India's First Internet IPO: Info Edge's Naukri.com

The listing of shares in Info Edge known for its job portal Naukri.com will make history on Nov. 24 for a number of reasons. It will be the first Indian Internet firm to list exclusively on an Indian exchange. Investor demand for each available share exceeded availability by 55 times, during the pre-Initial Public Offering (IPO) auction process, which ran from Oct. 30 to Nov. 2.

Its IPO will be keenly followed by rivals information portal Indiatimes.com and matrimonial site Shaadi.com, which are planning their own stock listings.

At IndusView, we know Naukri.com’s founder and CEO Sanjeev Bhikchandani well (Sanjeev, fellow IndusView board director Rishi Sahai and I were featured in the Red Herring magazine in June this year). Back then, the Red Herring reported the Bombay Stock Exchange’s benchmark Sensex broke a record 12,000-point high. Recently, it broke 13,000 points for the first time.

Any concerns about the Indian market’s receptiveness to Internet businesses should, by now, have been silenced. That's one reason why Naukri.com opted for an Indian listing in contrast to Sify Ltd and Rediff.Com India Ltd, which trade on the NASDAQ.

Its shares had been priced in the band of Rs. 290 ($6.50) and Rs. 320 ($7.20) a share. Info Edge plans to sell 5.32 million shares, nearly a fifth of its equity base. At the top end of the price band, it will raise about Rs. 170 crore ($38 million), valuing the firm at about $190 million, half that of US-listed Rediff and Sify which have been public since June 2000 and Oct. 1999 respectively.

In the year ending March 2006, Info Edge reported revenue of Rs. 841 million ($19 million) and a net income of Rs. 133 million ($3 million).

Info Edge, via its job portal, is capitalising on the general growth of the Internet in India. A recent report from IAMAI-IMRB estimated that the country was now home to 25 million regular users of the Internet, set to grow to 43 million by March 2008.

VC Attraction

Few things excite venture capitalists more than the possibility of investing at a low price in a company with global disruptive potential that offers an exponential return. Internet start-ups offer one of the best options for high-growth, capital efficient and exitable investments. As India’s Internet user base grows at 25% each year, more Internet companies are being formed to target the online market. Consequently, more funds are being set up to invest in such companies.

After a lull between 2000 and 2004, early-stage companies received venture capital investments worth $482 million across 52 deals last year. This year, investors have taken greater risks by investing money in very early stage companies.

Consequently, they have invested a similar amount as last year in twice the number of companies. In the first six months of 2006, that resulted in $240 million invested in 49 companies in sectors such as online classifieds and travel, mobile and mobile value-added services companies, gaming and telecoms.

Silicon Valley Spearhead

Not surprisingly, Silicon Valley based VC firms are taking the lead. At last count, 44 US-based VCs announced plans to set up India-based funds of an average fund size of $100 million. If successful, that would imply about $4.4 billion in new investment capital would be available for venture investments in India over the next five to six years. That’s more than twice the $2.03 billion total in venture capital and private equity investments in India in 2005.

Taking Indian Purchasing Power Parity (PPP) into consideration, that would be equal to $22 billion worth of investment capital in the US.

Info Edge was Kleiner Perkins Caufield and Byers’ first investment in India. It invested about $5.5 million in May this year along with Sherpalo Ventures, backed by early Google, Inc. investor Ram Shriram. ICICI Venture also owns a stake in Info Edge. It had invested Rs. 7.29 crore ($1.64 million) in 2000.

Recently, Silicon Valley-based VC fund Sequoia Capital merged its India operations with VC Fund WestBridge Capital Partners based in Bangalore. The new merged entity is now called Sequoia Capital India.

Sequoia joins other Silicon Valley funds such as Norwest Venture Partners, Matrix Partners, Benchmark Capital, Draper Fisher Jurvetson, and Greylock Partners that have expanded their presence in India recently.

The Job Ahead

But it’s still going to be an uphill struggle to quickly and efficiently find skills in a country as big as India to fill the gaps opened by these kinds of opportunities. For Info Edge, diversification into other areas – such as online property site 99acres.com and matrimonial site Jeevansathi.com, was a challenge.

While Info Edge’s book building of demand for its IPO has undoubtedly been a success, the true success will lie in a sustained share price and strong after-market support in the weeks after its listing. While diversification helps de-risk its business, a small dip in its core job market business could still have a significant impact on Naukri.com.

That does seem unlikely, however. A recent study conducted by the Confederation of Indian Industry (CII) has revealed that human resource (HR) is the biggest challenge faced by India Inc., particularly at the managerial, production and marketing levels due to the widening demand-supply gap.

With multinationals grabbing Indian CXOs and Indian firms expanding their operations overseas through acquisitions or setting up new facilities, the problem of getting the right people for management, production, marketing and research posts has become an uphill task, thanks to the growing demand for the same set of people by many firms.

Competition Grows

More threatening to Naukri.com, there are a number of competitors such as JobsAhead.com, owned by Monster, Inc. and TimesJobs.com, owned by Bennett, Coleman & Co. Ltd, publisher of India’s largest newspapers The Times of India and The Economic Times. They’re already looking for a piece of the market – and there are certain to be even more aggressive now that everyone’s focused on the IPO. Info Edge’s combined revenue leapt 86% last year – who wouldn’t want a piece of that?

Given the spectacular investor enthusiasm for Naukri.com’s equity, it seems likely that it will attract long-term support beyond the flurry of speculative investment.

We’ll be staying in touch with Sanjeev and monitoring the situation closely, particularly on November 24, when the shares are listed.

The world has just witnessed a landmark moment in India’s commercial history. In fact, with the Sensex breaking its previous record and Info Edge’s IPO book-building process complete, we’ve witnessed two in as many weeks.

Bundeep Singh Rangar
Corporate Website: www.indusview.com
Corporate Publication: www.theindusview.com

The IndusView Publication, Volume 2, Issue 13

India – UK M&A: The Empire Strikes Back

Indian companies will likely spend more than $10 billion on acquisitions in Europe this year, accounting for almost 90% of their total overseas acquisitions. Europe’s diversity makes it a tough market to crack by organic means alone so Indian firms have taken the acquisition route. They spent $2.68 billion during the first half of 2006 on 32 acquisitions of European firms, i.e. two thirds of the $4 billion spent by Indian companies on 85 overseas acquisitions.

Trade between India and Europe is expected to multiply five times to $100 billion by 2010 from current level of $20 billion, according to industry estimates. Propelling this growth is increasing merger and acquisition activity between companies in the two regions.

The most favored acquisition and investment targets are U.K. companies, helped by a common English language, similar accounting and legal systems and relatively flexible U.K. labor laws. Indian companies invested about $2 billion in the U.K. last financial year, more than twice the previous year. As a clear sign of trend-reversal, it surpassed the investment made by British companies in India.

That figure does not include the latest and largest ever acquisition by an Indian firm: the purchase by India’s Tata Steel Ltd of the U.K.’s top steel maker Corus Group Plc, a company more than three times its size for $8 billion.

Tata Steel’s parent namesake company Tata Sons Ltd, with revenue of $22 billion and equivalent to about 2.8% of the country's GDP, will lead the M&A league table with its acquisition of Corus Group Plc. The Tata Group had previously acquired the U.K.-based Tetley Group, then the world’s largest manufacturer of tea, for $407 million in February 2000.

The Corus acquisition will give Tata Steel the size and scale to be globally competitive in a consolidating steel industry. Tata Steel will become the world's fifth largest steel producer with a capacity of about 26 million tons and combined sales of $24.4 billion.


India - U.K. Trade: The Corridor Widens

The growing bilateral trade between the U.K. and India became clear this year when the two countries emerged as the third largest overseas investors in each other. There has been almost three-fold increase in the number of projects announced by Indian companies in the U.K. in first six months of 2006. The number of U.K. projects financed by Indian companies doubled to 76 creating 1,449 new jobs. The number of Indian companies that started U.K. operations grew by 23% last year.

To add to that, more than 500 Indian companies have a presence in London, of which 30 companies have listed shares on the London Stock Exchange. That’s greater than the total number of Indian companies listed on the New York Stock Exchange (NYSE) and NASDAQ combined.

Such progressive trends prompted the third annual summit between the Indian Prime Minister Manmohan Singh and the Prime Minister of U.K. Tony Blair in London on October 10, 2006. Government and trade bodies can do more, however, to encourage bilateral business.

While Indian industries such as information technology, pharmaceuticals and engineering have received significant investments, there are sectors such as infrastructure, energy and real estate that offer investment opportunities to the extent of $150 billion, $73 billion and $50 billion respectively over the next five years.

Further, if Indian companies could simultaneously list shares on both the Bombay and London Stock Exchanges, for example, access to capital and investment opportunities would be better for both sides. It could make London to India what Hong Kong is to China.

Stock Market: Growth Factored In

With corporate India currently announcing its results for the second quarter of the current fiscal year, investor apprehensions about the valuation of public companies seem to have been put to rest and their confidence strengthened.

The top five Indian IT services companies, namely Tata Consultancy Services, Infosys Technologies, Wipro Ltd, Satyam Computer Services and HCL Technologies produced strong quarterly numbers, better than what analysts predicted. The companies reported an average growth of 39% in revenue and 41% in net income during the second quarter ended September 2006.

Growth expectations are reflected in India’s IT stocks. Take India’s top four IT services companies: TCS, Wipro, Infosys and Cognizant Technology Solutions. They have combined annual revenue of $11 billion and an aggregate market capitalization of $73 billion. That dwarfs the top five U.S. companies Accenture, Amdocs Ltd, Computer Sciences Corporation and Electronic Data Systems Corporation and Europe’s biggest IT services company CapGemini put together, which have total annual revenue of $67 billion and a combined market cap of $65 billion.

This growth is not limited to the tier-1 IT companies only. Some of the mid-size IT services companies are displaying similar growth. We discuss these results in detail in our Special Report.

India’s growth is spread beyond the IT industry. Reliance Industries Ltd, a diversified manufacturing company which makes products ranging from chemicals to textiles to become India's most valuable firm with a market cap of $37 billion, grew better-than-expected 37% in sales and 9% in net income during the quarter. ICICI Bank, India’s largest private sector bank, reported a 30% surge in profit. Grasim Industries Ltd, one of the country’s largest cement producers, doubled its profit in the second quarter. Ranbaxy Laboratories Ltd, India’s largest pharmaceuticals company by sales, increased its profit by more than six times and sales by 26%. Cipla Ltd, the second largest drug-maker, registered 47% growth in its profit.

During the first quarter ended June 2006, the companies included in the Bombay Stock Exchange’s benchmark index Sensex, grew about 25% in profit and about 30% in sales compared with the same quarter previous year.

A clear consequence of this growth, buoyed by increasing M&A activity, is that India’s mid-sized companies are becoming large cap stocks. And the existing large ones are becoming truly global.


Bundeep Singh Rangar
Chairman, IndusView
Bundeep.Rangar@IndusView.com
www.indusview.com