Back on the Ground: From Macro to Micro in India
Arisaig’s core belief is that companies with a long-term, multistakeholder approach to doing business will deliver attractive compound returns in emerging markets. To identify such businesses, we conduct deep due diligence before allocating capital. Pre-covid, this meant travelling to the markets we invest in as much as possible (while still meeting our net zero commitments). It is through these direct interactions that we get to see a fuller picture of the potential of businesses and the culture of management. Whilst video conferences and increased reliance on expert networks have helped to fill the research gaps over the past couple of years, our 15-strong investment team have been waiting with baited breath to get back on the road.
After borders re-opened, India was a top priority for us, being the largest market that we are invested in. Partner and Co-CEO, Gordon Yeo, travelled from our Singapore HQ to India in June. He joined Vatsal, our Head of Research, and the India research team in Delhi and Mumbai, where we returned to our pre-pandemic drill of meeting with companies, visiting people in their homes, and spending time in the marketplaces.
At a macro level, the picture for India is definitely mixed. The surge in crude prices is a big challenge for an oil-importing nation – as one consumer put it to us, “in India, everything is linked to oil prices”. Over the course of the year ending March 2022, the import bill for oil almost doubled to USD120bn, tipping a prior current account surplus of 0.9% towards a deficit of 1.2%. However, the country is certainly more resilient than was the case during previous oil shocks. FX reserves are massive at USD600bn (vs c.USD360bn at the end of 2016). Tax revenue has also increased 60% in local currency terms since 2017, taking FY22’s tax-to-GDP ratio to c.12% (approaching the world average of c.14%). FDI has been robust (c.USD80bn+ in each of the last two fiscal years vs. c.USD60bn pre FY19) as India has benefitted from manufacturers diversifying dependence away from China. If this trend gathers steam such that India starts to see the scaled ecosystems of manufacturing necessary to allow complex onshore supply chains (the China model), this will clearly be very good for the country’s long-term development.
On a micro-level, the picture seems to be more positive. Whilst admittedly a small sample size, the four households we spoke to acknowledged inflationary issues but still sounded quite confident in their spending plans. As is well known, India suffered greatly during the pandemic, but was able to move through it with minimal stimulus (4% of GDP vs 12% in Brazil or 26% in the US). This past frugality, combined with sheer relief that life is getting back to normal, seems to be a driving force behind strong urban consumer sentiment.
It was a similar message from our holdings and other corporates that we met. Inflation may crimp short term margins slightly for our staples holdings, but probably won’t make a huge difference for our digital or retail holdings. In any case, those staples names, because they are dominant, should be able to win some market share from smaller scale rivals and informal competition, who are less capable of dealing with these pressures.
The other main message – from both consumers and CEOs we met – was that the digitalisation spurred on by the pandemic has led to structural changes in habits which seem to be sticking even after the return to normal life.
A company that we think is building a durable competitive moat in the digital space is IndiaMart, India’s dominant B2B online classifieds platform. Its main customers (who list their products on the site) are SME manufacturers focussed on non-standardised product categories (everything from tiles to planks to cushions to prosthetic feet!). Although the business is very clearly aligned with the mega-trend of digitalisation, being an aggregator of supply and demand on a national scale, there is also an important offline element to the business. IndiaMart has a c.3,000 strong sales force which goes from door to door onboarding sellers, uploading photos, classifying products, writing product descriptions, and teaching the seller how to use the platform .
One advantage of this system is that is creates a very-hard-to-replicate online catalogue based on a unique taxonomy of classification, essential for helping buyers find exactly what they are looking for and thereby improving the value of enquiries made to sellers. Highly intentional, serious traffic from prospective buyers means that those sellers who use IndiaMart to full effect can achieve impressive returns on investment (ROIs). A range of sellers we surveyed cited ROIs of 7x to as much as 150x from their spend on the platform).
The disadvantage of the offline-online hybrid model is that during the COVID lockdowns IndiaMart could not get ‘feet on street’ and so its model of customer acquisition and cultivation stuttered, meaning revenue and user growth was lacklustre – a notable contrast with pure digital businesses. It was great to hear that IndiaMart’s sales force are now back out in strength in the field, meaning customer activation is sparking up again. Meanwhile, our meeting with the Founder and CEO revealed that he and 150 staff on the product side are focussed on further enhancing the relevance of leads generated by the platform. In simple terms, making IndiaMart even more useful for these sellers will increase their willingness to subscribe, thus increasing the ratio of paying users as well as Average Revenue per User (ARPU).
Leaving aside these shorter-term insights from the visit to India, time in market discussing with the team reinforced that it’s important to take a step back and survey the enormity of the opportunity ahead for a business like Indiamart.
There are currently c.12mn GST (Goods and Service Tax) registered businesses in India, and according to the Founder this will grow to c.20mn in a decade. Hence, we are probably looking at c.7-8mn SMEs that the company can potentially have on its network. Meanwhile, the paying subscriber number today is merely c.170k. The company’s revenue today stands at c. USD100mn. If we assume a hypothetical 25% market share in the long-run within its relevant total addressable market – not unreasonable given how far ahead of competitors IndiaMart is today – there is a potential for a c.10x increase in paying subscribers in a decade. Assuming half of that are in the higher tier subscriber base, at today’s ARPUs, the potential revenue could be c.15-18x today. If India is able to become a true manufacturing powerhouse as suggested above, these numbers could be even higher.
Being on the ground helps us develop deeper understanding of both the macro and micro outlook for businesses that we are potentially going to back for the long-term. This is enormously beneficial, particularly when investing in emerging markets where information is often offline and interpersonal in nature. A two-year pause has made us appreciate this even more.
 Indian Oil Ministry’s Petroleum Planning and Analysis Cell, The Hindu
 Reserve Bank of India, Press Release June 22, 2022
 Worldbank data, Indiabudget.gov.in, Arisaig analysis
 Pib.gov.in press release May 20, 2022
 Statista, Press search, Arisaig analysis
 Company reports
 The Economic times, as of 28 May 2019
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