GPs struggle to understand Indian entry multiples

The ease with which many small firms list on the Indian stock markets means GPs often struggle to determine the true value of risk-adjusted returns.

General partners trying to understand exactly what they are paying for growth companies find it more difficult in India than in most other global markets, according to panellists at Private Equity International's India summit in Mumbai.

The relative ease with which companies can list on India’s stock exchanges was cited as a prime reason why the Indian market traded at a premium to most of its peers. There are about 7,000 companies listed across the country.

Spencer Swayze, director, natural resources at Texas-based limited partner UTIMCO, told PEI that it was often difficult to understand the metrics when buying into Indian firms, with entry multiples often stretched.

He told PEI: “The most difficult thing for us in India is understanding what we are paying for growth, compared to in the US or Brazil for example. It is hard to determine what is the true risk-adjusted return.”

Swayze said that a company that may be trading on six times earnings in the US, would often be on nine times earnings in India making it more difficult for private equity firms to make a case to buy.

He added: “You can make the faster growth argument, but there is also often higher risks associated with minority deals.”

Aberdeen Asset Management partner Wen Tan said that what would trade at around eight or nine times earnings in South East Asia might trade on 12 times in India, and that some GPs had become conditioned to accept the higher Indian levels of pricing.

Tan said there was a lack of public/private arbitrage and so many tiny companies could list in the country through an initial public offering process sometimes less rigorous than in other markets. This effectively meant the promoter could often set the price of an IPO and it would simply be accepted.

“There is a very different concept of valuation in India, and maybe other markets trade at a 30 percent discount.”