The firm’s investment into Indian dairy shows a strong belief in its potential, but with the need to build procurement infrastructure, it’s not a deal just anyone can do.
KKR India’s recent $77 million investment in India’s largest private value-add dairy demonstrates the firm’s confidence in the country’s growing demand and in scaling agribusiness to supply it. But the structured deal to invest in Kwality is also a lesson in careful risk planning in the challenging Indian dairy sector.
After Cargill Ventures (part of Black River Asset Management, now Proterra), Carlyle, Abraaj Capital and Rabo Equity Advisors each invested $18 to $29 million in the sector between 2010 and 2012, investment into dairy companies slowed.
India and agriculture have faced economic and climate challenges, so investors aware of the opportunity in dairy know they have to be cautious. “We would love to find a deal in Indian dairy,” Kushal Agrawal, chief financial officer at the smaller Indian agribusiness-focused Aspada Fund, told me recently. “But it is quite disorganised and tough to enter. We are looking.”
A key factor is the ability to bring produce to market, argued KKR India and Kwality deal leader Tashwinder Singh. “The demand-supply situation is in favour of demand. If you can bring the produce into the market in a good and efficient way [it] will sell.”
Kwality is also shifting its retail model from B2B to B2C, capturing the growing demand for dairy in urban centres. The dairy industry is growing between 20 and 25 percent per year and companies are expanding aggressively into small and medium cities, according to Rabobank.
But Singh said that finding a company with real capacity to scale up procurement had been the toughest hurdle, taking him and KKR India around five years of active searching.
In India, only 20 percent of milk is ultimately processed or pasteurised for the organised market. That leaves many rural houses with cows that could sell additional milk, but they do not have the right husbandry advice or infrastructure to take part in this scaling up.
Choosing the target market was the easy part. Co-operatives control much of the Indian dairy market, so Singh focused on value-added companies making products like cheese or flavoured milk for young urbanites.
Kwality procures milk from about 4,000 villages, testing it on site and providing farmers with nutrition and veterinary services. The company is tapping into a ready-made resource that needs to be backed by infrastructure. A large part of KKR’s structured deal, which Singh hinted could last five to six years, is directed at expanding Kwality’s farmer reach through better supply-chain facilities.
“You need to chill [milk] and make sure it is at a certain temperature, before it can move long distances to the processing centres. Growth in Indian dairy companies will be mostly about procurement,” said Singh.
He spoke of KKR not only as an investor but as a “solutions company”. “In this situation, we figured that a structured solution is probably the right solution for the company. So we gave them rupee capital from our domestic pools of capital in India, including our Non-Banking Financial Company.”
The deal could signal more willingness to invest into Indian agribusinesses. “[Indian agribusiness] is not an easy area to invest in …. although as it gets more organised there is opportunity. Products like basmati rice are less risky. As you look at more perishable products, the supply chain becomes increasingly important. You need a mechanism and infrastructure to make sure the product can reach the consumer as soon as possible.”
KKR has shown it believes the opportunity is there in Indian dairy and other agribusiness, but also that anyone else wanting to take the plunge will have to plan very carefully and have plenty of local knowledge.
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