We have been privileged to host many of our endowment clients and family offices in India so far this year. Given half of our investments are in India, this reflects our long-standing outsized exposure to the country but also their own growing interest in how to best reflect the world’s largest democracy and world’s fifth largest economy in their own allocations.
For us, the most important part of our job is to help these institutions spend time in the households of Indian consumers. This makes perfect sense given our portfolio is filled with consumer businesses but more than that it gives investors a sense of what ‘middle class’ India actually looks like, and what they are actually thinking.
The key take-away is that if you have invested in Arisaig over the last 25 years you have been investing behind 300m Indians rising from basic living standards to just getting on the ladder. Our soap, biscuit and toothpaste businesses were part of this story. The basic equation is they deliver 20% earnings growth, and you factor in 4% currency depreciation, 4% or so for a de rating and you will be sitting happy on teens
USD returns when all is said and done. That is what our clients signed up for and that is what we delivered in Asia.
The next 20 years is about 600m people moving from lower middle class to middle class, or visually 600m people making the transition from the left- to the right-hand side below.
600m Indians making incremental changes
Source: Arisaig Partners
Whilst income growth linked to better jobs will provide general support the key for us is finding categories that deliver more than income growth. Packaged food, apparel, footwear, and cosmetics.
Focus on categories growing faster than incomes
Source: Arisaig Partners, Marketline Research
This happens because when families moving
from the left-hand side to the right-hand side spend differently; the family on
the left buy clothes for their children one or twice a year. The one on the
right might be able to do this at a birthday as well, and maybe a religious
festival.
The family on the left have 4 pairs of
shoes and the one on the right has 12 pairs. The family on the right might also
increasingly have the mother as well as the father working; family income can
increase from better jobs but also from both parents working. This is one of
our key theses for India, the rise of women over the next decade will
fundamentally change consumption patterns in India. More here.
The key conclusion we want our investors to
take away from these household visits is that for us India has never been all
about macro. We were there during the rule of the Congress party and when Modi
took 95% of money our of circulation overnight (demonetisation). It will likely
always be two steps forward and one back, as with all democracies. We like slow
progress as our investments are in consumer businesses and so it is the small
incremental improvements for families like those above that will drive our
portfolio. That is what our portfolio is built to capture.
