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India, private equity and more ...

Monday, October 03, 2005

Investing in India

Almost all investment opportunities in India fall into one of 3 not-so-MECE (mutually exclusive, collectively exhaustive) categories:

  1. Domestic – tapping Indian consumer and enterprise demand (e.g. retail, construction & real estate, financial services, hotels)
  2. Export of existing goods/services – shift production/delivery of existing goods and services from high cost countries to India (e.g. IT, BPO, pharma generics, auto components, textiles)
  3. Export of innovative goods/services – creation of new IP (e.g. software products, pharma NCEs, semiconductor products)

Naturally, the 1st and 2nd categories have achieved more scale and prominence so far. The main distinction of (3) over (2) lies in creation of products (one-to-many sale), higher R&D costs, long gestation period before revenues, patent-filing, royalty revenues from the same etc. While a few companies have adopted this route, few companies have scaled up in innovative areas. I-flex was probably the largest company in this segment, before being bought out by Oracle.

In theory, the same goods and services that are exported can also be sold in the domestic market. In areas such as auto components and pharmaceuticals, domestic market revenues are comparable to export revenues. However, in most of these areas, the export opportunity is likely to be substantially larger than the domestic market opportunity. Also, the product range and pricing are also substantially different for the export market. We are therefore better off treating (1) and (2) as two separate categories.

More on each of these areas in later posts …

19 Comments:

At 9:50 AM, Blogger coolascucumber said...

Hi Anand,
That was as an insightful column. But , I somehow feel that the category 2 companies have gained more prominence and are more transparent.
Slowly, more and more companies are crossing the line into the category 3 companies. The examples which come to my mind would be Nokia, TI and Intel which have developed atleast a part of their latest products in India.
But, I know only about MNCs taking advantage of India's intellectual capital.
Is there a good deal of homegrown talent in India? As far as I know, most of the startups are confined to the likes of IITs, IISc and IIIT - Blore.

Keep blogging.

 
At 10:57 PM, Blogger sandeep said...

hi anand,
am a student of finance and currently completed my BBA (finance) studing my AMFI as well. would want to know the scope for outsourced equity research in india. mainly US and UK clientele
sandeep

 
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The export opportunity is likely to be substantially larger than the domestic market opportunity.

 
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At 11:30 PM, Anonymous Caliplus said...

The main distinction of (3) over (2) lies in creation of products (one-to-many sale), higher R&D costs, long gestation period before revenues, patent-filing, royalty revenues from the same etc.

 
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