Retail – A New Investment Frontier

Retail – A New Investment Frontier

 IL&FS Investment Managers

 International Retail Overview

 India Retail Opportunity

 Financing the Retail Sector

 Approaching Private Equity

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IL&FS Investment Managers

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 IL&FS

 Established in 1987 and headquartered in Mumbai

 Focused on the development of infrastructure projects and creation of
value added financial services
 Presence across all sectors of Indian Infrastructure
 Promoted by leading global and Indian Banks/Financial Institutions
 Promoted over 50 Special Purpose Vehicle companies in the
Infrastructure and Financial Services Space of which 2 are listed and
are outperforming the benchmark indices
 IL&FS and its affiliates have over 1,500 employees spread across the
length and breadth of India
 IL&FS developed assets provide services to over 50 mn people in India

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 IIML Investment Managers
 IIML is promoted by IL&FS and is its private equity arm
 IIML is one of the largest Indian private equity fund managers in India
with nearly US$900 million under management
 Team of 20 experienced professionals operating from Mumbai and
Bangalore
 Made 60+ investments with a Gross US$ IRR of 26% p.a. on exited
investments
 50% of deals are proprietary in nature sourced by IIML’s own team
and/or IL&FS Group
Contributors to IIML Managed Funds

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 Funds Under Management
 IIML manages 7 funds with a combined corpus of around
US$ 900 mn
South Asian AIG Indian India Auto India Project Leverage India Fund IL&FS India Realty
Fund Name
Regional Apex Fund Sectoral Equity Fund Ancillary Fund Development Fund (LIF) Fund (IIRF)

Vintage 1996 1997 1998 2000 2005 2006

IL&FS,
Primary Sponsors IL&FS IL&FS, AIG IL&FS IL&FS IL&FS
Punjab National Bank

Auto
Infrastructure &
Sector Focus Growth Components & Infrastructure Opportunistic Fund Real Estate
Growth
Growth

Regents of California, Life Insurance CalPERS, CalSTRS,

Life Insurance
Equitable Life IFC, DEG, Corporation, PNB, MacArthur
IFC, JBIC, ADB, Corporation, IL&FS,
Key Investors Assurance, Pantheon Mahindra & IL&FS, Taib Bank, Foundation, Oregon
IL&FS, SIDBI General Insurance
Capital, ORIX, IL&FS, Mahindra, IL&FS Banco Efisa, State Pension, GIC
Corporation
HDFC Evolvence (RE), IL&FS

Corpus (US$ mn) 25* 78 15 22 153 522

Amount Invested (US$ mn) 36 63 13 16 139 177

No. of Investments ** 26 10 8 7 27 7

No. of Divestments 9 7 4 4 - -
* Evergreen Fund until 2007
** Includes 3 commitments in LIF and IIRF

IIML also manages 1 propriety fund for IL&FS of US$ 56 mn

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International Retail Overview

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 International Retail
 Retailing – Worlds largest private industry
 Sales exceeding US$7.2 trillion

 47 of the global Fortune companies and 25 of Asia’s Top 200 companies

happen to be retailers

 Top 30 retailers account for 19% of the global retail sales

 Internationally Retail is a mature sector and organised players account

for more than three-fourths of the total retail trade. Large retailers
such as Walmart of US, Carrefour of France, Tesco of UK and others
now dominate the global retail market

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 International Retail
 Global retailers have adopted multi-format and multi-product strategies
in order to customize their product offerings for distinct target
segments

 Sales and Market Cap of top Global retailers

Company Sales US$ Mn Market Cap US$ Mn

Walmart 312,427 179,923

Carrefour 74,496 40,586

Kroger 60,553 17,187

Metro 55,722 17,549

Sears 49,124 15,888

Marks and Spencers 7,797 21,948

Source Bloomberg 19th July 2006

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India – Retail Opportunity

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 Indian Scenario
 Demographics
 Population : 1105 mn
 Population Growth : 1.6%
 Median Age : 24.3 years
 Urban Population : 29%
 GDP Per capita (approx) : US$ 700

 The spending pattern of the the emerging middle class is

Category (2004) % Of Total
Food, Beverage and Tobacco 43%
Clothing and Footwear 5%
Gross Rent, Fuel and Power 12%
Furniture, Fixture and Appliances 4%
Medical and Healthcare Services 8%
Transport and Communication 15%
Recreation, Education and Cultural 3%
Miscellaneous 10%
Souce KSA Technopak 2005
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 India Retail
 Retail in India is still at a very nascent stage with an estimated market
size of approximately US$ 222 Bn

 The organised retail market currently stands at US$ 7.7Bn a mere 3.5%
as of 2005

 Asian economies have shown substantial penetration in the last 2

decades and India has still to move up

Oganised Retail Penetration

80 75
Penetration

60 55
40
40 35 30
20 17
20
3
0
Taiwan Malaysia Thailand Brazil Indonesia P oland China India

Countries

Source HSBC 12
 Risks of Retail
 The industry recognizes “its all about location” but needs to address
other critical success factors

– Supply side chain management to increase productivity of

inventory
– Overhead control which tends to balloon particularly in the
early stages of growth
– Over crowding as evidenced by mushrooming mall
development in metros and mini metros
– Technology Implementation helping in real time or at least end
of day information transfer
– Recent influx in the retail sector has resulted in shortage of
skilled and experienced manpower
– Customer Retention

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Financing the Retail Sector

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 Financing Requirement
 Indian retail sector is highly fragmented with 12 million retail outlets
spread across the country. 80% of these are run by small families using
only household labor

 Organised Retail requires financing for

– New Stores : Store Capex and deposits for store sites. The
expense on this has increased over time as retail has gained
importance and real estate cost has escalated
– Existing Stores : Renovation and expansion of existing stores
– Working Capital : There may be some retailers who require
financing for working capital but this is rare as the majority
get credit especially in case of food and grocery

 It is estimated that more than $3 Billion capex per annum is required

to finance the growth of organised retail

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 Financing Requirement…(Contd)
 The Question now is “Who will Fund the Big Retail expansion”
– Private Equity
– Capital Market
– Indian Corporate houses
– FDI in Retail Sector
– Banks and Institutions

 India has emerged as the most attractive destination for mass

merchant and food retailers outperforming China 2 years in a row
according to global consulting firm A T Kearney

 Most of the developed nations are today showing signs of saturation

and hence multinationals are looking at virgin territories to abode and
expand the market

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 Private Equity
 Indian retail is currently dominated by entrepreneurs, families and a
few corporate houses

 They are not used to the professionalism that this industry demands
but are adapting and changes in the industry eg Pantaloon, Shopper’s
Stop, Trent, Lifestyle, Subhiksha, Nilgiris, Trinethra, Fabmall, Vijay
Sales, VLCC to name a few

 Recent equity financing deals are

Company Investor Amount
Pantaloon Retail ICICI Ventures,Bennett & Coleman Rs 750 mn
Shoppers Stop IIML, ICICI Ventures and Zodiac Clothing Rs 752 mn
Subiksha ICICI Ventures Rs 350mn
Trinethra and Fabmall GW Capital Rs 450 mn
Vishal Retail Bennett & Coleman NA
Crossword ICICI Ventures NA

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 Private Equity …(Contd)
 Private Equity has helped to scale the landscape for organised retail
over the years

 Growing awareness about this segment of financing with a maturing

capital market has made access to funds easier

 The coming years may see a couple of landmark transactions in Private

Equity

 Private equity is the most viable option for entrepreneurs and family
held business as it helps to finance the finance the expansion of the
business without the short term pressures of listing.

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 IIML Experience
 Company : Shopper’s Stop
 Category : Retail
 Year of Investment : 2000
 Investment Amount : Rs 150 mn
 Stake : 4.24%
 Current Market Price : Rs 498 Per Share

 Through this transaction IIML helped Shopper’s Stop to gain a foothold

in the organised retail market the benefit of which is seen today

 This transaction also gave IIML substantial returns

 Private equity is a tool that new and old business entrepreneurs can
use who are currently at a nascent stage and would like to grow in a
phased manner before tapping the capital markets

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 Capital Markets
 Retail Companies are today looking at tapping the capital markets

 Capital markets in India have over the years strengthened and helped
companies raise funds from the general public

 Transparency and efficiency

 Pantaloon had tapped the capital market in January for rights issue

 Private companies can access capital markets once they reach a

reasonable size

 There are only 3 listed retail companies in India and the listing of a few
more will help to build depth in the sector

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 Capital Markets
 Retail sector has a long way to go till they are able to gain a sizable
share of the capital market pie

 The Market Cap, P/E and performance of the listed companies are

Company Market Cap P/E CAGR Returns

Rs Mn 3 Year or
On listing (appox)
Pantaloon 3,561 60.2 89%
Retail
Shopper’s Stop 1,727 63.7 29%
(Since Listing
May 2005)
Trent 991 40 54%

Source Capitalmarket

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 Indian Big Business
 Traditionally the real estate players like Rahejas with Shopper’s Stop or
the Pyramid could make an easy entry into the retail sector.

 Today, Indian business houses have shown a keen interest in retail

– RPG : RPG which was the first group in India to spot an
opportunity in the retail sector and having tied up with SPAR is
set to go into an expansion mode
– Reliance : Reliance is at the forefront of the retail foray. It
plans to set up 1400 stores and invest $2.2 Bn in the coming
years.
– Birla : The Aditya Birla group is preparing a blueprint for
claiming a share of the growing retail pie.
– Bharti : Sunil Mittal promoted Bharti group is expected to enter
the retail sector with an initial investment of around Rs 6,000
Crs. It is believed to be in talks with Tesco
– Wadhawan Family : Promoters of Dewan Housing Finance has
set up retail chain by the name of “Spinach”. The company is
investing close to Rs 100 Crs in its retail foray

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 FDI In Retail
 Government has realized the importance of FDI in retail and hence
made the necessary changes

 To facilitate easier FDI inflow, instead of having to seek FIPB approval,

FDI upto 100% is allowed under automatic route for cash and carry and
wholesale trading and export trading

 The cabinet has allowed FDI upto 51% with prior Government approval
for retail trade in “Single Brand” products

 Going ahead, the Government is expected to adopt a gradual approach

to allowing further FDI in the retail space

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Approaching Private Equity

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 Benefits of Private Equity
 Financial
– Equity
– Quasi Equity
– Shareholders Loan
– Long term view

 Managerial
– Board Inputs : Industry Specialists, Independent Directors
– Investment Professionals with experience and knowledge of
building business

 Networking
– Global access to valuable group of people and skills

 Helps in achieving success

– Providing risk management tools and ensuring high standard
of Corporate Governance

 Brand Value
– The company gains a lot of brand value
– Helps when the company has to go for an IPO
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 What Private Equity Players look For?
 Team/ Management
– Strong execution focused team
– Track Record, Skill sets, Organizational Chart
– Shareholding Pattern

 Product or Service
– Value to customer
– Sustainability of competitive edge
– Merchandising and supply chain management
– Discontinuous or Continuous Innovation

 Market
– Size of Market
– Demand Drivers
– Target Market
– Competitors
– Time to market
– Product Positioning

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 What Private Equity Players look For?
 Business Model
– Revenue Model
– Marketing and Distribution Strategy
– Differentiation
– Foreseeable Exits

 Stage of Growth
– Early Stage or Late Stage

 Capital Requirement
– Capital Requirement
– Equity Dilution
– Number of Financing Rounds to Commercialization

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 Approaching Private Equity
 Business Plan
– Include audited financial statements
– Strategy Going Forward
– Target Market
– Current Customers
– Executive Summary
– Risks
– Exit

 Due Diligence Package

– Audited Financials
– Merchandising and footfall Strategy
– Location and property acquisition
– Current Customers

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Financing Lifecycle

The Chasm The Wall

Venture Capital Public Markets
Angels Strategic Investors
Founders
IPO
Early
Seed Capital Stage Later Stage Secondary
Offerings
Mezzanine
Revenue
C

B
A

Time
Valley of Death

Seed or Start-up: Market research and product development.

Early Stage: Funding full-scale operations and selling products/services. Not yet profitable.
Later Stage: Funding expansion and new products. Near break-even.

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