A huge talent pool, low IPO costs, and barreling growth have investment opportunities rocketing in a market that goes far beyond IT outsourcing
When I talk about India, I often refer to the image of a rocket ship launching. The country is taking off, and I see this in real time when I travel there every six weeks. The Indian economy is one of the fastest growing in the world, with GDP growth touching 9.3% last year. Simultaneously, India is experiencing exponential domestic growth for retail products and services due to the burgeoning middle class, which consists of 300 million consumers.
Many people still equate India with off-shoring and the IT services of Infosys (INFY), TCS, and Wipro (WIT). While those remain dominant, over the past five years Indian companies have vaulted new sectors to prominence on the global stage including technology, manufacturing, pharmaceutical, infrastructure, energy, consumer retail, telecom, financial services, media, and hospitality. India has developed a global brand that reflects its best-of-breed ability in not only IT but many other industries as well.
Private equity and venture investment have tripled in 2006 to $7.5 billion, and exit opportunities for venture- and private equity-backed startups are only expanding as the Bombay Stock Exchange rises and merger and acquisition activity grows.
Of course, investing in India comes at a cost and with associated risks. India’s infrastructure is in need of massive investment. While power reliability, living conditions, and road congestion are improving, they are still nowhere near the levels that businesses enjoy in the U.S. The country’s bureaucratic mind-set runs deep, from the government to the lowliest street vendor, making seemingly simple tasks take much longer. India’s tax and legal systems present an entirely different set of issues for foreign investors. Legal reviews can last for several months, knotted with structures and concepts unfamiliar to U.S. investors. Tax laws and corporate structures are also important to understand. Even the Indian accounting system differs from that of the U.S., requiring reorientation and reconciliation.
When you add the cultural differences in dealing with entrepreneurs in India, the time-zone difference, and the distance to get there, running a successful investing venture in India is no simple feat. And it is impossible to run a venture remotely over the long run; a local presence is ultimately required.
But even with these hurdles, India has never looked more attractive for investment. Here are a few reasons why:
1) Double-digit growth
India’s GDP is growing at between 8 and 9 percent annually and is projected to double from $800 billion today over the next eight years. India’s GDP growth is fueling the expansion of its middle class. Further, there is an enormous availability of well-educated human capital. Of India's 1.1 billion people, half are under 25 and 65% are of working age. The stock market has grown 278% from 2002 to 2006. Goldman Sachs (GS) believes India will be the world’s third-largest economy by 2050 —and larger than Japan by 2030—if growth continues at its current pace.
2) An emerging class of Goliaths
Companies from all industries in India have gone public and grown into global leaders, proving that startups can indeed move to the next level. There’s Reliance Industries in the consumer/retail sector, Infosys in IT services, Bharti in telecom, and Ranbaxy (RBXLF) in pharmaceuticals, to name a few. Tata Motors (TTM) caters to Europe’s small-car market as well as India's domestic market.
3) A nurturing climate for IPOs
In India, the revenue necessary to take companies public is lower, similar to U.S. IPO criteria circa 1992-1994. Valuations are sane, and the stock market is as hot as any global investor could hope. There are 9,000 listed companies in India, making it the market with the largest number of both small- and midcap public companies globally. Why so many? It's much easier for a company with approximately $20 million to $25 million in revenues to go public in India today than it is for a U.S.-based company to IPO with $75 million. Furthermore, India has the third-largest M&A market in Asia, with $25.6 billion spent on such deals in first half of 2006.
4) Diversity of opportunity
It’s not commonly known that India is the largest manufacturer of motorcycles, second-largest maker of small cars, and third largest of automotive components. In the pharmaceutical industry, India has quietly become the fourth-largest producer of pharmaceuticals, while also showing the ability to innovate with the second-largest number of drug filings. It is also one of the largest exporters of steel, among the largest consumers and producers of energy in Asia, the second-largest manufacturer of CD ROMs, and it has one of the largest forging facilities in the world. All of these industries create opportunities for startup investment.
That said, off-shoring will remain a powerhouse. Analysts estimate the market for offshore services will grow to $140 billion by 2014 from its current $40 billion base. Currently, more than half of all Silicon Valley startups off-shore to India.
5) Continuing surprises
Nothing in India seems predictable, and the country will continue to deliver the unexpected—from its Bollywood films to the production of hybrid cars. Startups need the usual: to solve a problem, find a secret sauce to stand out from the pack, and have capital efficiency. Some predictions? An Oracle (ORCL), Cisco (CSCO), Google (GOOG), or Wal-Mart (WMT) will emerge from India by 2012. Your electricity will come from wind farms in Minnesota that use India-based Suzlon’s equipment (Suzlon is the fourth-largest producer of windmill turbine generators in the world). And, at least three Indian companies will make the Global Fortune 100 by 2015.