Bengaluru: Sequoia Capital-backed start-up Hector Beverages Pvt. Ltd said it will spend $10 million to expand capacity at its Mysore plant as it prepares to launch new milk-based beverages such as Thandai, Badam Milk and Chhaas under its flagship brand Paper Boat by March next year.

Hector Beverages raised $30 million in fresh funding in July from existing investor Sequoia Capital and new funds such as Sofina Capital and Hillhouse Capital Management, boosting the company’s valuation to $100 million.

Part of the funds will also be used for more aggressive ad campaigns, said chief executive officer (CEO) Neeraj Kakkar.

“We’ve not been able to meet demand in the market as we’ve had capacity constraints," Kakkar said in an interview at the company’s Bengaluru office.

Additional capacity at the Mysore plant—its second in the country after the one at Manesar near Gurgaon—will help boost production. The total capacity could more than double by October next year. It currently produces 220 bottles of beverages per minute at its Mysore plant. It will add two lines with a capacity of 80 bottles per minute now and another line of 220 bottles per minute by next year.

The planned launch of milk-based beverages will expand Hector’s range of indigenous drinks that are commonly prepared and consumed at home. Its products include Chilled Rasam, Tulsi Tea, Jaljeera and Aamras.

Capacity expansion will help the company meet rising demand for Aamras, Jaljeera and six other drinks, and also enter new markets.

“We want to gain depth in distribution at this point," Kakkar said.

Hector directly services about eight cities and reaches 200 more through a distribution alliance with noodle maker Indo-Nissin Foods Pvt. Ltd.

Hector has responded to early failures in the market by acting quickly to pull two stock-keeping units, or SKUs—its Imli and Sattu beverages—from the market and stopped their sales through its e-commerce channel, citing logistical issues, instead relying on third-party e-retailers such as BigBasket and Amazon.com.

India’s beverage market is estimated to be worth $5.18 billion annually, and is dominated by large foreign companies such as Coca-Cola Co. and PepsiCo Inc. Regional brands such as Paper Boat are trying to carve out a niche for themselves in the market with innovative products.

“Paper Boat is a clear example of how you can take on the international brands with better innovation," said Anand Ramanathan, director at KPMG Advisory Services.

For the year ended March 2014, Hector Beverages earned 16 crore from sales. The company is yet to make a profit.

Clearly Kakkar, a former Coca-Cola employee, is in no hurry. According to him, profitability will come when the company decides to slow its pace of expansion.

“We are all trying to apply hyper-growth models and see their sustainability...and those models cost money," he said, adding that rapid growth will also require the company to keep raising money.

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