Private equity investments in India’s logistics services sector are set to rise as it

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gears up to improve transportation — with costs among the most prohibitive in the world — and boost related infrastructure bottlenecks.

The last four years have seen considerable growth in mergers and acquisitions (M&A) in logistics, ports, warehouses and container freight stations while free trade warehousing zones (FTWZ), freight stations, cold chains and captive spin-offs such as auto and retail logistics are seen as attractive targets now.

While analysts expect logistics to be among the top five sectors for PE investments in India in the near term, deal sizes will likely be around $20-$25 million.

“Many PEs are wary of investing given the small size of companies and therefore, lower investment ticket sizes. The key to more deals in this sector is, thus, breaking this loop,” said Manish Saigal, executive director, KPMG Advisory.

“The time is ripe for PEs to have the foresight to see a tree in five years’ time where others only see a seed at present.”

Logistics is seen as an attractive sector for PE investment as it offers strong free cash flow, low capital expenditure and much higher growth rates than in the transportation industry as a whole. About 17 small-ticket acquisition deals worth close to $500 million were struck in 2009, despite the downturn and going forward, a strong bounceback is expected, Saigal said.

“Infrastructure in India is very weak so logistics is very expensive than any other country,” said Sumir Chaddha of Sequoia Capital, which has invested in about 50 Indian companies including Cafe Coffee Day and Idea Cellular. “So, there is tremendous scope for improvement. Lot of it will be driven by infrastructure upgrades,” he added.

Logistics companies are on expansion drive, striving to grab a higher share of the fast-growing market. Trade estimates indicate overall logistics spending at about 13 per cent of India’s GDP while the industry is growing at 15-18 per cent annually.

Higher fund allocation in this year’s federal budget to boost infrastructure also offers tremendous growth opportunities for investors in the logistics industry.