Rebecca Lewis, Partner and Co-CEO
India has been a perennially outsized allocation for Arisaig over our 28-year history of investing in the Asian consumer. A highlight of the last three years has been the outstanding performance of Trent the Indian apparel retailer targeting the rise of middle class India.
In typical Arisaig fashion, this was a business bought early and small back in 2012. Whilst it delivered a healthy 23% USD annual return to 2021 we paused to reflect at this juncture given it had hit a PE of 140x. At this point, following a detailed reappraisal, our decision was to ‘do nothing’ even at this eye-watering multiple. This reflected our confidence that the new ‘Zudio’ brand would dramatically increase its addressable market and earnings. We must confess that the 500% return since has surprised even believers like us. The evolution of Trent as an apparel business is summarised in the schematic below.
Source: Trent Annual Report & Arisaig Analysis
Whilst consumer feedback remains positive for Trent our focus as long-term investors is to consider where the ‘next Trent’ could lie in the Indian consumer space. We are spoilt for choice in India which like the US is a consumer economy (c.60% of GDP). But of the 5,962 listed business in India there are a whopping 1,535 listed businesses classed as ‘consumer’. All consumer businesses are not created equal, however, and only 50 make it to our watchlist.
Source: Arisaig Partners
These select few have the desired ‘scalable category, dominant company’ combination. Their selection has been informed by our household visits in ‘Tier 2+ India’; some 300 cities outside the 6 main metros that are home to a third of India’s population. This is where consumer spending (and GDP) is rising fastest and so the shoppers to ask if you want to find out where India is heading.
Note: *Metro: cities with more than 10mn population; Tier 2+ : used generically to describe non-metro cities, primarily those between 100k to 10mn population; ^economic growth in USD, assuming India real GDP grows at 6%, nominal GDP grows at 11% and INR depreciates vs USD by 2% per annum;
Source: CNBC MAM, Statisticstimes, Worldometer, Arisaig analysis
The formalization of retail outside “Metro India” has been a key vein of research, and of recent allocations. Beyond Trent (apparel retail) we have identified the sharpest proposition for ex metro consumers in DMart (grocery), MedPlus (pharmacy) and Nykaa (online beauty).
These are not only best in class operators but also demonstrate the requisite long-term mindset. This month as the market was applauding 28% year-on-year GMV growth at Nykaa we were instead hailing cashflow reinvestment that will support consumer acquisition beyond its current 13 million transacting users. 75% of these users are outside Metro India and whilst Nykaa’s average basket of USD 24 reflects its aspirational nature it certainly isn’t targeting the Ambani wedding guests.
Source: Business Today
Meanwhile, on the branded consumer side, whilst Quick Commerce has lowered barriers to entry in many of India’s key cities, a distribution footprint of around 500,000 points of sale still matters if you want to scale up and sell affordably beyond India’s wealthiest 5%.
The big consumer brand names remain relevant and have this distribution prowess in spades but 20% growth from new ‘adjacencies’ can’t always move the needle overall given single-digit growth for established categories. The names that are jostling for a place in our portfolio tend to be established, proven brands that are best in class in terms of innovation and provide a more focussed exposure to the most exciting and scalable growth segments.
After the research is done high valuations in India mean it’s then a question of patience. Market undulations will be part and parcel of India’s rise as always. Our research in MedPlus was completed in early 2023 but we had to wait for a small cap market wobble in early 2024 to make our entry. For a country still at a GDP per capita of only USD2,500 we know that time is on our side and are happy to play the long game.
