The $5bn private equity opportunity in India

The size of the Indian food and agribusiness sector is expected to increase to more than $500 billion by 2020 requiring up-to $35 billion of investment. Private equity is likely to account for $5 billion of that total, or $800 million a year, according to Hemendra Mathur, managing director, SEAF India Investment Advisors, the private equity firm focusing on investment into SMEs.

India is one of the world’s largest producers and consumers of food products and the sector plays a critical role in the Indian economy. India’s agriculture sector employs nearly 60 percent of the country’s population and contributes approximately 18 percent of India’s gross domestic product, according to the Economic Survey of India. With access to a large natural resource base of 161 million hectares of arable land, 15 million hectares of fresh water reservoirs, the largest livestock population in the globe and diverse agro-climatic conditions, according to the Ministry of Agriculture, India is a highly favourable locus for growth in the food industry.

The total size of the food and agribusiness market in India – including agricultural inputs, production, warehousing, logistics, trading, packaging, processing and food retail and services – is currently around $375 billion, according to our own estimates. Out of that approximately $300 billion is food and the remainder includes agricultural inputs such as seeds, fertilisers and pesticides, animal feed and non-edible products such as cotton, jute, and equipment.

And the size of the Indian food and agribusiness sector is expected to increase to more than $500 billion by 2020 and this will require up to $35 billion of investment. Between 40 percent and 50 percent of this will come from equity investments from the public and private sectors. Even if we assume that one third of the equity investment will be in the form of private equity, this translates to at least $5 billion in private equity investment, or around $800 million a year.

This represents a large gap from current levels of investment and there are particularly important areas for investment throughout the sector such as regional expansion, sourcing and distribution strengthening, risk mitigation and other general business and resourcing improvements.

Private equity, especially at the SME level, is well-positioned to take advantage of many growth opportunities in the Indian processed food sector by providing expansion capital to companies in this sector. Further, by focusing on general business improvement at the same time, investments in this segment will gain substantial increases in their valuation multiples.

Source: Sustainability Outlook, May, 2014

There is, of course, also strategic investment interest in India evidenced by a wide range of acquisitions and joint ventures in recent years. Multinationals like to find Indian partners that are better positioned to look after farmer relationships and supply chain management and in turn the foreign companies bring expertise in research & development, branding, distribution and supply chain management to the relationship.

International players such as Wal-Mart, Metro, Tesco, Lavazza, Schreiber, Lactalis, Hershey’s, Total Produce (part of Fyffes Group), InBev, Heineken, Carlsberg, Anheuser Busch, Tyson Foods, Orkla Foods, Barry Callebaut, Olam International, John Keels, and Dr. Oetker have all entered India in last few years, in order to tap the huge and growing consumer base. Although I must qualify that it has not been easy for everyone as evident from break up of Bharti and Wal Mart JV and withdrawal of Carrefour from Indian market.

And multinationals such as Nestle, Unilever, Danone and Cadbury’s, who have been present in India for several decades, are reworking their strategy to gain a higher share of the consumer food basket.

The Government of India allows foreign direct investment into most agribusiness sectors through the automatic route except for the acquisition of agricultural land, retail and plantations. Food companies entering India can therefore own 100 percent of Indian operations in most of the sectors.

Given the high degree of fragmentation, the sector has seen a number of deals including joint ventures, mergers and acquisitions. The drivers of consolidation have been market entry, expansion of market and product range and achieving efficiency in sourcing and distribution.

The industry is ripe for further growth and consolidation. Most large food companies are open for growth by acquisition. Thus, the sale to strategic investors would remain a key exit route for private equity investors.