The Way Forward Post-Covid: √ Square Root Growth

The Way Forward Post-Covid: √ Square Root Growth

At what seemed like the height of the pandemic on 24 March 2020, and with the market reeling from a sharp pullback we sent a Covid-19 update to our investors.

Our broad message then was that it would be at least 2 years before growth returned for our sector. Specifically, we felt that companies in our sector could see anywhere from a 20-40% decline in operations this year and would spend the next year simply recovering from that decline. This is particularly unfortunate for the sector which was only just returning to growth after repetitive shocks for the last 5-6 years, including record back-to-back droughts, GST, demonetisation and a banking crisis amongst others.

More recently, I came across an article describing the expected growth in the market to be Square Root shaped (√). I think it captures what we have been saying since March quite well.

The initial spike in sales (post reopening) that some of the data is showing is the small spike at the start of the square root – this is likely to prove short-lived and I think there is already some evidence of that turning down as the virus response remains muddled globally. To be clear, the square root shape is meant to be indicative of what global growth will do – different countries and different sectors will have differing outcomes. Policies, societal behaviour and management skills will possibly separate the winners from the losers.

It’s a good time to highlight that our team has continued to work well from home and stay safe in all their various locations. All of our portfolio companies are fully operational and are practicing the necessary safety protocols to ensure a safe and healthy work environment for their workers.

Our companies have also been active in contributing towards CSR activities related to Covid-19 to support their broader communities. For example, we have helped with funding testing kits, ventilators and midday meal programs. Our sugar business has used its ethanol capacity to produce sanitizers. And some of the Hospitals we support have been in the frontline dealing with Covid patients.

We continue to be busier than ever with regular monitoring and new initiatives at portfolio companies.

We thank you for reading our letters and hope that everyone is staying safe during this period.

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Food for Thought During COVID-19

Food for Thought During COVID-19

We are constantly asked how the Food and Agri sector is performing in these uncertain times.

People expect to hear that the sector is resilient and not as affected as other sectors because surely everyone needs to eat. At a very high level, this is true. Most food companies across different countries have remained open during the lockdowns and farmers are still planting their fields. Barring issues caused due to logistics, there have been no food shortages across the globe due to the virus.

However, the value chain is complex and varies by sub-sector, country, and region. Making general statements about the industry is fraught with risks. I wanted to share a few observations that both the casual reader and the agri expert might find insightful.

Poultry Industry

The poultry industry in India has suffered greatly during the lockdown due to a perception that chicken can transmit Covid-19 when eaten. Despite efforts by the industry to dispel this belief, chicken sales in India were down c. 90% in the last two months. Globally, India is a top five producer of chickens and eggs making the drop significant for everyone involved in the industry including feed providers.

Fruit Juice Industry

The fruit juice industry in India has come to a virtual standstill as well. It turns out that most fruit juice is consumed “on-the-go” rather than at-home within India. To add on, home juice consumption is usually hand-made, as opposed to consuming from a PET bottle or tetrapak. Meanwhile, in the West, fruit juice consumption has gone up as more people stay at home and enjoy breakfast at home with a glass of juice.

Fresh Fruits & Vegetables

Similarly diverse reactions are seen in fresh fruits and vegetable consumption. India has seen a spike as more people revert to cooking at home with fresh fruits and vegetables, whereas the West has seen a growth in processed/ canned foods for home consumption over fresh fruits and vegetables.

Milk Consumption

The most interesting observation has been around milk consumption – which is surprisingly largely consumed in the office or by sweet makers in India. The unorganised and pouch milk segments in India have seen a significant drop in volumes while UHT milk has continued to perform well.

Ice Cream

Ice cream is another product that has shown diverging trends in India versus the West. Ice cream consumption has stayed strong in the West as consumers are accustomed to buying and storing ice-cream at home as well as consuming at home. On the other hand, ice cream sales in India have come to a virtual standstill because it is something people typically eat when out of the home. There is also a societal notion that Ice cream is linked to potentially catching a cold and thus being vulnerable to Covid-19!

So while the above might seem obvious to some and bizarre to others, I hope it has highlighted the differing trends and shifting landscape in the food and agriculture sector.

On a more serious note, these different locations and habits of food consumption are causing serious pain for the sector where one might least expect it. The recent woes of the dairy sector and meat processing industry in the USA have been well publicised in recent articles shared on our Twitter and LinkedIn accounts.

We continue to believe that the sector is a standout in times like this for its relative stability on the demand side. But not all value chains are built alike and identifying the right sub-sectors and the right parts of the value chain for investments will remain a key factor for successful investing in the sector.

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Inaugural Impact Report 2019: Creating Impact Along the Entire Food Chain

Inaugural Impact Report 2019: Creating Impact Along the Entire Food Chain

A message from Mandala Capital's Managing Partner, Mr Uday Garg

Our mission is to create impact along the entire food chain that is sustainable and scalable. What does that really mean and how is Mandala’s approach to impact as an asset manager differentiated?

Sustainable impact requires durability that ensures impact on all stakeholders beyond an investment cycle or fund life.The inherent challenge in our work is the potential for a promoter or owner of a business to have a time horizon and return expectations that are not fully aligned with the investment style and structure of a fund. As a firm, we recognize this dynamic and approach investments with the aim of balancing our objectives of optimal investor return while ensuring that investments are meaningful to the company. Often, it is only through active dialogue that these issues can be resolved to achieve an ideal outcome for all stakeholders.

Fundamentally, our relationship with the companies is built on a basis of trust that transcends the transactional and provides a foundation to influence operations post-investment. It is through our close operational involvement that we are able to closely monitor and prioritize value creating events that align EBITDA progression with sustainable social impact progression. Each of our companies are their respective category leaders in the food supply chain and, as such, innately capable of delivering positive social impact. Our investment structures are designed to ensure our companies are well poised to deploy Mandala’s investment to integrate operational adjustments as well as innovation to demonstrate return that has a correlating effect in contributing to long-term positive social impact. The developments that we guide within our portfolio are designed to be fixtures of an investee company and will amplify over time rather than truncate.

Scalable impact is impact that has a meaningful effect and that can be replicated at a larger scale without diluting impact.

Small scale start-ups established solely with the purpose of achieving impact either through innovation or geography are often dislocated from viable sources of capital and, more importantly, the supply chains that their products and services must be integrated with in order to have measurable and sustainable impact. Certainly these companies can develop and often grow into meaningful market leaders, but, as an asset management strategy, it is not a reliable assumption to expect high quality returns — financial and social — within 10 years. Instead, we have discovered that larger companies in the sector are naturally best positioned to make large scale, socially impactful, changes and bring in the private sector, government and DFI funding to grow.

In preparing to draft this impact report, we spent a long time reviewing the existing literature and practices in the space. In most instances we found at least one of two trends on display: either social impact is very loosely attributed to a fund manager’s investment or targeted impact investments show very little capability to achieve demonstrable returns. We then decided to take a slightly unconventional approach to evaluating our investments – intended to employ many of the same elements of our investment strategy – that would be focused on what our role was going to be, where we could add value and how we could showcase the sustainable and scalable impact we seek to create.

This report demonstrates our initial best effort in defining, measuring and monitoring the impact our investments havecreated and in laying the foundation for continuing to track their impact trajectory. We have defined our goals and the corresponding data points and worked with all our partners to gather the data. We have also formulated calculations that allow us to translate those data points into the monetary impact created towards each of our goals, per dollar invested into the Fund and deployed into each company.

We have taken this approach because we believe that numbers tell a complete story, removing from the results the emotion and bias that often favor less compelling and impactful investments from those which create true value. Numbers also serve as an effective bridge between our investors and portfolio companies. The trendiness of impact investing leads me to believe that the impact investing industry is moving towards a more quantitative approach in measuring and communicating impact.

Publishing and sharing Mandala’s inaugural impact report is a major milestone, both for the company and for me personally. The Mandala team – including all our partners – care about a lot of social causes and actively support and lead various philanthropic endeavors. This is in large part due to the influence of my grandfather, Mr. B.R. Barwale, who built a very large and successful business in agriculture and always emphasized the importance of giving back a significant amount to the farmers and the rural community, without seeking recognition or advertising his philanthropic efforts. Thus, from the outset, we have naturally sought partners aligned in this basic philosophy.

Mandala Capital was established in 2008 and we launched Fund I in 2014. This report is certainly long overdue, but we deliberately wanted to watch the impact investing industry mature and contemplate our role in the community of impact investors. We believe that this report reflects who we truly are while demonstrating adequate respect to the impact investing world. It is my sincere hope that you will enjoy reading it and that it will provoke new thoughts and ideas that broaden and elevate our ongoing dialogue.

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Disruption in the Indian Dairy Industry

Disruption in the Indian Dairy Industry

Trends in East India

Our recent c. $30 million investment in Keventer Agro and the subsequent launch of the first and largest UHT milk processing plant in East India has confirmed a few of our themes:

• There remain incredible growth opportunities in the food sector that can thrive with vision, leadership and capital
• Billion-dollar market segments, such as East India dairy in the case of Keventer, remain largely untapped by investors and corporates alike for various reasons
• Non-technology disruption is still possible in traditional business through pricing, packaging, quality and distribution strategies
• Sustainable impact – one that can benefit all stakeholders and grow year on year - can be achieved through scale investments with quality partners
• Alignment of interest between investors and management teams can create true value that is greater than the sum of its parts

East India today constitutes c. 30% of India’s UHT milk consumption and has been growing at CAGR of 23% for the last 5 years.  Despite this, the major dairy processors have chosen to import milk from corners of India into the East. They have also priced their products as per national standards, not accounting for different per capita income in the east or taste differentials.

The Keventer Dream

The common theme has been that the East is milk deficient and GDP/capita is lower than the rest of the country – so the focus has always been on other areas. Keventer is designed FROM THE EAST, FOR THE EAST. The aim is to deliver higher quality local milk, fortified with vitamins and at the cheapest price possible.

Using decades of expertise and relationships with the combined teams of Keventer and Mandala, we have managed to construct a state of the art plant – the most efficient and highest quality in the country today – on budget and ahead of time. Our distribution network in the East is one of the best in the FMCG space with a distribution reach of 100,000 retailers. The net result is a “magic price” on 160 ml double toned (or skimmed) milk in a tetra pak for Rs. 10! This is the lowest price in India and one of the cheapest in the world. And all the while with a focus on the bottom line.

We akin this disruption to what Jio has done for the telecom space. We are not simply trying to take market share from competitors. We are bringing in non UHT milk users into the market due to our price point. Tea sellers – traditionally buyers of pouch milk – are now using Keventer Agro UHT milk for their daily needs. Similarly, we expect mothers to use the Rs. 10 pouch in their child’s lunchbox. All our milk is fortified, thus also addressing nutrition needs of the malnourished and increasing health and well-being across consumers of all income brackets. 

Wealth Creation for All Stakeholders

Mandala Capital has contributed strongly to this vision in various forms ranging from roll-out strategy to corporate governance. The net result is a world class company which is a good corporate citizen.

The needs of all stakeholders are considered and we hope to create wealth not just for investors but also for our distributors and retailers as the brand grows in volumes.  Best quality, employee welfare, stakeholder benefits, social impact, corporate governance and the bottom line are always on top of our minds at Board discussions. 

It is worth touching on one of the other businesses under Keventer Agro, namely its banana business. We are now the largest branded banana business in India with a volume of 25,000 tons per year. As per our calculation, we are over 1% of Chiquita’s global business (spread across 70 countries) simply in one state in India! The potential for this business is very large and we must credit the teams working on this for transforming a commodity item like a banana into a branded play. 

Impact on Lives

The company has dedicated itself to making a significant impact in improving the lives and livelihoods of the 15,000 banana farmers that it works with. Due to extremely small land-holdings (less than 0.3 acres on average), farmers in the state of West Bengal do not have access to the latest technology or knowledge required to improve yields and reduce mortality.  

Keventer has started the “Keventer Assisted Farming program” wherein it provides farmers with multiple benefits – free agronomic advice, access to best agri-inputs in partnership with global leaders like Bayer and Syngenta, and most importantly guaranteed buy-back of their produce. The company is also collaborating with Govt. sponsored Farmer Producer Companies (FPCs) as well Clusters” at various locations. 

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Indian Agriculture on the Cusp of a Major Transformation

Indian Agriculture on the Cusp of a Major Transformation

This article was original published on VC Circle as a Guest Post by Uday Garg of Mandala Capital. See original article here.

Indian Agriculture: Ripe for a Transformation?

Indian agricultural growth and the related sectoral investment opportunities have always held a promise of greatness that has, until now, remained an elusive destiny. For the year that ended March 2018, agriculture GDP grew by 2.1% as compared to industry GDP and services GDP which grew by 4.4% and 8.3% respectively. Despite the relatively lower sector GDP growth, Agriculture still represented 16% of India’s latest annual GDP figures. Perhaps more than any other sector of the Indian economy, agriculture is inextricably tied to India’s long-term growth story. But where can the value in this opportunity be captured and cultivated?

Historically, the complexity of investing in agriculture globally combined with the heightened political sensitivity of the sector in India has left the sector starved for innovation and investment, with participants eager for a more robust program of reforms and varied sources of investment. But we see several dynamics at play today which are inadvertently working in unison to create an environment and circumstances with the potential to awaken Indian Food and Agriculture from its slumber. More importantly, these dynamics are pushing the food value chain to evolve, modernize and innovate, the net result of which will be the emergence of several large scale national champions.

Demand Drivers: Evolving Consumer Habits

India has typically had a small percentage of the total population that has followed consumption trends and trajectories similar to those in developed economies. Over time, technology and education have enabled the expansion of this demographic to include India’s middle and lower income consumer. The speed and adoption of this change has been significant. Coupled with the more well documented consumer food demand trends of protein consumption, lifestyle, and working parents, the net result is a consumer that is increasingly and consistently demanding more of everything: more food, more choice, more safety, more quality and an overall awareness of personal health, nutrition and environment. It could be argued that this dynamic has already evolved from being a trend to a fixture of consumer demand in the food and agriculture sector.

Regulatory Drivers

Historically, government policies alone, especially those focused on agriculture, have not been able to reverberate across the sector to generate meaningful and substantial change. Ironically, the gap between government policy and real sector change has recently narrowed with the help of policies in non-agriculture areas that have created the right ingredients to develop higher quality companies across the food value chain.

For example, GST, Ind-AS, NCLT and others have expedited the move from unorganized to organized across the food value chain and increased corporate governance, civic compliance and transparency across companies. Consumer focus on health and safety in food and the environment has resulted in stronger enforcement by the Pollution Control Board and the FSSAI. In addition, the wide open regulatory environment for online retail has created a competitive environment at such a large scale that this could finally be the push food retail and food logistics need to create large scale service providers.

Supply Drivers: Farm Level Changes

Small farm holding, low mechanization, poor technology and low yields have traditionally characterized farm level activities in India. These dynamics have tainted the perception of the overall sectoral investment opportunity. Several drivers are now pushing changes at the farm level and thwarting the inertia of the past. Labor shortages at farms are forcing technology adoption and mechanization. Climate change in the form of uncertainties around weather disruptions caused by floods, earthquakes, El Nino, La Nina, droughts and other weather patterns have further driven farmers towards technology adoption. Smarter fertilizer use and delivery systems, more efficient use of water, better quality seeds, soil conservation are now being readily adopted. Contract farming and closer partnerships with larger food processing companies will drive these changes faster and reduce inefficiencies across the value chain.

What is the Role for Private Equity and Venture Capital?

Deep sector knowledge is key to successfully investing in food and agri. The sector requires a unique core of deep industry knowledge and the ability to work closely with experts and promoters in the sector. Category leaders across the sector are typically multi-generational family businesses that require insight and trust from prospective investors. This will remain the key differentiator in the sector. When I formed Mandala Capital in 2008, no institutional private equity fund manager had exposure to the sector; today almost every major fund has one or two investments that would be classified as directly within this sector. This signifies the market’s recognition of the shifting tide of opportunity and growth in favor of the agricultural sector.

It is a foregone conclusion that private equity and venture capital will continue to pursue investment opportunities in the sector. The main challenge alongside sector knowledge and relationships will be identifying the correct inflection point in the supply chain for structuring meaningful investments. India’s supply-demand gap is an opportunity that necessitates scale and innovation to meet immediate and long-term growth dynamics. Early stage venture capital investors may struggle to find scale for the innovations they are bringing to the market. Direct consumer facing investors may find growth from the consumer but will struggle with the risks accompanying the consumer and marketing spend associated with it. Farmland investors will be unable to invest in Indian farmland due to public policy and the nature of farmland holdings. So where does this leave a prospective investor?

Businesses that reside in the supply chain either with respect to farmer inputs or delivery of products and services that are destined for the consumer through retailers or through FMCG companies are best poised for scale. These companies will necessarily need to build capacity for the sectoral opportunity and consumer demand drivers. Investments structured to allocate proceeds towards meaningful programs of capacity expansion in the supply chain will, in our view, unlock value for the consumer and investor at the critical inflection point of producing affordable and accessible food at scale and in tandem with demand.

The three forces outlined above – consumer behavior, regulatory effects and farm level changes – will inevitably propel a switch from unorganized to organized. The growth curve will favor sector champions with size and scale. As these companies look to increase capacity, expand into new states within India, launch new products and strive for greater compliance, governance and transparency, there is a real opportunity for Private Equity investors to play a defining role in fuelling the trajectory of this story.

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