India has been an expensive investment destination for some time now but there is still an appetite for the market among global investors, top private equity and venture capital fund managers said at the VCCircle India Limited Partners Summit 2018 on Tuesday.
There is a valid concern that India is expensive when it comes to valuation for investments. While the companies that have scope for value creation offer good valuation, those that have reached a certain stage and can hit IPO market in a year or two are generally expensive, they said.
The panel, titled as ‘Valuation woes – Is the market overheated’, saw participation from Sudhir Variyar, managing director, Multiples Asset Management; Avnish Bajaj, founder and managing partner, Matrix Partners; Shashank Singh, partner and India head, Apax Partners; Jayanta Basu, managing partner, CX Partners; Vishal Tulsyan, chief executive officer and managing director, Motilal Oswal Private Equity; and Prasad Gadkari, head investment strategy and policy, NIIF. Rishi Aswani, director, Duff & Phelps, was the moderator of the panel.
Bajaj said venture capital firms have to live through bull and bear phases. “In early-stage companies, the ones that are good on execution get valued reasonably. But as companies cross Series A and B rounds, they get money almost for free and valuations jump up significantly as compared to growth,” he said.
The panellists agreed that investors should enter a company and sector for reasons that are not entirely dependent on valuation. “Even if one gets at a slightly high valuation but the management and sector are right, it is going to pay off in the long run. Having said that getting through the right entry point is the key when it comes to clocking the right returns,” said Shashank of Apax.
He cited the example of his investment in Cholamandalam and how the timing of entry made all the difference. “We entered when the company was beaten down and its exposure to the commercial vehicle segment was at an all-time low. Post the investment, the market improved and with that the company’s performance improved and we managed to clock impressive returns. So timing of investment and exit cycle matters; valuation is not the only factor,” he said.
Panellists also said valuation gets heated up depending on what theme is playing out. “Suddenly, one sector or theme becomes hot and then valuation in that sector starts skyrocketing. Investors have to be wary to not fall in to this trap. Sectors such as IT, financial services and healthcare have all seen such phases over the years,” said Jayanta Basu of CX Partners.
He said the exit multiple has been higher in cases where the firm has gone right on growth assumptions of companies, irrespective of the sector and valuation.
In the infrastructure space, the participation of sovereign and wealth funds has given a positive signal to the ecosystem. Infrastructure has been in the doldrums for some time now and needed the right push with investments from global investors. Prasad Gadkari of NIIF said despite pricing challenges from active competition in the segment, it is encouraging to see the sector receives interest from top global guys.
“In this case, I am not concerned about what it does to value of assets—Rather, it helps the sector and takes it on a growth trajectory,” he said.
The general consensus among the panellists was that while India is expensive, there is still an appetite for the market in the global arena.
Basu said a heated market offers good opportunities from an exit point of view but the IPO market is going to be a bit shaky for a year at least and might take a better shape post the general elections. "Investors should not go for price when it comes to investments but look for the right fit," he said.