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Sunday, March 4, 2012

Agri growth scorcher drives private equity activity

This story first appeared in DNA Money edition on Saturday, February 25, 2012.

The vast Indian agricultural market and a pick-up in related activity have triggered a surge in private equity (PE) placements and merger and acquisitions (M&A) in this sector over the past one year.

Pundits believe there is still so much of growth upside left. Raja Lahiri, partner - transaction advisory services, Grant Thornton India, said agriculture as a sector is promising and there is a reasonably good private equity interest, especially in the segment like seeds. “Funds tend to chase businesses that address the bottom of the pyramid theme and investing in agriculture and related businesses do fit in to their investment theme,” said Lahiri. Agriculture and related businesses as a segment include the entire value chain of foods, agriculture produce, seeds, fertilisers, agri-technology, and agri-infrastructure.

While three deals have already been announced in the current calendar year 2012, industry experts see a lot many in the pipeline, which will get closed in coming quarters. Among deals that have already been concluded are Malabar Trading Co’s majority stake acquisition in Protect Nature Pvt, takeover of Hyderabad based Rohini Seeds by agro chemicals company Crystal Group and private equity investment by Song Investment Advisors in SV Agro Processing. Deal value of all these transactions have not been made public though.

Even the terms of trade appear to be gradually changing in favour of agri crops which basically mean the price of agri crops is increasing at a much faster clip than manufactured goods.

Analysing the key factors driving the trend, G Chokkalingam, executive director and CIO, Centrum Wealth Management, said it’s the highly populated countries like China, India, Brazil, Russia, South Africa that have logged the fastest economic growth in the last 7-8 years. “However, the size of cultivable land has only declined in this period. This has put tremendous pressure on agri crops as well as demand for food which is only rising. Interestingly, within India, the fastest growth is coming from the densely populated states like Madhya Pradesh, Uttar Pradesh, Orissa etc. So, on one hand, there is increase in food demand and cost, and shrinkage in cultivable land on the other.” He felt that climate variations will necessitate strong inputs for the agriculture sector in order to improve productivity. “Taking these factors into consideration, I feel the agri and related businesses will attract a lot of attention from investment companies. In fact, I see it as a major theme on the bourses in the next 2-3 years,” said Chokkalingam.

Another reason for increased attention from PE firms is that the size of these businesses has reached a certain scale in the last 3-4 years. Earlier, such businesses were too small and would only attract the start-up investors or investments from venture capital funds. Unfortunately, there weren’t many such investment entities in India, thus dampening growth and investments in this sector.

“The real growth capital story will start to unveil now because the sector itself has reached a certain scale ranging between Rs 60 crore to Rs 200 crore. Thus, it now makes sense for funds to look at investments of Rs10 crore to Rs 50 crore in such businesses. My sense is it will largely be growth capital PE deals that will dominate the market in the next couple of years. This is likely to be followed by a couple of buyouts though generally speaking, India is still not ready for such transactions, especially in the agri and related segment,” said Rajesh Srivastava, chairman and managing director, Rabo Equity Advisors (an agri-focussed fund).

IDFC Private Equity has also hopped on to the agri-business investment bandwagon by acquiring a significant minority stake by investing Rs 150 crore in Jaipur-based Star Agri Warehousing and Collateral Management. Girish Nadkarni, partner, IDFC PE, said, “The placement has been done through our $650 million IDFC PE Fund III.”

The funds will be deployed by Star Agro for expanding the warehouse network and creating a pan India network of allied post harvest management services. We are expecting the investment payback time frame to be 3-4 years from now.” He did not share precise details on their expected rate of returns though, “It would be in the same region as is the case with any standard internal rate of returns (IRRs) with PE investments,” he said.

Additionally, Bombay Stock Exchange (BSE) listed Onelife Capital Advisors Ltd is currently in the process of considering a proposal to acquire a group company Oodnap Agrotech Ltd (OAL) engaged in the agricultural and related business activities.

According to data compiled by Grant Thornton India, agriculture and related business segment attracted 14 M&As and 8 PE deals amounting to $586.56 million and $19.12 million respectively in the year 2011. The number was significantly higher in 2010 wherein the sector witnessed 26 M&As and 8 PE deals worth $354.73 million and $157.41 million respectively.

Srivastava said that the number of funds targeting this space has increased significantly vis-a-vis just a handful of sector-focussed firms in the past. “This is a good development for the sector because ultimately PE investors are seeing value in such businesses which will eventually help them expand better in the coming years. From the perspective of both volume and number of deals, 2012 will be better than 2011 for PE investments in this sector.”

In fact, Rabo Equity Advisors is expecting to close 3-4 fresh deals in the next couple of quarters and will raise a new fund as the existing corpus will get exhausted post the new placements. “The new fund will be launched by the end of this year. Precise details on the same will be finalised in over a couple of months from now,” said Srivastava.

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