Opportunity in Small & Mid Cap - A Private Equity Investing approach Presentation by Hiren Ved Alchemy Capital Management October 20
Presentation ti Path Investment Life Cycle Private equity opportunities in listed companies Case Studies
Investment t Life Cycle
Why PE opportunities in listed cos? Blurring of lines between Private and Public equity markets Long history of capital markets- since 1875 Short circuiting the normal investment cycle Large universe of listed companies 78 listed companies Street coverage 250-300
Why PE opportunities in listed cos? Indian economic growth and evolution Sweet spot Need for growth capital expansion, M&A, restructuring Innovation, emergence of new sectors embedded in existing companies Young Entrepreneurs- Professionalization Value unlocking Deal Dynamics very favorable Deal size ($2 20 mn) Valuation discount Speed of deal execution Transparency- Benefit of regulatory environment Ease of Due Diligence Liquidity - Ease of exit
Small Caps opportunity in India Established tradition of Small & Mid Caps transitioning into large firms Almost half of the BSE100 stocks can be considered to have been entrepreneur driven at an early stage of their corporate history Multiple examples of small caps companies starting off as entrepreneur driven firms but graduating into global/regional level giants Market Capitalization ($ mn) Company Name Sector 2003 Current CAGR % Gain Bharti Airtel Telecom 872 47343 171% Financial Technologies Financial 12 2798 292% Glenmark Pharma Pharma 51 2473 164% Pantaloon Retail Retail 19 1999 221% Praj Industries Alternative Energy 8 954 233%
Case Studies
Diamond Power Infrastructure t Investment Summary Share Price Chart Situation Company had un-serviced debt - $35 mn and negative net-worth Was constrained for working capital hence very low capacity utilization (15%- 20%) Was one of the leading players in the electrical conductors industry - the industry on the verge of takeoff 400 350 300 250 Alchemy Investment 200 150 6x in 2 years ClearWater Capital invests in Diamond Alchemy enhances stake to 10% Opportunity To provide initial capital to restructure debt OTS with bankers 100 50 0 Result Alchemy & other PE investors decide to infuse capital Clear Water Capital agreed to infuse $5.4 mn equity and $28.5 mn debt Immediately after funding stock price corrects by 25% Alchemy picks up 6% of the company Company enters Turnkey Project Eng. Services Alchemy enhances stakes to 10% Company makes two acquisitions 05 05 2 Sep 2 Nov 2 Jan 2 Mar 2 May 2 Jul 2 Sep 2 Nov 2 Jan 2 Mar 2 May 2 Jul 2 Sep Financials $ mn FY05 FY CAGR (%) FY09E Sales 58.3 80.1 37% 275 PAT -0.5 8.2 -- 24 Market Cap 19 102 129 --
Praj Industries Investment Summary Situation In turnaround mode; straddling ethanol & brewery segments; value addition for domestic sugar industries Crude rallies; ethanol blending in 11 Indian states mandatory; coverage in tropical countries Opportunity Alternative energy moves from niche to mainstream, US $44 billion committed to alternative energy. Praj develops multi feed capabilities for ethanol; move from tropical to to temperate countries Result Alchemy invests into Praj at a very early stage recognizing the opportunity for alternative energy Vinod Khosla, leading Silicon Valley venture capitalist and a green energy evangelist invests 10% in Praj Praj starts t investing for being a global l player Morgan Stanley Asset Management invests in the company Tata s pick up a 7.2% stake in Praj 300 250 200 150 100 50 0 04 Alchemy Investment 04 5 Aug 04 Source: Bloomberg 05 Price Chart 38x in 4 years 05 05 5 Aug 05 Vinod Khosla VC picks up a 10% stake in Praj Financials 5 Aug Tata s picks up a 7.2% stake $ mn FY03 FY CAGR (%) FY09E Sales 21 148 63% 450 5 May 5 Nov 5 Feb 5 May 5 Nov 5 Feb 5 May 5 Nov 5 Feb 5 May 5 Aug PAT 0.6 21 144% 75 Market Cap 16 947 177%?
Mount Everest Mineral Water Investment Summary Situation Great Asset Unexploited as yet MEMW has the largest source of natural mineral water at the foothills of the Himalayas the worlds largest mountain range. The source of the water was rated as one of the purest and perennial forms of water in the world- Hidell-Eyster International- USA Mount Everest had a current bottling capacity of 150,000 litres of water per day, it is only exploiting 1% of its source capacity. In comparison, international brands like Fiji bottles 80,000 liters of water per hour and Evian bottles 750,000 liters of water per hour. Opportunity A natural resource play 60 To invest in the fastest growing segment of the beverage industry, with a unique irreplaceable source. 40 160 140 120 100 80 Price Chart 79% in 2 years Alchemy picks up a Tata Tea acquires 64%@R 6.4% Rs.71 25% @ Rs.125 Result Alchemy invests to pick up 6.4% at an enterprise value of $ 64 mn (Rs. 71/- share) Tata Tea exits Glaceau and acquired a 25% stake in the company (June 20) at an enterprise value of $115 mn 20 0 05 3 Mar 0 3 Jul 0 3 Mar 0 3 Jul 0 31 Oct 05 31 Dec 3 May 3 Sep 3 Nov 3 Jan 3 May 3 Sep Source: Bloomberg
Thank You
Pi Private Equity Deals- Blurring Lines No of Deals US $ million 2004 2005 20 20 YTD 2004 2005 20 20 YTD Early Stage India 9 22 50 24 55 79 140 114 Early Stage Cross Border 6 6 9 1 48 71 100 12 Growth Stage 12 24 46 25 192 332 511 14 Late Stage (A) 18 40 108 67 298 632 3639 2185 PIPE (B) 24 49 66 38 547 763 1576 1753 Buy Out 2 5 14 6 514 3 1135 440 Other 0 0 9 2 0 0 373 23 Total 71 146 302 163 1654 2183 7474 5601 % (A+B) of Total 59% 61% 58% 62% 51% 64% 70% 70% Source: Venture Intelligence India
Listed companies- by Market Cap Large Caps Mid Caps Small Caps No of Companies 222 450 2095 Source: Bloomberg Legend Large Caps Mid Cap Small Cap Market Capitalization < $750 million Market Capitalization between $100 $750 million Market Capitalization > $100 million