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At a time when China has become so accustomed to being the 'most-favoured destination' in attracting investments from across the globe, it seems a little unlikely that it would lose one of its rankings to another country, and from among its Asian neighbours. But, believe it or not, that's true now.
India has overtaken China in attracting private equity investments this year to emerge as the biggest Asian destination (excluding Japan).
In 2007 private equity investments in India jumped to more than $13 billion between January and October, compared with $8.3 billion in China in the same period, according to a report by IndusView Advisors, an India-focused cross-border investment advisory and financial services firm.
So what makes India more attractive for private equity investors? That can best be addressed by comparing the price-earning ratios at which the key stock indices of the two countries trade, and the return on investments.
"The Indian companies have the highest return on investments in Asia at about 21 per cent, compared with nine per cent for China.
"The price-to-earning ratio for India's Sensex 30 [the benchmark stock index of Bombay Stock Exchange] is 24, while that of the Shanghai 50 index is 14.4," Bundeep Singh Rangar, chairman of IndusView, told Gulf News in an interview.
Some of the most profitable exits from the Indian companies by private equity investors include that of Warburg Pincus in India's top mobile operator Bharti Airtel and, a year later, in India's biggest BPO ([business process oursourcing)] company WNS, which started as a captive outsourcing unit for British Airways.
"Bharti gave Warburg a 5.5x return on its $300 million investment two years ago and WNS gave it a 13x return just last year from its $40 million investment," confirms Rangar, chairman of IndusView.
India is a difficult market to ignore because it offers the best of three locational advantages: a skilled workforce, lower costs and a growing domestic market. Together these provide more than enough flavour for private equity investors who are on the look out to bring value to their portfolio.
Real estate and infrastructure emerged in the report as the top sectors in luring private equity investment in India (which totalled through 52 deals). The sector received $2.6 billion through 32 deals.
It was closely followed by telecom with $2.1 billion worth of investments.
"The other significant sectors were information technology and IT-enabled services with 10 per cent of deal value; media, entertainment and publishing with 7.5 per cent, and pharmaceuticals, healthcare and biotech with three per cent, respectively.
The rewards have been substantial.
"Private equity firms have made lucrative returns from early bets on companies. The BPO industry, which grew by 37 per cent to $6.3 billion in financial year 2006 and expected to touch $8.5 billion by the end of financial year 2007, has actually been a runaway success," says Rangar.
Competition
China, however, is not expected to take the blow lying down.
It will provide stiff competition in the form of evolving vibrant capital markets that will be crucial for attracting investments. It is already expanding its stock market by encouraging more companies to list.
There are only about 850 companies listed on Shanghai Stock Exchange, compared with 5,000 on the Bombay Stock Exchange. Beijing has also pledged to allow more enterprises, big or small, state-owned or privately run, to go public.
Rangar says China's key point of advantage comes from the fact that its growth is multi-sector focused and hence has a wider area and scope to attract investors attention, while the Indian investment ecosystem is more service and technology driven - hence the limiting the field.
"It is only recently that the focus has been driven to other sectors as well. With the current economic changes China has been able to garner foreign direct investments (FDI) of about $73 billion, compared to FDI in India at about $15 billion last year."
India, for now, is expected to hold on to its 'most- favoured' tag in respect of private equity.
The country's $906 billion economy has grown at more than nine per cent since April 2005, making it the second-fastest after China among the world's top 15 economies. The government has set a target to accelerate the growth rate to 10 per cent by 2012.
Historically, the weakest link in India's development process has been its shaky infrastructure. There is widespread realisation now that to achieve its targeted growth rate India will be focused on solving that issue.
"The Indian government has responded to an urgent demand for new infrastructure, announcing that nine per cent of the country's GDP will be spent on infrastructure by 2012.
"Estimates suggest that a third of this investment, or about $150 billion, will come from the private sector, presenting an unprecedented investment opportunity," says Rangar.
As long as India stays focused on hitting its growth target, bourses will remain bouyant with infrastructure shares being the best pick. That will keep the country attractive to private equity investors, at least in the near future.
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