Retail – A New Investment Frontier
Retail – A New Investment Frontier
IL&FS Investment Managers
International Retail Overview
India Retail Opportunity
Financing the Retail Sector
Approaching Private Equity 2
IL&FS Investment Managers
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IL&FS
Established in 1987 and headquartered in Mumbai
Focused on the development of infrastructure projects and creation of value added financial services
Presence across all sectors of Indian Infrastructure
Promoted by leading global and Indian Banks/Financial Institutions Promoted over 50 Special Purpose Vehicle companies in the Infrastructure and Financial Services Space of which 2 are listed and are outperforming the benchmark indices
IL&FS and its affiliates have over 1,500 employees spread across the
length and breadth of India IL&FS developed assets provide services to over 50 mn people in India
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IIML Investment Managers
IIML is promoted by IL&FS and is its private equity arm
IIML is one of the largest Indian private equity fund managers in India with nearly US$900 million under management
Team of 20 experienced professionals operating from Mumbai and Bangalore
Made 60+ investments with a Gross US$ IRR of 26% p.a. on exited investments
50% of deals are proprietary in nature sourced by IIML’s own team and/or IL&FS Group Contributors to IIML Managed Funds
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Funds Under Management
IIML manages 7 funds with a combined corpus of around US$ 900 mn South Asian AIG Indian Regional Apex Fund Sectoral Equity Fund
Fund Name
India Auto Ancillary Fund
India Project Leverage India Fund Development Fund (LIF)
IL&FS India Realty Fund (IIRF)
Vintage
1996
1997
1998
2000
2005
2006
Primary Sponsors
IL&FS
IL&FS, AIG
IL&FS
IL&FS
IL&FS, Punjab National Bank
IL&FS
Sector Focus
Growth
Infrastructure & Growth
Auto Components & Growth
Infrastructure
Opportunistic Fund
Real Estate
Life Insurance Corporation, PNB, IL&FS, Taib Bank, Banco Efisa, Evolvence
CalPERS, CalSTRS, MacArthur Foundation, Oregon State Pension, GIC (RE), IL&FS
IFC, JBIC, ADB, IL&FS, SIDBI
Key Investors
Regents of California, Life Insurance Equitable Life IFC, DEG, Corporation, IL&FS, Assurance, Pantheon Mahindra & General Insurance Capital, ORIX, IL&FS, Mahindra, IL&FS Corporation HDFC
Corpus (US$ mn)
25*
78
15
22
153
522
Amount Invested (US$ mn)
36
63
13
16
139
177
No. of Investments **
26
10
8
7
27
7
No. of Divestments
9
7
4
4
-
-
* Evergreen Fund until 2007 ** Includes 3 commitments in LIF and IIRF
IIML also manages 1 propriety fund for IL&FS of US$ 56 mn 6
International Retail Overview
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International Retail
Retailing – Worlds largest private industry
Sales exceeding US$7.2 trillion
47 of the global Fortune companies and 25 of Asia’s Top 200 companies happen to be retailers
Top 30 retailers account for 19% of the global retail sales
Internationally Retail is a mature sector and organised players account for more than three-fourths of the total retail trade. Large retailers such as Walmart of US, Carrefour of France, Tesco of UK and others now dominate the global retail market
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International Retail
Global retailers have adopted multi-format and multi-product strategies in order to customize their product offerings for distinct target segments
Sales and Market Cap of top Global retailers Company
Sales US$ Mn
Market Cap US$ Mn
Walmart
312,427
179,923
Carrefour
74,496
40,586
Kroger
60,553
17,187
Metro
55,722
17,549
Sears
49,124
15,888
7,797
21,948
Marks and Spencers Source Bloomberg 19th July 2006
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India – Retail Opportunity
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Indian Scenario
Demographics
Population
:
1105 mn
Population Growth
:
1.6%
Median Age
:
Urban Population
:
29%
GDP Per capita (approx)
:
US$ 700
24.3 years
The spending pattern of the the emerging middle class is Category (2004)
% Of Total
Food, Beverage and Tobacco
43%
Clothing and Footwear
5%
Gross Rent, Fuel and Power
12%
Furniture, Fixture and Appliances
4%
Medical and Healthcare Services
8%
Transport and Communication
15%
Recreation, Education and Cultural
3%
Miscellaneous Souce KSA Technopak 2005
10% 11
India Retail
Retail in India is still at a very nascent stage with an estimated market size of approximately US$ 222 Bn
The organised retail market currently stands at US$ 7.7Bn a mere 3.5% as of 2005
Asian economies have shown substantial penetration in the last 2 decades and India has still to move up
Penetration
Oganised Retail Penetration 80
75 55
60
40
40
35
30 20
20
17 3
0 Taiwan
Malaysia
Thailand
Brazil
Indonesia
Countries Source HSBC
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P oland
China
India
Risks of Retail
The industry recognizes “its all about location” but needs to address other critical success factors – – – – – –
Supply side chain management to increase productivity of inventory Overhead control which tends to balloon particularly in the early stages of growth Over crowding as evidenced by mushrooming mall development in metros and mini metros Technology Implementation helping in real time or at least end of day information transfer Recent influx in the retail sector has resulted in shortage of skilled and experienced manpower Customer Retention
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Financing the Retail Sector
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Financing Requirement
Indian retail sector is highly fragmented with 12 million retail outlets spread across the country. 80% of these are run by small families using only household labor
Organised Retail requires financing for – New Stores : Store Capex and deposits for store sites. The expense on this has increased over time as retail has gained importance and real estate cost has escalated – Existing Stores : Renovation and expansion of existing stores – Working Capital : There may be some retailers who require financing for working capital but this is rare as the majority get credit especially in case of food and grocery
It is estimated that more than $3 Billion capex per annum is required to finance the growth of organised retail
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Financing Requirement…(Contd)
The Question now is “Who will Fund the Big Retail expansion” – Private Equity – Capital Market – Indian Corporate houses – FDI in Retail Sector – Banks and Institutions
India has emerged as the most attractive destination for mass merchant and food retailers outperforming China 2 years in a row according to global consulting firm A T Kearney
Most of the developed nations are today showing signs of saturation and hence multinationals are looking at virgin territories to abode and expand the market
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Private Equity
Indian retail is currently dominated by entrepreneurs, families and a few corporate houses
They are not used to the professionalism that this industry demands but are adapting and changes in the industry eg Pantaloon, Shopper’s Stop, Trent, Lifestyle, Subhiksha, Nilgiris, Trinethra, Fabmall, Vijay Sales, VLCC to name a few
Recent equity financing deals are Company
Investor
Amount
Pantaloon Retail
ICICI Ventures,Bennett & Coleman
Rs 750 mn
Shoppers Stop
IIML, ICICI Ventures and Zodiac Clothing
Rs 752 mn
Subiksha
ICICI Ventures
Rs 350mn
Trinethra and Fabmall
GW Capital
Rs 450 mn
Vishal Retail
Bennett & Coleman
NA
Crossword
ICICI Ventures
NA 17
Private Equity …(Contd)
Private Equity has helped to scale the landscape for organised retail over the years
Growing awareness about this segment of financing with a maturing capital market has made access to funds easier
The coming years may see a couple of landmark transactions in Private Equity
Private equity is the most viable option for entrepreneurs and family held business as it helps to finance the finance the expansion of the business without the short term pressures of listing.
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IIML Experience
Company Category Year of Investment Investment Amount Stake Current Market Price
: : : : : :
Shopper’s Stop Retail 2000 Rs 150 mn 4.24% Rs 498 Per Share
Through this transaction IIML helped Shopper’s Stop to gain a foothold in the organised retail market the benefit of which is seen today
This transaction also gave IIML substantial returns
Private equity is a tool that new and old business entrepreneurs can use who are currently at a nascent stage and would like to grow in a phased manner before tapping the capital markets
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Capital Markets
Retail Companies are today looking at tapping the capital markets
Capital markets in India have over the years strengthened and helped companies raise funds from the general public
Transparency and efficiency
Pantaloon had tapped the capital market in January for rights issue
Private companies can access capital markets once they reach a reasonable size
There are only 3 listed retail companies in India and the listing of a few more will help to build depth in the sector
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Capital Markets
Retail sector has a long way to go till they are able to gain a sizable share of the capital market pie
The Market Cap, P/E and performance of the listed companies are Company
Market Cap Rs Mn
P/E
CAGR Returns 3 Year or On listing (appox)
Pantaloon Retail
3,561
60.2
89%
Shopper’s Stop (Since Listing May 2005)
1,727
63.7
29%
991
40
54%
Trent Source Capitalmarket
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Indian Big Business
Traditionally the real estate players like Rahejas with Shopper’s Stop or the Pyramid could make an easy entry into the retail sector.
Today, Indian business houses have shown a keen interest in retail – RPG : RPG which was the first group in India to spot an opportunity in the retail sector and having tied up with SPAR is set to go into an expansion mode – Reliance : Reliance is at the forefront of the retail foray. It plans to set up 1400 stores and invest $2.2 Bn in the coming years. – Birla : The Aditya Birla group is preparing a blueprint for claiming a share of the growing retail pie. – Bharti : Sunil Mittal promoted Bharti group is expected to enter the retail sector with an initial investment of around Rs 6,000 Crs. It is believed to be in talks with Tesco – Wadhawan Family : Promoters of Dewan Housing Finance has set up retail chain by the name of “Spinach”. The company is investing close to Rs 100 Crs in its retail foray
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FDI In Retail
Government has realized the importance of FDI in retail and hence made the necessary changes
To facilitate easier FDI inflow, instead of having to seek FIPB approval, FDI upto 100% is allowed under automatic route for cash and carry and wholesale trading and export trading
The cabinet has allowed FDI upto 51% with prior Government approval for retail trade in “Single Brand” products
Going ahead, the Government is expected to adopt a gradual approach to allowing further FDI in the retail space
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Approaching Private Equity
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Benefits of Private Equity
Financial – – – –
Managerial – –
Global access to valuable group of people and skills
Helps in achieving success –
Board Inputs : Industry Specialists, Independent Directors Investment Professionals with experience and knowledge of building business
Networking –
Equity Quasi Equity Shareholders Loan Long term view
Providing risk management tools and ensuring high standard of Corporate Governance
Brand Value – –
The company gains a lot of brand value Helps when the company has to go for an IPO 25
What Private Equity Players look For?
Team/ Management – – –
Product or Service – – – –
Strong execution focused team Track Record, Skill sets, Organizational Chart Shareholding Pattern
Value to customer Sustainability of competitive edge Merchandising and supply chain management Discontinuous or Continuous Innovation
Market – – – – – –
Size of Market Demand Drivers Target Market Competitors Time to market Product Positioning 26
What Private Equity Players look For?
Business Model – – – –
Stage of Growth –
Revenue Model Marketing and Distribution Strategy Differentiation Foreseeable Exits
Early Stage or Late Stage
Capital Requirement – – –
Capital Requirement Equity Dilution Number of Financing Rounds to Commercialization
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Approaching Private Equity
Business Plan – Include audited financial statements – Strategy Going Forward – Target Market – Current Customers – Executive Summary – Risks – Exit
Due Diligence Package – Audited Financials – Merchandising and footfall Strategy – Location and property acquisition – Current Customers
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Financing Lifecycle
The Wall
The Chasm Venture Capital Strategic Investors
Angels Founders Seed Capital
Public Markets IPO
Early Stage
Later Stage Mezzanine
Revenue
Secondary Offerings
C B A
Time Valley of Death
Seed or Start-up: Market research and product development. Early Stage: Funding full-scale operations and selling products/services. Not yet profitable. Later Stage: Funding expansion and new products. Near break-even.
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