BY KAVITA CHHIBBER

India is shining and a lot of what glitters seems to be solid gold. That was the message conveyed by Anil Khatod, Managing Director and lead India partner at Argonaut Private Equity, a diversified global private equity fund with more than $3.5 billion under management.

Armed with all kinds of information, and numbers Anil made a stellar presentation on 19th March at the TiE monthly event in Atlanta.

So what makes people like him so excited about investing in India?

The answer to that, he said lay in the fact that in the past 6 years in spite of a 25 percent market correction, the Indian sensex has provided a 27 percent compounded annual return. “When I compare that to SNP 500, or the London Stock exchange index, you can see 2 percent for SNP 500 and 1 percent for London Stock exchange. There is relative volatility in the numbers but that is why it is so exciting to look at these markets outside of the mature markets.” Of course the first thing to remember when you take on emerging markets, he cautioned, was the fact that the investment has to be long term because these markets tend to be much more volatile than mature markets.

Anil quoted from the Goldman Sachs report which indicated that the Indian economy started a transformational process from 2003. It also said that if the fundamental structural change continues in the same vein, the country can sustain a growth level of about 8 percent in GDP until 2020. There is tremendous opportunity for productivity growth and at a sustainable 3 and a half percent, India can overtake not just some other European economies but also the US by 2045.

Since 71 percent of Indians live in villages, a huge urban migration is expected over the next 20-30 years leading to an urbanization bonus.

In the 1990s, the cost of capital and return on equity leveled each other off and as a result one didn’t create a lot of value in the business. But in the last 5 years the cost of equity has come down and the return has gone up becoming among the highest in the world-in some areas even higher than China since most Indian organizations had become so adept at making the most with very little capital. From 3 percent in the 1970s to 4-6 percent in the 1980s and 90s, India’s GDP in the last 5 years has accelerated to about 8 and ½ percent. Labor productivity is growing and the interesting thing is that the capital is coming from internal sources.

While 45 billion have been invested in India last year by foreign investment, Anil pointed out that it’s just a drop in India’s trillion dollar economy. India’s savings rate has come up to 35 percent from the days in the 60s to early 1980s when it was about 15 percent. China’s domestic savings rate is about 44 percent, So there is more capital that has become available to go into the economy. There are fewer dependants in each household and therefore more disposable income is available. In fact in 1990 the per capita income was 350 dollars. From 2000 to today, the increase in disposable income has been close to 300 percent.

India also has a young working force and that gives it advantage over many aging economies including China whose one child policy will probably land its people amongst the aging humanity by 2025. Anil Khatod said by 2016 India is expected to overtake Italy as one of the larger economies and follow that up by overtaking France and Germany. “ So somewhere around 2025, you will find India in the top 6 economies in the world.”

Perhaps the best way to learn about anything is to get hands on experience. It was extremely enlightening to have Anil share examples from some of the companies he had invested in and pursued closely in India, starting with Koutons, a company that specializes in designer wear for men at a very affordable cost. It was started by 3 brothers eight years ago and is today the third largest retailer in India, earning 7 million in 2004 to stand at 200 million in earnings today. Starting with 27 stores, the company is expected to open 3000 by the end of next year. It was their impeccable organizational skill, a clear understanding of their customer both in the rural and urban areas and efficient buying that caught Anil’s attention and his investment.

Another company that Anil talked about Acme Tele Power had revenue of a little over 700,000 in 2003 and today it has a net profit of 150 million dollars. The success story happened thanks to a simple technology created by Manoj Upadhyay the 32 year old newest billionaire to join the ranks, to stabilize power as India added 8.4 million cell phone subscribers. The green solution was sold to Bharati Air Tel one of the largest telecom operators The company ends up with a market capitalization of 3 billion and goes public shortly.

There are many such success stories that have made India a financial Mecca for national and foreign entrepreneurship.

In India, 500 billion dollars are earmarked on infrastructure and civil engineering has suddenly become the hottest discipline in all the IITs. One such company the Sriram group in the south has revenue of 300 million but an order backlog of 5 billion! Many banks are seeing resurgence as well, said Anil as India gallops on. From struggling with non performing assets where for example loans to farmers were not repaid, a bank that Argonaut has invested in, in Tamil Nadu the percentage of non performing assets has come down from 8 to 1 percent. The banks today have a much better asset quality growing at 20-25 percent annually and trading in a relatively inexpensive way.

Touching on some more points, Anil talked about India’s foreign trade and foreign exchange that had been stagnant up to the 1990s but then regulatory pressures started to ease up, and today from near bankruptcy India has a foreign reserve of close to 300 billion. He said that when capital markets start functioning the governance gets better and better. He recalled the time he first did business in India in the 1990s when he worked with Nortel Networks and he has seen the corporate governance scene change dramatically.

Three four years ago IT and healthcare made up 30 percent of private equity funding but last year they ranked 5and 9th as financial services raced to number 1, telecom to number 2 and the manufacturing segment to number 3. When economies thrive, the number of sectors that begin to blossom is also bigger, he said.

So what pitfalls to avoid when investing in India? Anil said there are some cardinal rules that one must implement. Do a thorough background check, hire the best teams to perform due diligence, do forensic checks if something doesn’t look transparent. Have the company checked out for fraud. And above all listen to your gut feel.

Anil pointed out that in spite of all the glitz about India there is also concern about the risks of investing there. Issues dealing with political uncertainty with coalition governments and politics affecting economics, labor reforms, skilled labor shortage, commodities inflation, were raised but even then the consensus was that India’s influence on the world will be quicker and bigger than most people expect.

Anil said he was happy to say that capital markets in India had finally taken a step in the right direction-to function like world class markets. “ There is a lot more transparency.”
So how should people participate? Anil’s advice was, that people should invest in what India and China consume because their economies are growing, and a large number of people with higher income are entering the market. And with all the commodity inflation you are also better of consuming what India and China are producing. It will keep consumption costs low. There were many jobs in the middle and senior managements for those who just wanted to go and look for work opportunity in India.

Anil reiterated that he was very excited to see the fundamental structural change happening in India and pointed out that his company’s investment was long term-for years and not months or weeks. “ When I was growing up in India the notion was save what you can because we don’t know what tomorrow is going to be like. That attitude has changed. Today most people(in India) believe tomorrow will be better.”

Nandan Sheth, the TiE Atlanta President, along with his team, with exceptional work done by Ashish Thakur and support from previous President Harish Mamtani, was very appreciative of Anil Khatod’s exhaustive presentation.

“I am not aware of many institutional investors in the South East that can provide a real perspective on Private Equity investing within markets emerging markets like India, Israel and Australia, as Anil can.

He gave a very thoughtful perspective on the opportunities and challenges in the emerging markets that his fund invests in. His point of view was very mature and tempered, shying away from the main stream euphoria that you hear when analysis with zero deal experience talk about these markets.

Some of the key takeaways from his presentation are important to synthesize:

Do not ignore “staple” industries or “emerging” industries that service local demand.
Do not be afraid to diversify your portfolio. Asset allocation strategies are fundamentally unique to each emerging mark.
Tread with caution. Emerging markets are prone to significantly more political, economic and inflationary risks.
Private investors have a variety of options if they want to participate in these emerging markets.

These are some very insightful lessons from a practitioner that understands both the business and cultural implication of investing in these growth markets.”

The response from attendees at the sold out event, inspired Nandan to invite Anil back later in the year to share a score card of how his portfolio had performed.

Many drove from far away areas of Georgia to attend the event on a week day, and comments ranged from, ‘I came from Athens GA for the presentation. Based on this presentation I would like to make a commitment to attend as many TiE Atlanta meetings as I can” , to “’Anil was real. He obviously has a tremendous command of the nature of these emerging markets”, and “I want to congratulate the TiE Atlanta team for maintaining the highest quality possible in terms of speakers that they have secured in 2008”. An evening that brought that made TiE shine again in the choice of speakers, and each month’s event is something to look forward to.