PE investors find food firms attractive; but few opportunities to invest3 min read . Updated: 12 Apr 2011, 11:54 PM IST
PE investors find food firms attractive; but few opportunities to invest
Bangalore: Being the world’s second largest populated nation, with nearly half its population below 25 years of age, food processing companies in India have been an obvious choice for private equity (PE) investors.
After the 2008-09 slump, investors started scouting for domestic consumption demand-driven sectors, particularly those which wouldn’t be hit by a fall in purchasing power.
Despite this interest and favourable macroeconomic factors, not many such companies have been able to raise capital. In 2010, only three food processing firms raised funds.
PE investors tend to like food companies as they grow fast and the business tends to be steady once a brand name has been established, said Deepesh Garg, director, o3 Capital Advisors Pvt. Ltd, a Mumbai-based investment bank. Food is a secular business; it does not get affected by financial downturns. With their growth potential and profits, these companies are considered safe investments, he said.
“There is a lot of interest in the food businesses, but not many investable companies are available as they are often cash-positive and don’t need institutional capital," said Garg.
Sunil Jain, vice-president of investment bank MAPE Advisory Group, said investors have been driven to look at commoditized plays such as rice and sugar as there is a lack of opportunity in the value-added play in food companies.
In 2010, there were 10 investments in commodity firms.
Last week, Standard Chartered Private Equity invested ₹ 110 crore for an undisclosed stake in Delhi-based Bush Foods Overseas Pvt. Ltd, a rice-processing company. Bush Foods, which has brands such as Neesa, Indian Star and Himalayan Crown, is an exporter of basmati rice to more than 34 nations.
Furthermore, VCCircle had reported last week that International Finance Corp. (IFC) plans to invest $30 million (Rs 132.6 crore today) through a mix of equity and debt in Karnal-headquartered Dunar Foods that is in the business of procurement, processing and supply of basmati rice. Investors say a well-differentiated offering and long-term commitment to quality is what they are looking for when it comes to backing a food-processing firm.
The food sector, per se, is a solid long-term opportunity for PE investors, given global emphasis on food security, said Rahul Raisurana, managing director, SCPE, adding that investment in Bush Foods is a continuation of “our thesis of backing agri- and consumer-based businesses that offer a well-diversified play between the global and domestic consumption story".
A large number of its customers are from North America and Europe, which is a good indication of the high standards of quality Bush maintains, he said.
“The company has solid brands, a premium global customer base, and reputation for product consistency and quality accreditations that enable it to cater to most countries globally," he said. “We are backing Bush for the differentiation it offers, besides the general industry thesis that we like." SCPE is looking at more investment opportunities in the space.
PE firms are also facing a dearth of investable food companies. Bangalore-based Zephyr Peacock India has been trying to invest in the sector for the last four years, without any success. Zephyr is a small and medium enterprises-focused PE fund investing in the range of $5-15 million. “We are interested in all part of food processing business, like procurement, packaging, logistics," said Mukul Gulati, managing director, Zephyr, adding that as people get busier, the demand for processed food will increase. “The business is slated to grow. At our stage, there are not enough proposals. We will love to do it. With the growth of organized retail, demand for processed or packaged food will also go up. We haven’t come across a single interesting opportunity."
With global brands such as Wal-Mart Stores Inc. coming into India and organized retail being more or less dominated by companies such as the Future Group, Spencer’s Retail and Aditya Birla Retail Ltd, there is huge interest on backing their national or regional vendors, said Mohit Agarwal, an associate with Equirus Capital Pvt. Ltd.
“With organized retail, there is a lot of shelf space available for suppliers. PE firms are ready to fund back-end vendors as these businesses won’t go away and can be very interesting if they cater to strong brands," he said. He added that as not many opportunities are left to back large food processing firms, as many of them are listed or have raised capital, valuations are high for companies that have a differentiated offering.
Meanwhile, there are firms looking for capital. Jam and beverage maker Mapro Foods Pvt. Ltd said it is in the process of appointing an investment banker to scout for PE investors. “There are some PE funds that have directly approached us, but we are not enthused with their proposals," said Mayur Vora, managing director, Mapro Foods. He declined to disclose the names of the funds.