This is an extract from a post that appeared in the India Markets Observer 2018, an online publication that brings together experts who discuss these challenges in the fund industry and investing insights and various perspectives.
Ankit Jain, fund manager of Mirae Asset Great Consumer Fund, and Neelesh Surana, CIO – Equities, Mirae Asset Mutual Fund, look at the Indian consumption story, narrated as an attractive long-term opportunity.
After a brief look at the demographics, the rural-urban divide, and the socio-economic classification, they note their observations.
Companies with focus on products at price points delivering high value to the Indian consumers have been able to scale well.
This is evident in categories like biscuits and snacks where companies have been able to penetrate rural areas by delivering higher value to consumers and being present at lower price-points, typically Rs 5. A lot of value fashion formats scaled-up their store count once it enhanced SKU’s largely sold at price points well-below Rs 1,000.
Another disruptive trend is the preference for natural ingredients based products which has led to the phenomenal rise of Ayurveda players and revived demand for older product categories like honey and Chyawanprash. The trick is to provide a product with good efficacy and reasonable price-points.
Key themes to play would be businesses that address the higher strata of population with a good product portfolio delivering higher value to consumers. Categories which have a higher proportion of the unorganised share would have an added advantage of shift to the organized players.
In the near-term, the growth potential for consumer companies would be driven by the pace of recovery in the rural segment. Rural growth drivers in the near term are:
- Healthy crop production in FY18 on the backdrop of two consecutive years of normal monsoon;
- An important monitorable would be impact of prices on overall farm income;
- Increasing DBT disbursements and farm loan waivers which should further increase in the run up to state elections;
- Enhanced capex of state governments aiding non-farm income;
- Rural housing (targeting more than twice the normal run-rate in FY18); and
- Normalisation of businesses post GST implementation.
GST is a significant reform as few categories (hair care, skin care, detergents etc.) are now in the lower tax bracket of 18% tax bracket (from earlier 28%). An important trend would be to monitor the price elasticity of demand in such categories, and share gains for the large players at the expense of partial/non-fully compliant fragmented unorganised companies.
Financial savings mix in the overall savings pool is bound to increase from present 40% given low positive real returns in physical assets over last couple of years. This coupled with government initiatives to formalize the savings pool augurs well for growth in the businesses like insurance and mutual funds.
Trends of shift in business from private lender to the institutional lender augurs well for loan growth uptick in retail oriented banks.
With large number of job seekers entering the workforce, we believe that hopes based on India’s demographic dividend are justified.
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