Venture capital and private equity activity in the food services business is fast hotting up.

The sector is expected to see a 50 per cent rise in investments this year to about $750 million, as food suppliers and retail companies look to scale up business and stay competitive by tapping the large potential of the domestic market.

“Most of the investment is now going towards supply chain management and building cold-chain storage infrastructure. Last year, about $500 million was invested in the sector,” said Mr Mahendra Swarup, President, India Venture Capital Association.

Of the total investments of $750 million in 2012, about $165 million has gone into purely front-end retail, such as FMCG, food and beverage firms. It is estimated, that each such food company, with at least 10-15 outlets, will have to invest $7-10 million on the back-end alone.

Investors say the “huge rise in interest” is because growth in the sector has been “phenomenal” for the past few years.

With quick-format restaurants posting the sharpest rise, growth has been about 30 per cent, year-on-year. So, a three- to seven-year long investment is expected to give at least two-and-a-half times increase in returns.

“With many funds focussing on IT and e-commerce firms, this has been an underserved industry till the last few years, especially the backend infrastructure,” an official from a PE fund said.

Added Mr Swarup: “The idea is to build a hub-and-spoke model for half-prepared food. There is huge demand for this where the kitchen area is small, such as food courts in malls and office complexes.”

With real-estate costs posing a challenge, such a model becomes tough for the smaller food firms — which are the target for such funds, as they help in scaling up. Among recent investments, World Bank arm IFC has reportedly put in $6.5 million into food-supply chain firm Snowman Logistics. Other similar investments include Swastik Roadlines (India Equity Partners) and JICS Logistics (IL&FS Private Equity) and Staragri Warehousing and Collateral Management Ltd (IDFC Private Equity).

Demographic edge

“We're bullish on the consumer sector, for Baring it's a core area. Given the demographics and vast population of this country, this will continue to attract a lot of capital,” Mr Keshav Misra, Partner, Baring PE Partners India said.

Baring is investing about Rs 500 crore in FMCG firm Marico along with GIC, Singapore. Other reports have indicated that New Silk Route Partners may invest in South Indian vegetarian restaurant and fast food chain — Adiga, while Sequoia has already invested $5 million in Pune-based kebab and wraps chain — Faaso's.

Last year in August, India Equity Partners invested $35 million in Delhi-based South Indian restaurant chain, Sagar Ratna. Before that, ICICI Venture had invested $33 million Devyani International, which operates franchisees of Pizza Hut, Costa Coffee and KFC.

>roudra.b@thehindu.co.in

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