Private equity circles infant Indian drug chains

By Narayanan Somasundaram and Bharghavi Nagaraju

MUMBAI, Oct 11 (Reuters) - Private equity firms are circling India's infant organised drug retailers, betting on high returns and a mergers and acquisitions led consolidation.

Indian drug retailing, worth about 300 billion rupees, is currently ruled by standalone stores.

New and aggresive technology-enabled organised retailers, with robust inventory management, are now taking centrestage, and analysts expect them to grow 50 percent annually.

"We have been looking at a lot of these firms, but haven't found the right size," said Aluri S Rao, director-investments at ICICI Venture that manages more than $2 billion in funds.

Other private equity hunters include UTI Ventures, Standard Chartered Private Equity, Warburg Pincus and a clutch of smaller funds eager to fund the ambitious expansions.

These firms are betting on a switch in consumer habits as incomes rise -- to brands, organised retail and plastic money. The chains too are keen on selling equity to hasten store launches, even as they wait for the existing stores to turn profitable, and protect their head-start.

Chains led by Apollo (APLH.BO), the largest with about 300 stores, LifeKen, MedPlus and Himalaya Drug are just starting out. Analysts peg the optimal size at about eight times that of the largest Indian player.

"We are possibly the most fragmented market," Anil Rajpal, associate vice president at consulting firm Technopak, said. "Several small regional players are expanding. The PE players will help in funding the growth plan."

ICICI's Rao says the fund will track the sector and look at a possible play in the consolidation phase.

SIZING UP

If the private equity players are waiting for the right sizes, retailers too are pushing for it.

MedPlus aims for 1,000-plus stores in two years from 210 now, said Apu Gupta, its chief marketing officer. ILabs Capital has invested $5.2 million in the chain. LifeKen plans to spend 1 billion rupees for 600 stores in two years and Himalaya aims to double its stores to 200 by end of 2008 with an investment of up to 150 million rupees.

Both the firms say they have had PE advances, but have warded it off for now. LifeKen Chairman Pranabh Mody said he would tap private equity only at an "appropriate time."

"There is room for a lot of players ... over the next 5-10 years. Someone can emerge strong before the large players enter." said Rajesh Raju, investment director at ILabs Capital. "It is a new structure, an evolving model with a lot of promise. A lot of players are there now and a shake-up will drive it further," a vice president of a domestic fund said.