Rising incomes and under-penetrated categories provide attractive investment opportunities in India
As disposable incomes have grown, we find that Indian consumers are now moving up the ladder to buy more premium products, or buying discretionary products they could not previously afford. We believe the premiumisation trend is likely to occur across different categories.
As one of the most populous countries in the world, India’s young and aspirational consumers provide a large and growing market across product and service categories. As disposable incomes have grown, we find that Indian consumers are now moving up the ladder to buy more premium products, or buying discretionary products (goods that are non-essential but are desirable) they could not previously afford. This includes air-conditioners (helped by the availability of financing and better electrification), property (where regulations are a tailwind for home-buyers), and financial products.
We believe the premiumisation trend (act of upgrading one's lifestyle by going for more premium goods and services) is likely to occur across different categories. People consuming plain biscuits currently will shift to chocolate biscuits and cookies, while those shaving with basic razors will generally trade up to a fancier-sounding blade. This can be seen in the sales mix of Nestlé India, a leading food and beverages company, as its premium products have grown twice as fast as the rest of its portfolio. Similarly, at Colgate-Palmolive India, while per-capita consumption levels are still only half of those in other developing markets and average selling prices are significantly lower, we believe this will change as consumers graduate from using its basic toothpastes to its premium brands.
Meanwhile, India sells approximately 5 million air-conditioners a year compared to 70 million units sold in China. This should change rapidly, as India has reached a level of per-capita income at which air-conditioner purchases typically accelerate. We believe this should benefit Blue Star, a leading air-conditioner brand in India. Its current revenues are less than USD 600m and it has gained market share consistently. We believe Blue Star could become a much bigger company in the long run as India’s air-conditioner penetration rises from the currently low levels.
In the property sector, rising urbanisation rates and the acceleration in demand for larger-sized homes after the Covid-19 disruption is driving strong demand. Recent changes in the industry have made it easier for the better-quality developers to gain share in what is an extremely fragmented industry. Since the new regulations, funding for poor-quality developers has been constrained. Customers have moved to organised sector real estate developers with strong balance sheets and a track record of delivering projects on time – benefitting the likes of Oberoi Realty and Mahindra Lifespaces.
We believe Indian banks enjoy many of the same growth drivers as consumer categories, with long-term tailwinds of rising incomes and greater financial inclusion in India. Additionally, 70% of the Indian banking sector is still controlled by inefficient state-owned banks, which are consistently losing share to higher-quality private banks. As such, we believe ICICI Bank, HDFC Bank and Kotak Mahindra Bank, with their dominant customer franchises, should have significant long-term growth potential ahead of them.
As is often the case with financial markets obsessed with forecasting the coming quarter’s results, we find that these companies are undergoing changes that are yet to be priced into valuations. With our long-term investment philosophy and process, we have set our sails towards the opportunities we believe will play out over the next decade and longer.
Source: United Nations World Population Prospects Report, OECD Development Centre. Company data retrieved from company annual reports or other such investor reports. Financial metrics and valuations are from FactSet and Bloomberg. As at end September 2021 or otherwise noted. Note: Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as are commendation to buy or sell the same. All securities mentioned herein may or may not form part of the holdings of FSSA Investment Managers’ portfolios at a certain point in time, and the holdings may change over time.
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