Victory of business-friendly BJP coincides with signs of improvement for PE sector

The sweep by the main opposition party BJP in the state assembly elections, pegged as the semi-finals to general elections in 2014, have only cemented the chances of the Narendra Modi-led party coming to power. The business and investing community has been watching the elections closely, and would be hoping for an encore in the general elections by BJP.

Things have also started to improve for the Indian private equity industry, with valuations becoming reasonable as capital markets have remained shut and dry powder with GPs decreasing. GPs, especially those who have been able to raise capital in the last 24 months, think that 2013 could potentially be the best vintage.

But could a BJP-led government, seen as business friendly, ruin this picture? The markets, predicting a BJP victory, have already run up BSE Sensex shares rose to a record high on Monday.

"While valuations will never be cheap, they have become realistic," said Manish Kejriwal, co-founder of Kedaara Capital, at a recent industry gathering. Cautioning, he said, “The deal market is not deep enough. I hope the US tapering of economic stimulus as expected so that there is balance on the euphoria of a BJP-led government."

While a lot of GPs would like the current investment environment in terms of deal flow and valuations to continue, it’s a two-way street for the private equity industry. Euphoria in the markets with sufficient interest from FIIs could mean opening up of primary markets for IPO-led exits, which the industry badly needs. Most private equity investments in India are minority deals, where a public offering is the main source of exits.

"Environment is generally depressed right now, which is an opportunity for private equity players as valuations in some sectors like auto components and manufacturing are reasonable. If the overall economic environment remains depressed you might get a few cheaper deals today but then you cannot build the growth (in portfolio companies) that you hope to see in the next three-five years. So it is an advantage and a disadvantage. India's economy is about growth, given where it is in the state of development," said Vikram Utamsingh, managing director of transaction advisory services at Alvarez & Marsal India.

Also most FII inflows are likely to be in the top 30-50 listed companies and not small to mid-market companies, where private equity firms typically invest. For interest in the companies to grow, economic growth will be watched.

"Mid-cap companies will continue to be depressed and will improve only if the economic environment starts to improve. Possibility of a BJP-led government may create euphoria around the stock market as a result of which valuations may run up. But if that euphoria will need to get converted into meaningful investment-friendly  policies by the new government to kick-start the economy again, it will give PE an opportunity to re-invest in the India growth story," said Utamsingh.

Also capital raising for GPs may not improve immediately as LPs are likely to take a wait-and-watch approach, to see the new government's policies and fundamental improvements in the economy.

BJP's vote share in the assembly elections is its best ever, as it won 69 per cent of seats on poll in these four states.

"Growth and governance over entitlement has been the clear preference of voters. Capital markets have started responding favourably to the prospects of a change in government, in the hope of an improvement in growth and governance due to the change in political leadership. Macro too is stabilising (trade and current account deficits, domestic liquidity issues and currency stability) while 2QFY14 corporate earnings surprised positively after a long time. The key risk to the markets incrementally is from the impact of US Fed tapering," said a Motilal Oswal Securities report.

But things will not be that easy for BJP or the NDA-led coalition. A lot will depend on what kind of allies it is able to get on back these victories, and how it plays some key states in North India.

"The three logical outcomes of the 2014 national elections—NDA, UPA or a combination of regional parties—remain open. Economic reforms will likely continue in the case of the first two outcomes while the third outcome would have inherent contradictions based on ideological differences and precedents. So, its (BJP) performance in Bihar and UP will be important for it to get to around 180 seats, the minimum required to form the next government, in our view; it has 22 seats of 120 in those two states," said Sanjeev Prasad, senior executive director & co-head of Kotak Institutional Equities, in a note.

(Edited by Joby Puthuparampil Johnson)

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