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Cold Chain Industry Set To Emerge As Sunrise Sector With High Investment Potential Post-COVID

The domestic and offshore funds are expected to diversify their portfolios and continue to invest in high yielding cold chain assets and many foreign institutions are exploring opportunities to invest in this growth sector.

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The Cold Chain industry in India has been shunned for a long time due to the requirement of high initial and operating costs, and lack of adequate infrastructure. However, the stakeholder sentiment is beginning to change. The cold chain sector is being termed as the sunrise sector gauging its indispensability and the investment potential in the near future.

Thanks to the government’s continuous efforts and favourable policies such as providing infrastructure status to cold chain industry, profit linked tax holiday, priority sector lender and lower GST, the sector is developing at an accelerated pace.

Additionally, the government’s decision to exempt service tax for cold chain services such as pre-conditioning, pre-cooling, ripening, waxing and retail packing among others, and excise duty exemption for refrigeration machinery and parts used for the installation of cold storage or refrigerated vehicle have only boosted the segment. There is, however, still a considerable gap between existing capacity and the requirement of cold chain infrastructure in the country. This gap presents a significant opportunity for stakeholders associated with the industry.

Factors contributing to the emergence of this sunrise sector

Growth in the organized food delivery and e-commerce segments remains a key driver for the cold chain sector in India. Food retailing has come of age and the growing penetration of organized food retail in the country has dictated the development of efficient cold chain supply management.

Other factors acting as catalysts for the cold chain industry include a rising emphasis on reducing food wastage and government initiatives. For example, FDI up to 100% is allowed and viability gap funding up to 40% of the project cost. The development of a “one-stop-shop” model to offer end-to-end logistics solutions has been favoured by India's Cold Chain industry. It is moving towards greater efficiency, optimizing end-to-end logistical progress, providing one-stop-shop cold chain solutions, and taking benefit of the growing number of Third-party players (3PL).

The upward trend towards outsourcing temperature-controlled logistics leads to demand for end-to-end supply chain services in this sector. Other than storage and distribution, the cold chain operators will be expected to provide value-added services like order processing, kitting, packaging, sorting, grading, etc. to create new revenue streams.

Developers are expanding into Tier II and Tier III cities as well. Such changes have led to a massive spurt in the food service industry, resulting in the cold chain requirements.

The OPEX (operational expenditure) model is likely to emerge over the CAPEX (capital expenditure) model as many cold chain operators may give more attention to cash flow optimization, as it is a better alternative to buying land and building the facility.

New horizons for cold chain industry

The cold chain industry's growth will demand a more skilled workforce in various realms such as drivers, forklift/reach truck operators, refrigeration technicians. In this context, the government’s Skill India Initiative with a significant focus on training and skilling will help boost the sector in a big way.

With the COVID-19 vaccine roll out in January 2021, the Indian government and cold chain private operators are gearing up to store and deliver vaccine products. The bulk of vaccines in India will be distributed by the Central Government Universal Immunization Programme (UIP) mechanism. According to the Ministry of Health and Family Welfare, the government expects to receive and utilize 400-500 million vaccine doses for COVID-19 and cover approximately 20-25 crore people by mid-2021.

The safe delivery of vaccines for mass immunization against COVID-19 requires huge cold chain facilities in the country as the vaccine product requires refrigeration or frozen condition for storage. India being the second largest country in the world in terms of population and with the second highest number of COVID cases in the world, it requires about 2-3 years for complete immunization against COVID-19. This will create sustained business opportunities for private cold chain players in storing, transportation and distribution of COVID-19 vaccine products.

Operating costs for the cold storage business in India are higher compared to the western countries. Operators are likely to adopt energy-efficient practices as part of their strategy to reduce operating costs. These practices include energy recovery systems, water reclamation systems, solar energy, refrigeration plugins; energy-efficient designs of refrigeration equipment and automation are some of the innovative features.

In addition, the market is likely to witness the adoption of cost-effective technologies like Radio-frequency Identification (RFID), Track Management System (TMS), Order Management Systems (OMS), and Warehouse Management Systems (WMS) in the near future.

Investors are confident that the cold chain is a safe bet for their capital investment. The domestic and offshore funds are expected to diversify their portfolios and continue to invest in high yielding cold chain assets and many foreign institutions are exploring opportunities to invest in this growth sector.

Investors remain focused on facilities supporting ‘First-mile delivery ‘. The growing middle class and young age population in India have become accustomed to e-Commerce and door-to-door deliveries, furthering the demand for refrigerated deliveries.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Srinivas N

Managing Director, Industrial & Logistics, Savills India

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