Why is the world’s biggest food company craving for a small home-grown maker of sauces and noodles? Nestle is reportedly leading the race to buy Capital Foods Pvt Ltd, contending with other big Indian and global FMCG companies such as Kraft Heinz, Hindustan Unilever, Tata, ITC, Orkla and Nissin Foods.

The answer to why the biggies are trying to slurp up Capital Foods lies in its popular brand — Ching’s Secret. When advertising boss-turned-food entrepreneur Ajay Gupta started Capital Foods in 1995, his secret formula for success was to encash a cultural phenomenon that big food companies had totally missed.

Riding high on a new Indian taste
What helped Gupta make a space for his company on the food table dominated by big brands was a canny cultural insight — for foreign food, the way to the Indian stomach inevitably passes through the masala trail. He noticed that the Chinese immigrants in India started incorporating Indian spices into their cooking, and Indians adapted Chinese cooking techniques and seasoning to suit their tastes. That created a whole new cuisine in India — the desi Chinese. This was the secret sauce Gupta stumbled on. He created Ching’s Secret to ride his way to success on this new cuisine which thrived in homes and on the street but was ignored by big FMCG companies that sold noodles and sauces.

Schezwan Chutney, a Chinese sauce with Indian flavour by Ching’s Secret, was a tremendous success. Such culinary twists by Ching’s Secret have created a whole new food style that includes innovations such as Udupi Chinese. Mughlai Chinese and Schezwan Chicken Biryani.

Desi Chinese, according to the Capital Foods website, is the one cuisine that has linked each and every part of India, from Kashmir to Kanyakumari. This huge segment had not caught the attention of big companies. Gupta’s business innovation drew on India’s cultural evolution which major multinationals — focused on numbers but blind to the local food cultures — had failed to take note of. Ching’s Secret pampered the unique Indian taste for the desi Chinese with hakka noodles, sauces, sauce mixes, instant noodles, instant soups, chutney, masalas and frozen meals.

Gupta had not just elbowed his way into a highly competitive FMCG sector where mega companies ruled — he had created a whole new category for himself. Today, the mega FMCG companies vying to buy out Capital Foods are actually after that unique category.

Gupta’s niche success
In a little more than a decade, the revenue of Capital Foods has grown nearly 10 times. Capital Foods is expected to close FY23 with a Rs 900 crore top line with an ebitda margin of 25%, according to an ET report. The core business is growing at a compounded annual growth rate (CAGR) of 30% while peer brands are expanding in single digits, the report said, citing executives close to the company.In 2006, Biyani’s investment vehicle Future Ventures, had pumped in Rs 13 crore for a minority 33% stake in Capital Foods. Biyani exited in 2013, selling its entire 44% stake to Artal Investments together with its affiliate private equity fund Invus Group for Rs 180 crore. At present, Invus Group, a European family office and investment arm, holds 40% stake in Capital Foods, American private equity group General Atlantic 35%, and Gupta owns 25% in the company.

Reportedly, Nestle might pay more than $1 billion for Capital Foods. The jump in valuation from nearly Rs 40 crore in 2006 to a possible Rs 8,000 crore now underlines the success of Gupta’s innovative idea of the desi Chinese.

The FMCG wars
India’s highly competitive FMCG industry is hotting up with Reliance Industries’ aggressive expansion of its own consumer product brands to neighbourhood stores. RIL is not alone in articulating its FMCG ambitions. Amul India’s goal, under its new CEO, is to become a total foods company and not just a dairy major. Mondelez has announced plans to invest ?4,000 crore over next four years in the Indian market. Tata Consumer Products has been aggressively foraying into various categories of consumer staples. All this when the FMCG market is alreayd dominated by big players such as Neslte, Hindustan Unilver, ITC, Britannia and Godrej Consumer Products.

Most large companies are acquiring local brands or businesses and direct-to-consumer digital brands to spruce up their existing portfolios. Reliance has recently acquired several small brands such as Campa cola, Sosyo Hajoori soft drinks, Lotus chocolates and Maliban biscuits.

Experts believe that with Reliance announcing its FMCG entry, the space will see frenzied deal making, and established niche brands will be courted by the big players at high valuations. That’s why Capital Foods, which created a space for itself, is likely to be bought for more than $1 billion. Analysts say the potential acquisition would be accretive for any buyer given the unique ‘desi Chinese’ positioning, despite about a dozen players in the noodles and condiments space.