “The tender process was kick-started in July last year and we won the competitive process. It’s a large tender though I will not be able to share financial details owing to the non-disclosure agreement (NDA),” he said.

For the PFT management, this deal opens up a very significant business opportunity as several other big networks around the world would be looking to digitise their catalogue as well. “It is a very innovative and cost effective way of dealing with digitisation of content / archive and we are bringing in a lot of value addition to the table. We are expecting this development will drive a significant amount of project traffic to our facilities,” the CEO said.

PFT’s global competitors in this space include the likes of Technicolor and Deluxe Entertainment, among others. However, it could not be ascertained whether the two companies had taken part in this tendering process.

AP’s digitisation exercise is largely fashioned to let the company switch its entire newsgathering, production and distribution system to the high definition (HD) mode. The trigger, AP officials said, was primarily to meet technical, editorial and business requirements of its global customers in this digital age.

AP’s film and tape archive contains around 70,000 hours worth of footage, including more than 1.3 million global news and entertainment stories, in 16 mm film and videotape, dating back to the beginning of the 20th century.

PFT will be driving this project using its proprietary content operations platform and supporting services solution called CLEAR. The digitisation work will be undertaken from its facilities in the US (New York) and UK (London), in addition to Indian facilities operating out of Mumbai and Bangalore.

“Currently, we have a team of over 550 developers writing bespoke scripts to support the innovative workflows required by this project. We will also utilise our own cloud technology for supporting services,” said Sankaranarayanan.

According to Alwyn Lindsey, director - international archives at AP, the company was looking for a partner with the ability to handle their global business needs and a project of this scale and thus, PFT was picked up. “Today’s market is driven by giving customers breadth of content, ease of access, and value for money. While we have already digitised around 10% of our archive, it has been a top priority to get all of our most saleable archive footage online and make it available to our customers, wherever in the world they may be,” said Lindsey.

The stakes are high. News networks like CNN, CBS, Al Jazeera typically tend to deal in their content in a unique way, which explains why the need for content is going through the roof. “All these networks now have a mechanism to fulfil that requirement in an effective manner,” Sankaranarayanan said.

In fact, PFT has already been working with a host of Indian and international entities on digitising archive content.

Some of the organisations currently using their service include British Movietone Library, British Film Institute, Imperial War Museum, IMG, Board of Control for Cricket in India (BCCI) and Eros International.

On the possible size of this market in India or globally and the extent of business PFT will be looking to tap going forward, Sankaranarayanan said, “I do not know if there is any formal research done on the market size.” PFT’s internal estimates, however, indicate that billions of dollars are spent on digitisation. “While this is a split between print and moving images, it is the latter where we see a significant growth happening in the years to come,” he added.

PFT will have to deliver the entire digitised archive and create nearly 4 million new assets in 18 months. The scope of work will involve digitising 3,000 hours of film with an average of 60 news stories per hour (i.e. creating a total of 900,000 files) and 29,000 hours of video with an average of 20 news stories per hour (i.e. creating a total of 2,900,000 files). The newly digitised content will appear daily on AP Archive’s website which will be facilitated by a dedicated connectivity between PFT and AP.

Agri growth scorcher drives private equity activity

This story first appeared in DNA Money edition on Saturday, February 25, 2012.

The vast Indian agricultural market and a pick-up in related activity have triggered a surge in private equity (PE) placements and merger and acquisitions (M&A) in this sector over the past one year.

Pundits believe there is still so much of growth upside left. Raja Lahiri, partner - transaction advisory services, Grant Thornton India, said agriculture as a sector is promising and there is a reasonably good private equity interest, especially in the segment like seeds. “Funds tend to chase businesses that address the bottom of the pyramid theme and investing in agriculture and related businesses do fit in to their investment theme,” said Lahiri. Agriculture and related businesses as a segment include the entire value chain of foods, agriculture produce, seeds, fertilisers, agri-technology, and agri-infrastructure.

While three deals have already been announced in the current calendar year 2012, industry experts see a lot many in the pipeline, which will get closed in coming quarters. Among deals that have already been concluded are Malabar Trading Co’s majority stake acquisition in Protect Nature Pvt, takeover of Hyderabad based Rohini Seeds by agro chemicals company Crystal Group and private equity investment by Song Investment Advisors in SV Agro Processing. Deal value of all these transactions have not been made public though.

Even the terms of trade appear to be gradually changing in favour of agri crops which basically mean the price of agri crops is increasing at a much faster clip than manufactured goods.

Analysing the key factors driving the trend, G Chokkalingam, executive director and CIO, Centrum Wealth Management, said it’s the highly populated countries like China, India, Brazil, Russia, South Africa that have logged the fastest economic growth in the last 7-8 years. “However, the size of cultivable land has only declined in this period. This has put tremendous pressure on agri crops as well as demand for food which is only rising. Interestingly, within India, the fastest growth is coming from the densely populated states like Madhya Pradesh, Uttar Pradesh, Orissa etc. So, on one hand, there is increase in food demand and cost, and shrinkage in cultivable land on the other.” He felt that climate variations will necessitate strong inputs for the agriculture sector in order to improve productivity. “Taking these factors into consideration, I feel the agri and related businesses will attract a lot of attention from investment companies. In fact, I see it as a major theme on the bourses in the next 2-3 years,” said Chokkalingam.

Another reason for increased attention from PE firms is that the size of these businesses has reached a certain scale in the last 3-4 years. Earlier, such businesses were too small and would only attract the start-up investors or investments from venture capital funds. Unfortunately, there weren’t many such investment entities in India, thus dampening growth and investments in this sector.

“The real growth capital story will start to unveil now because the sector itself has reached a certain scale ranging between Rs 60 crore to Rs 200 crore. Thus, it now makes sense for funds to look at investments of Rs10 crore to Rs 50 crore in such businesses. My sense is it will largely be growth capital PE deals that will dominate the market in the next couple of years. This is likely to be followed by a couple of buyouts though generally speaking, India is still not ready for such transactions, especially in the agri and related segment,” said Rajesh Srivastava, chairman and managing director, Rabo Equity Advisors (an agri-focussed fund).

IDFC Private Equity has also hopped on to the agri-business investment bandwagon by acquiring a significant minority stake by investing Rs 150 crore in Jaipur-based Star Agri Warehousing and Collateral Management. Girish Nadkarni, partner, IDFC PE, said, “The placement has been done through our $650 million IDFC PE Fund III.”

The funds will be deployed by Star Agro for expanding the warehouse network and creating a pan India network of allied post harvest management services. We are expecting the investment payback time frame to be 3-4 years from now.” He did not share precise details on their expected rate of returns though, “It would be in the same region as is the case with any standard internal rate of returns (IRRs) with PE investments,” he said.

Additionally, Bombay Stock Exchange (BSE) listed Onelife Capital Advisors Ltd is currently in the process of considering a proposal to acquire a group company Oodnap Agrotech Ltd (OAL) engaged in the agricultural and related business activities.

According to data compiled by Grant Thornton India, agriculture and related business segment attracted 14 M&As and 8 PE deals amounting to $586.56 million and $19.12 million respectively in the year 2011. The number was significantly higher in 2010 wherein the sector witnessed 26 M&As and 8 PE deals worth $354.73 million and $157.41 million respectively.

Srivastava said that the number of funds targeting this space has increased significantly vis-a-vis just a handful of sector-focussed firms in the past. “This is a good development for the sector because ultimately PE investors are seeing value in such businesses which will eventually help them expand better in the coming years. From the perspective of both volume and number of deals, 2012 will be better than 2011 for PE investments in this sector.”

In fact, Rabo Equity Advisors is expecting to close 3-4 fresh deals in the next couple of quarters and will raise a new fund as the existing corpus will get exhausted post the new placements. “The new fund will be launched by the end of this year. Precise details on the same will be finalised in over a couple of months from now,” said Srivastava.

PE investor in Ginger is a Tata Capital firm

This story first appeared in DNA Money edition on Thursday, February 17, 2012.

Indian Hotels Co Ltd (IHCL), the Tata group hospitality flagship, had last March announced Rs320 crore investment by Singapore based private equity firm, Omega TC Holdings Pte Ltd, into its subsidiary Roots Corp Ltd (RCL) that runs the Ginger chain of budget hotels in India.

The IHCL management had then said that Omega TC was chosen after discussions with a few PE players and the investment, which was to be made in various tranches till 2014, included buying out some of the existing investors in RCL.

Curiously, IHCL then was not willing to share any details about the ownership and other information on Omega TC. The IHCL annual report for 2010-11 also has no information about the ownership details of Omega TC.

It now emerges that the Singapore PE is an entity backed by Tata Capital, a Tata group company.

Responding to a DNA query during the third-quarter results about media reports on Tata Capital picking up stake in RCL, Anil P Goel, executive director - finance, IHCL, had said, “Omega TC is actually Tata Capital.” He, however, did not share any details on it.

A request for a meeting with the IHCL management to get a better understanding of the PE firm’s investment in RCL was denied.

Tata Capital, too, when approached, did not offer any comment.

Later responding to a DNA uery, the Tata Group media agency said, “Omega TC Holdings is an investment holding company of the Tata Opportunities Fund LP, a limited partnership fully subscribed by global investors. The Tata Opportunities Fund is one of the private equity funds sponsored by Tata Capital Pte Ltd, Singapore.”

Meanwhile, experts tracking the company development said proper disclosures should have been made about the PE investor into the IHCL subsidiary.

“To what extent is this investment transparent is something I fail to understand. What is its purpose, how was the transaction valued, whether it was done to set a valuation benchmark, or largely to give an exit to existing investors because no other investor is willing to come in, are questions that only the company officials can answer,” said a top official of a leading hotel chain requesting not to be identified.

The PE placement was also being viewed as paving the way for RCL’s initial public offering, which is likely to happen in the next couple of years.

During an IHCL annual general meeting in August 2010, Ratan Tata, chairman, Tata Group had responded to a shareholder query saying, “The Ginger hotel chain would be listed in the next couple of years, depending on a series of circumstances.”

Roots Corporation was set up in 2003 and currently operates 24 Ginger hotels across India. While a significant proportion of the Ginger portfolio is owned, there are a few joint projects like Ginger Rail Yatri Niwas (operated under PPP arrangement) and two management contracts in Manesar and Agartala.

The Ginger pipeline currently comprises 10 hotels under various stages of development including Ginger’s Mumbai debut at Navi Mumbai. These hotels are likely to add another 1,000 guest rooms to the existing portfolio.

Lemon Tree out to prove a point with business recast

This story first appeared in DNA Money edition on Monday, February 17, 2012.

Warburg Pincus-funded Lemon Tree Hotels has embarked on a major restructuring of its business with an eye on unlocking value.

The company plans to separate ownership and management of hospitality assets and is also weighing setting up a third-party hotel management company and introducing new hospitality brands.

Patu Keswani, chairman and managing director, Lemon Tree Hotels Pvt Ltd (LTHPL), confirmed the move to separate brand management from asset ownership. "It certainly is part of our long-term strategy. We will have a very clear division and I hope to do something specific even before our IPO, which should happen within a couple of years from now. To start with, we are planning to merge Red Fox into Lemon Tree and amalgamate the two. Eventually, we will have a company that will own both Lemon Tree and Red Fox brands, the management will reside there and so will a lot of assets," he said.

Lemon Tree is open to distinct identities for projects provided they "come with tax benefits," said Keswani.

"What it basically means is we will not downstream or move around any asset that will entail payment of duties, taxes and so on."

The company has 4-5 projects — with 100% asset ownerships — in its portfolio.

As a long-term strategy, the management is looking at aggregating them to create an asset company.

"It is an ongoing process, and we are in talks with lots of people to invest with us in the asset company. And as long as we own a majority of that company, we will be open to creating multiple asset companies," he said.

On the buzz about a Dutch pension fund coming on board as an investor, Keswani said "We are talking to many people, including investors from Europe. Nothing has been finalised yet."

And is Warburg is in the exit mode?

"Not at all," said Keswani. "We certainly are hoping that Warburg will stay as it has invested in the main company (LTHPL), which is both an operating as well as a property company."

Why is the company bringing in new investors then?

Keswani said the company has around six hotels that are with independent subsidiaries whereas LTHPL either owns 100% or a majority stake. "When we tie up with funds --- sovereign, pension or a private equity --- we may move some of our existing assets that are tax-friendly and we will have new hotels in these asset companies. So, right now, we have 3-4 companies that can loosely be termed as asset companies because they are downstream and pure assets," he said.

The company is also looking at creating a property company, though the timeframe will depend on when the new investor comes in. "It could take anywhere from the next six months to maybe 2-3 years, depending on when we partner with somebody (financial investor), the quantum of investment, the alignment and so on," said Keswani.

LTHPL is keen to keep a majority stake, while allowing the new investor in the property company to bring in at least `1,000 crore. It is likely the investor will secure a very small stake in Lemon Tree Hotels as well. "In fact, whatever conversations we are currently having with a few funds, the figure is in the neighbourhood of Rs1,500 crore," said Keswani.

Lemon Tree also has its eyes set on management contracts.

"It is going to be a step-down company where we will do joint venture with other people. It could also be a subsidiary of Lemon Tree where we will be managing hotels of other asset owners," Keswani said.

"We intend to do management contracts only in the mid-scale, upscale and deluxe categories. Thus, three new brands are currently being conceived and the work is at a very preliminary stage. The new brands will be with the management company and we should be ready to unveil them in another 3-4 months from now," he said.

The company is backing up its intent with some high-profile recruitments.

Murlidhar Rao, who was vice-president (operations) with Alila Hotels & Resorts in Singapore, has already taken over as the chief operating officer (COO) of its newly launched Lemon Tree Premier brand of hotels.

Similarly, Saurabh Nandi, shopper marketing manager - ASEAN, Procter & Gamble, operating out of Thailand, is expected to join as LTHPL's chief marketing officer by mid-March. Nandi will also be entrusted with spearheading new branding initiatives expected to be rolled out before June.

Thomas Cook says no piecemeal sale of company

This story first appeared in DNA Money edition on Friday, February 17, 2012.

Despite the financial stress faced by its UK parent, travel operator Thomas Cook India, which has been put on the block, on Thursday said the proposed sale is not a distress sale and the decision was taken based on the number of unsolicited expressions of interest received for the company.

Madhavan Menon, managing director, TCIL, said, “From the UK parent’s point of view, they clearly recognise that this is a business that is doing well and is a major player among the businesses present in this country. It is not a distress sale and unless the parent sees a value, a sale will not happen.” Menon said.

Menon said a detailed process being conducted by Credit Suisse was a two-staged one and is yet to begin. “We would try and complete the process quickly because when there is a stake sale it can lead to some amount of distraction from the business. And it is our intent to finish it (sale) at the earliest,” he said.

Menon said there would not be any piecemeal deal and Thomas Cook India will be sold as one piece. “At this stage, however, it would be speculative on my part to speak anything about
what the new owner would do with the business after having acquired it because we don’t even know who
the owner could be,” he said.

Reiterating his views on the Indian entity, Menon said that Thomas Cook India has operated independently of the UK parent, be it financially or commercially. For TCIL, foreign exchange is a major contributor to its overall business while it is the packaged holidays for their UK parent.

TCIL also said that the company management did not have a preference as to who the potential buyer would be as it entirely depends on what value the parent expects to obtain from such a sale.

“I don’t want to get into the expectations of the parent, because it is too early to speculate as to what they want. It is also driven by the fact that there are rules and regulations that govern the price, given that we are publicly-listed company. We are going through a process whereby there will be a price discovery and we will have to wait for that to happen,” he said.

To a query on whether TCIL would prefer a financial investor as a buyer who will retain the existing management as against a strategic buyer who may not, Menon said, “We have a successful management team and anybody who buys this business would obviously see some value in it because the team has built up this company over the last six years.”

The new buyer will have to negotiate the terms for the use of the Thomas Cook brand.

“The brand is available for a minimum 7 years and it will depend on what the bidders make of it and what value they appropriate towards it,” said Menon.