What are small and medium enterprises (SME) in the Indian context? Citi uses revenue as the determinant; it defines small as those who have sales less than $50 million and medium as those with sales between $50 million and $200 million.
The Reserve Bank of India (RBI) uses investment in fixed assets as the criteria. It defines small as a company where the investment in plant and machinery is more then Rs2.5 million ($61,000) but less than Rs50 million and a medium enterprise as one where the investment is more then Rs50 million but less then Rs100 million. For service sector companies the limits are somewhat lower but generally in the same ballpark. (The RBI uses these definitions to encourage banks to allocate part of their portfolios to such companies.)
Whichever way you choose to define the category, one thing is clear: in the current economic boom, companies of all sizes and shapes in India are on a roll. In stark contrast to the past, todayÆs economic boom is neither limited to specific sectors such as services û for example information technology and business process outsourcing û nor to large companies and business groups.
This leads to an obvious question: where are smaller companies finding the capital to fuel their growth ambitions?
CitiÆs emerging markets SME group dates back to 1996 û when it was launched in Taiwan, Hong Kong and Argentina. Shortly thereafter, in 1998, the group arrived in India.
ôIn the mid-nineties this segment was overbanked but underserved,ö comments Citi's Ghosh. ôWhat has not changed is that the space was and continues to be hugely attractiveö. Today, just nine years later, the SME category accounts for $2 billion of CitiÆs assets in India.
What makes this number even more remarkable is that the average exposure is less then $1 million. Ghosh explains: ôAt these levels our portfolio is not lumpy loans to a small number of companies but quite a granular portfolio broad-based across about 3,000 companies.ö
Citi has a tried and tested approach to identifying companies. Ghosh elaborates: ôWe identify segments where SMEs have a competitive advantage and sustainable proposition. This is key. We look for companies with upstream and downstream linkages with top-tier corporates and concentrate on geographies which have a critical mass within industry sectors. Finally, existing clients are the best source of new clients.ö
Genesis Colors obviously fits CitiÆs criteria as it banks with Citi and ICICI Bank. Coincidentally, Genesis was founded in the mid-nineties by a pair of ex-Citibankers Sanjay Kapoor and Jyoti Narula, both first generation entrepreneurs. They joined hands to set up a business marketing ties and other accessories under the brand, Satya Paul. As opportunities presented themselves they expanded the business, launching a full suite of designer garments under the Satya Paul umbrella, acquiring another couture brand, Deepika Gehani and opening multi-brand designer stores across the country.
Kapoor says a combination of his own entrepreneurial drive and the opportunity in the retail sector û which he terms ôa new industry driverö û spurred his decision. ôOpportunity is staring us in the face and young India is there to grab it,ö is KapoorÆs feeling.
Another example is AdImpactMedia. Founder and CEO Vibhav Parikh worked with Merrill Lynch, ICICI Securities and Citi before he was bitten by the entrepreneurial bug in 2005. ôAn investment banking career was no longer stimulating enough for me. Being young helped, because the ability to take risks was higher and secular economic growth across sectors has created new opportunities to exploit,ö explains Parikh.
AdImpactMedia installs LCD screens in prime locations across India û 200 screens are operational with another 1,000 contracted. Parikh believes, like Kapoor, that he is in the right place at the right time commenting that ôstrong growth in organised retail and real estate development has ensured a steady supply of quality locations at which to install our screens. The addressable market û defined in terms of preferred locations û is growing continuously which has helped us expand our network.ö
Or look at Parsec Technologies. Prabhat Agarwal, CEO and co-founder of Parsec, left a steady job with consulting firm Feedback Ventures in 1994 to start Parsec. The company provides contact centre solutions and specialised business process outsourcing (BPO) services. ôIt was a time when the industry was flourishing and everyone was talking about the software segment,ö says Agarwal of his decision to start a company in this area. Today ParsecÆs customer list includes leading companies, both in India and abroad.
ôThe SME space is hugely attractive,ö explains CitiÆs Ghosh. ôThe banking wallet is large in an absolute sense and in a relative sense growing faster than the wallet of the top tier corporates. Revenue streams are annuity and not episodic with attractive returns/yields if risk is managed well.ö
In contrast to when he started his business a decade ago, Kapoor, the CEO of Genesis, believes that ôtoday the liberalisation of the banking sector and widespread availability of private equity has made it easier to raise capital.ö Kapoor and Narula started their business with money raised from a friends and family network.
In May last year, Genesis Colors raised funding from JM Financial in its first round of private equity. It was a win-win situation û Genesis Colors needed to continue investing in the business to sustain the 80% year-on-year growth it has demonstrated over the last two years while private equity is keen to participate in one of IndiaÆs high-growth areas, retail.
¬ Haymarket Media Limited. All rights reserved.
