India’s HR Food Processing Pvt. Ltd – the producer of a line of dairy products under the Osam brand name, has raised Rs 45 Cr (US$6.76 million) through a Series B led by Lok Capital and including existing investor, Aavishkaar India II Company.
Lok Capital’s commitment to HR Food is being made through its third fund – Lok Fund III that saw its first close on Rs 300 cr (US$40.5 million) in June of this year.
Launched last year, Lok Fund III has a target corpus of Rs 700 cr (US$105 million), which it plans to raise within the next year to eighteen months. It will target investment tranches of between US$2 million and US$10 million over the next five years in growth stage companies in agriculture – particularly in dairy, supply chain management, and integrated “farm to fork” ventures, healthcare, and financial sectors.
Lok made its first investment in agriculture in January of this year when it led a Rs 25 cr (US$3.7 million) Series B round for Pune-based potato supply management company, Siddhivinayak Agri Processing Pvt Ltd (SV Agri). This investment is its second in the ag and food space and its first in dairy.
“We have been tracking the dairy sector for the last few years, but due to various reasons such as inappropriate business models and valuation mismatch, we were not able to close transactions,” Rajesh Babu, director at Lok Capital told Live Mint.
Under the agreed upon terms of the deal, Lok will acquire a minority stake in HR Food and Rajesh Babu, a director with Lok Advisory Capital, will join the HR Food Board.
Utilization
India is the top consumer of dairy products in the world, with milk consumption alone equaling 400 million liters per day, according to IIFL. In the years up to 2020, the country’s diary market is expected to see a compounded annual growth rate (CAGR) of 16 percent, to reach a value of US$155 billion. Per capita consumption in East India however lags behind the national average by nearly 50 percent – reflecting a significant market gap and opportunity for dairy producers.
“Like most other dairy markets, we compete against state-run cooperatives. Today, private sector players have a belief that there is a great opportunity for them, given the demand supply gap and the huge customer requirement for quality products,” said Abhinav Shah, co-founder and chief executive at HR Food.
Since the commercial launch of Osam in 2015, the brand has grown to be a leader in the private dairy sector – building a procurement network of 10,000 dairy farmers and processing 40,000 liters of milk per day. Its products are currently being sold through 3,000 retailers in Jharkhand. However, the company plans to use the funds from this raising to support its expansion throughout the states of Bihar and Jharkhand where there is a lack of penetration by organized, commercial scale diary producers. Toward this end HR Food has already acquired an additional production plant in Jharkhand, and is currently seeking out other acquisition targets or greenfield projects in East India.
“We have just completed one acquisition in Jharkhand. We are refurbishing that plant right now. We expect it to be a 120,000 liters (daily) plant and we expect it to be operational by March 2017. Both plants put together we will be at a capacity of 200,000 liters per day,” said Shah.
Dairy Differentiation
As a private label, Osam must work to gain market share from state-run co-operatives. To do this, the company controls all three logistical stages of its supply chain from sourcing, to processing, to marketing enabling the company to provide its suppliers with a transparent collection process, training, and input services such as feed for dairy cows.
“What we liked in HR Foods was the work they are doing with farmers,” said Rajesh Babu. “Osam is transforming the dairy sector in Jharkhand and Bihar through high quality customer offerings and improving farmer livelihoods by providing transparency on price, quantity and quality to over 10,000 farmers.”
The company also plans to factor in a higher level of value addition to its product line. Currently 85 percent of the company’s revenues are generated from the sale of packaged milk reports Live Mint, with 15 percent coming from the sale of value added products such as lassi or curd. However, by the end of fiscal year 2017/18 the company plans to lift this percentage to 25 percent of total revenue.