Entry of well-known groups, high returns are key attractions.
The domestic hotel and restaurant industry is witnessing mounting interest from private equity (PE) and venture capital (VC) players. The entry of well-known groups and celebrities, the possibility of exit with high return, and the lower penetration of reputed brands into the organised hotel and restaurant industry, are believed to be the key reasons for the increasing interest in the industry.
According to VCCedge, the industry witnessed ‘large size’ PE deals for the first time in last five years in 2010, though the number of deal was the lowest. 2010 saw eight deals worth $375 million, compared to 11 deals worth $57 million in 2009. Sixteen deals, worth $300 million, were signed in 2007.
A week ago, TVS Shriram Growth Fund — a Rs 600-crore fund, managed by Chennai-headquartered TVS Capital Funds — acquired a minority stake in Indian Cookery, the restaurant business promoted by chef Sanjeev Kapoor and Better Value Brands. Indian Cookery owns multiple Indian-cuisine restaurant brands — The Yellow Chili, Khazana and Indii. With the fund, the company plans to open 300 outlets over the next five years.
Mayank Rastogi, partner, private equity and transaction advisory services, E&Y, said, “The level of penetration of food services and restaurants category in India against some of the more developed markets is relatively much lower and is bound to go up. Increasing affluence and changing lifestyles are creating an interesting opportunity in the sector, especially for quick service restaurants, which provide aspirational yet affordable eating options.”
In December, TVS Shriram Growth Fund invested Rs 50 crore to pick up a minority stake in Om Pizza & Eats, the Indian franchisee of international chain of Papa John’s Pizza, Chili’s Grill & Bar and The Great Kabab Factory. Om Pizza is promoted by Bahrain-based Jawad Business Group.
TVS Capital Funds Chairman and Managing Director Gopal Srinivasan said, “The food services sector is a highly unorganised sector, with very few branded chains (above Rs 100 crore revenue). There is strong potential for a well-performing restaurant chain, with innovative business models, such as central kitchen/commissary systems, supply chain optimisation etc. The casual dining and value-for-money restaurants are reasonably defensive in tougher market environments.”
“At TVS Capital, we believe that restaurants are a high-growth area, when funded with cuisine innovation, backed with strong execution.”
In one of the biggest PE deals in the hospitality space in the last five years, Xander Group invested $110 million (Rs 520 crore) in the hospitality division of Pune-based Panchshil Realty last year. KKR, New Silk Route and Standard Chartered PE also invested $200 million in Coffee Day Resorts last year.
According to Siddharth Bafna, partner, corporate finance & transaction services, Lodha & Co, rapidly growing eating-out habits, owing to higher disposable income levels, changing lifestyles, increasing brand consciousness, etc, is spurring the growth of restaurant chains in India. He said, “Following western countries like the US, where most restaurants are part of a national/regional chain, restaurant chains are mushrooming in India nowadays.”
“The successful listing of Jubilant Foodworks has also encouraged PE investors to invest aggressively in scaleable restaurant chains.”
PE-backed Jubilant Foodworks, the franchise of Domino’s Pizza, got listed in early 2010 and JP Morgan and India Private Equity Fund, which had invested in it, exited through the IPO. Jubilant Foodworks, which was listed in February at an issue price of Rs 145 a share, was trading at Rs 512 on Wednesday. With a sales revenue of Rs 424 crore for 2009-2010, it has a market capital of Rs 3,230 crore.
Little Italy, a Pune-based restaurant chain, focused on vegetarian Italian cuisine, is also reportedly seeking private equity investment for pan-India expansion. It plans to dilute 20 per cent stake. BJN Group that owns the Firangi Paani and Sahib Sindh Sultan restaurants, is on the lookout for a PE investor and is believed to be in talks with India Equity partners. According to reports, Sagar Ratna Hotels is also eyeing PE funds.
India Equity Partners is reportedly acquiring a majority stake in Tata Group company Innovative Foods for Rs 75 crore. India Equity Partners MD Gaurav Mathur said, “As a policy, we do not comment on specific investments or our general sector strategy.”
Rastogi said, “The sector has largely been unorganised, with regional players concentrating on one or two cities and with just two-five outlets. Consolidation play, along with expected growth, per se provide attractive investment opportunities for both financial and strategic investors.” The restaurant market in India is pegged at Rs 45,000 crore. Organised branded vendors account for 20 per cent of this. The total eating-out market in India is nearly Rs 100,000 crore. The organised branded food services industry is expected to grow 20 per cent a year in near future.
