Technology, Venture Capital, Private Equity

At the outset, I have to say that this post is not motivated by any patriotic fervor. In fact, I have been extremely skeptical about the exaggerated claims of India’s emergence as an economic superpower. On many parameters, (share of world trade or per capita GDP for instance) we remain an economic minnow. However, like a prominent PE investor remarked in a conference that I recently attended – for India, God seems to be planning in lieu of the government (in his words, how else can you explain the fact that China and India both launched their family planning programs at the same time. They got it right, we got it wrong and we are left with one of the best demographic profiles in the world). Its in this context that I am inclined to say that the current global economic malaise may actually be a blessing in disguise for India.
First of all, lets recount the risks that any investor faces today. The two biggest questions on the top of every investor’s mind are – a) how much more downside remains in today’s already beaten down markets? and b) how long will it take for things to turn around? By all estimates, the answer to the first question is – maybe a little more (read 10%-15%). The EPS estimates for FY09 for the Sensex are around Rs 950. So, at current levels the Sensex is trading at around 10x PE(FY09). This versus a historical bottom of around 8x. I expect anywhere between 5-15% degrowth in EPS for FY10. That leaves the Sensex at a 11-12xPE(FY10). So, though we have lost a lot of ground, by FY10 levels, the market still doesn’t seem that cheap and indeed compared to some of the other emerging market peers, we trade at a premium. Therefore, there is some scope for further fall before markets bottom out.
Now, coming to the other important question of the expected time span for this bear market. In my opinion, this is where India is far better positioned to be first off the blocks on the path to recovery. If one considers the five major relevant economic blocks – US, EU, Japan, China and India, the former three are plagued by severe systemic issues (such as excessive leverage, low savings rate, inordinate consumption levels etc) that will take a long period of time to get resolved. Now, in comparison to China, India has some significant characteristics that will play in the latter’s favour. For starters, as is oft repeated, exports form a far smaller component of India’s GDP compared to China’s. Apart from this, India also has a lower operating leverage in comparison to China. China’s model has always been to build huge capacities, which worked very well in boom times, enabling it to attain economies of scale and enjoy great cost savings. However, in times like this, excess capacity can become a millstone around your neck and result in higher fixed costs. The fact that India is primarily a services led economy in contrast to China being a manufacturing economy also helps. The other areas where India scores over China are greater capital efficiency and also deeper management expertise in dealing with capital constrains of the kind we face today. (Merits to add here that the one area where China scores over India is its superior balance sheet (forex reserves and also budget surpluses), which afford it with the option of spending their way out of the crisis of the kind recently announced). Also, one of the key constraints, which has affected economic activity in the recent past, which is the shortage of credit should also get resolved in due course given the absence of any systemic problems. In fact, credit from domestic institutions has actually registered a 30% increase last quarter and it is the lack of availability of global credit, which has been the cause of paucity of capital. With the global credits slowly limping back to normal and also given the interest evinced by the debt FIIs in recently announced SEBI registrations, the availability of credit should improve with time. Finally, and this is the most important point – the falling commodity (esp. oil) prices are bound to have an immensely positive impact on our economy.
In sum, India doesn’t face systemic issues of the kind the developed economies face and in fact, the slowing consumption in the rest of the world and resulting demand destruction for commodities puts India in a good wicket for maintaining its relatively high rate of growth. Hence, there may be a case to make that if the demand for commodities and oil had continued to be what it was in the recent past, it could have imposed severe speed breaks on the Indian economy and therefore, the allusion to the remark earlier about God planning for India in lieu of the government.
In my next post, I plan to discuss some investing strategies in India for the next year or so. Stay tuned.