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Investors must get used to India growing at 6-7%: KKR India

The Indian economy has been witnessing sub-7% GDP growth for a year now. Sanjay Nayar, chief executive officer and country head, KKR India feels, given the structural and cyclical issues facing our economy, investors should get used to 6-7% growth rate.

May 02, 2012 / 18:06 IST
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The Indian economy has been witnessing sub-7% GDP growth for a year now. Sanjay Nayar, chief executive officer and country head, KKR India feels, given the structural and cyclical issues facing our economy, investors should get used to 6-7% growth rate.  

“We have large fiscal deficit, savings and capital spending has dipped, in response to that the current account deficit has also widened,” he told in an interview to CNBC-TV18. Meanwhile, he doesn’t expect inflation to ease to comfortable levels very soon.

The markets have been dull for the past few trading sessions, there has been be no major positive trigger for it move higher. Foreign fund flows have also not seen a great pick up from the time uncertainity on general anti avoidance rules (GAAR) has set it.

The government needs to take firm and quick steps on reforms like Goods and Service Tax (GST), allowing Foreign Direct Investment (FDI), then that would help to boost the sentiment amongst investors and help the economy, he suggests.

Meanwhile, he said that every class of investor is taken back with the uncertainty prevailing on GAAR. Since India is a capital importing nation; clarity on GAAR is of utmost importance.

Below is the edited transcript of Nayar's interview with CNBC-TV18. Also watch the accompanying videos.

Q: You are heading a very important private equity company. With the General Anti Avoidance rules (GAAR) coming into play in the Union Budget how do you think it impacts private equity companies and what are you waiting for on May 8th or 10th or whenever the budget finally gets passed and the details are known?

A: Every class of investors is a bit taken aback with the over arching views in GAAR. But we have to give some credit to the folks in Delhi that hopefully they will not do anything, which lends itself to a huge amount of subjectivity  because at least for private equity I can say that a quality of capital that we bring in is very different in the long term, it’s very value add.

Secondly, there is over USD 40 billion today in stock in India in unlisted companies and typically private equity helps small companies grow. Giving them enough benefit of the doubt I would say that they will be very mindful of how you shun away this kind of capital. The larger issue on the table is what are the rules and the framework going forward.

About the past we can only hope for it, I don’t think we can say much about the past. But, I would say that there is a lot of hope among us and we have been meeting the people at the ministry that what comes out of this will be respecting the fact that India is a capital importing nation.

This capital is distinct from short term capital is much more long term, much more value add and nobody is saying it has to be a zero tax regime. I don’t think investments come into India in response to zero taxes, but you do need to have clarity of rules and clarity of what the tax will be.

Q: Let us assume that the fine print by the second week of May tells us that may be its like 10-15% tax on private equity and may be a similar number may be 15% for short term capital gains for FIIs (Foreign Institutional Investor) as well and that it will not be construed as business income, will that be sufficient to keep private equity and more importantly FIIs attracted because there are some people who believe that you are not taxed in other destinations, FIIs are passed through. What do you expect will be the up short if clarity of this level comes in at 15% and no more?

A: FIIs I don’t know how they think. I would say they are far more nimble both in going out and coming in. so you may find some dramatic positives there, but on the private equity I won't say that it has slowed down. There is a lot of internal discussion in every firm so people are just being a little bit more circumspect, but it’s not like private equity has turned off the tap because structurally India does represent a tremendous long term growth story.

The larger issue for private equity will always be where is the growth, which sectors and the fact that Indian companies can deliver the growth that they have meant to deliver. The macro issues when you overlay on top of these companies challenges that becomes quite challenging.It all boils down to the fact of what value you are paying and what valuations you are getting into.

In summary, I don’t think private equity is here for the short run, it’s here for the long run. The long run story is intact, you make rules clearer, it gets one thing out of the way, but what it doesn’t get out of the way is a structural story for India, the micro and the companies delivering the growth.

Q: What are investments in private equity look like in 2012 itself because in the first three month we had strong FII flows because we didn’t have that uncertainty of GAAR come through. April came with that other uncertainty of GAAR.  For the first three months was there lot of private equity investments and April onwards was there lot of money just on the sidelines? Hence, could we see some amount of pick up post May 7th?

A: Private equity doesn’t respond on month to month basis. I don’t know the numbers, but there have been quite a few deals done in the last four months. Although in range of maybe USD 25-30 million a piece we ourselves announced the deal the TVS Logistics. I don’t think private equity is going to be a month to month to story.

The bigger question to as is what is it going to be for the whole year or for the next three to five years? I think that’s a better way of looking at it. In India in the last 10 years private equity has brought in about USD 50 billion plus and I would say about 35-40 is invested today. There is a lot of stock of money. Private equities have been around for a long time and played a very critical role.

Q: You spoke about the tremendous India growth story even if the macros look shaky as well as sectors, which sectors would you look at?  You yourself are in an NBFC or in a consumer company. Which sectors do you think private equity would be attracted to?

A: Everybody has their own approach. We are pretty sector agnostic. But just breaking up India into the three typical themes, they are still intact. India that in consuming, the India advantage, which is our export oriented sector, auto components, IT enabled, textiles and all the enablers around the growth which is infrastructure healthcare, cement. There is a lot going on around the whole India building story. Everyone thinks the same way. It’s not something which is much of a rocket science.

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Q: What about the India story itself? We were used to this 8-9% and trying to reach out to the 10%, but now we are seeing one year of sub 7% growth behind us. What are you getting used to in your mind as a private equity investor? Will that damage equity investments flowing into India. Would they want to just know, is this a 6% country, is this is a 7% country or do you think that either way it’s a good story?

A: We have been talking about this for quite some time. We have a structural slowdown cyclical issues as well. We have got a large fiscal deficit, capital spending is down, even savings are coming down and the consumption frankly has gone up. In response to all of that, the current account deficit is high.

So, the adjustment process is not going to be easy. One way is to cut the deficit; the other way is to let the rupee go. There are not too many tools left here. We have to get used to 6-7% growth rate, hopefully bit more benign inflation, but don’t expect inflation to come off dramatically because structurally you have a supply side induced to inflation and that is not going to change overnight. Finally, you will see rates settling down.

The worry that I have is that while we can live with this kind of a low common denominator which is not bad, frankly it is still a pretty good story. The issue is that if oil was to spike up or capital flows turn negative, then the situation becomes a little bit more grim. At the same time, if commodities prices come off in the world and oil comes down and we have a bit of luck on our side, which we always seem to have and if the government can do a few quick steps whether it is GST, few FDI announcements and be a little bit more emollient towards just the noise towards the foreign investors.

It might just help down the sentiment again. So, this is now going to be a kind of a month by month watchful thing as to where we are. But, structurally we are settling down into 6-7% benign inflation. Hopefully, less than where we are today, not really benign and kind of 8% long bond but look at the long bond. The long bond has gone up after the rate cut. So, it tells you what the market thinks.

Q: Focusing on KKR in specific, what sort investments do you have lined up for the future? What sort of hefty gains are you possibly sitting on because there is some apprehension that you have been around for three years but you have done only around six odd deals. More aggression from your side possibly going forward and which would be the sectors and also any sort of exits we can expect from here on?

A: I am not going to give you a full answer to this because we have never commented on our investments or investment pipeline. But generally, if we were just discussing the scenario that Latha painted, it will be a good time to put money to work if the valuations become more realistic.

Indian businesses when they begin to see growth again in the domestic market and domestic capital comes back to work, private equity will support it so you will see more deals. But, the domestic capital needs to come back into the market and they should feel confident about investing.

Q: Where do you think valuations are the highest in terms of sectors at this point in time and say if you were to give us where would you be more aggressive if the opportunity arose?

A: I really don’t have a sector by sector comment, but we keep looking at healthcare and I think it’s pretty expensive. India needs so much of healthcare development, so there has to be some opportunity there in the long run. But that’s just because you asked me a sector wise question.

I would say that the investment and the deal pipeline is going to look very, very interesting once you see kind of a bottoming out of the confidence and a bit of a upturn again, because as I said if domestic capital comes back to work I think private equity will get very active, because where are the avenues today for long-term capital.

The banks are structurally short of long-term capital. The public markets are what they are. I think long-term private equity, both the Indian firms and the global firms can play a huge role. This is an interesting time to stay focused on the companies and the growth plan and look for interesting opportunities.

Q: What’s your sense going forward on the rupee? Are we heading to some thing very bad or do you think we are habitually able to quiten those fears? Are there any levers left? I think we have used up everything - NRI, deregulation of interest rates, everything is over.

A: Everything boils down to the fisc ultimately so let’s leave the fisc aside. For the moment, one can just hope for calming down of the commodity prices, oil prices and hopefully the adjustment process I hope doesn’t happen to the rupee - that will be sad. I don’t know how to answer your question, but we are going to stay in the zone for some time and I don’t see an uptake from here.

Q: Are you looking to negotiate with UB Holdings for their commercial real estate space?

A: We don’t comment on deals as you know.

first published: May 2, 2012 12:26 pm

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