Money to feed

When leading private equity fund SAIF Partners invested $8 million in Tamil Nadu-based food processing company Asian Dhall Industries (now known as Asian Health & Nutri Foods) early last year, it sent hopes soaring of many entrepreneurs in the agri-foods business.

Most could easily dismiss this commodity-plus, region-specific company worth around Rs 100 crore, which sells varieties of pulses under the brand name Jeyyam, but there’s a story here. That innovative valueadds and small scale food businesses have a chance of making it big.

Given the context, it’s not surprising that small businessmen such as Sandeep Gogia, owner of The Fresh Produce Shoppe in Gurgaon that sells imported fruits and processed food and grocery brands, is considering private equity to fund his expansion plan. He’s got two outlets and is planning to open 10 more in the same region.

Size does matter How much are these segments worth?                                        2007
Non-food	36,400
Food (unprocessed)+	4,39,200
Food (processed)	3,20,600
Food (value added)	2,42,200
Food Services	48,400
Total Market Size	10,86,800
Source: YES Bank Figures in Rs crore + such as wheat flour and rice

These examples point to the big difference today for a relatively finance-starved food and agri-business segment—that there’s a bail-out of a different kind at hand. Just consider the pace of this ascent: According to a Venture Intelligence Report, the food and beverage sector that witnessed PE investments of a mere m4.2 million in two deals in 2006, has seen 11 deals worth m106.4 million in 2007. “We are aware of many PE deals being negotiated in the food and agri-business space in the current year,” says Rajesh Srivastava, Managing Director (Corporate & Commercial Banking), Rabo India Finance. He should know.

Evidently, Srivastava is spearheading a move to set up a sector-specific agri-fund. And he’s not alone. YES Bank, which was the first off the block, has already announced its decision to set up the country’s first food and agri-business fund. Both these are estimated to be around $100 million.

Fuelling this interest are the changes in the industry’s fundamentals. For one, the news of excise duty reduction in food processing and the reduction in customs duty on the import of machinery required for the industry have enthused investors.

For another, the economy— never mind the stock markets—is still humming along nicely, and that’s virtually pushing entrepreneurs to scale up operations to meet demand. “We estimate that the investment requirement for the food supply chain will be $30 billion through to 2015,” says Sonal Shah, CEO, YES Food & Agri-business India Fund.

The economic progress is evident in the value addition to food that is taking place. Kalyan Chakravarthy, Country Head (Food and Agri Strategic Advisory Research), YES Bank, says: “Research has proved that irrespective of whether they are urban or rural consumers, as the per capita income increases above $2 per day, people start eating meat and when it crosses $10, they start consuming processed food.”

Not without reason, a KPMG-FICCI report estimates that the food processing and agri-business is set to grow up to 12 per cent a year in the near future. Indeed, fruit and vegetable processing that today stands at a meagre 2 per cent, is expected to shoot up to 10 per cent by 2010.

Big food investments Investors are looking at opportunities across the food chain. Here are some of the deals: Manufacturing: Belgium-based food major Puratos is setting up a manufacturing facility in Mumbai to make pastries and chocolates. Danisco, a food ingredients company, has invested $6 million in both manufacturing and R&D Retail: A consortium led by media group Dainik Bhaskar has made a Rs 325-crore offer for reviving the Super Bazar in New Delhi. Future Group is investing in "fair price" stores and "value stores" Logistics: Apollo LogiSolutions (part of Apollo Tyres Group) has signed a $250-million JV with Toronto-based Spire Group to construct and operate temperature-controlled warehouses in India Exports: United Phosphorus has acquired Colombian marketing firm Evofarms; earlier it acquired Argentina's ICONA for $10 million. IT: Pune-based Temptation Foods has bought a 70 per cent-stake in Aptsource Software, a high-end enterprise solution consulting firm Know-how: Russell Credit, a wholly owned subsidiary of ITC, has purchased agri-biotech company Technico Pty, Australia, from the K.K. Birla Group Trading: The New York Stock Exchange has acquired a 5 per cent-stake in Multi Commodity Exchange.the maximum foreign equity investment permitted in derivative exchanges

Today, the total food processing market accounts for 32 per cent of the total food market. The advent of organised retail will lend a hand too. According to Gurgaon-based consulting firm, Technopak, the organised food and grocery segment is worth $1 billion and represents just 0.6 per cent of total food sales.

That means there’s plenty of room for growth. “Modern retails formats are a big positive as they offer an environment where new players have a chance to ride on them and offer products that fill need gaps,” says Avnish Bajaj, Co-founder & MD, Matrix Partners India.

But there are challenges. “Manufacturers have to identify the right need-gaps and product differentiation that have a pull,” he adds. “They then must create the distribution network, which should precede any brand-building activity.”

Also, according to another private equity fund head, most investors in the FMCG/branded food business need to understand that companies here face a genuine challenge in growing the scale of their business beyond a certain size and geography to achieve critical mass. “Players in this space have to first build ‘brand-ability’ and then think of investing huge sums on advertising and marketing to push their market size,” he says.

While it’s not entirely a bad thing for a company to continue being a regional player or make moderate gains, the investor will always want introduction of more progressive ways and considerable expansion in market reach, and therefore, consumption. Added to this, investors will have to necessarily look at a long window on investment of at least eight years.

Hence, it’s not surprising that most of the investors are looking first at specific areas in the value chain. “I see the supply chain side of the mechanics attracting funds. That’s the hard part of infrastructure that needs to be coming in. Also, deliveries of infrastructure is exciting to a fund manager,” says Harish Bijoor of Harish Bijoor Consults. To be sure, the country’s third-party logistics is set for explosive organic growth.

The current market is valued at over $90 billion. This is set to grow to $125 billion by 2010, according to Datamonitor report. At another end, the cold chain industry, currently estimated to have annual revenues of $2 billion, is set to boom, although it is already growing at 20 per cent a year. In fact, the market expects $300-billion worth of investments to flow into food infrastructure.

And it’s not private equity alone that’s driving the gravy train. Many food transnationals and Indian companies are driving the change as well (see Big Food Investments).

Even as players are looking to set up shop in India, companies here are acquiring business in the segment internationally to add to the value chain. “You will witness many companies of unconventional origin wanting to come in,” predicts Bijoor. Let’s hope he’s right.