INDIA: A PREFERRED INVESTMENT DESTINATION

• UNCTAD declares India as the second most-preferred global location for foreign investments.
• PwC urges Engineering and Construction companies to look to India for growth.
• Investments of more than $500 billion planned to flow into India's infrastructure by 2012.
• India registered a 45% growth in FDI during April-December 2008

Encouraging Estimates

Money will continue to chase growth prospects and the global investors are realizing the fact that India offers an excellent opportunity for them even at a time of global recession. Apparently that’s the reason why growth/emerging markets such as India and China continue to be the most attractive markets for the European family office investors, according to an informal survey conducted by London-based Somerset Capital, a leading independent private market placement firm.

The survey has also highlighted the fact that 63% of Somerset’s top 50 European family offices are ‘active’ in 2009 making new investments. If we extrapolate the same trend to the entire set of global investors, we get the reason why India continues to attract billion-dollar plus foreign direct investments (FDI) even in the recent months that are marked by heightened economic crisis globally. The invest-worthiness of India has been acknowledged by the United Nations Conference on Trade and Development (UNCTAD), which declared India as the second most-preferred global location for foreign investment in 2008.

A similar view was expressed in a recent report released in Toronto by PricewaterhouseCoopers (PwC), the world’s largest professional services firm, which has urged the Engineering and Construction (E&C) companies to look to India for growth as domestic markets contract. “Foreign companies who do not acknowledge the opportunity now may miss out on a critical opportunity to establish a long-term presence in one of the world's largest growth markets”, warns PwC.

PwC estimates that India will become the world's third largest economy by 2050. Similar projections have earlier been made by Goldman Sachs and CLSA. Despite the recent slowdown, PwC expects the Indian economy to grow at 7%-7.5% annually. The reason why PwC has emphasized on Engineering and construction (E&C) sector is the fact that more than $500 billion worth of investment is expected to flow into India's infrastructure by 2012. Projected spending from now until 2012 is $167 billion in electricity, $92 billion in roads and $65 billion in railways. The liberalization of government regulations and a deliberate strategy on the part of the Indian Government to develop infrastructure and promote foreign direct investment (FDI) spells opportunity for foreign E&C companies, the report says.

Government’s Initiatives

India’s Interim Budget for the Financial Year 2009-10 by the Finance Minister on February 16 informed the parliament that the government has accorded approval to 37 infrastructure projects worth $14.4 billion (Rs.70,000 crore) from August 2008 to January 2009. Under the Public Private Partnership (PPP) mode, in-principle approval has been given to 54 Central sector infrastructure projects with project cost of $14 billion (Rs.67,700 crore) and final approval to 23 projects for viability gap funding amounting to $5.75 billion (Rs.27,900 crore) between August 2008 and January 2009.

Not surprisingly, India received FDI worth $23.3 billion during April-December 2008, registering a growth of 45% when compared to the same period in the previous year. In the fiscal year 2007-08, India’s FDI was a record $32.4 billion. Although the government of India has acknowledged a slowdown in FDI post September 2008, the country is still receiving one billion dollar plus foreign direct investments every month. Considering the global liquidity crunch, this figure is not disappointing. FDI inflows in to India till September 2008 averaged between $2.5 billion and $3 billion a month. Despite the recent slowdown, India is attracting much more FDI compared to a few years back. The country had received $3.13 billion FDI in the entire fiscal year of 2003-04.

Apart from Engineering & Construction (E&C), other sectors such as IT, Telecom and real estate have attracted large investments from the foreign investors. During April-September 2008, FDI inflow in IT sector (including computer software and hardware) has reached $1.4 billion, which is equal to the investments during the whole financial year of 2007-08. The telecommuncation sector has attracted FDI of $5.8 billion in the calendar year 2008.

FDI Guidlines

The Indian government has been actively facilitating the foreign investments with its continuous efforts in policy reforms and simplifying approval routes. Recently, in a welcome move, it has further simplified the rules by restricting the cascading effect of foreign shareholding in an Indian company on its downstream investments. As per the new FDI rules, the foreign investment through the investing Indian company would not be considered for calculation of the indirect foreign investment in case of Indian companies which are ‘owned and controlled’ by resident Indian citizens and/or Indian Companies that are owned and controlled by resident Indian citizens. Certain sectors such as telecom, broadcasting and insurance, however, will continue to be covered under the method of calculation of total foreign investment outlined in their sector-specific regulations.

The Government of India permits FDI up to 100% on the automatic route in most sectors/activities. Some of the sectors such as Defence, Aviation, Print Media and Telecom have been classified as sensitive sectors.

FDI is allowed up to 26% in defence production subject to licensing and certain guidelines. In the aviation sector, FDI up to 49% and investment by Non-resident Indians (NRI) up to 100% is allowed on the automatic route in Domestic Scheduled Passenger Airline Sector, while FDI up to 74% and investment by Non-resident Indians (NRI) up to 100% is allowed on the automatic route in Non Scheduled airlines, Chartered airlines, and Cargo airlines as well as Ground Handling Services. FDI up to 100% is on the automatic route in Maintenance and Repair organizations, flying training institutes, technical training institutions, and helicopter services/seaplane services. Although the foreign airlines are disallowed to participate directly or indirectly in the equity of an Air Service Undertaking, the Indian Minister for Civil Aviation Mr. Prafull Patel has indicated that the government is considering a relaxation on this front.

In the Telecom Sector, 74% foreign investment (Including FDI, Foreign Institutional Investment (FII), Non-Resident Indian (NRI), Foreign Currency Convertible Bond (FCCBs), American Depository Receipt (ADRs), Global Depositary Receipt (GDRs), convertible Preference shares, and proportionate foreign equity in Indian promoters/ Investing Company) is allowed in Basic and cellular services, Unified Access Services, National/International Long Distance, V-Sat, Public Mobile Radio Trunked Services (PMRTS), Global Mobile Personal Communications Services (GMPCS) and other value added telecom services. Similarly, 74% FDI is permissible for ISPs with gateways, radio-paging and end-to-end bandwidth, while 100% FDI is allowed for ISPs without gateway and infrastructure companies providing dark fibre, right of way, duct space and tower (Category I). Companies offering electronic mail and voice mail services, and Manufacture of telecom equipments also allowed to have 100% FDI.

Print media has a cap of 26% FDI for publishers of newspaper and periodicals dealing with news and current affairs. Publication of Indian editions of foreign magazines dealing with news & current affairs also has a similar cap of 26% FDI including Investments by NRIs/PIOs/FIIs. The government, however, allows 100% FDI for publishing of facsimile edition of foreign newspapers and scientific magazines/specialty journals/periodicals.

Some of the other sectors, such as Direct-to-Home (DTH) and Insurance have the FDI cap of 49% and 26% respectively.

INDIAN MOBILE TELECOMMUNICATION: AMPLE SCOPE TO ENTER

--- Potential market of 700 million subscribers and $37 billion revenue base by 2012

--- Tata Teleservices - NTT DoCoMo, Swan Telecom – Etisalat and Unitech Telecom – Telenor deals expose Indian Telecom M&A Potential: Deals at $5.8 billion

--- IT and Telecom most consolidating sectors; only sector to cross three digits mark of 100 deals for $6 billion with 21.4% share in M&As worth $28 billion this year to October;

--- IT and Telecom sectors expected to close the year with deals worth $10 billion

The deal by NTT DoCoMo Inc, Japan’s largest mobile telecommunication service provider to pick up 26% stake in Tata Teleservices Ltd, the telecom services arm of India’s largest private sector diversified Tata Group for $2.7 billion exposes the India entry potential for global mobile telecom service providers who do not have on their radar an India entry strategy yet.

Such service providers are missing out on opportunities in a country where incumbent mobile telecommunication service providers collectively add more than nine million subscribers a month and are projected to have overall mobile services revenues of more than $37 billion by 2012 growing at a CAGR of 18%, according to estimates.

The string of investments in Indian telecom companies, including, Tata Teleservices Ltd, the telecommunication services arm of India’s largest private sector diversified Tata Group by NTT DoCoMo, Inc., the largest Japanese mobile telecom service provider; Unitech Telecom, the telecom arm of India’s second largest real estate developer Unitech Ltd by Norwegian telecom firm Telenor ASA, world’s seventh largest telecom service provider at $1.36 billion; and Swan Telecom, a start-up GSM telecom service company of a Mumbai-based real estate developer Dynamix Balwas Group by Dubai-based Emirates Telecommunications Corp (Etisalat) at $900 million; or, South Africa’s largest telecom company MTN Group’s attempts to enter the Indian market – are an indication of the fact that there is ample room to enter this market, at least inorganically.

“The investments in Tata Teleservices by NTT DoCoMo and the start-up operations of Swan Telecom by Etisalat and Telenor ASA’s in Unitech Telecom exposes the potential for inorganic activity in a market that is otherwise considered to be crowded but has a tele-density of less than 30%, signifying the expected growth potential in the sector.” said Bundeep Singh Rangar, Chairman IndusView Advisors Ltd, the India-focused cross-border advisory firm.

The Tata Teleservices deal will accelerate the telecommunication sector deal activity to $5.8 billion from about $3.1 billion in the deal street that grossed more than $28 billion this year to October.

Opportunities Exist

Other international telecom service providers seeking an India entry include Kuwait-based Zain Group, Qatar Telecom, Bahrain Telecom, Italy-based Telecom Italia SpA, South Africa’s MTN Group, among others. However, some of the global mobile telecom service providers such as Telefonica SA of Spain, French mobile telecommunication services provider, France Telecom and Deutsche Telekom AG of Germany are among those missing out on the opportunity to tap the growing mobile subscriber base expected to reach more than 700 million by 2012 from the current 300 million, at a CAGR of 21%.

Such growth trends bring with it corresponding increase in investments as government estimates suggest that the overall telecommunication sector will need $73 billion over the next five years to achieve a tele-density of up to 45%. And, a major chunk of the investment is expected to be realized through Foreign Direct Investment (FDI), particularly in the area of mobile communication.

It becomes significant as the government has granted new licenses and spectrum to aspiring operators such as Datacom Solutions a subsidiary of one of India’s leading consumer durables company Videocon Industries Ltd; Loop Telecom, a BPL Mobile Communications group company; S Tel Ltd, joint venture between Skycity Foundations and Telecom Investments (Mauritius) Ltd; among others which are likely targets – but within the regulatory purview of the overseas entity’s stake in the domestic company not to exceed 74%.

“MTN Group, South Africa’s largest mobile service provider with operations in 21 countries is another service provider waiting in the pit-lane to move in to India after its attempts to do so failed on two earlier occasions with leading Indian telecom service providers Bharti Airtel Ltd on the first count, followed by Reliance Communication, which could have been the largest emerging markets telecoms merger worth more than $65 billion.” added Rangar

Other large mobile telecom deal this year included Idea Cellular Ltd, the telecom business of the diversified Aditya Birla Group, acquiring 40% stake in Spice Communications Ltd, a regional cellular services provider for $675 million.

Information Technology (IT) and Telecom: Deals Despite the Downturn

Taking a collective view of the inorganic growth activity in the technology driven businesses, Information Technology (IT) & IT enabled Services (ITeS) and Telecommunication together account for deals worth about $6 billion emerging as the most consolidating sectors crossing the three digit mark of 100 deals with 21% share in M&As worth $28 billion to October this year.

Some of the large deals in the sector so far include:

§ The acquisition of Citigroup's captive Business Process Outsourcing (BPO) arm Citigroup Global Services (CGSL) for $505 million by India’s largest IT services exporter Tata Consultancy Services - the largest buyout of a foreign captive BPO in India;

§ WNS Holdings acquisition of Aviva Global services for $228 million,

§ Quatrro BPO Solutions buying a majority stake in the U.K.-based Babel Media for $110 million, and

§ Essar-owned Aegis BPO buying Nasdaq-listed People Support for $250 million

§ ITeS company CBay Systems bought 69.50% stake in MedQuist Inc. for $287 million.

In fact the pending purchase of Axon Group Plc, the U.K.-based provider of SAP implementation consulting, by HCL Technologies Ltd for $814 million after it rivalled the bid of its larger competitor and second largest IT services company Infosys Technologies Ltd, will give the IT and Telecom sector top slot in the sectoral ranking of the merger and acquisition (M&A) table with deal value exceeding $10 billion (including the Tata Teleservices deal).

The other deal in the making is that of Tata Consultancy Services’, India’s largest software services exporter, expected acquisition of Europe's largest engineering conglomerate Siemens AG’s IT Solutions and Services (SIS) unit.

Prior to the announcement of the Tata Teleservices-NTT DoCoMo, Swan-Etilsalat and Unitech-Telenor deals, the Power sector led the M&A activity with deal value grossing $5 billion followed by Pharmaceutical sector with M&A deal values of more than $4 billion. These sectors were followed by the Banking & Financial Services at $3 billion and Automotive Sector with deal value of about $2.5 billion.

BRAND POWER: RIL KING OF BRANDS AT $6.8 BN

India’s trillion-dollar plus stock markets boast of 20 companies with a brand value of over $1 billion, up from 16 last year. There are now a dozen (BSE-listed) companies with a brand value over $2 billion (vis-à-vis nine last year) and half-a-dozen with over $3 billion (up from four last year). Raise the cut-off to $6 billion, and it’s a club-of-one, India’s biggest private-sector company, Reliance Industries, with an end-2007 brand value of $6.81 billion (Rs 26,801 crore) vis-à-vis $5.8-billion in end-2006.

The Economic Times

Chief ministers urge Indian diaspora to invest in home state

Trade and investment opportunities in a resurgent India were the highlights of Day two of the 6th Pravasi Bharatiya Divas, which saw five chief ministers share their state’s unique strengths and future strategies as they tapped investment, vying for the attention of overseas Indian investors. Pranab Mukherjee, external affairs minister asked states and the NRI forum to come together in education, healthcare, energy sustainability, research and development as these sectors will “mar or make our future development.”

MINT
http://www.livemint.com/2008/01/09163456/
Chief-ministers-urge-Indian-di.html

Indian chip design firms acquiring for scale, R&D

Indian information technology companies, such as Wipro Ltd, Sasken Communication Technologies Ltd and MindTree Consulting Ltd, which offer chip-design services, are in an acquisitive mode to consolidate their position in the global market. In the last two years, these firms have together made five acquisitions totalling Rs502 crore, mainly to broaden their customer base and intellectual property (IP) assets.

Mint
http://www.livemint.com/2007/12/23234905/
Indian-chip-design-firms-acqui.htmll

Cisco to ramp up talent pool for business roles

It has been a year since Cisco announced that India will be its globalisation centre east. As part of the drive, the networking major is now planning to ramp up its corporate function resources in the next two years. This is apart from growing its engineering and development staff in the company’s main offshore destination.

The Economic Times
http://economictimes.indiatimes.com/News/News_By_Industry/Jobs/
Cisco_to_ramp_up_talent_pool_for_business_roles/articleshow/2635787.cms

The IndusView Publication - Volume 3, Issue 7

Indian Airspace: More Planes, Fewer Names

Market dynamics can create strange bedfellows. Kingfisher Airlines, a subsidiary of UB Group, India's largest alcoholic spirits manufacturer is looking to acquire Deccan Aviation, India’s top low-cost carrier to become India’s largest airline with a 34% market share. The transaction will bring together two contrasting companies. Kingfisher, run by Vijay Mallya, India’s flamboyant entrepreneur often compared with the U.K.’s Richard Branson and Air Deccan founded by Capt. G. R. Gopinath, a former Indian Army Officer who popularized low-cost air travel in India.

The merger follows the recent acquisition of Air Sahara by Jet Airways, until now, India’s largest private sector airline with a 32% market share, and the merger of two state owned carriers Air India and Indian – to create the National Aviation Company of India (NACIL).

The wave of airline consolidation we first predicted in Vol3 | Issue 5 clearly continues.

Wireless Telecoms: Size Matters

Consolidation also continues in the wireless sector, evident from the expected merger of Idea Cellular Ltd owned by Aditya Birla Group, one of India's largest diversified conglomerates, with Spice Telecom, which is 49% owned by South East Asia’s second largest phone company Telekom Malaysia Bhd.

Idea Cellular and Spice Telecom will have a combined subscriber base of 17.3 million in 11 circles making it the fifth largest mobile operator, surpassing Tata Teleservices Ltd, part of the Tata group, India's largest private sector business group.

The world’s fastest growing mobile phone market, which is expected to more than double to 348 million subscribers by 2010 has undergone consolidation worth more than $12 billion in transaction value so far this year compared with $2 billion last year. The most significant deal has been the acquisition of Hutchison Essar Ltd, second largest GSM mobile service provider, by the U.K.’s Vodafone Group Plc.

Real Estate: Billion Dollar Opportunities

General Electric Company (GE), the world’s second largest company by market value, is boosting its commitment to India’s real estate market by allocating $2 billion for real estate projects such as townships, special economic zones (SEZs), information technology (IT) parks, retail and residential developments.

Industry experts forecast demand, precipitated by India’s burgeoning Information Technology (IT) industry, for as many as 80 million housing units over the next 15 years and 200 million square feet in office space in the next five years.

More insight into India’s property market can be gotten from the Company Watch section of this issue where we’ve profiled DLF Ltd, India’s largest real estate developer slated to have the country’s largest initial public offering (IPO) when it lists $3 billion worth of new shares this month.

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

The IndusView Publication - Volume 3, Issue 6

Genpact IPO on NYSE

Genpact Ltd, India’s largest Business Process Outsourcing firm is expected to reach a market capitalization of about $3 billion, when it lists on the New York Stock Exchange later this year. That valuation is based on that of its peers, WNS (Holdings) Ltd and ExlService Holdings, which have already listed on U.S. exchanges.

The public offering will provide a healthy return to its principal investors, Oak Hill and General Atlantic, which invested $800 million for a 60% stake in the company two years ago. The remaining 40% is held by General Electric, which started Genpact as an in-house offshore facility 10 years ago.

IT: A $100 Billion Industry

India’s information technology (IT) and IT-enabled Services (ITeS) industry will be worth $100 billion by 2011 from about $48 billion in 2006, according to a report by IDC India, the Indian affiliate of Massachusetts-based market research firm IDC. The report suggests that the Indian IT industry will register a compound annual growth rate (CAGR) of 18% during these five years.

The estimate, however, seems conservative considering the 31% growth rate marked by the Indian IT industry in 2006. The industry, which has grown more than 30% annually for the past four years, according to the National Association of Software and Service Companies (NASSCOM), the industry body representing more than 1,100 Indian IT companies.

The IDC report suggested rising domestic sales, previously a weak segment. IDC forecasts IT & ITeS sales in India will grow at a CAGR of 20% to $41 billion in 2011 from $17 billion in 2006.

Indian Contenders

Indian companies are apparently better positioned to challenge the global blue-chip companies. Rating agency Standard & Poor’s (S&P) annual ‘Global Challengers List’ included eight Indian companies out of the 300 firms listed from 37 countries, compared with four companies from China. The list that identifies mid-size public listed companies exhibiting the strongest growth characteristics includes ACC Ltd., one of the oldest manufacturer of cement and ready mix concrete; Hotel Leela Venture Ltd, an Indian hotel company that owns four deluxe hotel in the cities of Mumbai, Bangalore, Kovalam and Goa; Jain Irrigation Systems Ltd, the country’s largest manufacturer of irrigation systems, pipes and fittings; Lakshmi Machine Works Ltd, one of the world’s leading manufacturers of textile spinning machinery; Marico Industries, one of the leading FMCG companies; Titan Industries, the world's sixth largest wrist watch manufacturer and part of the Tata Group, India's largest private sector business group; The Indian Hotels Company Ltd, a part of the Tata Group that operates Taj Hotels chain of luxury hotels.

Oil Tips a Perfect Balance

If India could discard its oil import bill, it will reach a perfect trade balance. During the fiscal year 2006-07, India's exports grew by 24% to reach at $125 billion, while non-oil imports increased to $124 billion from $99.5 billion during the same period. Its trade deficit, however, widened to $57 billion from $40 billion only due to the crude oil imports bill that rose by the same amount, i.e. $57 billion in 2006-07 from $44 billion in the previous year.

With the Indian economy estimated to grow at the rate of 8%-10% per annum in the coming years, the oil import bill will only increase as demand for energy rises to 200 Giga Watts by 2012 from the current installed capacity of 125 Giga Watts. It makes a clear case for large investments in alternative energy sources such as wind energy, nuclear energy and solar energy. Wind energy has added about 6,000 megawatts of power supply in the past five years, and it is estimated to create additional capacity of about 8,500 megawatts by 2012.

Large oil and gas discoveries announced by Reliance Industries Ltd., country's most valuable firm with a market value of $37.2 billion and Cairn India Ltd, subsidiary of Edinburgh, Scotland based Cairn Energy Plc strengthen India’s efforts to reduce dependence on oil imports.

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