
IDFC PE seals India’s largest dairy investment
India's dairy sector is rich in opportunity. Currently worth $70 billion, it is growing at 10% a year and is expected to reach $150 billion by 2020. The country is now the world’s largest producer of dairy goods and accounts for close to 20% of global milk output.
Last week, IDFC Private Equity moved to leverage this growth, investing INR1.55 billion ($28.7 million) for a minority stake in Parag Milk Foods, It is the largest private equity deal ever seen in the sector.
While big brands such as Amul, Britannia and Mother Dairy have dominated the market for a couple of decades, almost 60% of India's dairy industry is still in the hands of small companies and marginal farmers. A prospective market entrant therefore faces limited investment scope at the top end or a long road to consolidation from the bottom.
"Unlike China, dairy brands are limited in India and there are hardly companies with a market capitalization of more than $300 million," GirishNadkarni, partner at IDFC Private Equity, tells AVCJ. "Many private equity investors may want to bet on the dairy sector, but there are only a few deals that they can tap into."
This explains why Parag Milk Foods - which distributes its products under the Gowardhan, GO and Pride of Cows brands - has been popular among investors. When the company decided to raise fresh capital, it received at least nine term sheets from various parties, including some private equity firms. The company then shortlisted four potential investors and closed a deal with IDFC PE after a six-month bidding period.
The investment was channeled through IDFC Private Equity Fund III, which held a final close in March 2008 on $700 million. Nadkarni has joined the Parag board as part of the transaction.
Parag Milk Foods - which was founded in 1992 - is better known as Gowardhan, the brand under which it sells cheese, milk, butter, yoghurt and other dairy products. The company currently processes around 1.1 million liters of fresh cow milk per day across two plants and is expected to increase its capacity to 2 million liters per day within 2-3 years.
"We have looked at various companies in the dairy sector and most of them focus on producing pure milk," Nadkarni says. "Parag currently has over 60% of its top-line revenue coming from value-added products such as cheese, ghee and yoghurt and these products are growing at over 20% per annum."
One third of IDFC Private Equity's capital will facilitate a partial exit by Motilal Oswal Private Equity, which invested $14.1 million in the company four years ago for a reported 10-12% stake.
"MotilalOswal Private Equity came in when the company was still very small, but our investment is to achieve an initial public offering in three years," Nadkarni adds. "As IDFC also has an investment banking arm, we have the IPO expertise in terms of building up financial structures and bringing in independent directors."
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