As is often the case in India, it is hard to reconcile the current doom-laden headlines: India’s economic growth sputters to its weakest since 2013, with a stock market edging towards new highs, having doubled since that time. It is certainly the case that growth is not where India needs it to be if it is to find jobs for its young and growing workforce, and not where Mr. Modi envisaged it being when he forecast becoming a $5tn economy by 2025 (a near doubling, or around 8% per annum) at last year’s World Economic Forum. The reasons for this sluggishness are already much discussed (shadow finance concerns, property sector consolidation, auto habits changing, unhelpful monsoon etc.) but more importantly what is the outlook? A recent trip to Delhi, Madras and Bangalore provided some further insights.
Whether globalisation is in decline or not, India should be a worthy recipient of any manufacturing investment which may be diverted from China, either for cost related or political reasons. It is getting some, as the boom in domestically made mobile handsets demonstrates, but not as much as you might expect when you think of its huge, low cost work force, as well as its future potential as a market for such products.
It is hard to fault Mr. Modi’s single minded approach to resolving this conundrum. India’s ease of doing business ranking has improved from, an albeit shocking, 140th in the world in 2014, to around 60th today. Since its introduction in 2017, the Goods & Services Tax (“GST”) systems have been refined and simplified, with the number of items paying top rate GST slashed from over 200, to less than 30. Most recently, the effective corporate tax rate has been cut from, an admittedly uncompetitive 35%, to a very competitive 25%, and even less for new, qualifying investment projects.
According to Bangalore-based Teamlease, one of India’s leading providers of contract labour, there are approximately half a billion Indians in employment, of which an astonishing 40% are “outsourced”. This compares with typical global numbers of 5%-15%, with the point in this range typically determined by the relative difficulty in hiring and firing. So, as per the usual law of unintended consequences, the harder you make it to fire someone, the less likely they are to be hired in the first place. Much of this “outsourcing” in India is done by small local players, presumably designed purely to circumnavigate the draconian and complex labour laws, of which there are apparently about 44 to contend with before employing someone.
Teamlease are convinced that by March, thanks to the Bharatiya Janata Party (“BJP”) mandate and the ability it gives them to make some tough decisions, these will be simplified into four codes covering wages, social security, health & safety and industrial relations. The irony being that this is likely to result in a dramatic shrinkage of Teamlease’s addressable market, but the impact for the country will be much more positive.
In summary, the BJP playbook is becoming a classic low tax, anti-red tape, investment friendly agenda, designed so that the entrepreneur, whether Indian or not, can prosper and hopefully employ some more of their people. To help pay for it, large scale privatisation is next on the agenda – Mrs. Thatcher would be proud.
Interestingly, the drivers of inward investment heading India’s way might well be from Chinese companies rather than multinationals. This has been the experience in mobile phones, with all the Chinese manufacturers well represented locally, admittedly encouraged by strong incentives such as high import tariffs. Relatively cordial relations between the two leaders undoubtedly helps, but also the numbers in India are proving too tempting for many a Chinese entrepreneur, having witnessed first-hand what has happened at home during the past 20 years.
Meeting the Chinese founders of HappyEasyGo, India’s fastest growing online travel aggregator, in Delhi recently made this point very clear. The business model is based on the experience of Qunar in China who disrupted Ctrip, until Ctrip felt the need to buy them out. Now, in what must seem like déjà vu to Ctrip, HappyEasyGo are snapping at the heels of Ctrip investee and market leader, MakeMyTrip in India. Furthermore, Alibaba and Tencent are never far from any private equity funding roadshow in their respective sectors.
This investment friendly stance, while laudable and, in our opinion, likely to be highly beneficial in the longer term, maybe less helpful in the shorter term. Right now, India also needs some more monetary easing. Even with the supposedly more dovish Shaktikanta Das in charge, the Reserve Bank of India still does not accept that the inflationary dragon is well and truly slain. Real rates are still too high, but banks are also cautious, and big corporate borrowers such as the Reliance and Birla groups, are now deleveraging, rather than gearing up. Lower interest rates are inevitable, but the animal spirits needed to put them to good use may take more time.
So if a broad economic improvement is likely to be slow in coming, perhaps another few quarters hence, it remains all the more important to focus on areas of the economy which are experiencing growth rates well ahead of trend, and within these, on companies who are benefitting the most. A few examples of these are healthcare, soft drinks and shopping malls and particularly the cinemas within them.
Healthcare
Healthcare is an area of undoubted need with a mere 12 beds per 10,000 Indians versus 29 in America and an impressive 42 in China. Need is one thing and the ability to pay for it is another. With roughly half of medical bills still paid out of pocket, usage of private sector hospitals is driven by the wealthier end of the population, and it is here that the dramatic rise in non-communicable diseases (cardiac, oncology, diabetes) is also obvious. Much of this is diet and lifestyle related. Private insurance is also a driver of private healthcare expenditure, but again focused on the same wealthier, and increasingly well-fed, cohort. Madras based, but now nationwide operator of hospitals, Apollo is particularly well placed to address this market, and with ample bed capacity to fill after its rapid expansion earlier in the decade. By far the largest private hospital bed operator in India with over 10,000 beds, Apollo is also the leading organised pharmacy retail chain, which is gradually extending across the country.
Soft Drinks
According to Varun Beverages, soft drink consumption in India runs is below 50 bottles per capita, versus over 500 in Brazil, and nearly 1,500 in the USA and Mexico. The electrification of every village in India is now largely complete, removing one of the major barriers to wider sales, namely keeping the drinks cool in what is undoubtedly a hot country. Varun Beverages has been steadily increasing its Pepsi bottling footprint by taking over underperforming territories, and now controls the vast majority of states, and over 80% of Pepsi volumes sold in India. In most of these states, Pepsi has fallen well behind Coke given years of poor management, and this presents a huge opportunity for Varun to win back share, on top of the underlying industry growth. Their impressive track record, over 17% compound annual growth rate over the past five years, suggests this should be readily achievable. The pivot to healthier fruit juices and dairy based drinks is as well advanced in India as anywhere else and Varun is well positioned here too.
Malls/Cinemas
There is nothing better than a weekend in Madras, India’s 6th largest city and capital of the southern state of Tamil Nadu, to understand the Mall culture which is taking root in India’s urban middle class. It will not be news to many that India’s city streets are hot, dusty, polluted, busy and often ill defined, with pavements sometimes hard to find. As Manila, in particular, has shown before, the lure of a clean, air-conditioned Mall is hard to resist in such situations. Saturday night at the PVR Cinema in the Skywalk Mall was bustling, albeit the majority of visitors had better film taste than your correspondent, sensibly opting for Bollywood’s best over the latest Charlie’s Angels offering. Sunday afternoon and the relatively new Phoenix Market City Mall in the southern district of Velacheri was also packed, despite being relatively isolated. For today at least, this is purely a destination mall, since almost nobody else was foolish enough to approach on foot, especially not from the MTR stop two miles away.
There are about seven cinema screens per million Indians, versus 36 per million in China, and over 100 in the US, and this in a country that makes more films than any other country in the world. PVR is the leading chain in an ever consolidating cinema industry with nearly 800 screens. Modern multiplexes now account for around a third of India’s 10,000 screens up from 10% a decade ago. PVR has a commanding presence in 17 of India’s top 30 shopping malls, as well as a strong premium offering such as the Luxe brand present in Market City in Madras.
Conclusion
As we have discovered in China in the last year or two, when a sizeable economy grows at around 5% per annum, even if this is slower than it is used to, it still presents plenty of very profitable investments opportunities if you look in the right places. The same can be said for India today. The important difference is that Chinese trend growth is unlikely to reaccelerate to the heady heights of the past two decades, given the much more advanced stage of its economy, and its demographic profile. That said, there is likely to be cyclical upside in the next year or two as trade uncertainty dissipates and monetary and fiscal easing kicks in.
India, on the other hand, is expected to revert towards much faster trend growth once the current slowdown passes. This is mostly because of its young population, better demographics and an earlier stage in the process of urbanization, but also because of the structural improvements made in recent years, as well as the ongoing infrastructure investments. Whether it is the need for better healthcare, the joy of a cold Pepsi, or the escapism of a modern (and cool) multiplex cinema, these potential growth opportunities are only going to become more attractive when this happens.
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