NSR to take local food national

New Silk Route Advisors (NSR) wants to create the Yum Brands of India. The private equity firm has spent the last two years scouring the country's fragmented quick service restaurant (QSR) space for suitable candidates that, if supported by sufficient capital and expertise, have the potential to expand nationwide.

Yum Brands has more than 360 outlets throughout the country under the KFC, Pizza Hut and Taco Bell brands. Rather than imitate this model by selling Western food, NSR wants to offer affordable Indian fare. The first piece in the jigsaw puzzle fell into place in April with the acquisition of a significant minority stake in Vasudev Adiga's Fast Food, a Bangalore-based chain that specializes in south Indian cuisine. It took about six months to close the most recent deal but another could follow reasonably soon.

"There were five companies on the shortlist and, after the Adiga's deal, we narrowed it down to three, of which we will pick one," Parag Saxena, NSR's CEO and founding general partner, tells AVCJ. "We will put them under one holding company in order to make the most of the synergies. Companies have different needs but some functions can be managed together, such as HR and real estate."

The size of the transaction was not disclosed but sources cited by domestic media claimed that NSR's stake in Adiga's will increase as more capital is infused for expansion. This would see the private equity firm putting in $30-40 million over the next three years, taking a 40-45% interest in the company.

Issues of scale

QSR is a scale business - once critical mass is reached, it generates stable cash flow and 20-25% higher turnover than fine dining - but few local players have managed this. Paresh Kothari, business director at Cipher Capital, who advised on the Adiga's transaction, notes that most participants have 1-2 outlets and struggle to expand beyond four. Franchising is a popular, but brand value is often diluted by multiple users operating to varying standards.

Adiga's, which was founded in 1994, has 12 wholly-owned restaurants in and around Bangalore and plans to open another four in the next few months. The most recent addition broke even within a month of opening.

NSR is expected to support the company by augmenting the management team and introducing new systems and processes. But Kothari warns that recruiting lower down the ranks is just as important. "Each outlet requires approximately 100 employees, and so Aviga's has to set up training centers," he says. "With NSR on board these kinds of challenges can be addressed more easily."

The private equity firm spends a lot of time researching its brief before making investments, recruiting executives from the target industry to work alongside the investment team. For example, it brought in three people from Centurion Bank - now part of HDFC Bank - when it was looking for financial services deals.

In the case of food and beverage, NSR hired a CEO with experience of the sector who will now join Adiga's. Last year NSR posted an advertisement on its website for a CFO with experience in M&A, a key element of the private equity firm's plans for its portfolio companies in the sector. Altogether, they looked at 40 companies before deciding on a shortlist of five.

A similar amount of effort went into establishing what kinds of Indian food had the best chance of achieving nationwide appeal. According to Saxena, the investment team settled on three categories: Tandoori, the cuisine originating from Punjab that has to a large extent become the global face of India food; Indian Chinese, best defined as an adaptation of Chinese cooking and seasoning techniques to suit Indian tastes; and Udupi from south India, well known for its sajjige and dosa dishes.

Adiga's fits into the third category. Cipher's Kothari was impressed by the business model as much as by the food itself. He describes visiting an Adiga's outlet and seeing customers coming in from 6.30 a.m. to use the self-service dining facilities on the ground floor, while the first floor was geared more towards traditional casual dining. "They target mid-market families who want to enjoy quality Indian food - for breakfast, lunch and dinner," he says. "I was amazed at the turnover: 3,000-plus people each day."

Popular PE play

India's dining industry is popular with private equity as a means of tapping into rising urban disposable incomes. According to the Federation of Indian Chambers of Commerce and Industry, PE investors committed $100 million to the food service industry in the first half of 2011.

Recent transactions include Beacon India Private Equity investing INR80 million in Impresario Entertainment and Hospitality and India Equity Partners acquiring a majority stake in Sagar Ratna for $35 million, both of which are closer to the fine dining space than Adiga's. As for fast food, ICICI Venture invested $33 million in Devyani International, which has franchise rights for KFC, Pizza Hut and Costa Coffee in certain areas. NSR has also backed Coffee Day Group, India's largest coffee shop chain.

Saxena says Jubilant Foodworks is a more accurate model for what Adiga's aspires to become. The company received VC backing from Chase Capital Partners and Oppenhiemer's joint venture fund in 1999, rolled out the Domino's Pizza nationwide as a network of wholly-owned stores, and raised about $180 million through an IPO in 2010. The question is whether similar success is possible with local cuisine.

"We will expand at first within Karnataka state and then our challenge is to take it elsewhere," Saxena says. "We think Adiga's is something that can appeal nationally but it will take time."

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• Topics
• South Asia
• Consumer
• Expansion
• NSR New Silk Route Partners
• Consumer
• Growth capital