As more and more processed food is wolfed down.
Surging demand for processed foods, riding on a visible proliferation of quick-service restaurants (QSRs) and organised retail, has given a huge impetus to the cold chain industry. Government policies and schemes in the form of capital subsidies, grant of infrastructure status and viability-gap funding have also helped.
CRISIL research estimates the cold chain industry to log a compound annual growth rate (CAGR) of 13-15% in revenue from Rs 225 billion in 2015-16 to Rs 450 billion in 2020-21. That compares with a growth of 11-13% in the previous five years.
TCW Segment to Drive Revenues
Bulk of the growth will come from the temperature-controlled warehouses (TCW) segment, which comprises 90% of the cold chain industry revenue, and is expected to grow 14-16% a year (CAGR) to Rs 420 billion by 2020-21.
Within this segment, multi-purpose cold storages dominate, and their share of segment revenue is seen rising from 77-79% in 2015-16 to 84-86% by 2020-21.
CRISIL Research estimates investments of Rs 150-200 billion in the industry (comprising TCW and temperature-controlled vehicles, or TCVs) between 2016-17 and 2020-21, as demand for cold storage space and refrigerated transport (reefer) vehicles surges. Predictably, about 90% of the total investment is expected to flow into the TCW segment – primarily multi-purpose cold storage, which offers the prospect of early payback.
Growing urbanisation and rising per capita income are spurring growth of organised retail in the country, with purchases of frozen meats and vegetables at malls and retail outlets rising. That has sharpened focus on supply chain management and cold storages. Modern retailing formats require multiple sourcing and a centralised holding and dispatch system, followed by a decentralised sales network. Hence, strong growth in organised retail is expected to be a key growth driver.
Processed fruits, vegetables and meat products – the main users of cold storage facilities – form about half of India’s total exports. Exports of animal products include buffalo meat, sheep or goat meat, poultry products, animal casings, seafood, etc. Imports include raw materials for the chocolate and pharmaceutical industries, which are highly sensitive (especially pharma drugs regulated by importing countries), and hence, meeting quality through modern cold storages is of utmost importance.
Demand is surging as time-constrained urban consumers veer towards ready-to-eat products. This is benefiting the cold chain industry, whose services are being utilised by leading fast food chains such as Dominos Pizza, McDonald’s, Pizza Hut and Subway.
The organised QSR industry, according to CRISIL Research estimates, stood at Rs 136 billion in 2015-16 and is projected to accelerate at 18-21% CAGR to Rs 235 billion by 2018-19, driven by both established players and relatively new entrants potentially opening new outlets.
TCVs to See Moderate Growth
All this is also benefiting the TCV segment, which accounts for around 10% of the total industry in value terms. CRISIL Research expects TCV revenue to increase to Rs 26 billion in 2020-21 from Rs 17 billion in 2015-16, at a CAGR of 8-10%. Meat, dairy products and pharmaceuticals are expected to remain the drivers.
As per our interactions with players, there are around 15,000 reefer vehicles in the country today. A National Centre for Cold-chain Development (NCCD) study, released in September 2015, has indicated a requirement of 62,000 reefer vehicles. However, despite this huge requirement, we believe investments in reefer vehicles would be limited, mainly because this is a highly fragmented segment and the margins are typically low.
Government Schemes Aid Investment…
On its part, the government has taken a number of steps in recent years to improve investment in cold chains, including exempting customs duties on refrigeration units and equipment, setting up mega food parks, providing tax benefits on investments and creating the NCCD.
The cold chain industry has been accorded infrastructure status to ensure it is able to access low-cost funds for longer tenures. To attract foreign capital, 100% FDI was allowed under the automatic route in 2010-11. In May 2015, RBI classified loans to cold chain companies under ‘agriculture activities’ for priority sector lending, subject to a sanctioned limit of Rs 1 billion per borrower. Then, capital investment in creation of modern storage capacity has been made eligible for viability gap funding (PPP-VGF) scheme of the Ministry of Finance – with funding capped at 40% of overall project cost. A host of other schemes to boost investments in cold chains are also operational, including those of the Ministry of Food Processing Industries, Agricultural and Processed Food Products Export Development Authority and Mission for Integrated Development of Horticulture.
But capex, Fuel Costs Among Dampeners
However, most large potential investors still remain on the sidelines, awaiting improvement in the retail environment, especially since cold chain operations in India can cost more than double that in many other countries. India lacks proper infrastructure facilities for storage of fruits and vegetables, meat and seafood, etc and the lack of adequate back-end infrastructure has resulted in the produce not reaching markets for consumption.
Among other challenges, energy infrastructure is extremely lacking and serves as a huge impediment to integrating cold chain capabilities across the supply chain.
Low awareness on modern cold storage facilities also makes it difficult for players to charge higher rentals. Organised multi-purpose players (vis-à-vis unorganised players) use environment- friendly refrigerant products.
Another impediment is taxation. Current tax and subsidy rules prevent large logistics companies from creating economies of scale through efficient hub-and-spoke type distribution systems. Instead, logistics companies are encouraged to create small stocking facilities in every state. Given the expected implementation of GST by July 2017, it may be possible to create infrastructure on the basis of logistics requirement rather than taxation requirements.
AUTHORS CREDITS & PHOTOGRAPH
Binaifer F Jehani
Director
CRISIL Research
