Valuation demands puncture holes in PE-FMCG story

Deals have been increasingly getting stuck at the discussion table as promoters and investors haggle over acquisition cost

Consumer-driven companies may be the favourite pick of private equity (PE) investors, but the fact remains that the two increasingly have been at loggerheads with each other over valuations. The result: Deals have been getting stuck mid-way as talks simply fail to reach fruition.

Consider this: For the last four months, Vadodara-based Manpasand Beverages, maker of mango-based juice drink ‘Mango Sip’ has been struggling to raise money from PE players. Dhirendra Singh, chairman & managing director, Manpasand, admits he has been demanding a valuation of Rs 1,000-1,500 crore for the entire equity of the company, implying that a 10-12 per cent stake would be available for nothing less than Rs 100-180 crore. But PE players understandably are keen to strike a deal between Rs 80-90 crore, implying that total valuation should not be more than Rs 800 crore.

Singh has now slowly but steadily come around to the idea of a lower valuation after months of negotiations with PE players, which saw heavyweights such as IDFC PE walk out of a potential deal for a minority stake in the company. Rajkot-based Balaji Wafers, meanwhile, is yet to close talks with PE funds for a 15-20 per cent stake in the company because the promoters, the Virani family are demanding Rs 500-700 crore for the stake - something investors find too steep. Keyur Virani, director, Balaji Wafers says that his valuation demand of Rs 3,500 crore for the entire equity of the company is only 3.5 times its FY13 sales of Rs 1,000 crore. Singh of Manpasand, on the other hand, argues his valuation demands were based on the  growth potential of his business. “The turnover of our company last year was Rs 240 crore. This year, we are eying a turnover of Rs 400 crore. I don’t think I was off-the-mark when demanding a Rs 1,000-crore-plus valuation,”  he says.

At six times FY13 sales, Singh's valuation demands are indeed on the higher side, experts say. But it is not uncommon for FMCG companies to be demanding steep valuations from investors. In some instances, investors have even bowed to their wishes.

 

Two months ago, Ahmedabad-based Vini Cosmetics, maker of brands such as Fogg and 18+, sold nine per cent of its equity to Sequoia Capital for about Rs 100 crore, valuing the firm at over Rs 1,100 crore or nearly six times FY13 sales of Rs 170 crore. In July, Mumbai-based Westlife Development, whose direct subsidiary Hardcastle is the franchisee for McDonald's in the west and south of India, sold nearly 3.5 per cent stake in the company for Rs 180 crore, valuing the firm at nearly eight times FY13 sales of Rs 684.3 crore.

 

While the trackrecord of Darshan Patel, chairman, Vini Cosmetics, who was one of the promoters of Paras Pharma, which was bought by Reckitt Benckiser for Rs 3,260 crore or eight time sales in December 2010, and the Jatias, is known, experts say that PE funds in recent months have become cautious about investments in fast moving consumer goods (FMCG).

 

Sujay Kotak, assistant vice-president at Mumbai-based boutique investment bank Singhi Advisors, points to decreasing volume growth rates for this caution. "And paying preposterous valuations to acquire a stake in regional brands, which have their own challenges in getting a pan-India acceptance, simply doesn't make sense," he says.

 

Vikram Hosangady, national leader, private equity, KPMG India, adds, "The reason why deals are not closing is more to do with results being far lower than estimates and promoters not willing in many situations to adjust valuations. We have seen this across the spectrum in food, apparels, beverages etc."

 

The situation is not expected to ease too soon especially with second quarter results of FMCG companies likely to be weak. Till then, the battle between the two will continue to rage.