India logistics attracts higher PE

Private equity (PE) investments in India's logistics services sector are set to rise as it gears up to improve transportation – with costs among the most prohibitive in the world – and boost related infrastructure bottlenecks.

The past four years have seen considerable growth in mergers and acquisitions (M&A) in logistics, ports, warehouses and container freight stations while Free Trade Warehousing Zones (FTWZ), freight stations, cold chains and captive spin-offs such as auto and retail logistics are seen as attractive targets now. While analysts expect logistics to be among the top five sectors for PE investments in India in the near term, deal sizes will likely be around $20 million (Dh73.46m) to $25m, which is where most planned PE ticket sizes converge.

"Many PEs are wary of investing, given the small size of companies and therefore, lower investment ticket sizes. The key to more deals in this sector is, thus, breaking this loop," said Manish Saigal, Executive Director, KPMG Advisory. "The time is ripe for PEs to have the foresight to see a tree in five years' time where others only see a seed at present." About 17 small-ticket acquisition deals worth close to $500m were struck in 2009, despite the downturn and going forward, a strong bounceback is expected, he said.

"Infrastructure in India is very weak so logistics is very expensive than in any other country," said Sumir Chaddha of Sequoia Capital, which has invested in about 50 Indian companies. "So, there is tremendous scope for improvement. Lot of it will be driven by infrastructure upgrades," he said, adding container logistics, inland container depots and warehousing were attractive.

Overall logistics spending is estimated at about 13 per cent of India's gross domestic product while the industry is growing at 15 per cent to 18 per cent annually. Though PE players are quite active in the segment, analysts said rejections by these players are also very high, at 97 per cent to 98 per cent.

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