Indian agri-business to attract PE and VC

January 2014  |  FEATURE  |  PRIVATE EQUITY & VENTURE CAPITAL

Financier Worldwide Magazine

India’s agri-businesses are increasingly likely to attract more private equity (PE) and venture capital (VC) funds in the next few years, according to a joint report released by KPMG and the Federation of the Indian Chambers of Commerce and Industry (FICCI). 

The report, ‘Enhancing Competitiveness of Indian Food Chain’, was released at the inaugural session of the FICCI’s Food 360 conference in November and it suggests that future opportunities for PE and VC firms in the Indian food processing industry are significant. The report states that the food processing industry is expected to grow considerably by the financial year 2014-15 and agri-businesses are predicted to contribute in the region of 6.5 percent annually to India’s gross domestic product. 

In recent years the sheer size of the Indian agri-business market has precipitated a surge in PE placements and M&A activity. PE investments in the sector have rocketed from just 0.2 percent in 2008 to 3.8 percent in 2012. Furthermore, during the same period, VC investment has grown from 0.2 percent to 1.6 percent of total investments. PE placements in the Indian agri-business sector also increased from two in 2008 to 12 in 2012. The total PE investment in the sector rose from $38m to $53m during the same five year period. Agri-logistics is another area which has been attracting a great deal of investor attention of late; 2012 alone saw over $60m invested in the sector. 

According to the report, agri-product companies with a presence in edible oils and spices have also attracted particularly high levels of investor interest recently, with more than 40 transactions completed in the sector over the last five years. 

Overall, the agri-business sector in India attracted around $970m worth of foreign direct investment (FDI) between April 2000 and July 2013, and respondents to the joint survey feel that this trend will continue in the near future. “Continuous financial and regulatory support from government, increasing participation of private and public corporates, and increasing exposure of foreign players is likely to spur investments in developing the infrastructure across the value chain right from farm inputs to the consumers,” said Rajat Wahi , KPMG’s India partner and retail head. 

Clearly agri-business has already played a key role in helping to develop the Indian economy. However, the industry has still encountered a number of obstacles which have stymied its growth. Indian agri-businesses are currently characterised by high wastage, poor processing levels and a comparatively low global contribution. The hope amongst Indian businesses, however, is that the country’s food value chain will soon become much more streamlined and integrated, and will play a much more significant role in global markets. However, the industry will only achieve this goal through the “continuous financial and regulatory support from government, increasing participation of private and public corporates” according to Mr Wahi. He adds that the “increasing exposure of foreign players is likely to spur investments in developing the infrastructure across the value chain right from farm inputs to the consumers”. 

Historically, for Indian food producers wastage has been a particularly troublesome issue. It is estimated that the loss of primary produce before reaching the market due to lack of proper handling, cleaning, sorting, grading and packaging facilities at village level is around 30 to 40 percent for agricultural. Respondents note that problems of wastage still exist at every stage of the value chain. The fractured nature of the supply chain also results in a steep increase in total costs regarding procurement, transit and service charges levied at various layers of the chain. Consequently, the price received by the farmers is only around 25 to 60 percent of what the consumer pays. 

India’s share in the global food trade currently stands at around 1.5 percent. In order to improve upon this position and draw in additional investment, the availability of skilled human resources must be improved. The agriculture industry in India is still in desperate need of highly skilled and trained individuals across different levels to help handle and improve various operations. It is estimated that the Indian food processing industry requires around 530,000 people in the unorganised sector and about 100,000 in the organised sector to handle various food resources at all levels of the supply chain. 

One of the key recommendations contained within the report suggests that public-private partnerships (PPPs) should be fully embraced as a tool to help accelerate development within agri-business. It is in these structures that PE and VC funding could prove to be particularly useful. Indeed, PPPs have already been successfully deployed in areas such as contract farming, drip irrigation and terminal markets, and it is these sorts of innovative measures which have helped to address the challenges associated with the sector and have begun the process of improving the state of the country’s agrarian market. With increased PE and VC investment, these improvements can continue for years to come.

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Richard Summerfield