VC/PE Appetite begins to build for ethnic Indian Restaurants

A reader suggested that I compile and post interesting/useful articles written about the Indian restaurant industry that are published in the media. I am starting to do this with a recent article published in the Times of India on Monday, April 2012. Please note that these are simply reproductions of the original articles published. If you come across any interesting articles that I miss out, do email the link/article to me and I will review and post them. 

Article Credit: Times of India, Monday, April 2, 2012. Bangalore Edition

VC/PE appetite begins to build for ethnic Indian restaurants

Pranav Nambiar & Shilpa Phadnis TNN 

Bangalore: Indian quick service restaurant (QSR) chains have caught the attention of both the early stage venture capital (VC) as well as growth and late stage private equity (PE) investors. A host of traditional Indian joints like Adiga's as well as the next-gen chains like Mast Kalandar are in the radar of private investors.
Kanwaljit Singh, co-founder of VC firm Helion Venture Partners, said that macro factors like the growing quality of life and the scalable nature of the business make it an attractive bet. Helion invested in Mast Kalandar in late 2010 and over the last one year the chain has scaled from 10 to 35 stores across 4 cities – Bangalore, Chennai, Hyderabad and Mumbai. 
Prashanth Prakash, partner at VC firm Accel Partners, said that globally QSRs are not a venture play. Typically it receives later stage investments by PE or strategic investors. However, in India some VCs are experimenting with investments in new generation QSRs. VCs enter when the QSRs have at least 10or so units established. These formats rely on differentiators around the menu, formats, locations etc. 
Accel Partners has invested in Bangalore based Kaati Zone, which serves kaati rolls. Another VC firm Sequoia Capital recently invested in Mumbai based Kebab and wraps chain Faaso's. “The trend of people eating out more often and growing urbanization are helping these restaurants. Also, our street food is now served in a cleaner yet affordable format,” Prakash added. 
The more traditional restaurants that are of reasonable scale have received interest from later stage PE and strategic investors. In 2011, PE firm India Equity Partners invested $35 million in Sagar Ratna, a Delhi-based South Indian restaurant chain. Late last year Everstone Capital bought a 45% stake in north Indian food chain Pind Balluchi. There is also global investor action in traditional QSRs. The New Silk Route Partners is holding talks to buy a big stake in Vasudev Adiga’s. 
Investors are betting on ethnic Indian cuisine as it has a much larger target audience as compared to other organized quick service formats that serve Italian or American cuisine. Gaurav Jain, promoter of Mast Kalandar, said that the Jubilant Foodworks IPO has attracted PE players into the QSR space, providing profitableexits. Jubilant operates Domino's Pizza in India and has the rights for Dunkin' Donuts. 
Despite the promise, investors in QSRs face several challenges. Jain feels profitability at the store level is a key challenge. Food inflation has been in double-digits in the last three years, affecting the margins. 
Investors say that the business is operationally complex and finding the right talent is a huge challenge. Scaling into newer cities and standardizing of the backend is a major point of concern. 
So investors have to be prepared for a longer investment timeline. It typically takes about 8-10 years for a VC investor to reap decent returns. 
Kiran Nadkarni, CEO of Kaati Zone, said that competition from international QSRs is forcing home grown companies to keep the pricing competitive. "International players like McDonald's have expanded the snacking market by making the entry-level pricing attractive. We are exploring a kaati at price points starting at Rs 25-30," he said. QSRs also compete against darshinis and street food vendors for wallet-share. 


INVESTMENT ON THE TABLE 
• Accel Partners has invested in Bangalore based Kaati Zone, which serves kaati rolls 
• Sequoia Capital recently invested in Mumbai based Kebab and wraps chain Faaso's 
• India Equity Partners invested $35 million in Sagar Ratna, a Delhi-based South Indian restaurant chain 
• Everstone Capital bought a 45% stake in north Indian food chain Pind Balluchi 
• New Silk Route Partners is holding talks to buy a big stake in Vasudev Adiga’s