Private equity firms eyes Indian startups in IT, foreign investment by Indian firms lagging - report
In a report on the Business Standard, it noted that inbound deals in the technology sector in India had increased sharply despite overall deal volume and value had declined in the third quarter this year. Investment bankers were said to believe that interest in inbound deals will rise continuously.
Based on merger and acquisition data year to date by Venture Intelligence, inbound deals, excluding e-commerce deals, had surpassed outbound activity, which is a trend reversal. Aggregate investment by private equity and strategic investors in Indian assets posted USD1.32 billion as compared to the amount spent by Indian firms to invest in foreign assets, which was at USD154.7 million.
Avendus Capital head technology and outsourcing investment banking and executive director Amit Singh pointed out that private equity and strategic investors are looking to invest in risk-free sectors. "PE players who have set up funds dedicated to India are in a dilemma on when and where to invest. Add to this, an uncertain economic environment has impacted the rupee and also partly clouded political environment. They are hence looking at investing in companies and sectors with export orientation with less import component. IT/ITeS, and to some extent pharma and mining (though it has regulatory challenges) are the only industry that fit into this," he explained.
Moreover, Singh said there are only few local companies has EBITDA or earnings before interest, depreciation, taxes and amortization to cash ratio at over 50% and pre-tax return of investment (ROI) and return of capital (ROC) at over 20%.
Ernst & Young Partner & IT Advisory Leader Samiron Ghoshal outlines the three major points investors are taking into consideration in Indian firms. Companies who are looking to scale and has assets that has the capabilities to flourish in niche markets are two points to consider in investing an Indian company, Ghoshal said. The third point investors are taking into consideration are companies that have business across local regions but have back-end operations in India.
"We see activity in all the three areas. India's technology sector is undergoing a shift. The 90s was all about body shopping kind of work, Y2K and the period after that saw players beefing up their offshoring presence. The next five years will be about a handful of companies emerging and becoming big players in niche segment," Ghoshal added.