Private Equity Invades India

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It hopes to have 2,500 outlets in India by the end of 2007, and expects to boost its presence in Europe, where it has already opened two shops in the heart of café culture, Vienna. "With enough private equity, we are able to pursue our expansion plans aggressively," says Naresh Malhotra, a former head of kpmg India and now managing director at Coffee Day.

With so much money flooding in, some fear a bubble. "The market is overheated," says Carlyle's Gupta. Valuations are spiking ever higher as Indian firms play one suitor against another and potential investors elbow each other out of the way. For instance, Hiranandani Developers, a builder of gated communities and high-end office towers, has gotten offers of as much as $100 million from more than a dozen outfits. "It's crazy the way people are throwing money at deals," says founder Surendra Hiranandani.

One reason investors continue to throw money into India is that it offers a good way to cash out with a profit: its comparatively liquid and transparent stock market. The Bombay Stock Exchange's benchmark Sensex index is up 42% since January, spurred in part by IPOs for 15 private-equity-backed companies that raised a total of $887 million.

Another selling point is an abundance of family-owned companies. Although Indian clans have traditionally been reluctant to give up management control, the younger generation is often prepared to trade away a chunk of the company in exchange for cash and some advice on beefing up sales.

BEYOND TELECOM

That's how drug researcher Glenn Saldanha hooked up with British investors. Saldanha, who had worked for Eli Lilly & Co. in the U.S., returned to India in 1998 to help run his family's company, a Mumbai-based generics maker called Glenmark Pharmaceuticals Ltd. With an eye toward expanding overseas and boosting research, he took Glenmark public, floating 30% of the company. In 2002 Saldanha accepted a $10.2 million offer from London-based Actis Partners for a 15.4% stake. Under Actis' guidance, Glenmark streamlined its financial systems and launched a search for strategic partners. Revenues for the fiscal year ended in March were up 14% from 2005, to $126 million, while profits climbed more than 6%, to $1.5 million. "The funding put pressure on our management team, which drove us toward this fast and aggressive growth," says the 37-year-old Saldanha.

As India's economy continues to open up, private-equity investors are starting to diversify away from telecommunications and outsourcing. These days, health care, food, real estate, travel, and more are heating up. In addition to Coffee Day, for instance, Sequoia has plowed money into a rental-car company, a hotel chain, and a Web portal that helps arrange marriages. Says Sequoia India chief Sumir Chadha: "Investors are focusing on building companies [that have] Indian demand."

Lakshman covers India business for BusinessWeek .