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Rabo readying a feast

Starting at the peak of the global financial crisis, India's first agribusiness fund has done some smart deals in the food business.

Shalini S. Dagar | Print Edition: March 21, 2010

It was early 2008, and Dr K.R.K. Reddy, the Founder and Chief Executive of Sri Biotech, was wondering how he could ramp up his practically one-man show. Growth was strong and rapid, but the company needed some funds urgently. And it seemed to him that capital market was his best bet.

But, even as he hired an investment bank and the red herring prospectus was being drafted, he happened to meet Rajesh Srivastava of Rabobank, who was just firming up plans to set up India's first agribusiness fund. "My banker of course advised me against the meeting, saying that they will try and distract us from our IPO," recounts Reddy. But Reddy decided to go ahead because Rabo is well known in agriculture.

"Then, of course, these people successfully trapped us," says Reddy—gleefully. Following the first meeting, there was a flurry of activity. "We were very serious about the IPO, and had already spent Rs 50-60 lakh on the preparations, recalls Reddy. "But after those meetings we decided working with Rabo would be a better option and then we waited for the launch of the fund. Of course, they did not know that we were waiting," he says.

Then, later that year, the financial markets collapsed. Anxiety coursed through Reddy: Will the fund actually be launched? For Srivastava, that was a no-brainer: the strength of the investors precluded such fears. (See Rabo's India Agri Business Fund.)

A couple of other private equity funds were also chasing Reddy, but he signed an exclusive term sheet with Rabo in August 2008. "Somehow there was a comfort. With other funds it was just commercial terms," says Reddy.

That is a refrain one hears of Rabo Equity from other companies in which it has invested. According to Srivastava, now Chairman and Managing Director, Rabo Equity Advisors, this comfort stems from Rabobank's deep knowledge of agriculture and the food space, and a worldwide network of expertise.

In March 2009, the Sri Biotech engagement turned into a full-fledged—and the first—investment for Rabo's fund. For Rs 48-crore-odd, Rabo Equity bought 32.5 per cent in Sri Biotech. Since then, Dr Reddy's one-man show has been transformed: it now has a second line of leadership, some 30-odd key employees including a CFO, a marketing head and a research head. Former Rallis MD Vijay Rai and former ConAgra President Utpal Sengupta have joined as independent directors on the board. Sri Biotech aims to invest Rs 100 crore over the next couple of years in infrastructure, and research and development, and diversify into crop protection and remediation products.

Srivastava is clear that, in operations, it is Reddy's word that prevails. "Operations are his forte. He is a scientist of repute who has built a very strong foundation for the company," says Srivastava before adding "we never ever have had our way easily with him."

RABO'S INVESTMENTS IN THE PAST YEAR
COMPANYAMOUN (Rs Cr) STAKE (%) MONTHAREA OF BUSINESS
Sri Biotech4832.5MarchOrganic agri-inputs
GeePee Agri3026OctoberEdible oils, mainly soya
LT Foods2514.7NovemberRice processor, exporter
Daawat Foods2629.5DecemberBranded basmati rice

It is not a gripe though. Srivastava actually looks out for the "tough cookies" in the promoters that he backs. The father-son duo of M.K. Mansingka and Maneesh Mansingka of GeePee Agri are also from the same mould. Rabo Equity acquired a 26 per cent stake in the soya processing company for roughly Rs 30 crore. Again, the Mansingkas, despite the presence of other funding options, chose Rabo, because— as Maneesh puts it—"we felt we could co-exist."

The two Mansingkas had known Rabo and Rajesh for quite a few years. In fact, during the previous downturn in 2000-01, they had negotiated a tricky debt repayment schedule in a very pragmatic way. "That ease is difficult to monetise. Also I would have had to expend a lot of lung power in explaining our sector to some of the other investors," adds Maneesh Mansingka, who is the third generation of the family in edible oils.

For Rabo, too, the Mansingkas were a relatively easy call to make. "They had sustained successful relationships with multinationals such as Bunge and Nobel. Edible oils, though a tough business, is a defensive play for us in our portfolio," says Srivastava. Moreover, there is scope for brand building in the GeePee business, which is where Rabo hopes to lend its skills.

Targeting a topline of Rs 2,000-2,500 crore over the next couple of years, GeePee is planning a capex of Rs 75 crore in the next 12 months. It is also hoping to move into cottonseed and sunflower oil. Rabo's remaining two investments came from a single promoter family— the four Arora brothers, who own the listed company LT Foods and its subsidiary, Daawat Foods. Rabo Equity invested in both the companies. The group, mainly a basmati ricefocussed company, exports to over 40 countries. With the Rabo association it is now looking at diversification into rice-based snacks and increased focus on brands.

If the portfolio of basmati rice, soya oil and agri-inputs sounds too diverse, then that is the intent, according to Srivastava. And the investments will then form a symbiotic tie with each other. "The intention is to make 10-12 investments in different sectors, so that there is a beautiful ring of companies who feed into each other," he says of the investment strategy. Naturally then, more action is up ahead. Each of Rabo's bets offers "growth and expansion with add ons," according to Srivastava. As Rabo's investment record shows, there seems to be no dearth of opportunities. Srivastava agrees that the deal pipeline looks rich.

RABO'S INDIA AGRI BUSINESS FUND

  • Total size of the fund: $100 million plus greenshoe option of $20 million which Capvent has already exercised. Total: $120 million.
  • Main Investors: Rabobank (lead investor with 30%), IFC, FMO, DEG, CDC.
  • Funds used till February 2010: $35 million.
  • Desired investment arena: Agri-biotech, rice, edible oils, vegetables, food packaging, beverages, dairy, poultry, agri-infrastructure.
  • Fund's USP: Sector-specific domain knowledge with enormous network of relationships.
And there is plenty to invest. A $20-million (Rs 920-crore) greenshoe option for the fund was exercised recently by the Swiss fund Capvent. If the pace of investment continues, Srivastava will raise a second fund by 2010-end. There is already talk of an investment in Gautam Thapar's gherkin exporting company, Global Green, plus deals in packaging industry or tea industry. Some of these may fructify soon.

While there are many private equity funds who are investing in agri-related businesses, most do one deal or so, and none is focussed on this sector the way Rabo is. Plus, the investors in Rabo's fund are all institution builders themselves—the International Finance Corporation, Washington, development banks DEG of Germany and FMO of The Netherlands.

What has worked in Srivastava's favour is that the capital markets and the traditional funding channels dried up during the time he was out in the market scouting for deals. However, as most of his investee companies say, they opt for Rabo not because of the money. "It is the know-how." The Rabo pedigree is an unbeatable advantage for the size of the companies that he is looking at. And it opens many doors for them globally.

That apart, the Rabo money comes with many strings attached. Corporate governance structures are a must as with any PE fund. Added to that is strict compliance on environment, health and safety (EHS) grounds. "Typically no company satisfies 100 per cent the EHS standards that we need when we enter. But we take commitments from them that they would change, which we monitor," Srivastava says.

That can be quite a headache. But headaches can be cured by returns of 20 per cent—the usual for investments such as the one made by Rabo—even though returns may come four-five years after the first investment. Srivastava, 52, himself comes with many ‘roots' in agribusiness not just from his 12 years at Rabo but also from an equal time in Bank of Baroda. Those stints along with a brief tenure at Lazard, make it easy for him to draw links from the farm to the markets.

Maybe, as Srivastava says, the Rabo's India Agri Business Fund will show promoters and the market at large how "to make sustainable and ‘good' money in Indian agri-business." Good in his lingo means money made through good practices. Mid-market food and agri companies can have superior management, value chain integration, practices, business vision and growth prospects Ashok Gulati, Director in Asia, IFPRI, says of Rabo's role: "I think it is a very healthy development… Rabo's equity fund will help expansion and innovation in these companies." He is all for such fund infusions in India's agri-value chains, which are very fragmented and weak.

Gulati notes that since Rabo is investing in equity, it will involve itself deeply and bring its global exposure and contacts to bear. "By sitting on the Boards of these companies, they will help these companies to lay hands on latest technologies and top-end markets," he says.

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