PE, VC firms continue to bet on India’s consumer sector story

Private equity (PE) and venture capital (VC) firms continue to bet on India’s consumer goods and services sector despite economic growth having dipped to its lowest in a decade.

PE and VC investments rose over 46% in the first half of fiscal 2014 from a year ago, with consumer companies in retail, e-commerce, consumer packaged goods and quick service restaurants raising $609.39 million in 51 deals in the first six months of the fiscal year.

This compares with the $416.79 million raised in 57 deals a year ago, according to investment tracker VCCEdge.

Some of the biggest deals in the last three years in the online retail and retail space took place in the September quarter.

During the quarter, flipkart.com raised $200 million (around Rs.1,200 crore) from existing investors private equity firms Tiger Global Management LLC, Accel Partners and Iconiq Capital, and MIH (a part of South African media company Naspers Group), making it India’s largest investment in online retail.

Retailer Kishore Biyani’s Future Ventures India Ltd (now part of the Future Lifestyle Fashions Ltd) made $55.03 million by selling its 25.8% stake in apparel firm Biba Apparels Pvt. Ltd, reported VCCircle.com on 1 October.

For the financial year ended 31 March, Biba Apparels had a revenue of a little over Rs.300 crore and an operating profit margin of 17-18%, said Siddharth Bindra, managing director of Biba, in an interview in May.

“This is a good time to invest in India as the rupee depreciation gives overseas investors an edge and they also have dedicated funds for the consumer sector as the consumption story remains strong,” said Sanjay Bindra, who launched Seven East, a premium women’s ethnic wear brand in 2011 after leaving the family-owned Biba Apparels.

In the first half of the fiscal year, the rupee depreciated 13.31% against the US dollar. However, it has gained 1.33% till date.

In most other sectors such as textiles and infrastructure, investors have lost money, said Santosh Verma, director, investment banking, IDFC Capital Ltd. He said investment opportunities have become scarce, because of which sectors such as consumer, banking, financial and insurance services continue to see an uptick.

To be sure, the consumer sector is seeing a slowdown as buyers cut back on discretionary spending. Sales across reality, auto, consumer durables, apparel, footwear, jewellery, packaged food and beverages and premium brands have been falling, according to various reports.

“It is a recessionary year. At the ground level, there is de-growth (decline in growth) in the market and sales have slowed across sectors,” said Bindra of Seven East who is going slow on his expansion plans and feels consumer sentiments may remain subdued until after the end of the general election sometime in May 2014.

In addition, even though investments in the consumer sector have increased, investors have turned cautious and are taking longer to close deals. For instance, the Biba deal was closed only after over two years of negotiations with various investors. Mint reported on 1 December 2010 that Biyani would exit from non-core businesses.

“We have a robust pipeline,” said Verma, adding, however, that compared with five years ago, deal-making today is much more challenging. “Firstly, valuations are high on both sides. Besides that, investors now also do forensic audits besides audit evaluations. This makes the process much longer,” said Verma.

Firms, nevertheless, are optimistic about getting new investors on board. “We expect to announce a deal in the next two-three weeks,” said Mukesh Sawlani, chief executive officer of AND Designs—a venture from which Biyani is looking to exit.

Source: Mint

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