Investors continue to buy India's consumption story

Despite slowdown, smaller firms attract growth capital

Private equity (PE) investors haven't lost their appetite for consumer goods companies despite the consumption story taking a few knocks in the past few quarters. A recent study by Fitch group company India Ratings & Research shows the growth rate of domestic private consumption has been at its lowest at 3.68 per cent in 34 quarters. This, the study says, is becoming a well-entrenched trend.

Despite this, PE investors have not hesitated to pump in money where it mattered. According to data sourced from VCCedge, the number of deals so far this year stood at 58, valued at Rs 3,293 crore ($588.09 million), in comparison to 229 deals in 2012, valued at Rs 12,901 crore ( $2,303.81 million).

While last year was characterised by large deals in frontline companies such as the Rs 685-crore ($135 million) investment by Temasek Holdings for five per cent stake in Godrej Consumer Products (GCPL) and the Singapore government's GIC Special Investments and Baring India PE's joint investment of Rs 500 crore for a minority stake in Marico, this year, it is smaller companies that were the recipients of PE money.

CavinKare, maker of Nyle and Chik shampoos, recently saw an investment of Rs 250 crore by Chrys Capital, while Bangalore-based TTK Prestige saw Rs 300-crore being pumped in by PE major Cartica Capital last week.

Ritesh Chandra, head (consumer group), Avendus Capital, says, "The consumer segment continues to offer attractive stable returns to investors. Demand drivers like increasing rural consumption, shift from unbranded to branded products and an increasing consumption base are likely to lead to significant growth in the coming years. This leads to enhanced PE interest in this sector."

Says C K Ranganathan, chairman and managing director, CavinKare, "In my view, FMCG is still a safe bet. Which is why in an environment like this, where consumers have been deferring purchases on account of inflationary pressures, companies still continue to find investors."

Easy exit options
What also appears to be drawing investors to consumer goods companies is the option to exit easily. This, according to experts, is linked to the growing MNC interest in India's consumption story, which provides an easy avenue for investors to cash out. Actis PE, which sold its 63 per cent stake in Paras Pharmaceuticals for $726 million (Rs 3,630 crore) to Reckitt Benckiser in 2010, walked home with a neat profit through the deal. It had, for the record, acquired the stake in Paras for $150 million (Rs 700 crore) a few years before its final exit.

Chandra says, "Given the vast market size and potential of the Indian consumer market, there continues to be strong interest from both domestic and global strategic players to acquire market share through an inorganic growth strategy. In addition, consumer IPOs are seen as 'safe' anti-cyclical investments. This facilitates an easier exit for PE investors in consumer companies."