Selective shopping

It’s not only individual customers who look to fast-moving consumer goods (FMCG) companies for can’t-refuse deals. Even private equity players are turning to the sector as a good investment destination. Whether it’s Temasek (through its investment arm Baytree) investing $140 million in Godrej Consumer Products (GCPL), Indivest and Baring investing $97.8 million in Marico, or last fortnight, International Finance Corporation putting in $17 million in Parag Milk Foods, most domestic consumer goods majors have seen significant PE activity since 2012. (See: Betting on a sure thing)

Indeed, according to data from Grant Thornton, the value of all PE investments in the sector is up from $221 million in 2010 to $338 million two years later. The reason this is a sector that’s traditionally considered recession-proof and will, therefore, be in the money in the future as well. Agrees Ajeet Singh Karan, partner, Baring Private Equity Partners (India), “There is an element of predictability here, unlike a sector such as infrastructure,” he says. 

Getting the valuation right, though, is a challenge. As Karan says, “This is not an inexpensive sector.” Grant Thornton estimates the Indian FMCG market was worth ₹3.10 lakh crore in 2012 and will register a CAGR of 10% to reach ₹ 4.10 lakh crore by 2015. It is this growth that is attracting PE funds, not to mention the rising stock prices of FMCG companies. But what about the companies? What makes them willing to take on a private investor when they have become so much more cautious when it comes to mergers and acquisitions? (See: Willing to sell but unwilling to buy)

Acquiring a company at current valuations may not make sense, but it is an ideal time to cash in on high valuations and privately place equity. That provides much needed capital for expansion and given the prospects of the sector, expansion is certainly warranted. PE investors largely take a small stake and leave the running of the company to the promoter. This arrangement  suits the promoter, who gets the money and retains control as well. Rasna chairman Piruz Khambatta points out that PE funds could also come in with the objective of selling out to a strategic partner once the company gains scale. A case in point is Paras Pharma, which was sold by Actis to Reckitt Benckiser and later to Marico.

Adi Godrej, chairman, Godrej group, maintains that PE funds invest in FMCG companies since they see a huge value creation over the next five years. That’s certainly proved the case with GCPL — the deal with Temasek was struck at ₹410 a share in end-December 2012; the GCPL stock is currently trading at ₹ 865. Incidentally, the Temasek investment was meant to not only reduce the debt on GCPL’s books but also fund its purchase of 60% stake in Chilean hair colour and cosmetics company, Cosmetica Nacional. “We were looking at equity infusion and Temasek offered us good terms. Hence, we concluded the transaction,” Godrej explains the deal.

Similarly, Baring’s deal with Marico helped the Mumbai-based consumer goods company complete its buyout of Paras Pharma’s personal care business for $100 million. Others have used capital infusion to expand business organically. Last September, IDFC Private Equity put in $29 million for an estimated 20% stake in Parag Milk Foods, a large player in the private dairy industry. Now, International Finance Corporation will invest $17 million, which will go into expanding the company’s milk processing facilities in Maharashtra and Andhra Pradesh. According to Devendra Shah, chairman, Parag Milk Foods, the plan is to strengthen the company’s operations by focusing on plant automation, apart from expanding the procurement and distribution network.

The romance of private equity funds with FMCG companies is likely to continue for a while — most other sectors are over-regulated and the capital markets, too, look lukewarm. “I expect there will be PE players who will be eager to invest in the sector if any player wants to raise further equity,” says Godrej. And exits? That depends on when the sector regains its appetite for M&A.