Abhinav Mehra and Andy Draycott, portfolio managers at the Chikara Indian Subcontinent Fund discuss B2C tech stocks hold appeal amid India’s consumption boom, which can be found below:
Domestic consumption has increased rapidly in India over the past decade. In fact, nominal GDP per capita has risen to $2,278 from just $1,460 during the period (to the end of FY22).
However, according to Morgan Stanley’s report – Why this is India’s Decade (2022), this could mark just the early stages of what stands to be a much longer-lasting and larger-scale trend as a result of favourable demographics over the next several decades.
The investment bank forecasts that India’s nominal GDP per capita could hit $5,242 by FY2032. That translates to a compound annual growth rate of 8.7% over the next ten years.
That level of sustained growth should create several pockets of investment opportunities whereby increasing affluence benefits certain sectors disproportionately. There are many ways to get exposure to this upside, but we believe that you’d be hard-pressed to find areas offering a greater opportunity to leverage India’s GDP per capita growth, than business to consumer (“B2C”) technology.
Tipping point
Digital penetration in areas of domestic consumption is currently very low in India; recent examples include beauty & personal care at c.9%, food delivery at c.4% and insurance at just c.1%.
As GDP per capita grows and disposable income increases, these verticals offer tremendous structural growth opportunities and allow the aggregators to become large companies, such as food delivery businesses; Doordash (US) and Meituan (China) which are $28bn and $96bn in market cap respectively. The same is evident in the travel industry with Booking.com (Netherlands) at a market cap of $100bn and CtTrip (US & China) at c.$23bn.
As India’s middle class expands and India develops, we expect to see this similar trend play out over the coming decade and beyond. This should result in vast valuation upside for leading, consumer-facing tech stocks already commanding a significant share of their under-penetrated markets. To put this into perspective, Indian food delivery company Zomato has a market cap of $7.5bn, whilst online travel company MakeMyTrip’s is only c.$3bn.
Up until very recently, B2C tech had been severely out of favour. The market rotated into value from growth in 2022, and as rising interest rates in the US increased the cost of capital, companies such as Zomato (which had only recently listed) weren’t yet profitable and were still burning cash – and their share prices suffered.
This environment also rapidly closed the taps of private equity funding as well as public markets via new IPOs. In response, a lack of liquidity and capital naturally forced many leveraged private B2C tech firms across the board to shut their doors.
The upside of this period was that it has enabled what we believe to be the highest quality companies to emerge stronger; those that survived by keeping a tighter rein on costs, focusing on core operations snapped up market share from their newly-absent rivals.
Now, we’re beginning to see these cost-cutting measures translate into profitability sooner than anticipated at their IPOs.
Zomato, a multinational restaurant aggregator and food delivery company, is a perfect example.
Thanks to the prudent approach of its management team, it has consolidated a 54% share of its market (as at December 2022). Meanwhile, it reported a 33% jump in adjusted revenue and adjusted EBITDA breakeven in its food delivery operations in its recent quarterly results (Q4FY23).
The stage is set for the company to become increasingly profitable from here as Indian citizens continue to spend more and more on food delivery. Management has even said they are 90% confident in achieving profitability across the entire business over the next four quarters by reducing losses in quick commerce.
Another example is online insurance broker, Policybazaar, which now commands more than 90% of India’s online insurance market.
In its recent results for the final quarter of FY2023, the company reported year-on-year revenue growth of 61% and an improvement in its consolidated EBITA margin to positive 3% from negative 15%.
The online market currently accounts for a very small percentage of all insurance premiums. We believe the company’s strong financial base and dominant market share positions it well to outgrow the wider sector as insurance penetration grows and within that the share of online increases.
Achieving outperformance
It’s no secret that domestic consumption growth in India is a strong investment theme regardless of the way in which it is approached. But we believe that outperformance can be achieved by identifying certain areas where historical precedence points to particularly rapid growth combined with attractive entry points as some of these B2C tech companies are still trading well below their 2021 IPO prices, despite some having vastly improved metrics on revenue and profitability.
The rapid penetration increase of B2C technology led by higher income growth against a backdrop of investors focusing on ‘value’ over ‘growth’ is, in our opinion, creating a unique opportunity in this sector to offer rare investment potential. That’s why we recently increased our allocation to the theme to c.18% of our portfolio.
Abhinav Mehra and Andy Draycott, portfolio managers, Chikara Indian Subcontinent Fund
