Foreign private equity attracted by Indian logistics industry

BENGALURU: The promise of high growth in the country’s warehousing and logistics sector is luring not only foreign investors but also private equity firms. According to real estate consultancy firm JLL India, in 2015 the sector received Rs 1,438 crore in investment through two major deals, topping the Rs 1,350 crore inflow to the sector in 2012 through five deals.

“The year 2013 had seen a remarkably low investment. However, government initiatives in making the policy environment-conducive and strengthening of the ecommerce logistics platform post-2014 seems to have resulted in an investment comeback as seen in 2015,” said Nirav Kothary, head of industrial services at JLL India.

Some private equity funds that are looking to invest or have already invested in the segment are IL&FS (Tara India Fund III), Fidelity International, Milestone Capital Advisors, Standard Chartered Private Equity, Everstone Capital and Kohlberg Kravis Roberts (KKR).

Institutional players expect an internal rate of return (IRR) of about 16-20 per cent from a warehouse development project. Experts say that policies allowing 100 percent FDI in warehouses and food storage facilities under the automatic route (where manufacturers can sell their products online directly), as also declaring some zones to be tax-free (i.e. free trade warehousing zones or FTWZs), has brought the sector under the foreign PE investment radar.

Global private equity firm Warburg Pincus had entered into a joint venture with Embassy Group to invest Rs 650 crore for setting up warehouses across major cities in the country. The New York-based private equity has also committed Rs 850 crore to Ecom Express, a logistics solutions providers to the Indian ecommerce industry.

“We believe there is significant potential to make further investments in the Indian logistics space as the sector continues to evolve and develop,” said Viraj Sawhney, managing director of Warburg Pincus. The fund has committed over $500 million to the sector to date across a number of investments spanning Continental Warehousing, Ecom Express, Embassy Industrial Parks, Gangavaram Port and IMC.

“Warburg Pincus is investing from a global $12-billion fund. We have no predetermined investment size and our equity investment typically ranges from $50 million to $500 million,” said Sawhney.

Data shows that nearly 25 per cent of all warehousing absorption is driven by the ecommerce segment, making it the biggest demand driver for the sector, with Maharashtra, Gujarat and Andhra Pradesh been the frontrunners in attracting industrial investments.

Under the ‘Make in India’ initiative, states like Punjab, Haryana and Karnataka are also taking bold steps towards better industrial policies.

“This segment is extremely important for us. We have already invested into warehousing in the past and have experienced very healthy returns. Now, with the ‘Make in India’ initiative, attractive investment opportunities for NRIs into domestic AIF, rising yields from commercial assets etc., makes it worthwhile for us to look at this sector very seriously,” said Rubi Arya, executive Vice-Chairman at Milestone Capital Advisors

Experts say the biggest challenges are in aggregation of land and getting development permissions. Since warehousing is primarily allowed in urban zones, the cost of land is prohibitive. However, with the rollout of GST, it is expected to get better and more transparent.

According to JLL India, warehousing is seeing higher supply of organised Grade-A and B warehouses. In 2015, the cumulative warehousing supply (grades A and B) across eight cities stood at about 97 million sq ft compared with 79 million sq ft in the previous year. This supply is expected to reach 116 million sq ft in 2016.

With industrial corridors like Delhi-Mumbai industrial corridor (DMIC) and the expansion and improvement of road network, things are indeed looking up for the industrial and warehousing sectors, they say.

Credits ET Realty

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