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Southern Seduction

PE investors are a rage in small town south India.

By Nitya Varadarajan | Print Edition: July 1, 2007

Sabare International is a home furnishings company that operates out of Karur, tucked away in the hinterland of Tamil Nadu. Like many of the family-run businesses in such towns, Sabare has been growing with a prudent mix of promoter contribution and debt. Then one fine day, a new opportunity came knocking, in the guise of private equity. Result?

In June 2005, Kotak Private Equity pumped Rs 30 crore into this little-known company. "The scope for leveraging with debt is limited, and many promoters are now realising the advantages of equity," says Nitin Deshmukh, Head, Kotak Private Equity.

Sunder Rajan
Sunder Rajan
 

Sabare, Karur and Kotak are not exceptions. Across a broad swathe of towns in south India-Erode, Karur, Salem, Trichy and Coimbatore-private equity (PE) is finding some very unlikely takers. Opening their balance sheets to strangers are a rash of promoters of hitherto low-profile, conservatively-run businesses that range from edible oils to apparel to poultry. For instance, the Avinashi-headquartered sp Apparels has secured funding of Rs 36 crore from New York Life. Asian Dhall of Salem has also pulled in Rs 36 crore from Saif Partners. And KPR Mills from Coimbatore has attracted three pe investors (Blue River, Argonaut Ventures and Brandot International) and Rs 105 crore.

There's good reason for the PE rush. "Valuations have gone up significantly because of the Sensex touching historic heights, and even small-town companies are being tempted to encash value,'' says K. Ramkumar, Regional Head South (Investment Banking), Religare Securities. Another reason for leaning on private equity is the realisation that to remain small forever would relegate one to oblivion. It is, however, not an easy decision to make, as the fear of losing control looms large. But, as B. Soundararajan, 46, Managing Director, Suguna Poultry, explains: "I keep telling others who come to me for advice that as long as they are ethical and transparent, there is little to fear." Soundararajan recently offloaded 5 per cent of his holding in favour of IFC Washington for Rs 49 crore.

Soundararajan, a first-generation entrepreneur, initially had his inhibitions. But his growth ambitions overruled those fears. Last year, Suguna Poultry, which five years ago had shifted its headquarters from a small town called Udumalpet (in Tamil Nadu) to the city of Coimbatore, showed a net profit of Rs 75 crore on sales of Rs 1,400 crore. Soundararajan wants to take the turnover up to Rs 3,000 crore by 2010. This calls for a capital expenditure of some Rs 600 crore. Clearly, the promoter couldn't be too choosy about where the funds came from-as long as they came. "IFC has a deep exposure to agri-businesses globally and is in a position to bring some value-addition to the table through its technical team," says Prasad Gopalan, Head of the Chennai office of IFC.

Another first-gen businessman, S. Susindran, Managing Director, Sabare International, put it very simply. "I have a burning ambition to grow." Susindran started by sourcing supplies of home furnishings to global retailers, then got into manufacturing and is currently in the midst of a major expansion programme that involves Rs 209 crore.

Before Kotak Private Equity funding, the company's turnover was Rs 153 crore. In one year (2006) it jumped to Rs 330 crore and Susindran is confident of touching Rs 1,000 crore by 2010. "In the interest of growth, you should sacrifice some ego," quips Susindran.

Along with funding comes visibility, which isn't a bad thing in a branded business. Says Stanley Jyotiraj, Chief Financial Officer, sp Apparels: "It is true we did not care for visibility or publicity in the past.

But with our acquisition of Crocodile brand outlets from Shivram Associates, we decided that visibility was what we needed.'' The PE funds were needed to transform the company into an integrated player, with owned outlets to boot. The Rs 265-crore company is investing Rs 350 crore for its manufacturing and retail outlet facilities and had recently bought out a brand called Natalia, which specialises in western women's wear.

Clearly, it's not only money that a PE player brings along. As Susindran points out: "Concepts such as corporate governance, employee stock options, even conducting board meetings, and hiring professionals are new to small-towners like us. We can't go for a crash course, but a PE partner can help us."

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