Description
The PPT describes on Rico Auto Industries: Case study for raising private equity in India.
Case Study Rico Auto Industries: Raising Private Equity in India (February 2007)
Exercise VII Matilda Taberski
The company: Rico Auto Industries (Rico)
• India-based maker of auto components and assemblies since 1984 • Formerly established as a sewing machines manufacturer
• Arvind Kapur (CEO) and his family own 51% of the company
• Listed on the Bombay Stock Exchange since 1985 • Certifications for its quality, safety and environmental standards
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski 2/29
Rico‘s recent history and future prospects
• First customer: domestic bicycle manufacturer Hero Honda
• 1994 first foreign customer in Japan ? Today global customer list
• Since 1994 they target the export market: ? Extention of the product line ? Own creation of essential parts • Rico depends on domestic market: ? Only 7% of revenues are from export sales ? In recent years export has been growing 92% annually (12 % expected in 2006) ? CHANCE
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
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India: the business environment
• Country of great disparities ? upcoming middle class as future consumers • Strong government regulations and licensures (trend to improve) for companies ? Indians are used to adjust to difficult situations • By the middle of the 21st century the most populated country with a lot of young professionals ? young workforce and consumers
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
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India: the business environment
• English is a common language
• Western legal institutions
• Modern stock market • Private banks and corporations • Infrastructure differs widely across the country
transparancy
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
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India: the business environment
• Venture Capital (VC) investments known, but a lot of VC losses in the past • Today trend to invest in established and listed firms • Fear that valuations are becoming excessive • Companies with a market capitalization beneath $100 million tend to be undervalued • Capital-constrained economy for long time • Firms tended to be cautious and unwilling to take risk ? most of family‘s wealth is tied up in company
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski 6/29
India: future development forcast for the auto (components) market
• The Indian auto and motorcycle market ? expected to grow at 11.6% per year to 2010 • Global future growth in the auto components market ? more than 10% per year
• The auto component business in India ? expected to grow at 14% per year (2004-2010), with exports increasing at 25.7% per year up to $10 billion in 2010
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
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India: future development forcast for the auto (components) market
• Reason for the expected growth of India‘s auto component business ? Developed markets have been facing problems and stated that India could serve as a key outsourcing destination (besides China and Brazil) in the future ? A company example: the target is to move 30 % of its purchasing cost base to low-cost countries, implying an increase of $240 billion over 5 years
? Domestic demand will grow with the country‘s development
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
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Rico‘s Business Plan for the near future
• Expand share in the Indian business • Plans for the export business ? Adress advanced purchasing programs for future products ? ensures 5 – 8-year production cycles to demonstrate design expertise, manufacturing flexibility and low costs ? Raise ferrous and aluminium casting capacity ? Buy additional CNC machines ? Add an R&D facility to headquarter
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski 9/29
Rico‘s Business Plan for the near future
• Rico sees possibility of acquisitions in the U.S. or India • Already acquired land to build a new plant • Already started constructing a new and larger electricity plant for the headquarter
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
10/29
The consortium of PE firms
• New Vernon Capital (NV) ? An Indian-focused investment fund? they know the market ? The founder is Indian (grew up in India) and has major experience in investment banking and finance in general ? In May 2005 they had raised $500 million in committed capital including the capital from BV with the aim to invest in several asset classes • Bessemer Venture (BV) ? They invest since 1911? they offer private equity skills ? Limited partner and prospective co-investor of NV
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski 11/29
The consortium of PE firms
• The planned $28 million investment shall be raised from a consortium of private equity firms including New Vernon along with Bessemer Venture and two Morgan Stanley India funds
• Threats seen by New Vernon: ? Infrastructure ? Governmental limitations and obstractions (especially in commerce and taxes) ? Power is expensive ? but still great opportunities
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
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The Deal
• Total investment of $28 million • 15.4 million shares shall be issued and bought by the investors at $1.56 per share (lock-up period of 1 year) ? 15,400,000 * $1.56 = $24,024,000 • Family ownership: ? First reduction to 44.7% and issuing of 3 million warrants: convertible within 18 months ? family ownership 47% • No board representation of the private equity firm
• Consortium‘s idea: Liquidity through listing on western stock exchange ? consortium has little opportunity to excess influence
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski 13/29
Case Analysis
1. Can Rico reach the $1 billion goal with $28 million by 2011 („a goal that would require a whole new approach to the business“)? 2. Is the current price right or would the company need to issue more equity?
3. How much might the consortium be diluted?
4. How can the group mitigate the financing risk? 5. Have the right partners been chosen? 6. Would it be better to grow more slowly and use bank debt instead of VC and then dilute at a higher market valuation?
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
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Case Analysis – 1st Question
1. Can Rico reach the $1 billion goal with $28 million by 2011 („a goal that would require a whole new approach to the business“)? ? Today‘s (March 2005) revenues are $161 million, in order to reach $ 1 000 million the annual growth needs to be on average approximatly 36% over the next 6 years (in the past 5 years it was 30%) ? $ 1.018 billion* in 2011 *$161,000,000 * (1,36)6= $ 1,018,730,540
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
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Case Analysis – 1st Question
1. Can Rico reach the $1 billion goal with $28 million by 2011 („a goal that would require a whole new approach to the business“)?
• With the given information further growth is definitive, however the goal is very high and reaching it seems not easy (for 2007 the expected total sales are only $257 million which is not enough in order to reach the goal) • The Business plan seems to be well developed: the market is growing and additional capacities will be needed ? the investors know where their money is going to be invested in • The competitors Bharat (India) and the HuBei TriRing (China) might be a threat
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
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Case Analysis – 1. Question
1. Can Rico reach the $1 billion goal with $28 million by 2011 („a goal that would require a whole new approach to the business“)? • The expenses in million $: ? 2005: profit 11 – expenses 23 = -12 ? (28 – 12 = 16) ? 2006: profit 14 – expenses 32 = -18 ? (16 – 18 = -2) ? 2007: profit 19 – expenses 7 = +12
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
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Case Analysis – 1st Question
• The business plan requires the shown expenses/investments and it shows that in 2006 there will be a lack of $2 million
? Bank loan? Or additional equity?
? This topic should be discussed before the deal closing ? Should not be a problem since in 2007 profit can be expected • The goal calls for a new approach, therefore questionable if they can find a new approach with the „old“ decision makers ? consider to give some management power to the PE firm
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
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Case Analysis – 2nd Question
2. Is the current price right or would the company need to issue more equity? • 15.4 million shares shall be issued and bought by the investors at $1.56 per share (lock-up period of 1 year) ? 15,400,000 * $1.56 = $24,024,000 ? The company needs to issue more equity $ 28,000,000 - $ 24,024,000 = $3,976,000 $ 3,976,000 / $1.56= 2,548,718 ? 2,548,718 shares are needed to reach $28 million ? The family loses even more ownership!!
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
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Case Analysis – 2nd Question
2. Is the current price right or would the company need to issue more equity? • In this context it needs to be considered if the doubling of the stock price of the Rico share from April 2004 (308) till March 2005 (672) is due to actual performance or is there the possibility of a speculation bubble
? How is the trend at the Bombay Stock Exchange?
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
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Case Analysis – 3rd Question
3. How much might the consortium be diluted?
• I think that it is negotiable in the contract. If the consortium trusts the current management of Rico, they do not need to intervene in the business. Nevertheless, it is the consortium that invests the money and bears the risk, so it is up to them how much power they are willing to give away.
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
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Case Analysis – 4th Question
4. How can the group mitigate the financing risk? • Financing risk can be mitigated by funded market research and a well reasoned business plan • The business plan needs to be precise and all risks should have been taken into consideration (avoiding overconfidence and exessive optimism) • Sticking to the business plan while observing the business environment cautiously is important
• Mitigating financing risk can be done through a diversed investment protfolio and risk hedging
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
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Case Analysis – 5th Question
5. Have the right partners been chosen?
• The information show that the backgrounds of some members of the consortium make good matches with Rico: one member had managed his family‘s manufacturing operation and grown the company‘s export revenues to 60% starting at 1% when he took over • Also there is some personal connection between the investors and the CEO: relatives vouched for the determination of the PE firm • The backgrounds and experience of the general partners from NV and BV add confidence to a good and profitabel outcome of the deal (compare slide 7)
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
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Case Analysis – 6th Question
6. Would it be better to grow more slowly and use bank debt instead of VC and then dilute at a higher market valuation? • Pro‘s: ? The family does not lose influence that quickly ? Slower growth might imply stable growth
• Con‘s: ? Cost of growing might be higher ? It would be more expensive to regain family ownership if desired than if the valuation is lower (?lower share price)
• To make a clear statement more information needed: ? For example: return on capital has to be compared with the cost of debt
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski 24/29
Main Risks for Rico‘s Future and the Engagement of the PE firm
• Companies from developed countries outsource their production to other country than India: China, Brazil etc. • Indian government might cause problems (restrictions, additional payments…) • Forcast might be wrong and therefore Rico‘s expected financial data
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
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Strengths and Weaknesses of the Engagement of the PE firm
• Strengths: ? Rico has currently only one big competitor in the Indian market and therefore the chance to gain a lot of market share ? Knowledge about the Indian market (Rico) and the international market (PE firm) • Weaknesses: ? Low/No experience in the PE field in India ? Family owned business – might lead to conflict of interest between the family members?
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
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Possible Dealbreaker
• The small alterations that need to be made or decided on (mentioned above) • The exclusion of the PE firm from the management: ? The inclusion of PE and VC on the board brings expertise and makes the firm more efficient ? It sets the stage for the development of a more professional management
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
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Conclusion
• Looking at the data from the point of view in 2005, I would have advised both parties to close the deal with small alterations: ? The PE firm should get some management power ? More equity shares have to be issued ? discussion about family ownership has to be resumed ? $28 million in 2005 and additional capital in 2006? ? additional analysis necessary ? The goal of $1 billion is fairly high ? the extention of the time target or lowering the amount should be discussed
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski 28/29
Conclusion
• I do think that despite the mentioned existing threats in the Indian business environment, Indias ecnomical and political situation is safe and stable enough for foreign investment. • Especially with the know-how that the PE firm and Rico has I believe that with the mentioned small alteration to the deal the investment will be a success for both parties.
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
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doc_596537658.ppt
The PPT describes on Rico Auto Industries: Case study for raising private equity in India.
Case Study Rico Auto Industries: Raising Private Equity in India (February 2007)
Exercise VII Matilda Taberski
The company: Rico Auto Industries (Rico)
• India-based maker of auto components and assemblies since 1984 • Formerly established as a sewing machines manufacturer
• Arvind Kapur (CEO) and his family own 51% of the company
• Listed on the Bombay Stock Exchange since 1985 • Certifications for its quality, safety and environmental standards
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski 2/29
Rico‘s recent history and future prospects
• First customer: domestic bicycle manufacturer Hero Honda
• 1994 first foreign customer in Japan ? Today global customer list
• Since 1994 they target the export market: ? Extention of the product line ? Own creation of essential parts • Rico depends on domestic market: ? Only 7% of revenues are from export sales ? In recent years export has been growing 92% annually (12 % expected in 2006) ? CHANCE
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
3/29
India: the business environment
• Country of great disparities ? upcoming middle class as future consumers • Strong government regulations and licensures (trend to improve) for companies ? Indians are used to adjust to difficult situations • By the middle of the 21st century the most populated country with a lot of young professionals ? young workforce and consumers
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
4/29
India: the business environment
• English is a common language
• Western legal institutions
• Modern stock market • Private banks and corporations • Infrastructure differs widely across the country
transparancy
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
5/29
India: the business environment
• Venture Capital (VC) investments known, but a lot of VC losses in the past • Today trend to invest in established and listed firms • Fear that valuations are becoming excessive • Companies with a market capitalization beneath $100 million tend to be undervalued • Capital-constrained economy for long time • Firms tended to be cautious and unwilling to take risk ? most of family‘s wealth is tied up in company
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski 6/29
India: future development forcast for the auto (components) market
• The Indian auto and motorcycle market ? expected to grow at 11.6% per year to 2010 • Global future growth in the auto components market ? more than 10% per year
• The auto component business in India ? expected to grow at 14% per year (2004-2010), with exports increasing at 25.7% per year up to $10 billion in 2010
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
7/29
India: future development forcast for the auto (components) market
• Reason for the expected growth of India‘s auto component business ? Developed markets have been facing problems and stated that India could serve as a key outsourcing destination (besides China and Brazil) in the future ? A company example: the target is to move 30 % of its purchasing cost base to low-cost countries, implying an increase of $240 billion over 5 years
? Domestic demand will grow with the country‘s development
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
8/29
Rico‘s Business Plan for the near future
• Expand share in the Indian business • Plans for the export business ? Adress advanced purchasing programs for future products ? ensures 5 – 8-year production cycles to demonstrate design expertise, manufacturing flexibility and low costs ? Raise ferrous and aluminium casting capacity ? Buy additional CNC machines ? Add an R&D facility to headquarter
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski 9/29
Rico‘s Business Plan for the near future
• Rico sees possibility of acquisitions in the U.S. or India • Already acquired land to build a new plant • Already started constructing a new and larger electricity plant for the headquarter
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
10/29
The consortium of PE firms
• New Vernon Capital (NV) ? An Indian-focused investment fund? they know the market ? The founder is Indian (grew up in India) and has major experience in investment banking and finance in general ? In May 2005 they had raised $500 million in committed capital including the capital from BV with the aim to invest in several asset classes • Bessemer Venture (BV) ? They invest since 1911? they offer private equity skills ? Limited partner and prospective co-investor of NV
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski 11/29
The consortium of PE firms
• The planned $28 million investment shall be raised from a consortium of private equity firms including New Vernon along with Bessemer Venture and two Morgan Stanley India funds
• Threats seen by New Vernon: ? Infrastructure ? Governmental limitations and obstractions (especially in commerce and taxes) ? Power is expensive ? but still great opportunities
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
12/29
The Deal
• Total investment of $28 million • 15.4 million shares shall be issued and bought by the investors at $1.56 per share (lock-up period of 1 year) ? 15,400,000 * $1.56 = $24,024,000 • Family ownership: ? First reduction to 44.7% and issuing of 3 million warrants: convertible within 18 months ? family ownership 47% • No board representation of the private equity firm
• Consortium‘s idea: Liquidity through listing on western stock exchange ? consortium has little opportunity to excess influence
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski 13/29
Case Analysis
1. Can Rico reach the $1 billion goal with $28 million by 2011 („a goal that would require a whole new approach to the business“)? 2. Is the current price right or would the company need to issue more equity?
3. How much might the consortium be diluted?
4. How can the group mitigate the financing risk? 5. Have the right partners been chosen? 6. Would it be better to grow more slowly and use bank debt instead of VC and then dilute at a higher market valuation?
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
14/29
Case Analysis – 1st Question
1. Can Rico reach the $1 billion goal with $28 million by 2011 („a goal that would require a whole new approach to the business“)? ? Today‘s (March 2005) revenues are $161 million, in order to reach $ 1 000 million the annual growth needs to be on average approximatly 36% over the next 6 years (in the past 5 years it was 30%) ? $ 1.018 billion* in 2011 *$161,000,000 * (1,36)6= $ 1,018,730,540
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
15/29
Case Analysis – 1st Question
1. Can Rico reach the $1 billion goal with $28 million by 2011 („a goal that would require a whole new approach to the business“)?
• With the given information further growth is definitive, however the goal is very high and reaching it seems not easy (for 2007 the expected total sales are only $257 million which is not enough in order to reach the goal) • The Business plan seems to be well developed: the market is growing and additional capacities will be needed ? the investors know where their money is going to be invested in • The competitors Bharat (India) and the HuBei TriRing (China) might be a threat
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
16/29
Case Analysis – 1. Question
1. Can Rico reach the $1 billion goal with $28 million by 2011 („a goal that would require a whole new approach to the business“)? • The expenses in million $: ? 2005: profit 11 – expenses 23 = -12 ? (28 – 12 = 16) ? 2006: profit 14 – expenses 32 = -18 ? (16 – 18 = -2) ? 2007: profit 19 – expenses 7 = +12
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
17/29
Case Analysis – 1st Question
• The business plan requires the shown expenses/investments and it shows that in 2006 there will be a lack of $2 million
? Bank loan? Or additional equity?
? This topic should be discussed before the deal closing ? Should not be a problem since in 2007 profit can be expected • The goal calls for a new approach, therefore questionable if they can find a new approach with the „old“ decision makers ? consider to give some management power to the PE firm
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
18/29
Case Analysis – 2nd Question
2. Is the current price right or would the company need to issue more equity? • 15.4 million shares shall be issued and bought by the investors at $1.56 per share (lock-up period of 1 year) ? 15,400,000 * $1.56 = $24,024,000 ? The company needs to issue more equity $ 28,000,000 - $ 24,024,000 = $3,976,000 $ 3,976,000 / $1.56= 2,548,718 ? 2,548,718 shares are needed to reach $28 million ? The family loses even more ownership!!
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
19/29
Case Analysis – 2nd Question
2. Is the current price right or would the company need to issue more equity? • In this context it needs to be considered if the doubling of the stock price of the Rico share from April 2004 (308) till March 2005 (672) is due to actual performance or is there the possibility of a speculation bubble
? How is the trend at the Bombay Stock Exchange?
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
20/29
Case Analysis – 3rd Question
3. How much might the consortium be diluted?
• I think that it is negotiable in the contract. If the consortium trusts the current management of Rico, they do not need to intervene in the business. Nevertheless, it is the consortium that invests the money and bears the risk, so it is up to them how much power they are willing to give away.
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
21/29
Case Analysis – 4th Question
4. How can the group mitigate the financing risk? • Financing risk can be mitigated by funded market research and a well reasoned business plan • The business plan needs to be precise and all risks should have been taken into consideration (avoiding overconfidence and exessive optimism) • Sticking to the business plan while observing the business environment cautiously is important
• Mitigating financing risk can be done through a diversed investment protfolio and risk hedging
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
22/29
Case Analysis – 5th Question
5. Have the right partners been chosen?
• The information show that the backgrounds of some members of the consortium make good matches with Rico: one member had managed his family‘s manufacturing operation and grown the company‘s export revenues to 60% starting at 1% when he took over • Also there is some personal connection between the investors and the CEO: relatives vouched for the determination of the PE firm • The backgrounds and experience of the general partners from NV and BV add confidence to a good and profitabel outcome of the deal (compare slide 7)
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
23/29
Case Analysis – 6th Question
6. Would it be better to grow more slowly and use bank debt instead of VC and then dilute at a higher market valuation? • Pro‘s: ? The family does not lose influence that quickly ? Slower growth might imply stable growth
• Con‘s: ? Cost of growing might be higher ? It would be more expensive to regain family ownership if desired than if the valuation is lower (?lower share price)
• To make a clear statement more information needed: ? For example: return on capital has to be compared with the cost of debt
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski 24/29
Main Risks for Rico‘s Future and the Engagement of the PE firm
• Companies from developed countries outsource their production to other country than India: China, Brazil etc. • Indian government might cause problems (restrictions, additional payments…) • Forcast might be wrong and therefore Rico‘s expected financial data
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
25/29
Strengths and Weaknesses of the Engagement of the PE firm
• Strengths: ? Rico has currently only one big competitor in the Indian market and therefore the chance to gain a lot of market share ? Knowledge about the Indian market (Rico) and the international market (PE firm) • Weaknesses: ? Low/No experience in the PE field in India ? Family owned business – might lead to conflict of interest between the family members?
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
26/29
Possible Dealbreaker
• The small alterations that need to be made or decided on (mentioned above) • The exclusion of the PE firm from the management: ? The inclusion of PE and VC on the board brings expertise and makes the firm more efficient ? It sets the stage for the development of a more professional management
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
27/29
Conclusion
• Looking at the data from the point of view in 2005, I would have advised both parties to close the deal with small alterations: ? The PE firm should get some management power ? More equity shares have to be issued ? discussion about family ownership has to be resumed ? $28 million in 2005 and additional capital in 2006? ? additional analysis necessary ? The goal of $1 billion is fairly high ? the extention of the time target or lowering the amount should be discussed
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski 28/29
Conclusion
• I do think that despite the mentioned existing threats in the Indian business environment, Indias ecnomical and political situation is safe and stable enough for foreign investment. • Especially with the know-how that the PE firm and Rico has I believe that with the mentioned small alteration to the deal the investment will be a success for both parties.
Rico Auto Industries: Raising Private Equity in India - Matilda Taberski
29/29
doc_596537658.ppt