Nestle India Limited had acquired 26% stake in Indocon Agro and Allied Activities Private Limited, engaged in milk collection business in Western India for an undisclosed amount. Indocon Agro and Allied Activities Private Limited is an unlisted company incorporated in 2010.

Nestle is one of the oldest multi-national companies in India and has been present here for close to 100 years. Nestle India is a subsidiary of Nestle SA of Switzerland. The company has its headquarters at Gurgaon near Delhi and has several factories spread all over India. It is incorporated in 1959. Nestle India, one the biggest players in FMCG segment, Nestle India manufactures products under four categories.

  •         Milk Products and Nutrition
  •         Beverages
  •         Prepared Dishes and Cooking Aids
  •         Chocolates and Confectionery

Nestle India’s stake in Indocon Agro will help the company in its backward integration strategy of targeting raw material product distributor

Nestle India has eight manufacturing facilities in India – at Moga (Punjab), Samalkha (Haryana), Nanjangud (Karnataka), Ponda and Bicholim (Goa), Choladi (Tamil Nadu), Pantnagar (Uttarakhand) and at Tahliwal (Himachal Pradesh).

It has created brands like Nestle Milkmaid, Nestle Everyday, Maggi Noodles, Maggi Soups, Polo, Kit Kat, Nescafe &  more. As per the market-wise position Nestle India stands first in instant noodles & ketchup, second in healthy soups, No.1 in instant coffee, & No.2 in the overall chocolate category. The company has 7,000 employees in India and its products are sold in 40 lakh outlets across the country. The company has no Direct Subsidiary. It is perhaps one of the best industry in food processing sector.

Strategy

Nestle India Limited is trying to adopt backward integration strategy i.e. targeting the raw material product distributor/ supplier so that they can keep control over their prices and a steady supply of the major raw material component required for their products. Milk is the major and most important raw material components of this industry so all the margin and prices of products depend on it.

Opportunities for Nestle India Currently it has its own manufacturing facilities at Moga in Punjab and Samalkha in Haryana, which largely service the northern market and contact of the supplier agreement with some suppliers in West and south based Schreiber Dynamix Dairies Ltd and the Hyderabad-based Heritage Foods for its curd and UHT (ultra high temperature) milk. Besides, it sources milk powder from domestic players such as Sterling Agro and VRS Foods. As the Indocon Agro is not a popular company but may have some connection with these above-mentioned company, so that by acquiring the stake in this Nestle will be able to cut down the share of this middle player’s commission for improving their margin in products. This investment will contribute to creating shared value with farmers engaged in milk.

Indocon Agro and Allied Activities Private Limited is an unlisted company but due to this deal, it came into the actual market of their best selling star product and now it will get global identity where they can give the total collection of product and will have the best price for the milk.

Food Industry in India

The Indian food processing market is one of the largest in terms of production, consumption, and export and import prospects rank fifth in terms of production, consumption, export, and growth. Since, India is one of the major food producers worldwide, with new reforms ruling the roost, it encourages commercialization. In fact, in the last decade, India moved from an era of scarcity to surplus, in the area of food production. The Food Processing Industry in India is on an assured track of growth and profitability over the next five years. An average Indian spends about 50% of household expenditure on food items. Very good investment opportunities exist in many areas of food processing industries, the important ones being fruit & vegetable processing, meat, fish & poultry processing, packaged, convenience food and drinks, milk products etc.

The food processing industry contributes to 6.3 percent of the Gross Domestic product of India, 19 percent of the Indian industry, and 13 percent of the export production. The export production in food processing sector has increased from USD 6.98 billion in 2002-03 to USD 20.51 billion currently. A number of players in this industry are small players and form the unorganized sector for this industry. About 42% of the output comes from the unorganized sector, 25% comes from the organized sector and the rest of it comes from the small-scale players. The most common type of food processing units that form the organized sector are flour mills, fish processing units, fruits and vegetables processing units, meat processing units, non-alcoholic and aerated drinks units, sugar mills and modernized rice mills.

Food processing industry in India has been facing constraints like non-availability of adequate infrastructural facilities, like cold chain, packing and grading centers, lack of adequate quality control and testing infrastructure, inefficient supply chain, shortage of processable varieties of farm produce, seasonality of raw material, high inventory carrying cost, high taxation, high packaging cost, affordability and cultural preference for fresh food.

Ministry of Food Processing Industries allowed 100% FDI except in alcoholic beverages and retail, several duty and tax reliefs, financial assistance for infrastructure building, setting up of food processing units etc. In the case of export-oriented units, foreign investment is permitted even in the case of items reserved for small scale sector. In addition, the export oriented units are given a number of incentives and concessions under the Export-Import Policy, such as duty-free import of capital goods, raw materials and intermediates, export income being exempt from Corporate Tax etc.

Valuation

As acquisition price is not disclosed ,it is not possible to discuss valuation in any case. Further,  Indocon seems to be only milk aggregator and just incorporated two years back. However, the dairy industry has attracted interest from private equity players over the past three years. In the largest deal in Indian dairy space, IDFC Private Equity Fund III invested Rs 155 crore ($29 million) in Pune-based Parag Milk Foods Pvt Ltd in September 2012.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 unorganized players, with larger co-operatives like Amul accounting for only for three per cent of the Indian market.

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.

Conclusion

Any industry where one raw material is very crucial for the growth and quality of its finished products ,backward integration is a must and it should ensure regular quality supply of raw material. This is particularly more important in the industry where the raw material is perishable. Hopefully, this deal will lead to more deals in the dairy sector in near future.

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