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Logistic and Warehousing Great Avenues for Investment!
Ranveer Sharma
Managing Director -Eredene Capital
Saturday, April 5, 2014
Eredene Capital Plc (ERE:L)is an independent investment company that specializes in investing in Indian infrastructure with a focus on port services and logistics. The Eredene Group has a portfolio of eight principal investments in India.

Avenues for Investment

From last few years, sectors like port, logistics and warehousing are witnessing ongoing changes. The traditional logistics and warehousing businesses are developing a more institutional approach to attract private capital. Within five years, these sectors will evolve significantly with key trends mentioned below:

> The entrepreneurs (Promoters) who were focused on the top line businesses to grow as fast as possible will now shift focus towards a well defined execution and expansion strategy. This will see the logistics sector get more organized than the current level of around six percent.
> Earlier, promoters were focused on business ownership but now, they are seeking private capital. Additionally, we will see more promoters' acceptability for debt funding to achieve an optimal capital structure for the business.
> Private equity investors will adopt a more sectoral focus to logistics and warehousing investments like - agricultural warehousing, cold storage warehousing and e-Commerce logistics.
> Investors in India will be more patient as western investment models cannot be superimposed on Indian businesses. They will typically seek an investment horizon of 6 - 8 years against typical 5 years horizon in the west.
> New ports and port projects will come on stream along with development of hinterland infrastructure comprising freight corridors, industrial parks and Inland Container Depots (ICD).

New Evolving Technologies

Warehousing Management Systems (WMS), Radio Frequency Identification (RFID) and Customer Relationship Management(CRM) technologies promises huge possibilities in logistic and warehousing business. For instance, MJ Logistics, a third party logistic, where we are using a high class WMS solution from Red Prairie to optimize inventory control, resource allocation and client reporting across the cold storage business which serves leading clients like DuPont,Walmart and Dabur. At MJL, we are now exploring usage of RFID at the company's mother warehouse outside Delhi where TATA Motors is the anchor client which have resulted in enhanced productivity, reduced labor costs and streamlined operations.

One of our urban infrastructure investments in the Mumbai region is exploring a relevant CRM product which offers integration across a number of platforms along with dynamic analytics to track customer interaction. A large client of one of our portfolio companies is already using the SAP software to integrate with the company's existing software.

Restructure your Business

A business cannot run without owning the underlying assets. Today, promoters own the underlying assets as well as run the business along with an operational team. The disadvantage of this model is huge capital expenditure required to develop such a business and further a long gestation period taken to achieve an attractive return on investment. Such a business could be restructured into an operating company (OpCo) and a property company (PropCo) i.e., the promoter could stay involved in the OpCo and license the assets provided by PropCo against a lease rental which will act as an annuity for the PropCo. This approach allows promoters to choose their core competency that is OpCo.This is a key trend we foresee with significant interest from Investors.

Advice to Entrepreneurs

Entrepreneurs need to take care of certain aspects for achieving success in long term. A company that focused majorly on ownership walks the race in snail pace. The wise decision will be to increase the growth rate with external funding. There are few points that you need to ponder on while seeking external funding. Be open and clear with the level of your involvement in the business. Are you willing to grow the business with significant decision control held by the Investor? If you still have concerns in diluting significant ownership, explore suitable structured investments which are increasingly becoming popular. For example, mezzanine finance will be a win-win situation as the promoter will be able to retain ownership while the Investor will have a better predictability of returns. Today mezzanine finance is available from a number of places including Non-Banking Finance Companies (NBFC). The typical Investor return target in such investments is in the range of 15 to 17 percent. The funding that a company receives is very valuable as an investor takes a certain level of risk on the capital that comes with underlying restrictions around its investment tenure. A clear exit roadmap therefore becomes critical, it is vital that promoter and Investor's interests stay aligned at all times. Remember a successful exit for your Investor is as much your win and will go a long way to attract subsequent funding(s). (As told to Jisha Unni)

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