MC EXCLUSIVE Exit pipeline via IPOs would aggregate to $3 bn plus in next three years, says ChrysCapital’s Sanjay Kukreja

Exit pipeline via IPOs would aggregate to $3 bn plus in next three years, says ChrysCapital’s Sanjay Kukreja

Leading home-grown private equity firm ChrysCapital has been one of the busiest investors in India Inc in recent years, having pumped in more than $5 billion across 100 plus bets, returning $6.5 billion to investors via 80 plus exits.

Day’s after winning the race for picking up a controlling stake in ICICI Ventures backed popular western desserts brand Theobroma, Sanjay Kukreja, the firm’s Partner and Chief Investment Officer ( CIO) spoke exclusively to Moneycontrol on the rationale and valuation multiples behind the buyout and the growth potential in the consumer segment.

Kukreja also highlighted that ChrysCapital has as many as 6 IPO-bound portfolio firms ranging from NSE to Lenskart, with the firm looking at an admirable exit pipeline of $3bn plus in the next three years. Enterprise tech, pharma/healthcare, consumer and financial services remain the firm’s focus investment areas even as Kukreja adds that Indian startups are scaling up quicker to hit $100 mn in revenues and profitability , unlike earlier.

Let's speak about some of the key themes that have emerged in recent times on deal street, which has been busy, both on the M&A as well as on the ECM ( equity capital market) front. There have been a lot of buyouts by private equity firms, strategics are slowly making a comeback and competing with the private equity suitors and there are also tie-ups and consortiums being formed to seal transactions. What are you observing and how are valuations currently across sectors?

I expect about 40 to 50 billion dollars of just private equity deals to happen in the course of the next 12 months. So, it is a pretty large and robust market. The big concern has always been that valuations are expensive in India. We continue to see those challenges, although I think they're limited to the top 50 to 100 companies, mostly on the listed side. But when you look at the mid-range of companies that we typically look to invest in, it's not so much a valuation issue that we are finding, although you can break it up sector-wise.

I'd say financial services is pretty reasonable. You're finding deals in pockets close to one times book or between one to two times book, which is pretty reasonable from a historical standpoint. I would say enterprise tech multiples have also corrected or become more reasonable today than they were maybe three to four years ago. Pharma and healthcare continues to be challenging, more expensive, although the businesses in this segment are more attractive. So you will have to apply a sectoral lens. Consumer has always been expensive in India. I would say the equation has also become a little bit more interesting with growth coming in and inflation coming off. Incremental next year forward earnings are becoming more palatable. Overall, I would say the environment is conducive. I feel like there aren't any macro issues and tariff concerns seem to have subsided. I do expect a fairly robust dealmaking environment for the next 12 months.

One of your portfolio firms in the financial services segment, Hero FinCorp, has got the SEBI nod for its 3,688 crore IPO. What are some of the factors driving many firms in the financial services space to explore a listing, especially in the NBFC space? We have seen the likes of HDB Financial and Credila Financial which are prominent examples. This is also a sector which you have closely tracked before you took over the role of CIO.

Clearly, in the consumer finance businesses and NBFCs are in that business, capital is your raw material. These are ideal candidates that should be public. They shouldn't really be private as long as they have scale and stability in numbers. The advantages of being public are far greater than being private. You see that in Credila, which is also our portfolio company, so we have two of those situations, Hero FinCorp as well as Credila, which are both IPO bound. I think if you have size and scale and visibility and you aren't going through a bad credit cycle, I feel you should be public because you are able to access capital a lot easier, both on the debt side and also the equity side. That really helps in value creation and gives the ability to grow faster going forward.

Let's shift focus to the pharma sector. Intas Pharma is a portfolio firm of ChrysCapital. Now we are aware that it has flirted with the idea of listing in the past on multiple occasions, but in the interim period, it's also made some big, bold M&A bets. Sanjay, can you give us a sense of when an IPO could be on the cards once again, as far as Intas Pharma is concerned and meanwhile, do you think it would look at beefing up its portfolio a little more? You have backed other pharma firms that have been listed - Eris Lifesciences, KIMS and Mankind Pharma. And ChrisCapital has had great success in the past in the pharma space.

First of all, I think the pharma market and particularly the domestic formulation market is what you're referring to with the likes of Mankind and a few others that you mentioned. Intas Pharma is also a leader in that space and has much more of a global footprint compared to some of the other companies that you referred to. It's a fantastic company and is probably one of the largest private companies in India. It would be in the top five or six largest private companies that generate in excess of $500 million of EBITDA. So its an extremely profitable business. It is a good candidate to be listed because it's very large and has the potential to have north of a $10 billion market cap if it were listed.

The question really is in businesses like that in pharma, there isn't that much need of capital, right? These are fantastic businesses, 40 plus percent return on capital, EBITDA margins are in the 20s. So there isn't any need of capital. And therefore, the question is, why go public and who's going to sell, right? And that's what drives most of the decision making in these cases.If you recall several years ago, we did the IPO of Eris Lifesciences, in which case we were the only shareholders, and the exiting shareholders, the company didn't need primary capital. The IPO was facilitated to only exit to create our exit.

Similarly, in Mankind Pharma’s situation, the promoter sold very little and what we sold was also very little, there wasn't any primary capital. I would expect the exact same thing to play out for Intas Pharma. And the need of the cap table will determine that. Intas has been acquisitive, they've taken some big bets historically, for example, Accord, and became very large in UK and Europe. And so to finance that could have been a reason to do it, but they're so profitable that they've paid down all the debt related to that acquisition, and the business continues to chug along. I think they're going to be acquisitive in the future as well. And I do expect them to go public at some point, as they do these acquisitions, maybe in the next two to three years.

I am going to stick to the theme of value unlocking because there are several other firms in your portfolio that are also IPO bound. There’s the big one, National Stock Exchange and there's also one in the consumer space, Lenskart. Any other firms in the ChrysCapital portfolio that could be exploring an IPO or at least preliminary work beginning in FY25?

Yeah, I think it's a very interesting time for us. A lot of our companies are exploring going public. Frankly, I haven't seen this kind of activity of companies going public in our portfolio in a while. Right now, the pipeline is very robust. I think there's six companies that are exploring going public in our portfolio at the same time, maybe in the next 12 to 24 months. And it depends on regulatory approvals, and other factors, but they are evaluating it. So there would be NSE that you talked about, HeroFin Corp you referred to, these would be amongst the largest. There's Credila that we also talked about in the financial services space. There's Lenskart in consumer space. There's Corona Remedies as well, which is on the pharma side, and Safex, which is on manufacturing and agro-chem side.

These are companies that have already filed the DRHP or are in the process of filing it and in the process of going public. We do expect a very robust exit profile over the next two to three years. If I were to venture a guess, I would say this would probably aggregate to north of $3 billion in the next three years for us. So close to a billion dollars per year, maybe more than that in terms of the exit pipeline.

That’s a pretty impressive pipeline. Now, let's shift focus to a key transaction which grabbed the headlines recently as part of which ChrysCapital acquired a majority stake in Theobroma for around Rs 2,100 crore. This was a hotly contested deal and had been in the works for a long time. Give us a sense of what multiples did you strike this deal and also, do you intend to use Theobroma as a platform to expand further in the western desserts segment?

I think consumer in India, as I alluded right in the beginning, is a great sector with high return on capital and decent growth. It's always been the story that's promising to deliver in India. But we have always had some mis-steps as well along the way. Inflation, slow growth, etc which has flattered to deceive. And so we've always been struggling to make the math of the equation work between high multiples and the growth and the returns.

I think we are quite excited about consumer right now because I feel that for the first time in a long time in India, the math and the equation is finally coming together. And so we're excited about that. I feel the multiples are not cheap by any stretch of imagination. They're pretty stretched and rich, which has always been the case, but maybe lesser so than what it was three to four years ago. But at the same time, I feel growth and visibility on growth is improving, particularly in segments like QSR. I like the segment that Theo is in, western dessert chain. So just to have visibility on 20-25% growth, if you have to pay up early 20s multiple, I think the equation would still work. This is where we ended up. I would say Theo transaction would be in that 22-23 times forward multiple range.

I do feel there's a long headroom for growth in the sector for decades to come. The challenge, of course, was valuation and growth. And I think now we're beginning to see inflation settle. And therefore, same store sales growth, which is the key challenge in the QSR side, and if you look at some of the listed companies as well, which has been running negative for maybe over two years or so, is now turning a corner. We are certainly seeing that in the positive territory in some of the companies that we've been looking at and exploring. We are quite excited for what lies ahead in Theo in the QSR space. The potential of using it as a platform that you referred to obviously exists. And we can explore that as it sort of shapes up and plays out. The investment is still pending regulatory approvals.

What was the reason for your bet on a top brand in the western dessert segment like Theobroma as compared to a top brand in the Indian ethnic snacks segment like Haldiram? Is there a difference in the growth projections in those two segments and which is why you perhaps aggressively chased Theobroma instead?

No, I wouldn't say so. I think I'm equally optimistic on growth for Indian brands and snacks that's also playing out. There's growth, there's management, there is margin improvement, there's international potential, all that needs to be factored in and valued accordingly. And of course, finally, there's the valuation, which you triangulate with all of that. And so we found the best risk reward here, and we are pushing it in this direction. But I'm equally optimistic on growth in many other segments in the QSR side.

You have substantial exposure in the startup space with portfolio companies like Awfys Space Solutions, Dream Sports, FirstCry, XpressBees and we have already spoken about Lenskart. Help us understand what are the key themes that you're observing in the startup space recently? They faced a funding crunch in the recent past. Is there better financial discipline now and better unit economics? Are you seeing more down rounds?

We have been building exposure to this space. Although we don't see it as a startup space, and in no version of the world should we look at companies that are valued at 5 billion and 10 billion as startups anymore, in any case. So, we don't view them as startups. We would apply the same lens and the same profitability lens as we would do to more traditional mature businesses. I think there's a transition period and we are backing companies that are really profitable or have unit economics that has been settled. And these are traditional private equity under-writable deals.

There is a whole world in the startup ecosystem which is better equipped to take on risks in earlier stage companies. We come in much later and we are happy to pay up for them, for the risks that those guys have taken and really pick the winners and partake in the journey between them and at that stage, before we take them public. So there's still value creation, and we feel that's still to be done. There is a whole sort of path of moving from 10 to 15 different risks and projects in a company to bringing it down to three to four key themes, and really growing as a stable business. And I think we are the conduit to that. That's really our strategy. And we're finding a whole bunch of businesses that have scaled and have become profitable.

I think in the first decade of our existence, we never saw companies that had scaled to 100 million dollars in their first five or 10 years. I think now we're beginning to see that. There have been about four or five deals that have come to our investment committee, which have scaled to 100 million dollars in 10 years or within 10 years of starting. And that was something that we didn't really see earlier. We still look at China with envy, how companies there scale within five to seven years to get to 100 million in revenue and profitability. I think we're beginning to see that in India and that's very heartening. I think it's a good sign for a lot of the funnel from below to come up and emerge as profitable, nice businesses. And the other trend, of course, is most of these businesses are not purely online businesses anymore. Take Lenskart, for instance, where many of their stores are offline, which contribute a greater portion of revenues.

ChrysCapital has had a very impressive track record over the years. You've exited over 80 companies returning $6.5 billion. We have spoken about the IPO part, but what about the non-IPO exit part? Are there any minority or majority stake sales on the cards from your portfolio companies? And if yes, any sectors that you would like to highlight for us?

Yes, I think it's a mix, as always is the case. I think historically, in our journey, we found that we've been able to take roughly a third of our business’s public, and the remaining end up going either to other private equity firms or to strategics. And that's really been the historical ratio. I think that ratio is increasing quite a bit. We are seeing a lot more liquidity in the public markets and therefore well over 50 per cent, maybe even two thirds of the exit profile that we're expecting might go towards the public markets, as opposed to more private equity and strategics going forward.

There will, of course, be some companies that we will take and exit to other private equity firms. We ran a process last year, for instance, in a company called GeBBS, where we ran a process. It was a very successful exit for us. EQT ended up taking a stake in that company, it was over $850 million, that's a buyout stake. And that was a sale to private equity as well, right? So we'll have those types of exits as well.

Recently, there were media reports that ChrysCapital had closed its latest fund at $2.1 billion, the biggest one by a homegrown Indian private equity firm, beating the earlier record set by Kedaara Capital. Can you give us a sense of what are the ambitions in terms of investment strategy post this new fund? How is the investment mix and the appetite?

Maybe three years ago, 500 million of deployment as ChrysCapital on a given year used to be considered as a big number. I think that's now become par for the course. In fact , in the last two or three years, we've been doing more like $700-$750 million a year. And just given the pipeline of what we are seeing and the types of deal flow that we are seeing, I feel confident that in the years to come, we could probably scale this to a billion dollars of deployment on an annual basis, including our co-investors' capital that comes alongside us. So I think that scale up is pretty organic. It is very manageable in a market that is seeing $40 to $50 billion of deployment per year.

So that's the overall macro on the deployment side. I think from a sectoral mix point of view, the strategy continues to be the same. I think we are very deeply focused on enterprise tech, pharma/healthcare, consumer and financial services. These are our core sectors. Probably, 80 per cent to 90 per cent of our funds are deployed in these four sectors. And then , opportunistically, we will do deals in new economy companies, which are more consumer in nature.