Volatile Rupiah uearths value in Indonesia

29.11.13 / The Asia Media Journal

Creador Capital CEO Brahmal Vasudevan believes the depreciated rupiah makes Indonesia an attractive investment. Indonesia markets are undergoing a temporary soft patch but the rupiah will stabilize in a narrow band between 10,000-12,000 to the US dollar, according to Vasudevan. Indonesian consumers will retain their purchasing power as government subsidies shield consumers from depreciatory inflation.

Many Indonesian companies remain attractive to US dollar investors, Vasudevan claims, as economic activity picks up and the consumer class grows. Indonesian firms turn to debt sparingly and foreign debt is even more rare, says Vasudevan, which protects management against external pressure in the downturn.

"Depreciation in the rupiah will likely have a low single-digit impact on Ebitda margins for Indonesian media companies," says Vasudevan, citing higher costs for foreign content. With the government continuing to subsidize fuel, reduced consumer spending is not expected.

The currency environment enables Creador, a US dollar fund, to take longer positions in its targets. With the rupiah expected to stabilize, Vasudevan sees the current depreciation in the rupiah as an opportunity to invest at more attractive valuations, while realizing growth and valuation multiples when markets improve.

The Kuala Lumpur-based private equity firm announced a first close of US$105 million on its second fund, drawing largely from existing limited partners. Despite a regional downturn, investor interest is strong, with a further US$150 million sought before the final close is 2014.

When you invest in these markets you must accept there will be cycles, says Vasudevan. "We invest through cycles because we have done lot of work on the sectors we follow and we know the five- and ten-year trends." The attraction of Indonesian media, particularly satellite TV, is its parallels to Malaysia in the late 1990s and India in the late 2000s, when each market saw sustained high growth.

Creador's principal Indonesian media investment is MNC Sky Vision, in which they co-invested before and after the IPO. The stock is up 50% since its debut on the Jakarta exchange, but Vasudevan estimates depreciation has reduced that gain to about 30%. "We believe that MNC will continue to improve its market share and competitive position, so the long-term profits look good," he says.

MNC Sky Vision is Creador's only IPO, but the fund's first exit came earlier this year, selling a stake in Old Town White Coffee and pocketing a 73% Internal Rate of Return (IRR) for its investors. Exits can be complicated when equity markets are down and the currency is weak, Vasudevan admits, but "the most important factor is where the investment is in the exit process."

Creador focusses on mid-cap Indonesia companies with an equity value between US$300-500 million. The fund targets companies that will continue to achieve 20-30% annual growth. "By paying lower multiples than large-cap comparables," Vasudevan explains, "the downside risk from multiple contraction is low and if we are lucky, we may get a little bit of multiple expansion."