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Cold chains are hot
Retail growth would spur demand for warehouses, but this is a business for the moneyed

Bharti's warehouse

Spick 'n' span Bharti's warehousing facility in Ludhiana

A decade ago, Bangalore-based first generation entrepreneur Chaitanya Srinivasan decided to get into the cold chain business. He did all the right things—he had anticipated the retail boom; he spent a year in the US understanding the technology; he even found a joint venture partner, the Holland-based Frigolanda. All that ground work was completed in 1999.

The joint venture, however, failed. "We could not pursue the JV beyond 2002 owing to cultural differences and Holland's set of expectations from India," says Srinivasan, Managing Director of Chaitanya Cold Storage. In 2005, he found that a part of his business—a fleet of 18 refrigerated reefer trucks—was unviable. So, he sold them off. "We realised that trucking is a highly challenging business to do in India and hence decided to focus only on cold storage," he recalls.

Srinivasan was an entrepreneur who had caught an idea ahead of time. He has increased his cold storage capacity from 40,000 cubic feet in 2002 to 1,10,000 cubic feet now. About 40% of this has been taken up by Reliance Retail in Bangalore.

Now there is a flurry of activity in this business. (Interview: Jignesh Shah). One major player in the field, XPS Cold Chain, a division of Transport Corporation of India. It caters to a strong clientele, including Cadbury India, Gujarat Co-Operative Milk Marketing Federation (Amul), Domino's Pizza, Dr Reddy's and Workhardt. In February 2006, Container Corporation of India floated Fresh & Healthy Enterprise—a 100% subsidiary, with an outlay of Rs 100 crore, and focussing on procurement and marketing of fresh fruit. Much of this is being driven by the retail rush. According to AT Kearney, India, the ninth largest retail market in the world is expected to cross the $21.5-billion mark by 2010 in organised retailing. Last year, modern retail formats grew between 25 and 30% in India against 13% in China and Russia, according to AT Kearney.

Top Agenda

"India's $250-billion food and agri-sector is expected to double in the next 10 years, says Sonal Shah, Chief Executive Officer of Yes Food & Agri Business India Fund—a $100-million private equity fund floated by Yes Bank in May this year.

Shah believes that transportation of food products plays a critical role in the value

chain. India struggles with an annual wastage of over $12 billion. Retailers would want to whittle down these losses by using cold chains extensively. Financial investors are excited about this opportunity. Rabo Bank International will also announce a $100-million food and agri-business private equity fund soon. Last November, Rabo India Finance, a subsidiary of Rabo Bank International, advised Gateway Distriparks in its Rs 48.12-crore acquisition of 50.1% stake in Cochin-based Snowman Frozen Foods from Amalgam Foods. Rabo India Finance is now advising an international player in its plan to partner a domestic cold chain company. "This sector would be the critical link in the value chain and by far the most profitable one," says Rajesh Srivastava, Managing Director of Corporate & Commercial Banking, Rabo India Finance. He believes that cold chains could command premium valuations as they start providing value-added services.

Entrepreneurs have to overcome several problem areas. First, this is a capital-intensive industry. Srinivasan says that investment in a cold chain could run from several hundred crores to few thousand crores. This makes it less feasible for small and medium entrepreneurs to build big capacities. "But the risk-reward is very high. A deep pocket support from professional investors like venture capitalists is a must," he says. "This is capital intensive, but it is a promising business," says Sanjeev Mantri, Head of Cluster Banking Group, ICICI Bank. He says many VC/PEs are keen to invest in logistics companies. The gestation depends on the model of business. "Traditionally, the gestation has been varying between four-six years but if a new facility were to be established at current property prices, the gestation could stretch beyond 10 years," says a Delhi-based cold chain operator who doesn't want to be named.

Where The Model Suffers


"Risk-reward is high. A deep-pocket support from professional investors like VCs is a must"- Chaitanya Srinivasan, Managing Director, Chaitanya Cold Storage

In perishables, the revenue charges per square feet is higher. But the storage need in most cases is very short, so it becomes a volume-driven business with high margins. But cold infrastructure for perishables also guzzles capital. Other products like electronics, phones and consumables of computer hardware may not need much space, but requires careful handling and a dust-free environment. Some of these can turn into low-capital, but profitable niches where small entrepreneurs can hold their own.

Strangely enough, this sector also suffers from excess capacity. By the end of 2006, India had 5,101 cold storages with a capacity of 2.17 crore metric tonne. Though there is a 23% growth in number from 4,146 cold storages in 2001, the key growth impediment is the nature of the industry—over 63% of the cold storages are located in the states of Uttar Pradesh, Uttaranchal, Maharashtra, West Bengal, Punjab and Gujarat. While rural areas are short of capacity, some urban centres like Kolkata face a glut. Ashish Jhunjhunwala, Director of Hindustan Ice & Cold Storage, cites the situation in West Bengal, where the combined installed capacity of the 390-odd cold storage units is over 52 lakh tonnes. But close to 7-8 lakh tonnes (15%) of this capacity is unused. "The under-utilised capacities, especially in the metros has depressed the pricing power and players are operating at rates which prevailed 15-18 years ago," says Jhunjhunwala.

Some retailers may still set up their own cold chain. "Such retailers will be able to attract VCs and PE funds easily," says Rabo India's Srivastava. The idea of a consortia could upset the plans of entrepreneurs entering this space. For example, entrepreneurs in the West Bengal Cold Storage Association have been lobbying with the state government to ensure that corporates entering retail should use existing capacity rather than set up their own.

Haunting Issues

Technology is another problem. "The Indian cold chain industry is not mature when compared to emerging destinations," says Keith Sunderlal, Director of South Asia, International Association of Refrigerated Warehouses. Still, there is a big business opportunity here. Big retail chains may end up dominating the business. But soon, small and medium entrepreneurs could still find niches. ICICI Bank's Mantri gives the example of the AS Group, his SME client. This company runs 20 warehouses and has attracted PE investment. His USP—the warehouses are non-asbestos and non-toxic. He plans to add another 30 units. He also offers specialised packaging solutions to customers like Nokia. "Small entrepreneurs need to be calibrated and focussed," says Jhunjhunwala. "We have expansion plans and are keen to partner with professional investors who appreciate the potentials of the business," he adds. Are his angels listening?


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