Dairy products maker HR Food Processing Pvt. Ltd has raised Rs45 crore ($6.7 million) in series B funding from impact investor Lok Capital and existing investor Aavishkaar.
The round was led by Lok Capital’s third fund. The Ranchi-based company had earlier raised around $2.5 million from Aavishkaar. Unitus Capital was the sole financial adviser for the transaction.
HR Food Processing, founded by Abhinav Shah, Rakesh Sharma, Abhishek Rajan and Harsh Thakkar, started operations in May 2015 with a single processing plant in Jharkhand. The company sells two varieties of milk, besides value-added products such as paneer, curd, sweet curd, mango lassi, lassi, butter milk and pedha under the Osam brand.
The company plans to use the funds to raise production capacity and expand distribution to neighbouring Bihar.
“We have just completed one acquisition in Jharkhand. We are refurbishing that plant right now. We expect it to be a 120,000 litres (daily) plant and we expect it to be operational by March 2017. Both plants put together we will be at a capacity of 200,000 litres per day,” said Abhinav Shah, co-founder and chief executive at HR Food.
“We have been tracking the dairy sector for the last few years, but due to various reasons such as inappropriate business models and valuation mismatch, we were not able to close transactions,” said Rajesh Babu, director at Lok Capital.
Shah said expansion into Bihar could be either through a greenfield project or by acquiring an existing plant.
HR Foods Processing collects milk from over 10,000 farmers in over 250 villages in Jharkhand and Bihar. It operates in all 18 districts in Jharkhand through a network of 105 distributors and over 3,000 retailers.
According to Shah, there is a strong opportunity for private dairy companies in the eastern markets.
“Like most other dairy markets, we compete against state-run cooperatives. Today, private sector players have a belief that there is a great opportunity for them, given the demand supply gap and the huge customer requirement for quality products,” said Shah.
To compete with state cooperatives, the company is differentiating itself by providing additional services across its supply chain.
“We control all three parts of the supply chain—sourcing the milk, processing and making the products available in the market. This helps us to provide value to farmers through a transparent milk collection process. We also provide them training and services such as providing them feed for the cattle,” said Shah.
Currently, 85% of the company’s revenue comes from packaged milk, and the rest from value added products such as curd and lassi.
HR Food Processing plans to increase the contribution of value-added products to about 25% by end of financial year 2017-18, said Shah. “We might add a couple of variations to our curd. Currently curd is around 4-5% of overall sales,” he said.
For Lok Capital, which till recently focused on financial services, this is the first investment in a dairy business and second the in overall food and agribusiness space.
Eastern India is an under-penetrated market and highly unorganised, said Babu, adding the company also has a lot of opportunity in terms of expanding to other states such as Bihar and Chhattisgarh.
Lok Capital is looking to invest in three to four agri businesses from its third fund, added Babu.
In June, Mint reported that Lok Capital had achieved the first close of its third fund at $40.5 million (about Rs270 crore). The firm is aiming at a final close of $100 million and expects to achieve the target over the next 12 months, the report added.