Financial Uplift

K.R.K. Reddy will not forget 2008/09 –and not just because financial turmoil paralysed the whole world then. About 10 private equity （PE） funds approached him to pick up a stake in his 15-year-old Sri Biotech， which makes crop nutrition and protection products. “We hadn’t had many proposals earlier， but at that point we were not interested， because we wanted to come out with an initial public offering，” says the Hyderabad-based Reddy. One of those 10 firms was a little unusual. India Agribusiness Fund had just been set up by the PE arm of Dutch financial services provider Rabobank Group. According to Rajesh Srivastava， Chairman and Managing Director， Rabo Equity Advisors， it was the first fund in Asia to focus solely on agribusiness and food.

“I met Srivastava and his team half a dozen times before we inked the deal （of `45 crore） in March 2009，” says Reddy， a Ph.D in biotechnology. “I was convinced partly because this fund was focused on agri and related sectors.”Reddy put Sri Biotech’s initial public offering on hold in response to gloomy market sentiment after he started discussions with Rabo. India Agribusiness Fund， with a corpus of $120 million （`650 crore）， has since invested in eight other companies and exited one.

Some eight years ago， agribusiness was not on the radar of PE and venture capital （VC） funds. According to data from research firm Venture Intelligence， there was just one PE deal， valued at $7 million， in the sector in 2004， and no VC investment. PE funds， typically， fund growing companies and VC firms back businesses that are starting out. Cut to 2012： nine PE deals worth over $330 million and four VC deals worth $7.5 million. Although VC investments fell 11.8 per cent from 2011， overall VC deals in India declined at a higher rate –by a fourth. And PE deals in agribusiness quadrupled in 2012， while total PE investments in the country slid 13 per cent.

This surge in investor interest in recent years is despite the middling average annual growth – 3.34 per cent – in agriculture and allied sectors between 2007/08 and 2011/12. In the same period， the overall GDP growth was 7.86 per cent. However， investors in the sector do not base their decisions on this statistic.

Mark Kahn， Venture Partner at Omnivore Capital， a VC firm backed by Godrej Agrovet， says aggregate statistics for agriculture can be misleading， as some sub-sectors – agricultural inputs， for instance – have grown at a healthy pace. “There is a desperate need for technology in agriculture and we invest in companies in that space，” he says.

Omnivore， whose fund size is`250 crore， invests up to`10 crore in a company in the first round. It has invested in Skymet Weather Services， a private weather forecaster， equipment maker Khedut Agro Engineering， and supply chain IT solutions provider FrontalRain Technologies. Among other things， FrontalRain allows procurers of agricultural produce under contract farming to aggregate information about their suppliers of seeds and other inputs. In contract farming， a buyer – usually a company – agrees to buy produce from a set of farmers at a predetermined price and， in some cases， may even provide the farmers the requisite inputs.

FrontalRain Managing Director Jayaram Srinivasan says supply chain solutions for agribusiness are highly specialised. “People were very sceptical， but we have been able to price our product at about `6 lakh a year while other similar products cost about `1 crore，” says Srini-vasan， who started Bangalore-based FrontalRain with his friends Ravi Mandayam and Sreeram P.， in November 2010.

Alluding to India VCs’ proclivity for e-commerce and mobile startups， Kahn says： “VC funds in India are clones of their American masters and fund what was popular in Silicon Valley two years back.” If his firm is any indication， things are slowly changing.

It is not just agri-focused entities such as Rabo and Omnivore which are responsible for increasing interest in agribusiness. Even traditional PE firms such as Temasek and Blackstone have invested in companies like Godrej Agrovet and Nuziveedu Seeds. Temasek’s$104-million investment in Agrovet was the biggest deal last year， followed by a $73-million one by Mount Kellett and the International Finance Corporation in Jain Irrigation Systems， the world’s second largest drip irrigation systems maker after Israel’s Netafim.

According to Anil Jain， Managing Director， Jain Irrigation， what is working for agribusiness， as well as for food and retail， is that it is driven by domestic factors， unlike many other sectors. “It is a sure bet for investors in terms of sustained growth and return on investment，”he says.

V.K. Arora， Chairman and Managing Director of LT Foods， which makes Daawat brand basmati rice， concurs with Jain. “Agri-related segments like foods are more stable than other businesses，” he says. LT Foods， listed in 2006， got its first PE investment in October 2009， when Rabo Equity pumped in $5 million. Two months later， Rabo invested another $5 million in a wholly owned subsidiary of the company. According to the Planning Commission’s approach paper to the 12th Five-year Plan（2012-2017）， nearly half the expenditure of an average household is on food and food products.“Pressure on food demand is likely to remain strong over the 12th Plan period， while consumption is likely to be more diversified，” it notes.

Ernst & Young partner Devinder Chawla says the growth of organised retail and relaxed foreign direct investment （FDI） norms are driving investor interest in agriculture and food companies. India now allows up to 51 per cent FDI in multi-brand retail and 100 per cent in singlebrand outlets. Organised retail has just eight per cent of India’s $518 billion retail market， but that is expected to rise to 20 per cent by 2020. India also plans to accelerate the annual agricultural GDP growth rate to four per cent in the 12th Plan period.

These factors played a part in IDFC Private Equity’s entry into agribusiness last year. It invested some`300 crore in StarAgri and Parag Milk Foods. Girish Nadkarni， Partner at IDFC Private Equity， says： “We decided to look at the entire agri value chain and the top 10 companies in each space.”

Some agribusiness companies are highly specialised， but investors do emphasise scale. “While we look at improvement in income for small and marginal farmers， companies’ability to scale up is also important，”says Siddharth Tata， Agriculture Portfolio Manager， Acumen Fund， which invests in social enterprises. It has invested $3 million in two agribusiness enterprises in India.

With PE and VC firms – both conventional and specialised – warming up to agribusiness， companies in the sector are well placed to realise their potential， and funding may not be a problem after all.