Arisaig Partners

India Deep Dive: Resilience, Recovery and Adaptation

Hugo, Strategy Research Partner, joined Vasudha and Vatsal for a ten-day tour of India, travelling to four big cities: Delhi, Hyderabad, Chennai and Mumbai.  Alongside meetings with the management of holdings and prospects, we spent time visiting households, SME manufacturers and hardware retailers.

Getting back to in-person meetings and spending our weekends walking around the aforementioned cities served as a reminder of the value of in-market travel, with the ‘softer’ impressions impossible to replicate through desk research.  The sense of energy and optimism in India was palpable, with the level of activity and ‘hustle’ back to pre-COVID levels and then some.

The big picture: India vs China

At USD 2.7 trillion, the ‘official’ Indian economy is apparently the same size as that of the UK, which does not really tally with the observable levels of activity at street level and the 20x larger population of India. If we adjust for purchasing power parity, Indian GDP is 3x bigger than the UK, which feels intuitively more accurate, although our hunch is that there is a huge amount of additional activity that remains hidden from the official statistics (in a way that does not happen in China, for instance).

India’s population is 1.38 billion, almost exactly the same as China, and indeed is set to surpass that of its northern neighbour within the next year. And thanks to strong demographics, it will continue growing for many decades to come. Even if the government of India does an average job, the economy can grow at a mid-single digits rate; but the expectation is that high single digit GDP growth should be quite achievable for a long while yet. Given China’s level of development, and Beijing’s recent (necessary) pivot to quality of growth as opposed to quantum, a low single digit rate of growth seems realistic for this country. This is all to say that it seems inevitable that India will close the gap with China in terms of economic scale over the next couple of decades.

One of India’s perennial bottlenecks relative to China has been infrastructure, but this is moving forward, with huge improvements visible since Hugo’s last trip three years ago. Unlike China, India cannot simply bulldoze historic city centres and replace them with newer versions: see Old Delhi photos below).

Old Delhi walkabout

Instead, the model appears to be one of building new cities on the outskirts of the big metros and using these as the hubs for developing new industries, given the old city centres are clearly not suitable for this.  Hyderabad has been particularly notable in this regard, with its ‘Cyberabad’ district to the west of the old city being home to a rich array of pharma, BPOs, MNC tech companies and financial services companies.  Driving here from the airport felt like being in Singapore or China.

India or Singapore?

The pattern of new town development is similar in Delhi, which is flanked by tech-hub cities, Noida and Gurgaon.  As we heard from the CEO of InfoEdge (which runs the leading online jobs portal in the country), India retains a pretty unassailable advantage for outsourced service industries – as he put it, there is simply no-where else where the likes of Microsoft or Oracle can hire (within weeks) a couple of thousand people with good English and requisite technical skills.

The other high-level observation was that planning for the much-vaunted ‘China + 1’ is now really happening, and India is likely a beneficiary.  What we heard was that the initial 2020 lockdowns in China did not actually change thinking amongst supply-chain managers because this policy from Beijing was regarded as a fairly rational (if rather draconian) response to an extraordinary and unprecedented situation. However, the rolling, unpredictable lockdowns imposed in the first half of 2022 were something of a watershed moment, with Western supply-chain planners now waking up to the view that China is perhaps not the stable policy environment that was once assumed. This means that India is starting to look more favourable than China from a policy-risk standpoint. Whilst writing this blog, a news story flashed up stating that Apple would be shifting production[1] of AirPods to India.  We are starting to see a drip-feed of similar stories, including iPhone 14 production going to India[2].

Hurdles remain for India, including engineering-related ‘skilling’ of the labour force and coherent build-out of hard infrastructure, but both are being improved. For instance, the government’s Gati Shakti[3] (‘strength of speed’) initiative is intended to create a data-driven, integrated and seamless platform for infrastructure project approval, all with the intention of meshing together hitherto disparate manufacturing clusters.  Such tools will be essential if India is to attempt to replicate the complex, scaled supply chains that give China such an advantage in manufacturing at present.

Bottom-up sentiment

Over the course of our trip, we spoke with around a dozen households.  One caveat here is that these were generally A and B income levels, all in high tier cities, so may not give a complete picture.  However, what we can conclude is that urban consumer sentiment remains in pretty good shape, with households conscious of inflation but not to the extent that it is fundamentally changing behaviour.  One lower income household we met did mention they would reduce the frequency of clothes purchases, but generally there was no change in loyalty to the usual FMCG brands, and no intention to down-trade. If we were to conduct similar conversations with households in developed markets right now, we suspect the mood would be utterly grim – as to be expected with inflation going from almost zero to 7-8% and energy prices going ballistic.  By contrast, India is quite well accustomed to mid-to-high single digit inflation, so going from c.4% to the 7% today is not too much of a big deal.  This may explain why most people we met were in a buoyant mood. The mood of the households tallied with what we heard with our SME and paint dealer channel checks.

The second major finding was that the shift to ecommerce amongst upper tier consumers should be sustainable.  Upper tier consumers order an array of products online these days, including fresh grocery.  Using ecommerce was obviously essential during the COVID-era, but having experienced the huge improvement in convenience, consumers are minded to stick with online ordering as far as possible.  A partial exception would be apparel, where for obvious reasons people do still like to go to a store.  One thing we might fail to appreciate sitting from our perches in developed countries is that traditional offline shopping in India is not just inconvenient but also unpleasant – one woman described her dislike of traipsing around a street market in the heat, haggling for everything, carrying heavy bags around, then taking them home on a crowded bus or a rickshaw (entailing more cost, stress and haggling). Therefore, when we see a slowdown in ecommerce in developed markets as consumers relapse back to offline shopping, we should not assume the same pattern will repeat in Emerging Markets – the situation in the latter is fundamentally different.

Our meetings with SME manufacturers were primarily intended to gain insight on the value proposition of IndiaMart, the country’s leading online B2B marketplace.  To take a step back for context, India has around 20 million of these SMEs.  These are doing all sorts of things, from manufacturing leather goods, building materials or furniture, to selling seeds and tractor parts. In the pre-digital era, these companies would have been totally reliant upon local networks and word of mouth to grow.  IndiaMart was set up to solve this problem, allowing these companies to access a national market rather than just the local one.  It enables them to grow into much bigger businesses than would otherwise be possible.

In a separate blog piece from Gordon’s earlier visit, we detailed the long-term prospects for IndiaMart, suggesting that revenues could be 15-18x higher than today, assuming continued sound execution.

It’s important to re-iterate that point on execution, and to be emphasise to our readers that this is not a ‘slam dunk’.  From our visits, as expected, we heard complaints from some merchants about lack of relevance of some leads from potential buyers sent to them by the platform.  And yet even for these more sceptical users, IndiaMart remains an important business development tool and there are no alternatives that can be considered. Many merchants we spoke to had tried using a smaller rival platform but found it useless. We also heard from our meetings with the founders of IndiaMart that the company is very focussed on increasing lead relevance, with a longer-term view to using this to increase ARPUs.

Having said this, there were quite a few merchants we met who loved the platform, and had no complaints on lead relevance.  These people viewed IndiaMart as the indispensable tool for growing their business. An example was a shoe and handbag manufacturer we visited, hidden away in the centre of a maze of alleyways in Mumbai (pictures below).

Mumbai alleyways

This company paid around USD2,000 for a three-year contract and got payback on this within two months! The company gets some 30% of its orders from IndiaMart leads now. This may be an extreme example but is illustrative of the immense user surplus that Indiamart can generate for merchants that use it effectively.  This bodes well for the long-term ability of the company to increase ARPUs.

Shoe and bag manufacturer in Mumbai – owner using the desktop site of IndiaMart

Interactions such as this demonstrate why we like to run concentrated portfolios, underwritten by very in-depth on the ground research. Were we to run more diversified, low conviction portfolios of 50-60 names (the norm for most EM managers) there would not be much point in spending days traipsing around small factories in the backstreets of India. Our philosophy is that by putting in the hard yards on the ground we are able to build conviction in a small number of exceptional companies like IndiaMart, and that it is this stock selection capability which we expect will continue to drive our alpha over the long term.





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