PE firms raise exposure to India’s logistics sector

PE firms raise exposure to India’s logistics sector

Mumbai: Private equity investments in India’s logistics services sector are set to rise as it gears up to improve transportation - with costs among the most prohibitive in the world - and boost related infrastructure bottlenecks.

The last four years have seen considerable growth in mergers and acquisitions (M&A) in logistics, ports, warehouses and container freight stations while Free Trade Warehousing Zones (FTWZ), freight stations, cold chains and captive spin-offs such as auto and retail logistics are seen as attractive targets now.

While analysts expect logistics to be among the top five sectors for PE investments in India in the near term, deal sizes will likely be around $20-$25 million, which is where most planned PE ticket sizes converge.

“Many PEs are wary of investing given the small size of companies and therefore, lower investment ticket sizes. The key to more deals in this sector is, thus, breaking this loop," said Manish Saigal, executive director, KPMG Advisory.

“The time is ripe for PEs to have the foresight to see a tree in five years’ time where others only see a seed at present."

Logistics is seen as an attractive sector for PE investment as it offers strong free cash flow, low capital expenditure and much higher growth rates than in the transportation industry as a whole.

About 17 small-ticket acquisition deals worth close to $500 million were struck in 2009, despite the downturn and going forward, a strong bounceback is expected, Saigal said.

“Infrastructure in India is very weak so logistics is very expensive than any other country," said Sumir Chaddha of Sequoia Capital, which has invested in about 50 Indian companies including Cafe Coffee Day and Idea Cellular.

“So, there is tremendous scope for improvement. Lot of it will be driven by infrastructure upgrades," he said, adding container logistics, inland container depots and warehousing appealed to him.

Logistics companies are on expansion drive, striving to grab a higher share of the fast-growing market.

Trade estimates indicate overall logistics spending at about 13% of India’s GDP while the industry is growing at 15-18% annually.

Supply chain and logistics firm Arshiya International plans to invest Rs2,500 crore to set up five FTWZs across India while Gateway Distriparks expects its unit’s terminal business to drive growth going forward.

FTWZs are created near a port or in the hinterland, which allows duty-free storage of imported goods and also provide space for assembling products, which are services provided by firms such as Arshiya.

“The scope is across the board... all the segments are very attractive," said Darius Pandol of New Silk Route Partners, which manages $1.4 billion worth of funds.

Higher fund allocation in this year’s federal budget to boost infrastructure in the world’s second-fastest growing major economy also offers tremendous growth opportunities for investors in the logistics industry.

As investments into India’s infrastructure sector gain pace, investors will also look to put small money into related ancillaries such as warehousing and freight transport.

Though PE players are quite active in the segment, analysts said rejections by these players are also very high, typically 97-98%.

For example, for every 100 investment opportunities received, only 10-15 are considered for due diligence, KPMG’s Saigal said.

“PE investments will rise but for that the number of logistics companies has to rise," said Sameer Ranade, sector analyst from brokerage Asit C Mehta.

“If PE investment has to be broadbased, then more investments in manufacturing has to take up."