Last week, US-headquartered Sequoia Capital India announced that it had bought a stake in Indore-based Prakash Snacks Pvt Ltd for US$30m. Prakash Snacks is the maker of Yellow Diamond brand potato chips, assorted Indian snacks, and a supplier of private label brands to retail supermarkets.
According to an official at Prakash Snacks, who asked not to be named as he is not authorised to speak to the media, Sequoia has bought a minority stake, though he was unable to confirm the exact percentage of the stake.
This is the second big investment in what can be called a Tier II brand after US-based buyout firm Carlyle Group invested US$22 m in Tirumala Milk Products Pvt Ltd in June last year. Tirumala was started as a small town enterprise in South India.
The same year, a fund backed by securities firm Motilal Oswal Ltd picked up 20 per cent of Bector's Food Specialties Pvt Ltd, maker of the Cremica brand of biscuits and breads, for an undisclosed amount.
Commenting on the increased activity in the second tier food and beverage space in India, a securities analyst who has a focus on the food industry said that it makes good business sense for investors.
“You could say that businesses built out of suburban India would understand the broader Indian consumption story better, as not all of India lives in the four major cities of Delhi, Mumbai, Bangalore and Chennai,” the analyst said.
According to him, these brands tap into the second and third tier of population in the smaller cities, towns and villages, which combined represent a much higher value market.
“For an investor, this is a bet for the future, as the purchasing power of these segments is bound to grow with the surging Indian economy, and thus will bring higher revenue for these smaller brands,” he said.
The brands that have attracted big money are strong brands in their regions with a good governance structure, better cost structures, well-fixed distribution networks, and importantly, business families behind them who want to grow.
“Given the rocketing valuations of national and international brands that are trying to get into India, it is no surprise that investors are flocking towards suburban Indian brands,” he said.