India’s lower-tier urban opportunities

The appetite for private equity investment in the country is real: there were 166 deals in the first half of 2011, up 15% year-on-year, while investment reached $4 billion, a gain of 2.4%, according to AVCJ Research. The crux of these transactions have occurred in places like Mumbai, New Delhi, Chennai, Hyderabad and Bangalore, but more rural locations are also undergoing significant urbanization, and their tastes are becoming more sophisticated.

These cities, many of which are home to more than two million people, are appealing in their own right, argues Jacob Kurian, partner at growth capital-focused New Silk Route Advisors. “Investment costs are lower, and companies’ profits are good,” he says. “Looking at investment opportunities in non metro cities should make sense for PE investor.” 

The urbanization factor

An India urbanization report released by Morgan Stanley in February, which looked at the country’s top 200 cities by population, inevitably found that Bangalore, Hyderabad and Pune are the fastest-growing urban centers. But second-tier cities like Mysore and Meerut also appeared in the top 10. Mumbai, meanwhile, ranks 21st on the list.

“Urbanization is a core component to the process of city formation and building out India’s competitive strength in the global markets,” Ridham Desai, head of India research at Morgan Stanley, said in the report. “The India urbanization findings underscore our commitment to putting clients at the forefront of the most timely investment debates.”
Hand in hand with a boost in urbanization is an increase in wages. India’s consumer segment, and the food industry in particular, has been a direct beneficiary of this.

“The growth of the food industry is expected to be driven by an increasing preference for ‘healthier,’ ‘hygienic’ and ‘quick’ foods, amid an era of nuclear families with an increasing need for convenience,” Nikhil Vora, managing director of IDFC Securities, tells AVCJ. “We think foods will continue to attract a significant amount of private equity investment going forward in the consumption space, given the strong growth prospects and the fact that food constitutes 30% of an Indian consumer’s total expenses.”

Aureos Capital is the latest fund to pledge a greater focus on these territories. Last week, the firm, with a consortium of private equity funds, acquired Carlyle’s majority stake in Chennai-based publishing services provider. But along with announcing the big-city deal, Aureos said that its $200 million-targeted Aureos India Fund II would maintain a greater focus on tier tier two and tier three locations. The fund cited healthcare as a particular interest.

Likewise, Sequoia Capital recently made a $25-30 million investment in Prakash Snacks, based in Indore. That deal came a year after Motilal Oswal Private Equity Advisors bought a 20% stake in ready-to-eat snack maker Mrs. Bector’s Food Specialities from Punjab near the Pakistani border. Also last year, Carlyle invested $23 million in Tirumala Milk Products, based in Narasaraopet in the Guntur region.
“You can find almost all the same consumption segments that you see in big cities, but with price points that are slightly lower, and styles that may be a season behind. But other than that, the smaller cities are on a tear,” New Silk Route’s Kurian says.

Rich pickings

In terms of food investments, one of New Silk Route’s latest transactions was in Bangalore-based Coffee Day Resort. The firm jointly took a minority stake in the company with KKR and Standard Chartered Private Equity. According to reports, the 20% stale sold to the consortium for more than $200 million.

In May, a $75 million India-focused fund launched by SEAF, a Washington-headquartered firm that specialises in emerging markets, invested in Tropilite Foods. The ingredient supplier to the dairy and bakery sector is based in Gwalior, which is approximately 300 kilometers outside Delhi and off the radar of most investors.

Hemendra Mathur, managing director of the SEAF India Agribusiness International Fund, notes that there are around 60 cities in India with a population of two million. Although he accepts there are challenges investing in smaller cities – investors must have strong networks for deal sourcing, and they must be prepared to travel more and take real time to conduct due diligence – the effort may pay off.

“There are a number of promising companies [in these cities] which have good valuations and the potential to grow,” Mathur says.“These companies are well-sourced by investors who have experience in turning a profit.” 

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• Topics
• South Asia
• Venture
• Early-stage
• NSR New Silk Route Partners
• The Carlyle Group
• Morgan Stanley
• Aureos Advisers (Aureos Capital)
• Sequoia Capital