Mumbai: Sanjay Nayar, chief executive officer of KKR India Advisors Pvt. Ltd, the Indian arm of one of the world\u2019s largest private equity (PE) funds, said India offers a long-term growth potential in every sector, but the current environment is tough.
\nIndia is one of the strongest stories, \u201cbut if you keep over-promising and not delivering, then it loses its charm. If we start delivering on a few …, you will be surprised at the positive inflow of capital again\u201d, Nayar said. Edited excerpts:
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\nBetween the private equity fund and the non-banking finance arm, you have at least $2 billion exposure to India. What kind of impact do you see of a slowing US economy and the European debt crises on India?
\nThe US doesn\u2019t see a double dip; it probably works its way out of system. The bigger issue is in Europe\u2014the financial institutions have exposure to a lot of sovereign debt, and right now it\u2019s not very clear how sound it is. The financial agility in the whole European system is pretty weak and that reflects in the capital markets and the bond markets in that part of the world. By contrast, there is a lot going on in the US and the markets are open and they are functioning.
\nWith the external environment, my sense is that yes, India will be impacted like anybody else, a little bit through the export route. But from a capital market point of view, obviously with so much risk in the world, at the end of the day while India is still a securely positive story and some amount of risk is taken off the table but the currency and the stock markets do get impacted. I would say not overplay the overseas card and we should be very clear that India has its own set of issues.
\nMany believe that India will largely be unaffected and in fact the crisis in Europe is an opportunity for India.<\/p>\n
This is again a very Indian way of looking at it. The way I would look at this is that we had the opportunity three-four years ago, especially at the last crisis.
\nLook at the secular story, the domestic demographic shift that\u2019s going on, the consumption boom in this country\u2026If only we had got the investment spending right from the beginning \u2026We have let that opportunity go and this puts us into a different situation today. It\u2019s still an opportunity if we can get some reforms back on track. The key thing for us is to just put our head down\u2014and by us I mean obviously the government and the policy makers\u2014and get a few things done. Even if we start now, we will take a little longer because investment spending and trickle-down effect does take much longer. …It\u2019s still not too late. There is enough elasticity of growth in this country if we get a few things going in terms of reforms.
\nWhat are the few things?
\nGetting the investment back on track\u2026 Private capex has been one of the lowest in the last eight-10 years and we know the reasons for it. I think getting the basic reforms on financial sector which has been held up…
\nSuch as?
\nThe insurance, pension, some basic things and banking\u2026 Things are to be done on land reforms and on the agricultural side. Some of these are not that political as they are made out to be. If we have the conviction and the leadership, the impact would be quite immediate because elasticity and the need for this is so much that it can really do wonders. It will also get the confidence back into the local industry to invest and spend and, finally, global investors still want to invest in India.
\nSecularly it is one of the strongest stories, but if you keep over-promising and not delivering, then it loses its charm. If we start delivering on a few of these reforms, you will be surprised at the positive inflow of capital again.
\nWhat will be the top most priority?
\nAs I said, get the infrastructure spend going… It does take time but I am sure a couple of fast-track projects that are on the anvil can get approved on a fast tract and get going. I think there is enough to be done on the agricultural front. The insurance and pension reforms have been on the table for quite some time.
\nSo you are saying it\u2019s largely the undoing of the domestic factors.
\nThat\u2019s my sense. We have an expanded fiscal account, an expanded trade account and an expanded current account deficit. So the level of flexibility we have today is not that much. Whatever actions you do now they have to be very well measured and well delivered. You don\u2019t have the luxury which you had two-three years ago because we have over-budgeted revenues. They haven\u2019t worked out for many reasons. Our flexibility is much lower than before. So whatever measures we do have to be extremely precise and extremely well executed to get the impact. I just don\u2019t see the design and the leadership to get that done and that\u2019s why I think it\u2019s a largely local issue.
\nWhat\u2019s your take on equity markets?
\nI think we are still slightly expensive compared to a lot of our peers\u2026 trading at 14 times forward is not something that is cheap. It would be cheap if you could guarantee 20-25% growth into perpetuity which you can\u2019t, but I don\u2019t think the markets are going to collapse or something. They can stay at these levels.
\nDownside risks are still there.
\nA little bit, not much. But I think they can stay at these levels for a couple of quarters at which point they will look cheaper because the earnings will obviously grow\u2026 The profits are getting impacted with the over all macro situation.
\nWe have always said Indian business grows despite the government. I don\u2019t think we can say that any more and I think that inaction on the policy front does impact the micro story, not to mention that doing business is become more difficult. The environment is definitely different than what it was four-five years ago.
\nWhat\u2019s happening in the currency market?
\nThe fact is that a lot of people are pulling capital out and you are seeing the impact. But I really don\u2019t know how the rupee is stayed and how it\u2019s managed or not managed. I think fundamentally rupee is probably now trading at more fair value than where it used to because we are running four deficits – revenue deficit, trade deficit, current account deficit and fiscal deficit. There is no reason for the currency to be strong. I would say that it is trading at much more than its fair value right now.
\nSo you are seeing downside risk for equities and currency.
\nNot much from here. The equity markets can continue at these levels for a few quarters which mean the stocks will look much cheaper as we go ahead. The currency could be anywhere between 47 and 50 (a dollar) for sometime. If it continues between 47 and 50, it can benefit the export sector quite a bit although it does hurt us on the inflation front, given that we import a lot of commodities and oil. But both commodity prices and oil is coming off. That should in a way balance out.
\nYou said that corporate India had been growing despite the government, but now it\u2019s not happening any more. Have they stopped investing?
\nThe companies are obviously working very hard in managing inflation of costs. So one is just the normal operations are getting impacted because there is inflation at every aspect of costs of goods sold.
\nThey are passing that on to the consumers.
\nYou can\u2019t pass on much. The Indian consumers are very price conscious in whatever things they pick up. So, the management of margins is becoming much more difficult. I don\u2019t think there is that much of fresh investment spending in the private sector going on, as one would have hoped for. Again, it comes back to the larger issue – are people feeling confident about putting money back to work? There is a bit of a struggle right now.
\nTo what extent are your investment decisions and strategies being influenced?
\nThere are a couple of things. One is that private equity as an asset class clearly provides very-very long term capital and that doesn\u2019t change. Therefore, we are not worried about quarterly earnings or even yearly. But one thing is becoming clear that you really have to back very strong management teams and obviously partner the entrepreneurs, because most of the companies are entrepreneur-driven here. What\u2019s becoming more important is finding the right partners and backing the right management teams. The second thing is obviously, there is a view on various sectors. In India there is a long term growth potential in every sector.
\nEven now?
\nEven now, because structurally, the secular growth story is absolutely in tact. The final thing really becomes the ability to execute against the plans that people have … Not only because management team is good or bad but in what sector are they working and what are their external constraints that either help them or detract them from executing the plan. A lot of external factors come into play as well. One has to look at all these things before making an investment decision.
\nSo you started KKR in India in 2008. Is the investment scene getting worse?
\nI started in 2009 after the Lehman crisis. In terms of deal flow and opportunities, there is a lot of it because right now the equity markets are quite shut. We are seeing a lot of deal flow and will see even a steeper increase in deal flow as we go ahead. If the growth and the spending do start the right way, you are going to be short of capital here …. There is going to be reluctance to dilute stake in banks by the government and it\u2019s not easy for large public sector banks to provide you long duration debt capital which is going to be so badly required for infrastructure sector. When you put these two things together, there will be a scramble for capital. There is going to be lot of opportunities both on long term debt as well as high quality long term equity.
\nWe will have a set of new private banks shortly.
\nI don\u2019t think so; I have never believed that you needed too many banks anyway. But I don\u2019t think you are going to have too many banks shortly.
\nIt\u2019s not going to be easy; just the draft guidelines are out and they need to be finalized and then there the Banking Regulation Act needs to be amended. It\u2019s a long process.
\nShould companies be allowed to float banks?
\nI never believed in that.
\nWhile investing, what kind of weightage do you give to corporate governance?
\nIndian companies have come a long way in terms of corporate governance and we are very satisfied the way we are seeing functioning of the boards. Corporate governance is an important criterion for us and I think that private equity and independent directors can help improve that. We are having a lot more open dialogue at the board level and that\u2019s very encouraging.
\nFor many private equity investors, 2011 was to be a year of exit but it turns out to be that you can\u2019t really exit because primary market almost doesn\u2019t exist virtually. In some way many private equity investors are trapped and they say returns are actually coming down from 25% to 18% and even 15%.
\nYes, exits are not easy; you can\u2019t take exits for granted. We don\u2019t have a big track record as a market where we have provided exit to private equity. The kind of private equity deals that are happening since 2006 and 2007 in private unlisted companies and holding companies and operating companies, we need IPOs (initial public offers) for exits\u2026 You are right, it\u2019s difficult to get exits.
\nIs the return expectation getting muted?
\nYes, again it depends upon each firm. We do take a very healthy dose of scepticism when we look at the exist and the exit multiples. I don\u2019t think you should think that in India you are going to get an expansion of multiples. You have to take a good dose of scepticism and make sure that you either have a small contraction or at best be flat in terms of entry multiples. The only way we are going to make money here is that you really have to work hard with the companies on operational improvement and profit generation. That\u2019s going to be the key and well-run companies, proficient in what they do will always have a good exit three-four years from now. But right now as things stand today, it\u2019s a tough environment to exit.
\nYou said India story still remains intact but money is not coming to India
\nI think capital is always going to flow where there are opportunities, adjusted for risks of all kind. \u2026 If you want to attract overseas capital you have to look really beautiful from every aspect, governance, execution, infrastructure,\u2026 You are entering a new era where capital is not going to be able to flow that easily, everybody needs capital.
\nDoes India look very ugly?
\nIt doesn\u2019t look ugly but I am saying that you just have to look more attractive. Which means valuations, the cost you pay on dollar debt and all the other things\u2026
\nWhat\u2019s your take on interest rate?
\nI think we are getting to the end of it, in terms of the hikes. I just wished that we probably used it as a much harder tool in the beginning. It has been a very gradual and a very long phase..
\nShould the hikes have been faster, quicker?
\nQuicker in the beginning as it does lose its sharpness as a monetary tool over time. People talk about blunt monetary tools…. I think this is what happened in a way..
\nWe see many private equity (PE) funds are raising money to invest in listed mid cap companies where they see the growth opportunities instead of finding companies, hand holding them and growing with them.
\nWe are going to try and stay to the core and the core is what you said. You have to find good entrepreneurs, good businesses with good management teams to back and just stay with them in the long run and really get aligned from the beginning in where we can add value.. We are not big believers of investing in listed companies. If we have to because India has so many listed companies, that\u2019s a different issue.
\nWhat is the philosophy behind running a very active NBFC (non-banking finance company) here ?
\nThe logic is just to be a much more complete alternate investment manager for Indian entrepreneurs and Indian companies. So when you are having a discussion about what solves a company\u2019s need, you are not just talking of one product but you can actually try and help it along the capital structure. As you know in India, if you want to do anything that\u2019s remotely debt oriented, you should have a rupee balance sheet. So the NBFC is really a kind of a vehicle to have a rupee balance sheet that is funded by us.
\nFinally, any plan to raise an India-focused fund?
\nNone right now because there is enough going on from our existing platform.<\/p>\n","protected":false},"excerpt":{"rendered":"
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