Indian F&A potential
country view
Non-bank structure
As Asian economies continue to struggle, one country in the region is looking
increasingly attractive. A long-time democracy noted for its relative stability and
well-embedded regulatory environment, India only began its deregulation
program in 1991. Since then, three successive coalition governments of different
political hues have pursued liberalization - slowly, surely and, according to Hans
Hannaart, one of our people on the spot, irreversibly.
IN DU-,
Afood factor
Basic foods
Foreign opportunity
Late arrival
Starting with a bang in the tndian land ofopportunity, the
management team left to right: Rana Kapoor, Anton Nillesen,
Hans Hannaart, Bram Kruimel and Ashok Kapur
The Indian team have been
travelling, to New York,
Utrecht and London, to explain
what they have been doing on the
•sub-continent over the past six
months, and to explain how
interesting this new market could
be for us as an F&A bank. 'The
potential of F&A in this country is
huge,' says Hans Hannaart, acting
as spokesperson for the
management team. 'And
government - national and state -
are starting to understand that
potential. A number of states are
promoting this sector to outside
investors and foreign food companies.'
One of the ways they are handling this
promotion is to invite RI in as
consultants. 'Frankly,' he says, 'we were
thrilled to be asked. The fact we're
advising government obviously gives us an
immediate profile in India.'
^^fased on the evaluation and analysis of
the enorntous sector, India appears to
have huge potential for an F&A bank.
The subcontinent heads the world tables
in production of a cluster of products -
India is responsible for 10% of the milk
produced world-wide. It has 28% of
world tea production. It is also the top
producer of sugar, fruits and vegetables,
and number two in rice. It has the same
erop production as the US - yes, you read
that right. The downside is that it also has
a major problem with yields. Coinpared
to world averages, most Indian products
are in the 30 to 40% range. 'So there is
really a lot of scope for improvement,'
says Hannaart. 'That improvement is
needed in every step in the chain. Seeds
need improvement, wrong combinations
^^)f fertilizers are used extensively, farming
tends to be small-scale (which was
government policy for many years), post-
harvest handling is inefficiënt, there is a
lack of infrastructure - road, rail, sea.
Basically, there is a lot of wastage, and
that in a country that could be the largest
food producer in the world.'
Reliable estimates indicate a major
increase in prosperity will make huge
demands on the sector as a whole. At
present, India distinguishes three
categories of living standards. The first is
subsistence - people consume primarily
grains and vegetables. A second group,
and this is where real growth is expected,
represents growing consumption of higher
protein foods - poultry, eggs, etc. The
third group comprises the wealthy.
McKinsey is forecasting that in the next
ten years around 34 million households
will move up from subsistence to the
'basic' group. 'The average household is
four to five people,' says Hannaart. 'So
you're talking about an additional 150
million-plus people. This is where huge
potential lies because you need more
processing for basic foods. We see major
opportunities in the processing industry.'
At the moment there are two agribusiness
markets in India - edible oils and sugar.
But the growth, says Hannaart, will be in
the basic food segments - milk, milk
products, poultry, both fresh and
processed, bakery products, bread,
noodles, wheat processing in general, and
beverages - coffee and tea. 'And these are
the sectors where we will focus our
efforts,' he explains. 'The same McKinsey
report shows the total value added
generated by food will move from USD
20 billion to over USD 50 billion over the
next decade. What is needed to achieve
that is a new Green Revolution. They
already had one when the country
became self-sufficient. Now, there will
have to be another to develop, change
and modernize the total food
chain.' It will be financed by a
combination of state, local and
private initiative and investment.
'We're talking about USD 35 billion
in necessary investment. So that
means the larger international food
companies coming in which have
both the investment power and the
technology.'
Even though the scenario looks
enticing, the relative stability of
India's economy could actually be a
disadvantage. While companies are
hardly overvalued, there are
anything but bargains on offer throughout
the troubled region. 'The rupee has
devalued by a little over 10% during the
crisis,' Hannaart explains. 'That is
significantly less than many other
currencies. But it also means that the
value of buying into companies is still
relatively expensive compared with
neighbouring countries. On the other
hand, India is a late arrival on the
international scene, and is less vulnerable
for that reason. This is really a land of
opportunity - if you know where to look.'
Unlike most of our starter operations,
the bank in India is a so-called 'non-
bank finance company'. The reason we
opted for this, rather than a branch or
rep office, is flexibility. 'There are two
advantages,' says Hannaart. 'One is that
it allows us to open offices around the
country without having to apply for
Central Bank approval each time. The
second is that we do not have to inject
more capital every time we expand.'
Two offices have been opened in India -
one in Bombay, the other in Delhi. We
may look for a banking licence further
down the road, Hannaart adds, but that
would also be strategie.
