Thursday, April 19, 2012

PRIVATE EQUITY BETWEEN AGRI & FOOD PROCESSING

The Indian political system went through tough times when the UPA government declared that 100% FDI investment in Indian Agriculture. Well I am not going to write a story about the doldrums about this issue, my objective is to draw Private Equity and Investment Bankers towards the sun rising sector of Food Processing Industry. Before I start off with the detail I would like to present the position of Indian agri production position globally.

• India's Position in World's Production

• Largest producer of milk in the world (105 million tonnes per annum)

• Largest livestock population(485 million tonnes per annum)

• Second largest producer of fruits & vegetables (150 million tonnes per annum)

• Third largest producer of food grain (230 million tonnes per annum)

• Third largest producer of fish (7 million tonnes per annum)

• 52% cultivable land compared to 11% world average

• All 15 major climates in the world exist in India

• 46 out of 60 soil types exist in India

• 20 agri-climatic regions

BRIDGEING THE GAP OF AGRI AND FOOD.
India stands to be well placed in terms of global agri production and this makes Indian food processing industry to become one of the leaders in global food processing by 2030.In my previous article I wrote about drawing the focus of the PE and IB for agricultural sector. In this regard development of the agricultural sector will boost up the growth opportunities of Indian food processing industry. The food processing industry provides vital linkages and synergies between the industry and agriculture production. The Food Processing Industry sector in India is one of the largest in terms of production, consumption, export and growth prospects.

With a turnover of $110 billion, it accounts for 35% of the Indian food market, and has been growing at a better rate of 14% in the last few years. Government has provided sufficient back up to enable this sector to propel up. For promoting exports from India two nodal agencies, Agricultural & Processed food products Export Development Authority (APEDA) and Marine Products Export Development Authority (MPEDA) were formed. MPEDA is responsible for overseeing all fish and fishery product exports; APEDA, on the other hand, holds responsibility for the exports of other processed food products.

The food processing industry needs PPP model of investments to achieve the industry size of $300 billion. It would be very dejecting to read that India has always remain late in identification of the jewels in new industrial growth. This is being proved by the presence of several global foods giants and leading Indian industrial enterprises in the country's food processing sector, such as: Nestle India Ltd, Cadbury's India Ltd, Kelloggs India, Hindustan Lever Ltd, ITC-Agro, Godrej Foods and MTR Foods Ltd.

Now when the majority market of the food processing industry is being run by global majors Indian government has come up with new packages and support system for the industry. The schemes included development of integrated cold chains, Mega Food Parks (MFP), Modern Terminal Markets (MTM) and bulk storage facilities as well as modernization of markets, quality control laboratories and abattoirs.

But agriculture sector is reeling still despite of such major’s global food processing companies. The reason behind is lack of governance issues of the Indian government. Well budgets are being laid down and million of funds are released for the agri and food processing sector but lack of governance issues keeps the gap widening only over the years. If Indian governance issues were stringent then the growth of both the industry Agriculture and Food processing should have been robust.PE and IB could find substantial growth opportunities through developing linkages between agricultural productivity and Food processing industry.

Now questions will come up that the food processing industry is having bottle necks of policy issues which make the sectors less attractive and this is quite true. Now unless investor’s community moves to the government to remove and simplify these issues then only sector will become free for unlimited growth. Among the bottle necks numerous laws, under the jurisdiction of different ministries and departments, govern food safety and packaging makes investors shaky about opening up new ventures. Infrastructure bottle necks are another hindrance but I find that these issues are opportunities for investment leading to Indian economic growth.

More than 30% of the produce from farm gate is lost due to inadequate cold chain infrastructure (covering only 1% of total F&Vs production) and inadequate logistics. About 80 per cent of the 217 lakh tonnes cold storage capacity is engaged by potatoes while other F&Vs account for only 0.2%. I don’t find one answer why we always blame the issues of lack of infrastructure despite of having resources to develop and improve the same.

Key Growth Drivers of Food Processing Sector in India.
Indian consumption pattern and living standards have taken a radical change resulting immense opportunity for growth. In my research I found few of the probable reasons which makes this sector a Sunrise Sector.

• Increasing spending on health and nutritional foods.

• Increasing number of nuclear families and working women

• Changing lifestyle

• Functional foods, fresh or processed foods

• Organised retail and private label penetration

• Changing demographics and rising disposable incomes

Research and development investments are also required to improve the standards of food preservation and improve the quality equivalently to global standards. Unprocessed foods are susceptible to spoilage by biochemical processes, microbial attack and infestation. The right post harvest practices such as good processing techniques, and proper packaging, transportation and storage (of even processed foods) can play a significant role in reducing spoilage and extending shelf life. The challenges in processing lie in retaining the nutritional value, flavour, aroma, and texture of foods.PE and IB has immense opportunities to do investments for developing the Indian agri product sector.

ONLY PE AND IB CAN CHANGE.
We are wasting our resources by doing investments in such sectors where investments return becomes risky. We are taking this risk in order to make quick returns from stock market gains. But we need a paradigm shiift in our investment theme. We need to invest for long since good thing takes time to grow. We have exhausted enough of short time return doubling investments. If India needs to achieve a sustainable growth then we investors needs to make a change in our style. Private Equity investments and IB should change their decade old process of doing business. India needs growth not for 2 years of 3 years. Proper policies and investments are only in the hand of capitalist and hence we should us it. We should be the first to identify the new investment avenues and work accordingly.

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