Investing in India

Saturday, January 10, 2009 | Posted by: Grant Thornton
Categories: | Tags: India, economy, India Watch, investing, Abhishek Sharman, IEP Advisors Private Ltd

Going into 2009, India appears more attractive than most other nations as a destination for investing capital. The economy is growing, is less dependent on exports and has sufficient head room on most “per capita” metrics to support continued interest from the investor community. The country does have its challenges- it has a fiscal deficit situation to take care of and looks destined to have a weak coalition government in the next elections; but the corporate will and strong domestic consumption should be able to tide the country through the challenges of the current economic environment.

India is also a country of cultural nuances- it has subtleties to it which though not apparent at the surface, are core to it. Dealing with corporate houses which successfully do business in this country is often an awakening to and selectively a celebration of those nuances. I want to highlight three key cultural themes which are integral to doing business and investing in India.

The first is “Aspiration for Value Offerings”. The culture of India is a “value for money” oriented which is only natural given that a large population in the country is underserved in many of the essentials of life. At the same time, India is also increasingly affected by changes in the developed world in a variety of fields. India may need basic sanitation and may lack cold storage for longevity of food produce but at the same time is the fastest growing mobile market in the world. India embraces old and new ideas with equal fervour- however; it does so if the offering is wrapped in value engineering and low cost. It is not necessary that India follow the developed world trajectory of evolution. “Paging” never became big in India; in fact India leapfrogged that intermediate phase of evolution in communications technology and became one of the largest mobile phone markets. What allowed this to happen were the cheapest handsets, cheapest tariff rates and free incoming calls. This value orientation is also the reason why a strictly adequate quality car priced at $6,000 / unit (Maruti Suzuki 800) has sold more than two and a half million units in this country and why the Tata Nano is likely to be a metamorphic success for the auto industry volumes in India.

The second theme which I would want to highlight is “Strong Founder/ Entrepreneur Identity”.  When dealing with the Indian corporate, it is imperative that we are cognizant of (in most cases), the strong individual driving the business. This tends to be true even when the Company has gained critical mass and is publicly traded. The culture of the firm is often the culture of the individual and it flows through. The Founders’ share in the BSE 500 Companies has averaged 58% in FY 2008-09. The Founders see companies as businesses in perpetuity and not necessarily as vehicles for optimal value creation (many might argue that this trend is changing though not at a pace which should significantly alter the fact in the near to medium term). The strong entrepreneur identity has an impact on key elements like company strategy and capital structure.

The third cultural nuance is the aspect of “Social and Cultural Customization”. India – as numbers stack up; is a land of vast opportunities and unrealized potential. However it is a culturally plural society which is an aggregation of 1000 different languages and dialects, diverse religions and (therefore) consumer preferences. A large number of opportunities that we see in this country are a play on the vast population of the country. It is also important to understand the fractured nature of this population and appreciate the importance of niche offerings- as the niches can be pretty sizable in themselves. A related observation is that social pressures and compulsions are often as effective as contractual obligations; a case in point is the fact that defaults in unsecured microfinance loans compare favourably with defaults in bank portfolios!

In context of the above, some points I feel are important while considering investments in Indian Companies are

• Understanding of key individuals behind successful companies and their values
• While considering market opportunity for businesses, one should see the market as an aggregation of heterogeneous niches rather than a homogeneous opportunity
• Companies which focus on delivering value at attractive price points are more scalable proposition than companies which seek to charge a premium for better quality
• Social contracts and compulsions can be as effective as legal contracts
• Finally, India has a thriving parallel economy and information asymmetry exists- so talking to management, stakeholders and market players are as important as analyzing financials

Abhishek Sharman
Vice President
IEP Advisors Private Ltd.

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