Saurabh Mukherjea, Founder and Chief Investment Officer of Marcellus Investment Managers, shares his perspective on the major transformations that India has undergone.
While he admits that such a path has been followed in other countries, but uniquely for India, they're happening together. And the impact is electric.
- The networking of the country.
Doubling of the highway network. Fivefold growth in domestic air traffic over a 10-year period. When I migrated to India in 2008 one in three families didn't have a bank account; now every family has one. UPI. GST. The country is networked.
The rise of SaaS, cloud and mobile transforms the ability of smaller companies, especially cash generator smaller companies. They can transform their businesses using low-cost world-class tech. Serendipitously for us, we've got low-cost, world-class tech and small companies who are smart, that are using that to scale up rapidly in a way that wasn't possible, say 20 years ago.
- Easy access to domestic capital.
The attack on black money has gone on full throttle. The Reserve Bank of India repeatedly points out that 95% of Indian household wealth is in gold and real estate. While the central bank won't say it, I'm happy to say that the bulk of that wealth, which has gone into gold and real estate, is black money. And by attacking the black economy, we're pushing money out of the black financial savings, black household savings into white household savings.
A mere 5% of Indian household wealth is in financial savings. Roughly, Indian household wealth is $10 trillion. That means $9.5 trillion is in physical assets.
As you toggle even $1 trillion out of that $9.5 trillion, into the financial economy, you're bringing down the cost of capital, making angel funding available, bringing down the 10-year bond yield, stoking the stock market.
- Formalise and Consolidate.
In 2010, India's top 20 companies accounted for just 30% of national profits. In 2021, India's top 20 companies account for 95% of national profits. We are formalising and consolidating the entire economy, not just things to do with rideshare and food delivery. A part of the spoils will go to a well-run technology company. But there are many other very smart, well-run companies who are using technology but ostensibly aren't technology companies who are making a lot of money out of this epic consolidation of the world's sixth largest economy.
Relaxo consolidates and formalises footwear. Titan formalises and consolidates jewellery and Asian Paints in paint. Similarly, we can sit here for the next 10 minutes and can rattle off 100 industries, which need formalisation and then consolidation. Jaggery, agarbatti, barley sweets would be a third area of formalisation and consolidation. Opportunities abound. Network the economy, crack down on black money, bring low-cost, world-class technology to the table, and Indian entrepreneurs will be up to formalise and consolidate.
For years, I used to be sent by my wife on Saturday afternoons to go and buy meat or fish. It was hot. One had to find a parking spot. Hygiene of some of the vendors was questionable. Now, at the click of a button fresh meat is delivered to our doorstep with multiple vendors to choose from - Licious, Meatigo. Formalise the fragmented informal industry, consolidate and create wealth. You have happy customers and happy shareholders. There'll be many more of these. The story of the decade, I would submit to you, is the formalisation and the consolidation of this giant economy.
- The decline of the conglomerate.
A conglomerate was created in our country as a way to address two issues our country faced through the 70s, 80s, 90s.
One was scarcity of capital. A conglomerate basically made money in X industry and transferred it to Y industry. This is no longer a problem.
Second reason for a conglomerate through the 70s and 80s was political access. Access to the ecosystem, and especially in Delhi, in the licence raj, having the right contacts in Delhi were essential.
Both factors are less relevant today. Hence, the conglomerate in India largely is a declining force in corporate life.
Like everything else, they're trying to latch on to whatever they can. So internet being the latest thing, but it is not, it actually doesn't stand to reason. For example, let's say you are going to be selling lipstick through ecommerce. It's a fundamental rewiring of how you sell lipstick. It's not just a person saying, I'm going to sell lipstick by advertising it on the internet, right. The way the supply chain works, the way the head of marketing works, the way marketing and manufacturing interfaces, utterly changes in a digitally run lipstick company. A conglomerate cannot do that, a conglomerate can't go back to its empire and say "boys and girls, we're going to rewire the whole thing because of this new thing".
I'm sure there'll be sincere attempts, but to rewire a conglomerate to compete with Nykaa or Amazon is a Herculean task. A conglomerate is used to IT being a department. The conglomerate is not used to IT running the company. The CEO says I'm the boss you are Head of IT. And in the new world Head of IT is the boss. Right. The CEO might not even have a job.
If you look at India, look at businesses which are generating substantial returns on capital well above their cost of capital. It's because of focus and detail. Part of that detail is their tech strategy, acquiring data, analysing data, locking in customers, repeated engagement. So whether it is Bajaj Finance or Asian Paints, tech is at the heart of their dominance. And they've combined that with highly focused management teams, which would just focus on getting one thing, right.
A conglomerate by definition is dabbling many industries. If you take a typical Indian conglomerate, they'll have two businesses which make money and 20 that lose money. And life for them is a constant balance of keeping the fires going in the other 18. In that context, the internet comes in as one last bandaid to see if something can be salvaged from the other 18.
Do read Saurabh Mukherjea suggestions on the 5 questions to answer when investing in new-economy companies.
The above views were expressed during the Morningstar Investment Conference, India.
