In the largest ever deal in Indian dairy space, IDFC Private Equity Fund III has invested Rs 155 crore ($29 million) in Pune-based Parag Milk Foods Pvt Ltd. The deal has been struck by the private equity group at IDFC Alternatives, which has $2.2 billion under management. IDFC Alternatives has invested in the firm through compulsorily convertible debentures (CCDs).

Part of the investment has also been used to provide a partial exit to Motilal Oswal Private Equity, which has made 3x returns on its four-year-old investment. The PE firm had invested Rs 55 crore in Parag back in 2008 through its India Business Excellence Fund and sold off 40 per cent of its holding, a source familiar with the development told VCCircle.

According to another source, of the Rs 155 crore invested, Rs 75 crore is primary issue to IDFC Alternatives. Of the remaining Rs 80 crore secondary component, Rs 65 crore would go to Motilal Oswal and the rest Rs 15 crore to other investors.

Post-investment, Parag Milk’s promoter Devendra Shah will own around 60 per cent stake while the two PE investors will hold around 30 per cent. The balance is held by the Shah family and their friends.

Edelweiss Capital was the financial advisor while Rajani Associates was the legal advisor to Parag Milk Foods on this transaction.

The deal would be IDFC Alternatives’ first consumer-facing investment and the PE firm now sees more opportunities at the intersection of consumer and infrastructure sectors. This is also its second investment in the rural infrastructure space after it invested Rs 150 crore in Jaipur-based Staragri Warehousing and Collateral Management Ltd, a company providing post-harvest management solutions.

The funding will be used by Parag to build capacities in various product lines and strengthen its procurement infrastructure. Founded in 1992, the company reported a turnover of Rs 880 crore in the last fiscal and is targeting Rs 3,000 crore by 2015. Also, given its focus on value-added milk products, the company plans to increase its EBITDA margins from the current 8 per cent to 14 per cent by 2014.

Parag also targets Rs 3,000 crore top line, improving margins with value-added products.

The company processes close to 1.1 million litres of milk per day and has a capacity to reach 2 million litres a day. It currently has two plants in Manchar (near Pune, Maharashtra) and Palamner (Andhra Pradesh) with plans to set up two more. In terms of procurement, Parag reaches out to 3,200 villages and 100K farmers while on the distribution side, the company reaches 120K retailers through 1,200 distributors. Parag also runs the largest cheese plant in Asia with a capacity of 40 tonnes a day.

Parag Milk Foods has recently come up with ultra-heat treated (UHT) milk and will also launch cheese and yogurt under the Go brand. Its traditional brand Gowardhan also continues to sell traditional dairy products like fresh milk, ghee, curd, milk powder, etc. It is also planning to introduce whey products, yoghurts, flavoured milk, lassi, milk cream and paneer, among others. In addition, the company has introduced a premium brand called Pride of Cows, consumed by celebrities and industrialists like Sachin Tendulkar, Shilpa Shetty, Hritik Roshan, the Ambanis, the Piramals and the Godrej family.

“Parag Milk has created strong pan-India brands. It has strengths across procurement, processing and distribution, which are unique among private sector dairy companies,” said Girish Nadkarni, Partner at IDFC Alternatives, who has joined the board of Parag.

Opportunity in dairy sector

The total milk collected in India is 127 million MTPA worth Rs 3,50,000 crore and it is expected to increase to 7,00,000 crore by 2022, according to IDFC. Most of this market is still dominated by unorganised players, with larger co-operatives like Amul accounting for only for 3 per cent of the Indian market.

“The dairy sector is at a very interesting cusp in the economy of India. It has the potential to build the rural economy,” said Satish Mandhana, managing partner and CIO at IDFC Alternatives.

The industry has attracted interest from private equity players over the past two-three years. VCCircle has recently reported that IFC and Cargill Ventures are in talks to invest in Dodla Dairy. Carlyle’s Asia growth fund is also investing Rs 110 crore in Guntur-based Tirumala Milk Products and IFC is backing Modern Dairies. There are other players like Kwality Dairy, Creamline Dairy and Prabhat Dairy, all looking for private equity funding.

(Edited by Sanghamitra Mandal)

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