All of Arisaig’s partners were in India in February to run two separate tracks of visits to current holdings and prospects. Business confidence here remains ‘full steam ahead’. A recent survey[1] in Business Standard showed that 86% of CEOs are looking to expand capacity this financial year. Industrial credit[2] is back to growth (at a high single digit rate) having flatlined over the last two years. Rates in India are higher than during the COVID period, but actually below their 10-year average[3]. While the West worries about inflation and geopolitics, India is getting on with relaunching its pre-COVID growth trajectory.
Through good times and bad, one of the key amplifiers of domestic demand growth Arisaig is looking to harness in India is that of formalisation in basic consumption categories. The formalisation opportunity in retail, in particular, has long been a core pillar of Arisaig’s investment approach: businesses such as Wumart (Chinese hypermarkets), Sumber Alfaria (Indonesian small box), Future Retail (Indian grocery retail) and Raia Drogasil (Brazilian drugstores).
In India when evaluating the modern retail opportunity, it is critical to understand the immense scalability of the opportunity set. Whether it is apparel retailer (Trent), grocery retailer (DMart) or pharmacy retailer (Medplus) the growth opportunity when compared to western peers is staggering.
Of course, India isn’t America today in GDP terms but the competition isn’t either. In terms of evaluating the growth opportunity for Trent, DMart or Medplus, it is important for us to be on the ground (we have had an office in India since 2005). We know that the main competition isn’t formal competitors, but the local informal traders on the streets.
Focusing in on Trent, whose share price is up c.295% over the last 5 years. Our meetings reaffirmed that one of the key factors behind Trent’s continued strong growth in 2022 was the quality of its execution during the depths of COVID. Inventory management discipline (from our company meetings we believe Trent was one of the few businesses whose inventory days decreased in 1H21) was particularly crucial. On a longer-term view, the positioning of its Zudio brand continues to enable the company to make steady formalisation inroads: its pricing is similar to that of informal street vendors, but with significantly better quality (based on our own survey of 500 shoppers and various channel checks).
The upside surprise for Trent so far in 2023 has been that its grocery retail business has turned profitable, despite competing against 10 million kirana stores that can offer credit and convenience in equal measure. Trent’s ‘religious’ focus on pricing at a local level seems to already be winning over the hearts, minds, and wallets of Indian consumers. Longer term, its aspiration is to seek differentiation through the quality of its fresh produce – certainly a compelling proposition if they can overcome the inevitable supply chain complexities. The team continue to investigate this through channel checks and local expert meetings locally.
References:
[1] https://www.business-standard.com/companies/news/india-inc-upbeat-on-sales-may-increase-capex-hiring-in-fy24-ceo-survey-123040200399_1.html
[2] https://bfsi.economictimes.indiatimes.com/news/industry/higher-credit-growth-to-support-overall-economic-momentum-in-india/98398298#:~:text=Credit%20growth%20to%20industry%20registered,to%20contraction%20in%20manufacturing%20GVA.
[3] https://tradingeconomics.com/india/interest-rate
