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PE investors see logic in logistics again

Private equity or PE firms are once again actively looking for investments in the logistics sector, which had experienced a drop in the pace of deal activity due to a mismatch in valuations.

PE firms were previously looking at deals of at least $50 million, while smaller logistics companies were keen on deals of only up to $20 million.

“A good number of PE deals in the sector concluded in the (current) financial year as well as a healthy number of deals in the pipeline are reflective of the strong PE interest in the sector,” said Manish Saigal, executive director and national industry head, transportation and logistics, KPMG India Pvt Ltd.

Buyers are getting more flexible with accepting smaller ticket sizes as is evident from recent investments:

• India Equity Partners (IEP) invested $10 million in Swastik Roadlines.

• Ashmore Alchemy Investment Advisors invested $10 million in Siesta Logistics Corp Ltd.

• Mayfield Fund and Sidbi Venture Capital Ltd invested $11 million in Fourcee Infrastructure Equipment Pvt Ltd, with another $10 million coming from IEP subsequently.

“This flexibility will also help entrepreneurs raise equity capital for disruptive and yet untested ideas in this sector in the Indian context,” said Gautami Seksaria, founder and partner, Supply Chain Leadership Council (SCLC), which conducts business events for the logistics and supply chain sector.

Finance minister Pranab Mukherjee unveiled plans for 15 more mega food parks in the country in the Union Budget for 2011-12. He asked states to reform legislation relating to agriculture produce marketing urgently to improve the supply chain. Given that an estimated 40% of the fruit and vegetable production in India is wasted because of inadequate storage, cold chain and transport facilities, the Budget extended infrastructure status to these, apart from the mega parks. Such status acts as an incentive to companies to enter the sector.

According to Venture Intelligence, which tracks PE and venture capital in India, PE investments in the logistics space declined from 17 deals worth $491 million in 2008 to 10 deals worth $182 million in 2009. In 2010, there have been 11 deals worth $245 million.

“Many logistics players are now expanding into cold chain, so the opportunities to invest are increasing,” said Vishal Sharma, founder and chief executive, Tuscan Ventures Pvt Ltd, a PE firm focused on logistics, citing examples of companies such as Transport Corp. of India (TCI) and Gati Ltd are expanding into cold chain.

LCL Logistix India Pvt. Ltd, one of Tuscan’s portfolio companies is in the process of raising $10-12 million from PE investors.

Investors also attribute the increased interest to the fact that logistics players have realized that they can’t be just transporters and therefore becoming less asset-heavy and offering more services.

“These companies have begun to move towards providing third-party logistics (3PL). They have started evolving, so though a significant part of their revenue is trucking, there is a mix now of other services (in their revenue),” said Shruti Gupta, vice president, Tano India Advisors Pvt Ltd, a PE firm. Deals in this space are typically $7-15 million in size, she added.

At least half a dozen logistics companies with a presence in 3PL and cold chains that Mint spoke to indicated that they are in talks with PE firms for a possible dilution in the next three to six months.

There has also been significant PE activity in those segments of transport infrastructure where the policy framework is firmer and friendlier than in other sectors, such as roads and minor ports, experts said. While most minor ports have PE investments already, there have been seven deals in the roads segment in 2010, more than the number of deals in the previous four years put together, according to SCLC data.

Within logistics, the cold chain segment is expected to see significant buoyancy in investment as the twin strands of market strength and policy benefits converge.

“Besides, the anticipation around the full opening of the sector, that is expected to see a number of global retailers set up shop in India, makes it further attractive,” said Seksaria of SCLC.

Though overseas strategic interest in the segment has been limited, there’s domestic interest in looking at fast-moving consumer goods, confectionery and retail businesses that may carve cold chain companies out of their existing systems to take advantage of increased opportunities. “This will mean an excellent opportunity for PE investors interested in this segment,” she said.

Tuscan Ventures, which spotted the opportunity in the cold chain sector earlier on, incubated Cold Star Logistics Pvt Ltd, which has been operational for the past three months.

Source: IBN Live

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