Seriously clueless

India, private equity and more ...

Thursday, March 30, 2006

Bessemer invests in India' infrastructure sector

We've just invested Rs. 100 crore ($ 23 million) in Shriram EPC Limited, a specialized engineering & construction services company in India! This is our fourth India investment, after Rico Auto, Sarovar Hotels and BA Systems. That's as good an excuse as I have for not blogging, as I've been really busy over the last 6 weeks on this front.

Shriram EPC is a part of the Shriram Group, a reputed Chennai-based conglomerate known for its financial services businesses (chit funds, truck financing, consumer lending). Shriram EPC builds small-midsize power plants with a focus on renewable energy (i.e. biomass-based plants & windmills), does industrial construction (builds parts of steel & other metal plants, constructs cooling towers) and works with municipalities on water/sewage projects. Besides the niche focus on specific areas within the infrastructure sector, Shriram EPC also has strong technology tie-ups in most of its business lines (e.g. with Hamon, world's #2 cooling tower company). We really liked Shriram EPC's management team, most of whom have over 2 decades experience in the sector. On a personal note, Shriram EPC's CEO - T Shivaraman - and I are both alumni of both Don Bosco School in Madras and of IIT Madras. (Since hardly 1-2 people make it to IITM from Don Bosco, I suspect the two of us are part of a rather small group of people with affiliations to both these institutions).

We've been tracking India's infrastructure 'catch-up' over the last year. We (and several analysts) believe that India is now on a belated but sustained push to invest in infrastructure across-the-board (power, roads, water, ports/airports, urban development). Based on how such infrastructure build-outs have happened in other parts of the world (think of USA's freeway network built in the last century & China's efforts over the last 20 years), this process spans several decades. These are still early days in India, and we expect these investments to sustain over the many years to come. I (and you) know that there will be some stops-and-starts along the way, but process is irreversible.

Shriram EPC fits well into our thesis of being a part of this infrastructure build-out. Having grown up in Chennai, I am familiar with the Shriram Group and hold them in high regard. I am personally glad that Bessemer now has an opportunity to work with the group. On a lighter note, I now have an official reason for regular visits to my family in Chennai!

While the real work begins now, I hope I'll get back to blogging more often now that the investment is completed!

Press coverage of this investment - 1, 2, 3, 4. Here's the official press-release:

Bessemer Venture Partners invests Rs.100 crores in Shriram EPC Ltd.

To fuel its fast growth, Shriram EPC Ltd. (SEPC) has raised Rs.100 crores ($ 23 million) equity capital from Bessemer Venture Partners, a leading Global Venture Capital and Private Equity Firm. Shriram EPC Ltd., a member of the Chennai-based Shriram Group, is an emerging leader in Engineering Services Segment. The Company provides turnkey solutions in Power Projects, Metallurgical Projects, Cooling Towers, Water Treatment Plants and Windmills. The investment will fund SEPC’s growth plans. These include expanding existing capacity of windmills, acquiring new technologies and consolidating its leadership position in providing non-conventional energy solutions.It will also help the Company to commit larger resources to R&D and commercialisation of new technologies in the areas of Coke Oven & Coal Gasification.

Started in 2001, the company has been growing aggressively and currently sitting on the order book position in excess of Rs.600 crores ($ 140 million) with pipeline of business opportunities in excess of Rs.1,500 crores ($ 350 million). Mr.T.Shivaraman, CEO of SEPC said “This investment will help us achieve our target of Rs.1,000 crores plus ($ 230 million) turnover by 2008. Not only does this investment give us the funds, but Bessemer’s brand also adds a significant value when it comes to international technology tie-ups.”

According to Mr.Rob Chandra, General Partner at BVP, "Infrastructure build-out typically spans several decades, and India is in early stages of seeing significant investments to bring its infrastructure upto global standards. As a specialized engineering services company with a clear focus on technology, Shriram EPC is well placed to benefit from this growth. We are pleased to be associated with the Shriram Group and are impressed by Shriram EPC's strong management team and robust order pipeline across various high-potential sectors. We look forward to partnering with Shriram EPC as they continue to aggressively grow their engineering & construction business. "

Bessemer Venture Partners is the oldest venture capital and private equity firm in the United States, with investments throughout the world. With offices in Silicon Valley, Boston, New York, Shanghai, and Mumbai, the firm manages two billion dollars of venture funds, carrying on a tradition of hands-on, active investing that has continued since 1911. Its India presence represents the Firm’s first office outside North America in its 95-year history. Over 100 Bessemer companies have gone public, including American Superconductor, Ciena, Gartner Group, Ingersoll Rand, International Paper, Maxim, Parametric, Perseptive Biosystems, Staples, VeriSign, Veritas and W.R. Grace.

KPIN Capital Consulting Pvt. Ltd., Mumbai, acted as Exclusive Advisors to SEPC for the investment.

Sunday, March 05, 2006

Interesting little book

Shit, it’s been ages since I wrote. For the few that remotely care, sorry! Life’s been insanely busy over the last several weeks. I finally managed to make time to read as well, and am intrigued enough to write about the book I read.

Among my pet hates are 3 categories of books - those that tell the reader how to (1) lose weight, (2) be happy and (3) make more money. I view such books as a general attempt to swindle readers. The first category says ‘eat right, move your butt’ in various lengthy ways. On the second, if you can afford to buy a self-help book, you’re doing fairly ok to start with. Look around at the less fortunate, stop whining and be happy with what you have. The third typically goes down the ‘buy low, sell high’ route and are mostly written by people who weren’t that successful at making money anyway (or else, why’d they need to write such books for a living). Given my prejudice, when my colleague – Rob Stavis – sent across a book titled ‘The Little Book That Beats The Market’, my initial reaction was skeptical. Stavis himself ran arbitrage trading for Salomon Smith Barney, and knows a thing or two about beating the market. This book ia authored by Joel Greenblatt, whose hedge fund – Gotham Capital – has delivered over 40% annualized returns over a 20-year period! Further, the book didn’t look intimidating at all. In fact, it is a 150-page pocketbook that can be completed in one sitting.

I am really intrigued by what Greenblatt writes in this book. The central thesis is ‘buying good businesses at bargain prices is the secret to making lots of money’. Sure, that’s obvious. Greenblatt then goes on to propose a simple ‘magic formula’ to identify good businesses that are available at bargain prices. The two metrics he uses are:

1. Good business = one that generates high return on capital, as measured by EBIT/(net working capital + net fixed assets)

2. Bargain price = high earnings yield, as measured by EBIT/(market value of equity + net interest bearing debt).

EBIT stands for Earnings Before Interest & Taxes or pre-tax operating earnings. Note that both of these metrics do NOT require any estimates or projections, and are measured purely using past data (last 12-months EBIT & current balance sheet, equity values). All one needs to do is rank all listed companies on these 2 metrics, and invest in those that have a high rank on both counts.

This may sound very simplistic, but wait till you see the results. Greenblatt applied this ‘magic formula’ to a 17-year period from 1988 to 2004, and created a hypothetical portfolio of top-30 stocks that this formula throws out (the portfolio is juggled once a year, using the same formula). Such a portfolio would have generated annual returns of 30.8% over this 17-year period, compared to 12.4% for the S&P 500! Greenblatt goes on to perform various statistical tests, to show that this super-performance isn’t due to luck or some statistical aberration, and that the formula works across different scenarios. It may always be possible to find specific companies that rank poorly on these metrics, but go on to make spectacular stock returns. However, at a portfolio level (say, 20-30 stocks or more), this formula outperforms the market by a margin that’s doesn’t leave much reason for doubt.

This is the kind of book that left me scratching my head, with tons of questions (but, doesn’t the value of a firm depend on future earnings & growth?). At the same time, I cannot deny that this seems to work really well, in the face of hard data.

I’d encourage you to read the book, visit and enlighten me if you have any more insights on this matter.