 "C K Ranganathan Promoter, CavinKare")
Dhirendra Singh, chairman & managing director of Vadodara-based Manpasand Beverages, has had a fairly hectic schedule these past few weeks. Along with his usual engagements, he has had to find time for a series of meetings with his investment bankers - Kotak Mahindra Capital and Indiainfoline. The maker of the Mango Sip brand of juice drinks, which competes with the likes of Maaza from Coca-Cola, Slice from PepsiCo and Frooti from Parle Agro, is looking at an initial public offering (IPO) of about Rs 400 crore in six to eight months from now.
Singh's business is growing, necessitating capital for expansion. "We closed 2013-14 with a turnover of Rs 300 crore. We are eying a turnover of Rs 400-500 crore this year on the back of new launches in categories such as natural mineral water and carbonated drinks," he says. "We want to expand our juice portfolio and add more flavours. This will require investment in manufacturing, distribution and marketing, which explains the IPO. I will be taking a final call on the amount to be raised along with my bankers shortly."
He also says that besides the need for growth capital, the desire to give existing investor SAIF Partners an exit route helped his decision to consider a public offer at this stage. "This is the right time to tap the capital markets. As the stock markets climb, it will increasingly become expensive to get in," he adds.
The uptick in the stock markets has created fund-raising options for a number of companies, including those in the Rs 2.5 lakh crore fast-moving consumer goods (FMCG) sector. The buzz around small and mid-sized FMCG firms going public is growing by the day.
Improved sentiment
The bid to raise public funds comes as companies anticipate better times ahead after the installation of a new government at the Centre, voted to power on the assurance that it would put the slowing economy back on track. "Growth in FMCG depends on how the economy performs. When economic growth picks up, consumption improves, which helps consumer goods companies grow," says Abheek Singhi, senior partner and director, The Boston Consulting Group (BCG).
While the next few quarters are expected to be challenging for most FMCG companies due to rising inflation and deficient rainfall, which are likely to put margins under pressure in the near term, analysts say that the tide will change by the next fiscal when economic activity is expected to pick up.
Green shoots are already beginning to show. Manufacturing activity rose to a four-month high in June. The HSBC Purchasing Managers' Index (PMI), widely tracked by companies, investors and policy makers to gauge the health of the economy, stands at 51.5. A reading above 50 denotes expansion, while one below 50 implies contraction. Analysts say that PMI has been picking up pace since April this year and is expected to gather momentum going forward. Many companies, say analysts, are preparing for this period of recovery by tapping into channels for funds, IPO being one avenue available to them.
Like Singh, billionaire bottler Ravi Jaipuria is also contemplating listing two key companies of his RJ Corp over the next one year. This includes Varun Beverages, which represents his bottling interests, and Devyani International, the fast-food and beverage operations. Jaipuria has not specified the amount he is looking to raise (some reports suggest it is Rs 500 crore), but says this is the right time to tap the capital markets, given its current buoyancy. Other regional firms such as the Rajkot-based Balaji Wafers as well as national players such as Cafe Coffee Day, headquartered in Bangalore, too are considering IPOs.
"Tapping the primary market was long overdue and the change of government has acted as a catalyst," says Navroz Mahudawala, founder of Mumbai-based investment firm Candle Partners. "India's consumption story still attracts takers, notably among institutional investors, and if the IPO is not huge and overpriced, there should be retail participation as well."
Private equity link
Ranganathan was fortunate to have tied up with ChrysCapital last year because private equity (PE) investors are not too keen on investments in FMCG companies citing steep valuations. Data bears this out. Between January and May 2014, PE investments in FMCG, as tracked by advisory firm Grant Thornton, were down 17.04 per cent to $101.62 million (Rs 610 crore) from $122.5 million (Rs 735 crore) for the same period last year. Compared with the previous year (2012), the drop was even steeper at nearly 59 per cent. According to Grant Thornton, PE investments in FMCG between January and May 2012 were worth $246.6 million (Rs 1,480 crore).
Sanjeev Krishnan, leader, private equity & transaction services, PricewaterhouseCoopers, says, "Typically, a company goes through much less intensive diligence when raising funds through an initial public offer. This could be a trigger for the rush. As a result, it is possible that many companies which have tried PE funding over the last few months and haven't succeeded for various reasons could go in for an IPO now."
Disclosing that he has been routinely receiving queries from food companies on the prospect of raising money through listing, R Laddha, director, investment banking, J R Laddha Financial Services, a Mumbai-based financial consultancy, says that companies, notably in food, need capital to invest in supply chain and back-end operations besides distribution, manufacturing and marketing. "IPOs," he says, "are one way through which they can raise money, now that investor sentiment is improving."
What has also buoyed the sentiment of promoters is the recent easing of IPO norms by the Securities and Exchange Board of India. It has allowed companies with a market capitalisation of under Rs 4,000 crore to sell 25 per cent of their stake or stocks worth Rs 400 crore, whichever is lower. In other words, explain merchant bankers, the issue size needn't be Rs 1,000 crore as was the norm earlier for companies with a market capitalisation below Rs 4,000 crore.
This, say experts, is aimed at giving the primary markets a push with an eye on getting even small- and mid-sized unlisted firms (besides the larger ones) to come out with public issues. In the last two months, the Bombay Stock Exchange's benchmark Sensex has moved up nearly 15 per cent in comparison to the same time last year when the rise was down 2 per cent, a pointer to the interest in the equity market that FMCG companies can cash in on.
