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PE-VC deal value in dairy double of last year's

Business Standard:  August 02, 2017

Ahmedabad: The domestic dairy industry has of late grabbed the eyeballs of private equity (PE) funds and venture capitalists (VCs), with the sector bagging $60 million investments in just two deals so far this year.

Data from Venture Intelligence show that so far in 2017, only two deals in the dairy space have fetched around $60 million (around ~385 crore). The deal values have been consistently on the rise in the past five years. From $13 million in 2013 to $30 million in 2016, and 2017 has already beat the previous year's cumulative deal value.

Venky Natarajan, managing partner, Lok Capital, a leading VC fund which has exposure to the dairy sector, feels the sector has the potential to attract around ~5,000 crore over the next five years easily. In fact, Lok has identified dairy as one of its key investment sectors in its Fund III. It had made its maiden investment in dairy in 2016, when it led a Series-B funding of $6.7 million in HR Food Processing Pvt Ltd (brand Osam), a Ranchi-based dairy brand, along with early-stage fund Aavishkaar.

Natarajan feels that besides encouraging growth rate in value added products (VAP) in dairy, the sector as such is a safe bet as demand for milk is estimated to grow with rising aspirations and population growth.

The returns upon exits have been encouraging, too, for PEs and VCs. For example, data from Venture Intelligence show IDFC PE made two times return from the open market when it made a partial exit from Parag Milk Foods in March this year. In January 2014, Carlyle had sold its stake in Tirumala Milk Products to Le Groupe Lactalis in a $72-million deal in which it made 4.5x returns.

But, is dairy as lucrative as it looks, with most of the market with cooperative giants?

R S Sodhi, managing director of Gujarat Cooperative Milk Marketing Federation, which owns Amul brand, said, "Dairying is a safe business; demand is set to grow, especially for branded products. If overall milk consumption is growing at five-six per cent, demand for branded dairy products is clocking a 10-12 per cent growth rate. Having said that, PEs and VCs need to choose their targets carefully; if you look deeper, most private dairies have an Ebitda margin in the range of five-six per cent." Ebitda is earnings before interest, taxes, depreciation and amortisation.

Having a PE-VC investor on board, however, does not only bring in requisite funds, young dairy firms look at them as harbingers of professionalism and mentoring. Abhinav Shah, co-founder and chief executive of HR Food (which sells under Osam brand) felt that having a VC on board has helped in guidance and mentoring, preparing them for the long haul. HR Food had used the funds raised to expand its capacity up to 200,000 litres per day and now aims to take the share of VAP in its turnover from current 10 per cent to 20 per cent over the next few years.

As such, the value of the dairy industry at retail level is estimated to be ~4.5 lakh crore, of which nearly 30 per cent lies with organised players, and this segment is clocking 13-15 per cent growth rate per annum. The VAP segment is doing better, at 18-20 per cent.

Some products like flavoured milk, yoghurt and cheese are growing upwards of 20 per cent per annum, given their small base.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.