WATCHING TOM AND JERRY CARTOONS with one’s nephews may seem like goofing off, but that’s how 45-year-old Devendra Shah, chairman of Parag Milk Foods, got his latest marketing idea. “Jerry scampers to the fridge to steal cheese, or Tom uses a piece of cheese to set a trap for Jerry. Cheese is all over the show, and that’s where kids begin their association with it,” says Shah. The next day, he called his marketing head and said he wanted to sell cheese to kids by co-branding it with the cartoon cat and mouse who have entertained generations.
Go Tom & Jerry Cheesos, a spread that comes in a squeezable tube, is one of the dairy products from Parag’s farms on the market. Shah has already spent Rs 12 crore on the brand last fiscal. The bulk of that came from the Rs 55 crore that Motilal Oswal Private Equity invested in Parag in mid-2008. (Parag’s profit in 2010-11 was around Rs 36 crore.) Another Rs 25 crore for machinery has been lined up for this fiscal. Raising money is not a concern for Shah. He doesn’t disclose names, but says he spends most of his day “meeting people who want to invest in the company and partner us”. It’s no boast: The dairy sector has private equity firms grinning like Jerry.
Last July, The Carlyle Group, one of the largest private equity firms in the U.S., invested Rs 110 crore for a 25% stake in Tirumala Milk Products. Tirumala is a Rs 750 crore dairy company based in Narasaraopet, a town in Guntur district, Andhra Pradesh, 100 kilometres from the nearest airport. In February this year, Aavishkaar Ventures, a Mumbai-based venture capital company, invested $5 million (Rs 22.5 crore) as seed capital in Milk Mantra, a dairy startup in Bhubaneswar. Hyderabad-based Creamline (in which Godrej Agrovet has a 26% stake) is in talks with potential investors to raise Rs 100 crore in equity. “We’re trying to get an overseas investor as a strategic partner for one of our dairy clients,” says Mahesh Singhi, managing director of Singhi Advisors, a Mumbai-based advisory firm that is patching potential investors with two dairy companies based in North India. Girish Aivalli, executive vice president and country head for food and agribusiness research at Yes Bank, says the bank is advising a handful of high net worth individuals on the dairy business. So why is all this money chasing milk?
The reasons are many and compelling. Vineet Rai, managing director of Aavishkaar Ventures, says: “In India, milk practically sells itself. It’s an established market. You don’t have risks related to technology, labour, distribution, and consumption.” Then there’s the larger context of economic growth: Demand is expected to reach 150 trillion tonnes by 2015, from 108 trillion in 2010—a compounded annual growth rate of 15%. “With per capita incomes rising, the share of dairy in the food basket will rise,” says Aivalli.
Another plus: 80% of the country’s dairy industry is fragmented, and there are more than 500 small and mid-sized private dairy firms for investors to consider. “As India becomes more developed, demand for branded consumer products will grow, including branded dairy products. Companies that have built a strong branded franchise will benefit tremendously from this shift,” says M. Shankar Narayanan, managing director and head of Carlyle Asia Growth Partners in India. That’s why Tirumala spent the first tranche of Carlyle’s investment on an ultra-high temperature milk processing unit, which extends shelf life to three months, at its Hyderabad factory. “This will let us enter northern markets. Having Carlyle on board speeds up investments in technology and marketing, and helps us focus on the value-added segment,” says Danda Brahmanandam, joint managing director, Tirumala. The real money, he says, is in value-added products.
Shah of Parag Milk Foods concurs. “Milk is no longer a commodity business. The dairy industry is all about brand building,” he says. His next bet is on premium milk , priced at Rs 70 a litre, from the company’s 3,800 Swiss cows in Manchar, near Pune. It will be distributed directly by the company to ensure quality. “High-income consumers don’t mind paying more for quality milk delivered to their doorstep,” says Shah. Rakesh Soni, director at Motilal Oswal Private Equity, who also sits on Parag’s board, is happy with the dairy firm’s plans. “We’re in it for the long haul, and in no hurry to exit,” he says.
Shah has set up a second plant in Palamaner, Andhra Pradesh. The real challenge is not branded or value-added products, but fresh milk (often sold in plastic pouches), which has the lion’s share of sales. Growth in value-added segments is faster, and margins higher, but the real battle is village-level procurement. “For a dairy company to succeed, the procurement strategy is key,” says Singhi. It’s also what daunts potential investors. “We considered the dairy sector, but decided against it,” says Jacob Kurian, partner at New Silk Route, a PE firm. “Building a large distribution network for perishables is a challenge.”
One reason why Carlyle invested in Tirumala, says Narayanan, was that the promoters had strong ties with farmers. “Their procurement strategy is efficient, and we believe their business model cannot be easily replicated,” he says.
E.N. Rao, executive director at Tirumala, says his company’s margins are higher than the industry’s 4% to 5% thanks to its short supply chain. “We have our own agents, who collect directly from farmers and supply to our chilling and processing centres. It lets us control quality.” In the next two to three years, it plans to enter Karnataka, Kerala, Rajasthan, and Uttar Pradesh.
Parag’s procurement strategy in Maharashtra has been successful, but Shah admits that old ties between farmers and traders can be a hurdle. Before setting up the Palamaner plant, he spent days with farmers, learning about local issues and building up his network one farmer at a time. He still makes it a point to wear a white kurta-pyjama when he meets them, so that farmers see him as “one of them”.
Procurement issues are what prompted Srikumar Misra, a former Tetley employee, to move from Kolkata to Bhubaneswar to set up Milk Mantra. Aavishkaar’s Rai says: “Orissa is a complicated market for setting up a milk procurement process, as there’s no culture of dairy farming. But the advantage is that there’s no competition.”
The quickest way to enter new markets is, of course, acquisition. Tirumala is considering it, and weighing possibilities in North India. French dairy major Danone, too, plans to set up operations in the country. Many analysts say the dairy industry will soon see consolidation. Rai says PE interest is growing because the sector is verticalised, with large, medium, and small players, “so money that comes in at any stage can create exits for itself, through listing, merging, acquisitions, or sale”
