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Private Equity in Fruit & Vegetable Processing and Food FMCG - Oct 2014

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Private Equity in Fruit & Vegetable Processing and Food FMCG

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Private Equity in Fruit & Vegetable Processing and Food FMCG - Oct 2014

  1. 1. Aurum-DealCurry CXO Dialogues __________________________________________________________ Webinar on the 10th October 2014: 3pm – 4pm Private Equity in Fruit & Vegetable Processing and Food FMCG
  2. 2. Aurum Equity Partners LLP An investment banking firm, with a depth of diverse-sector experience.
  3. 3. Strictly Confidential Nitin Jain Lead – Agri, Food & Beverages Sector specialization: • Agriculture, Food & Beverages • Financial Services Deal Experience: 15+ years of experience spanning investment banking and equity research. Academic Experience: • Masters of Business Administration (MBA) – Goizeuta Business School, Emory University, Atlanta, USA • Post Graduate Diploma in Business Administration (PGDBA) – NMIMS, Mumbai • Bachelor of Arts (Honors) – Economics at University of Delhi. Previous Work Experience • Indcap Advisors Pvt. Ltd. • IL&FS Limited • Bank of America • Standard Chartered Bank Conferences & seminars: Active Speaker at conferences organized by industry associations like ASSOCHAM , PHD Chambers of Commerce and ICAI. . Select Deals : • Advisory to DMI Finance for raising funds • IL&FS Limited divested their stake in NSE to a Private Equity Fund • Merger of Sundaram Finance with Lakshmi General Finance
  4. 4. Strictly Confidential Sagar Kurade Sector Expert – Agri-Infrastructure and Food Processing Sector specialization: • Agri- Infrastructure • Food Processing Deal Experience: 14+ years of experience working in India leading Industrial Consulting company for Agri-Infrastructure & Food Processing. Academic Experience: • Masters of Business Administration (MBA) – University of Hartford, Connecticut, USA • Post Graduate Diploma in Food Processing - IGNOU • Bachelor of Commerce – Goa University Previous Work Experience • Project Manager –SNET, USA • G.M – Suman Food Consultants • Director – Suman Project Consultants Pvt. Ltd. Conferences & seminars: Active Speaker at conferences organized by Ministry of Food Processing, Govt. of India as well as Industry Associations like AIFPA, CIFTI (FICCI). . Current Designations : • Managing Director – Suman Project Consultants Pvt. Ltd. • Vice President – All India Food Processors Association. • President – Association of Food Scientist & Technologist (I) (Delhi Chapter) • Member – CIFTI, FICCI
  5. 5. Disclaimer  This note has been prepared by Aurum Equity Partners LLP (‘Aurum’) to present to the participants of the webinar dated 10th October 2014 titled “Private Equity in Fruit & Vegetable Processing and Food FMCG”. This note is presented solely for the internal use of the recipient/ participants of the webinar and does not carry any right of publication or disclosure to any other party. This note is incomplete without reference to, and should be viewed solely in conjunction with, the verbal briefing provided by Aurum.  In preparing this note Aurum has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from published and public sources. Accordingly, neither Aurum nor any of its affiliates, shareholders, directors, employees, agents or advisors make any representation as to the accuracy, completeness, reasonableness or sufficiency of any of the information contained in the note, and neither of them shall be liable for any loss or damage (direct or indirect) suffered as a result of reliance upon any statements contained in, or any omission from this note and any such liability is expressly disclaimed.  Aurum has developed this note on its own behalf and without prejudice. This note should not be construed as an offer to sell any securities in or assets of any of the companies referred to in this document, or an invitation to offer. Strictly Confidential 5
  6. 6. SECTION 1 Fruit and Vegetable Processing Strictly Confidential 6
  7. 7. Global F&V Processing Market Global F&V Processing Market (USD 190bn – 2014) by Geography India & Central Asia, 4.70% South East Asia, 7.20% South America, 11.30% Africa & Middle East, 4.10% Oceania, 2.00% North Asia, 27.70% 14.10% Strictly Confidential 7 North America, Products Segmentation Europe, 28.90%  Canned Fruits and Vegetables (43%): Canned fruits and vegetables, Jam, Pickles, Sauces (ketchup, salsa, tomato paste) , Jellies  Frozen fruit and vegetables (36%): IQF vegetables, frozen potatoes, frozen ready to eat, frozen ready to cook, etc  Dried and Dehydrated Food (10%): Dehydrated fruits & vegetables, soup mixes and bouillon  Juices, Precut vegetables and Ready-made salad (11%): Fruit and vegetable juices, precut vegetables, fruit cups and ready-made salads Global F&V Processing Market (USD bn) 177 176 182 184 190 198 217 250 200 150 100 50 2.4%  Demand for industry products is expected to grow strongly in developing economies such as China and India.  Demand in developed economies such as the United States is expected to decline at a marginal rate, while demand in Europe is expected to remain stable over the next 5 years till 2019 - 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: IBISWorld Industry Report, Global Fruit & Vegetables Processing, August 2014 S NO Major Companies Food Revenue in CY13 (USD mn) * Estimated revenue 1 Nestle 84,343 2 Unilever 30,466 3 H J Heinz Company 11,529 4 McCain Foods 5,300* 5 Campbell Foods 4,910
  8. 8. Is Indian F&V Processing Conversion Really Low? EXPORTS OF PROCESSED F&V IN FY14 Segment Quantity (MT) Value Strictly Confidential 8  Processed F&V form just 2.5% of the total produce in India, which is far lower than in the developed countries (US – 65%) and developing countries (Brazil – 70%, China – 23%)  Higher preference for fresh products in India  Indian farmers are focussed towards table top production  Low level of F&V processing can also be attributed to high wastage as 18% of India’s fruit and vegetables are wasted due to lack of cold storage facilities Frozen F&V Fruit Pulp & Concentrates Canned F&V Dehydrated F&V Essential Oils, Perfumery etc Juices (INR 11 bn in FY13) Jams, Jellies & Marmalades (INR 7 bn in FY13) Sauces & Ketchup (INR 10 bnin FY13) Soups (INR 2 bn in FY13) Pickles, Chutney and Relish (INR 30 bn in FY13) KEY SEGMENTS Wafers & Salty Snacks (INR 150 bn in FY13) B2B B2C and HORECA RTE and RTC Food (INR 29 bn in FY13) Source: APEDA, Ministry of Food Processing, KPMG, Emerson Report (INR bn) Cucumber & Gherkin (Preserved) 218,750 9.6 Dried & Preserved Vegetables 56,158 7.4 Mango Pulp 174,860 7.7 Other Processed F&V 287,385 22.7 TOTAL 737,153 47.4 Source: Canadean, Analyst Research Indian Farmers are focussed towards table top production in F&V  Mango has various varieties, however only 3 or 4 varieties are in demand for processing namely- Alphonso, Totapuri and Kesar which forms only 10%-15% of total mango production (18,000-19,000 MT) in India  Similarly, Potato has various varieties however, only 3 or 4 varieties are in demand for processing like Chipsona, Sindhuri, Kufri Bahar etc which form 8-12% of the total production base of 40,000 MT
  9. 9. F&V Processing – Huge Market Potential S No Type of Processing Source: Databoard, Public Sources 9 Strictly Confidential Market Demand Market Growth rate Organized Market Processing Penetration Overall Opportunity L M H L M H L M H L M H L M H 1 Fresh F&V      2 Canned      3 De-hydrated      4 Frozen      5 Ingredients      6 Packaged       Fresh F&V Market in India -  97% of market unorganized. Modern retail is just 3-4% of the market. However, we believe this market will grow at a robust rate  Dehydrated F&V and Ingredients Market -  Dehydrated F&V applications are in seasonings used in Food FMCG products like soup, pasta etc. Globally the market is $20 bn. India opportunity for a B2B and Horeca distribution of de-hydrated F&V  Food Ingredients market includes food flavours, stabilizers, emulsifiers, food additives etc. We expect strong growth in this market  Packaged Foods -  Market in strong growth phase expected to grow by 15-20%+ over the next few years
  10. 10. F&V Processing: Key Issues and Opportunities Supply Chain Issues Key Issues  Fragmented supply chain with multiple intermediaries leads to high supply-chain wastages and high price build up  Traditional F&V value chain have average wastage of 15- 20% as compared to only 5-10% wastage in case of direct procurement from farmers  Smaller land holdings of farmers Opportunities  Contract Farming is an opportunity for the processors that will help in better price realization for farmers and minimizing wastage. However, success of contract farming requires greater enforceability of contracts Infrastructure Issues Key Issues  There are inadequate and inefficient cold chain facilities and lack of modern warehouse infrastructure in the country  Wastage in the fruits and vegetables supply chain estimated at INR 440 bn due to lack of suitable infrastructure  India stores 1/3rd of its food grain production v/s China storage of 2/3rd of its food grain production Opportunities  Private processing and retail players could play an important role in addressing this infrastructure deficit  Government need to play its part by making changes to viability gap funding models, land acquisition etc Price Build-up in a Typical F&V Value Chain* Source: FICCI, ASSOCHAM, Emerson 10 Strictly Confidential 100% 25% 15% 15% 25% 20% Total Retailer Commission Agent Wholesaler Middlemen Farmer Source: Aurum Estimates INFRASTRUCTURE DEMAND- SUPPLY GAP Infrastructure Existing Capacity (Mn Tons) Estimated Demand (Mn Tons) Cold Storage 30* 61  India has approximately 7,000 cold storage facilities with 30 MT of cold storage facility  About 93% of this capacity is used for storage of potato products, only ~1% used for other fruits and vegetables  Of about 85 MT of vegetables and 45 MT of fruits being produced in India, only 4 MT of fruits and vegetables are transported in refrigerated vehicles
  11. 11. F&V Processing: Key Issues and Opportunities Financial Issues Key Issues  Most food processing companies have varied EBITDA margins depending upon the product portfolio, exports Vs domestic sales and working capital requirement cycle Opportunities  Food processing companies should look to strengthen their backward integration, thereby driving higher productivity and improving quality and safety  Players should also focus on value addition through modern technology and scale Recent Policy Initiatives Source: FICCI, ASSOCHAM, Makeinindia 11 Strictly Confidential FINANCIALS OF SELECT F&V PROCESSING PLAYERS Particular Capricorn Food^ Keventer Agro Food & Inns FY13 Revenue 2,541 3,008 2,576 FY13 EBITDA % 21% 8% 8% FY13 PAT % 6% 0% 1% ROCE* 19% 7% 9% Debtor Days*@ 82 43 49 Inventory Days*@ 232 94 116 Creditor Days*@ 66 45 41 *Balance sheet items as on March 31, 2013 @ Days of FY13 Revenue ^FY12 financials Regulatory Issues Key Issues  Agricultural markets in most parts of the country are regulated under the respective state APMC acts  Licensing of traders under APMC leads to monopoly and provides little help to farmers in direct and free marketing  India’s food safety regulations are not in-sinc with global standards. Product approval process is time consuming and cumbersome. Opportunities  Standardization of regulations such as APMC Acts and adoption of global food safety standards like Codex should be accelerated Priority Sector: Food Processing is recognized as a priority sector in the new manufacturing policy of 2011 FDI Policy: 100% FDI is permitted in the automatic route for most food products except for items reserved for MSME Deduction of Tax: Tax incentives available to new F&V processing units, with tax exemption for first 5 years Central Excise Duty: Against a standard excise duty of 12%, processed F&V carries a merit rate of 2% without CENVAT or 6% with CENVAT
  12. 12. F&V Processing- M&A and PE Transactions M&A and PE transactions pertaining to B2C segments like Juices, Jams, Pickles, Salty Snacks, RTE Food etc are covered under Food FMCG sector Strictly Confidential 12 SELECT M&A AND PE TRANSACTIONS (2010- PRESENT) DATE TARGET SEGMENT TRANSACTION TYPE INVESTOR DEAL SIZE (INR MN) Sep-14 Allfresh Supply F&V Logistics PE Aspada Investment 120 Aug-14 Champion Agro Fresh (minority stake) Fresh F&V PE Exhilway Global 1,200 Jun-14 Nilon’s Enterprises (minority stake) Diversified PE Banyan Tree NA Apr-14 Lucid Colloids (minority stake) Food Additives PE IFC 1,650 Jan-14 Brattle Foods (minority stake) F&V Logistics PE GTI Capital 68 Jan-14 Saraf Foods (29%) Dehydrated F&V PE DSG Consumer Partners 100 Jul-13 Capricorn Food Products India (minority stake) Pulp & Concentrates PE Quadria Capital 500 Jul-13 Exotica Fruits Private Limited (27%) Pulp & Concentrates M&A M/s Doehler Asia Pte Ltd 150 Apr-13 Lawrencedale Agro Processing (minority stake) Fresh F&V Supply Chain PE Aspada Investments NA Source: Databoard, Public Sources
  13. 13. Our View Strictly Confidential 13 SUPPLY SIDE  Large Supply of F&V - India ranks 2nd in fruits and vegetables production in the world after China producing ~11% and ~19% of global fruits and vegetables respectively in CY2012. India ranks No.1 producer in the world in –  Production of Banana (31% global market share)  Papaya (42% market share)  Mango (42% market share)  Lemons (22% market share)  Focus on enhancing process-able produce –  Opportunity in contract farming, organized farming  Crop yield rates are remarkably low in India, and an opportunity to double production yield  For instance, India’s three key crops namely cotton, corn and rice comprise nearly one-third of the land acreage, and have yields 40-45% lower than global average yields in these crops  This would imply that if global yields are matched, the production of these crops could grow by 75% to 100%  DEMAND SIDE  Strong demand of Packaged foods growing at 15-20% pa  Opportunity to build world-class processing facilities for exports and domestic demand stemming from growth in packaged foods  STRONGER PE FLOWS TO HELP BUILD THE INFRASTRUCTURE, SUPPLY CHAIN AND PROCESSING –  Fresh F&V procurement, supply chain management  Cold chain  Processing – Food Ingredients and de-hydrated  Packaged Foods Source: National Horticulture Board
  14. 14. SECTION 2 Food FMCG Industry Strictly Confidential 14
  15. 15. Food FMCG Industry- Landscape Strictly Confidential Category Market Size (2011) (INR bn) Projected 5 Year CAGR % Projected Market Size (2016) (INR bn) SNACKS, RTE AND RTC Biscuit 126 15 253 Salty Snacks 120 20 299 Chips 30 22 81 Instant Food – Noodle 18 20 45 Instant Food – Pasta 1 25 3 Breakfast Cereals – Oats 1.5 28 5 Breakfast Cereals – Cornflakes 5 25 15 Ready to Eat 4 18 9 Ready to Cook 15 25 46 Total 321 756 CULINARY Jam 4.5 20 10 Pickles 17 15 34 Sauces 3 18 7 Total 25 51 STAPLES Packaged Salt 25 12 44 Wheat Flour 1000 8 1469 Rice 1000 25 3052 Spices 400 8 588 Edible Oil 900 7 1262 Total 3325 4565 Source: Analyst Research
  16. 16. Key Challenges in Scalability Strictly Confidential Advertising/ Promotion Cost % of Sales 13% 9% 17% 14% 4% 20% 15% 10% 5% 0% HUL Britannia India GSK Consumer Dabur India Nestle India High Advertising and Promotion Expenses (FY14)  Due to highly competitive nature of the market with multiple brands positioned with narrow product differentiation, advertising and promotional spends of the companies are very high  On average, sales and promotional expenses account for 10-11% of revenue for Top FMCG companies 1 Distribution Network Barrier  Traditional trade still accounts for ~94% of overall sales while modern trade accounts for only 6%  Huge investments are required for setting up a traditional distribution network, especially in Tier-II & Tier-III cities and rural areas 2 Complex Tax Structure  There are varying local tax structures across different states- VAT, Octroi, Excise duties and Service taxes  Because of these, products prices differ across states  Further, smuggled goods account for~15% of the total goods flow, making it difficult for FMCG companies 3 Taste Diversity  There are huge variations in taste preferences of Indian consumers across multiple geographies, cultures and religions  This is a serious challenge for regional players looking to build pan-India presence 4 Source: FICCI, ASSOCHAM
  17. 17. Equally Large Opportunity – Key Growth Drivers Favourable Demographics  Large young population with 66% of population below 35 years where snacking incidence is high  As GDP grow, these categories are expected to expand given the high correlation of income and consumption 60+ 35-59 15-34 Strictly Confidential Headroom to Grow  Other than Staples, all the other segments including snacks, RTE, RTC and culinary products have low penetration  Low per capita consumption – The per capita consumption of packaged food in India is 18 Kg/head v/s 300+ kgs in developed countries Favourable Consumer Trends  Consumer looking for indulgence, variety seeking  Convenience is a key need as consumer lifestyle changes - hence ready to eat and cook  Desire for branded products v/s unpackaged and unbranded Fresh Food vs Packaged Food Consumption (Kg per capita) Infrastructure to Aid Growth 800 600 400 200  Huge opportunity of scaling up in rural/ hinterland markets  Easier to build distribution network and reach as infrastructure develops Source: FICCI, ASSOCHAM 31% 35% 26% 9% 0-14 Indian Population Age Distribution Source: Census 2011 273 210 307 469 171 357 335 178 53 18 - US France Brazil China India Fresh Food Packaged Food Source: Euromonitor International
  18. 18. Significant PE activity in Packaged Foods Strictly Confidential 18 SELECT M&A AND PE TRANSACTIONS (2012- PRESENT) DATE TARGET SEGMENT TRANSACTION TYPE INVESTOR DEAL SIZE (INR MN) Sep-14* Rasoi Brand (100%) Edible Oil M&A Emami Biotech 800 Aug-14 Manpasand Beverages (minority stake) Juices PE SAIF Partners; Aditya Birla PE 800 May-14* Maiyas Beverage & Foods (minority stake) Diversified PE Ascent Capital 1,000 May-14* Keya Brand- Amalgam Group Seasonings M&A Vallabhdas Kanji Limited NA Mar-14* Bikaji Foods International (25%) Savory Snacks PE Lighthouse Funds 1,200 Feb-14 Global Beverages Juices PE Goldman Sachs, Mitsui Global 3,150 Jan-14 DFM Foods (25%) Savory Snacks PE WestBridge Capital 645 Dec-13 Kohinoor Foods (20%) Staples M&A Al Dahra International 1,130 Dec-13 Capital Foods (44%) Instant Food PE Artal Group SA 1,800 Dec-13* Tierra Food India Pvt Ltd (25%) Savory Snacks PE DSG Consumer Partners NA Jul-13 VKL Seasoning (66%) Seasonings PE India Value Fund 2,400 *Transaction not yet completed Source: Databoard, Public Sources
  19. 19. SECTION 3 Case Studies- 2 Business Models Strictly Confidential 19
  20. 20. Case Study: PE Investment in Manpasand Beverages Strictly Confidential 20 About the Company  Established in 1997 by a first-generation entrepreneur Mr Dhirendra Singh, Manpasand Beverages Pvt Ltd is a Gujarat-based juice manufacturing and marketing company  The company has a brand “Mango Sip” (4th largest mango drink brand in India) which has a strong presence in semi-urban and rural parts of India  The beverage maker has its manufacturing units in Vadodara, Varanasi and Dehradun PE Investment by SAIF Partners  In 2011, growth capital investor SAIF Partners India invested $10 million into the company for 26.5% stake  In 2010 the company had revenues of Rs. 40 cr. Over the next 4 years, the company expanded its distribution network significantly across other states focussing on Tier II and Tier III cities  The company clocked revenues of Rs. 290 cr in FY 2014 and is estimated to clock revenues of Rs. 500 cr in FY 2015, growth of over 12x during FY10-FY15, with distribution network now across 20 states in India and over 200,000 retailers  Besides its renowned Mango sip brand, it has also expanded into Apple Sip, Guava Sip and Litchi Sip brands  It has recently undertaken a capex to double its capacity from 60,000 cases per day currently Pre-IPO Funding  Manpasand Beverage in 2014 has raised further private equity capital of INR 800 mn from SAIF Partners and Aditya Birla PE. It is looking to come out with its IPO issue at the start of FY16. Source: Databoard, Public Sources Note: This case study is based on public information, and on Desktop research.
  21. 21. Case Study: PE Investment in Capital Foods  Established in 1996, Capital Foods is a renowned player in the Indian processed foods market offering ingredients for a variety of cuisines such as Chinese, Thai, Italian, Indian and European. It has two established brands  Ching's Secret- Instant Chinese noodles, soups, condiments, curry pastes and frozen entrees  Smith & Jones- Range of niche sauces, baked beans  In 2006, Future Group’s investment arm, Future Ventures, picked up 33% stake in Capital Foods for INR 130 mn. Over the years, it hiked its stake in the company to 44%. Strictly Confidential 21 Future Group’s Investment into Capital Foods (2006) POSITION BEFORE FUTURE GROUP INVESTMENT Particulars Unit FY 2005 Total Revenue INR mn 199 Market Share - Instant Noodles % Negligible Market Share- Instant Soups % Negligible CURRENT POSITION Particulars Unit FY 2013 Total Revenue INR mn 1,455 Market Share - Instant Noodles % 2% Market Share- Instant Soups % 11%  Revenues of Capital Foods have grown at a CAGR of 28% from FY 2005 – 13. The company further expects to double its revenue to INR 3,000 mn till FY16  Capital Foods is already the No. 3 player in the instant soup segment after Knorr (64% market share) and Maggi (23% market share); Ching’s Secret leads the market in Chinese soy and chilli sauce  Much of the growth of Capital Foods is due to its association with Modern Trade -- approx. 40% of Capital Foods turnover comes from Modern Retail with 8-9% sales coming from Future Group stores like Big Bazaar  The company has presence at all major modern trade outlets as well as 125,000 general trade stores across four states — Maharashtra, Gujarat, Punjab and Karnataka  Future Group sold entire stake in 2013 – Future Consumer Enterprises (FCEL) in December 2013 sold its entire 44% stake in Capital Foods to a European private equity fund Artal Group for INR 1,800 mn Source: Databoard, Public Sources Note: This case study is based on public information, and on Desktop research.
  22. 22. Aurum’s View on Food FMCG Sector Strictly Confidential 22 OPPORTUNITY FOR GROWTH CAPITAL  Regional Expansion Model –  For years, Food FMCG industry has been dominated by MNCS (Nestle, HUL etc) and few India corporates (Britannia, Parle, Dabur etc). However, there is enough room for emergence of medium sized regional players (revenues of INR 500-1,000 cr) catering to  Taste preference of the local population; and  Focusing on product innovation OPPORTUNITY FOR CONSOLIDATION  Also, we expect consolidation in the industry where by large Indian or global MNC may acquire local or regional brands for their established distribution network  PE players backing Professional Management to grow businesses organically and via acquisition e.g. Recent PE funding of A. Mahendran (ex-Godrej Consumer professional) founded Global Beverages & Foods Pvt Limited by Goldman Sachs, Mitsui Global
  23. 23. Strictly Confidential Contact us at Corporate Office 301 & 312 A, Suncity Business Tower Sector 54, Gurgaon – 122002 India. Fax: +91 124 4424485 Tel: +91 124 4424488 Website : Email: Contact me at - Facebook: LinkedIn: