Over the past few months investors have started to cast India in a newly optimistic light. But there are some who never had doubts. Shankar Narayanan, a private equity specialist, has been cutting deals in India for 10 years and boasts of 90% returns over the last five years. "I'm probably the only guy who hasn't lost money on a deal in India," he says.
Today he is more optimistic than ever. The ADB this week raised its 2004 GDP estimate to 6.7%, marking India as the second-fastest growing economy in the world, behind China. And despite the rallying stock market, which just hit a 44-month high, PE ratios remain at a relatively modest 16.8 times. That's lower than the figures for Hong Kong, Singapore, Thailand and Taiwan, though none of those countries will post comparable growth levels to India next year.
At the same time, foreign direct investment is still modest. In the year to October 2003 foreigners invested $5.65 billion into India, less than half the figure for Taiwan over the same period. But foreign investors' wariness of India could be about to change.
"In the last six months there has been a change," says Narayanan, who is head of buy-outs, restructuring and real estate at ICICI Venture. He predicts that private equity investors can reasonably expect returns of 30-40% over the next five years. "People recognize Indian growth today. True, India was shackled in the past, but the controls are being systematically dismantled. You have to remember, Indian companies have only really had good governance for the past 12 years."
Goldman Sachs echoed the Indian bulls in October when it published Dreaming with Brics, a research paper with the immodest goal of predicting the course of the global economy over the next 50 years. The paper claims that Brazil, Russia, India and China (B-R-I-Cs, get it?) will be the global economic powerhouses of the first half of the 21st century.
"India has the potential to show the fastest growth over the next 30 and 50 years," it says. "Growth could be higher than 5% over the next 30 years and close to 5% as late as 2050 if development proceeds successfully."
But for old hands like Narayanan there have always been opportunities for private equity investments. His advice: stick to the common-sense rules. "I based my strategy on a simple premise: to invest in sectors that would grow as India moved from the developing to the developed world and to select quality investees whose interests are aligned with ours," says Narayanan.
Today, he sees the key sectors as call centres and business outsourcing, software services, pharmaceuticals and biotech, and autoparts makers.
Last week Norwich Union, a UK insurer, announced its intention to shift 2,350 call centre jobs and data input jobs to India, following the transfer of 1,200 jobs to centres in Delhi and Bangalore earlier in the year. In the same week, Merrill Lynch unveiled a multi-million development and maintenance deal with Satyam Computer Services.
British trades unions reckon 200,000 jobs in the financial industry alone could be outsourced abroad in the next five years, with India the favoured destination for many of them. Some estimates claim that India has an 80% share of the global market - a market that Goldman estimates could be worth $585 billion in 2005.
Much of the growth opportunities in India are based on business models that leverage India's cost and language advantages. One of Narayanan's most recent deals was a buy-out of Tata Infomedia, a niche publishing, printing and yellow pages business. He is now talking to other yellow pages companies in Europe and the US, offering to outsource their pagination, database management, typesetting and call centres.
For some industries the marriage of low cost and high skill is unique. Four Indian pharmaceuticals companies got a boost in November when they signed a deal with the Clinton Foundation to provide cheap Aids drugs to African and Caribbean nations. The scheme opens a vast market for the four companies. That aside, India's pharma and biotech market is expected to grow its sales revenue five-fold by 2010.
But some pundits are touting the auto ancillary industry as the next big thing. These companies make the thousands of uncomplicated bits and pieces that are used in cars and motorbikes, such as rear-view mirrors, indicator stalks and switches. The interest in these companies has been phenomenal in 2003, comfortably outperforming even the surging stock market. Amforge Industries, for instance, is up almost 1000% this year.
Before getting carried away with the numbers Narayanan warns investors to remember that it is as important to invest in the people behind a business as it is to invest in a hot sector. "People tend to lose rationality and stray from the basic principles," he says. "They think that toads will turn to princes."
There is more to the Indian growth story than cheap graduate-level workers who are competent in English. There is a rule of law, underpinned by a proper legal framework, and a democratic parliament, both established by the British. Of course, sinophiles like to point to Enron's problems in Dabhol and scoff, but it serves well to remember that Enron had more than a hand in the problems besetting that project.
Naryanana likes to scoff back at such critics anyway. "It's very easy to put money into China," he says "But difficult to get it out. In India the process is practically automatic."