Private Equity & Venture Capital

Case: Shriram Transport Finance

Group- 05

Y. Akshay Bharadwaj M054-18 y.akshaybharadwaj18@iimranchi.ac.in 6204960511

Sarthak Gupta M176-18 sarthak.gupta18@iimranchi.ac.in 8130147480

Rakesh Kumar M166-18 Rakesh.kumar18@iimrachi.ac.in 8237440458

1. Briefly describe the evolution of the PE industry in India. Does India offer a good investment

opportunity for PE investors? Why?

 In India, the PE Industry revealed signs of fracture because of widespread macro issues

plaguing India in the year 2012.

 The spectre of retrospective taxation on investments by overseas investors, and the

lack of a clear policy stance, proved tough for general partners at PE firms to navigate.

 During that time, 55 funds had a mandate to invest in India. Yet, only around US$3

billion total fund value had been allocated which was a drop of about $4 billion from

2011.

 Despite the growing number of deals, from 531 deals in 2011 to 551 deals in 2012. PE

investors in India had moved towards even smaller deals. PE fund managers investing

in India hoped for a moderately positive 2013.

 India’s PE industry faces obstacles such as the absence of a well-developed capital

market that would allow firms to leverage their equity with borrowings and thus put

more money to work in the businesses they target. Regulatory obstacles and sudden

changes to government policies are also common, and PE investors have learned to

anticipate those. They also have the occasional brush with opacity or integrity issues

with the existing managements at some of their target firms.

2. What makes the Shriram Group of companies an attractive target for investment? What

factors did TPG consider when targeting STFC for investment?

  STFC was Shriram’s cash cow and was a diversified business ranging from financials to

non-financial services such as IT.

 Well established national reach and a loyal customer base

 STFC had a near monopoly in the transport finance sector

Factors TPG considered when targeting STFC for investment:

 STFC held a strong market position for investment with market capitalization of $115

million, asset base of $1.15 billion and net profits of $11.5 million.

 TPG wanted to leverage STFC’s expertise in financial sector investing. STFC was on the

booming side making transport finance sector attractive.

3. What would be a suitable exit valuation? Which valuation method is best suited for the

given case? What is the appropriate valuation range?

Values as per the case exhibits:

 EBITDA=Profit before tax + finance costs + depreciation & amortization

=18809.10+24612.06+134.64 = Rs.43555.8 million (from Exhibit 3)

 Total no. of shares= 226,300,568 (from Exhibit 7)

The best suitable valuation method: EV/EBITDA ratio.

 EV/EBITDA=1.11

 Enterprise Value (EV)=Rs.48346.938 million

 Price per share=EV/total no. of shares= Rs.213.64/share

 Appropriate valuation range:

 PE firms in India usually expect a three to four times returns on their money invested.

 As per above calculations, the appropriate valuation range should be 3*price per

share to 4* price per share.

 That would be Rs.640.92(3*Rs.213.64) to Rs.854.56(4*Rs.231.64) per share.

4. What is the best exit option for TPG? Perform a comparative analysis of the different exit

options available. Is the time ripe for exit?

Best exit option for TPG:

 Two options that TPG can consider are- IPO strategy and Trade sale.

 Out of the two, Trade Sale would be a better option because it requires less time and

would help avoid the lengthy public disclosures required during an IPO.

 A partial transfer of ownership to right strategic partners or any other prospective

investment client is what TPG can do.

 Secondary stake sale is not that viable an option for TPG as it would require more time

and effort to identify a financial buyer with enough capital and interest to buy TPG’s

stake in STFC.

Comparative Analysis of different exit options available:

I. IPO
  Pros: Require less time and effort, smooth exit option, Ripe market condition, Highest

returns

 Cons: Regulatory requirement in terms of public disclosures, exposed to market risk

till shares traded on exchange

II. Trade Sale

 Pros: Less time consuming, More control over the process, immediate exit,

sometimes highly valued

 Cons: Identifying right strategic partner, reaching an agreement on valuations, sharing

confidential information during negotiation

III. Secondary Sale

 Pros: lifetime of a transaction is shortened

 Cons: Difficult to find another PE firm, more time and effort needed

It is the right time to exit as even though 2012 proved to be a great year for TPG but given

the market conditions at that time, nothing was a guarantee.

 For TPG, 2012 has proved to be the great year for the Indian stock market with 25.7%

gains, the best in three years.

 Also, STFC has a near monopoly in transport finance sector.

 By early 2012, having acquired access to and skilfully deployed PE money for growth,

Shriram had become the largest asset financing, non-banking finance company in

India, with market capitalization of $7 billion.