India investing: Art of connecting the macro to the micro
(26 days ago)
Author H. Jackson Brown Jr once remarked: "Opportunity dances with those already on the dance floor." For global investors and businesses, India in the 21st century is that very dance floor -- but we must hasten to add that the investment opportunities here come with a unique set of challenges.
Creating a business out of an opportunity that appears attractive at the macro level may be beset with challenges at a micro-level. Essentially, the country's large market size in any sector presents a compelling investment opportunity, and yet the average return available per user may challenge the viability of the business model.
With rising incomes, immense growth opportunities will emerge in the coming decades across telecom, aviation and other such infrastructure sectors. The consumption of goods and services is expected to rise to levels approximating those of more developed markets such as China and the US.
Take, as examples, the case of optical fibre cable and airline seats per capita. The optical fibre cable (much needed for 5G technology deployment) kilometres per capita in India is currently at 0.09 vis-a-vis China's 0.87 (as per CRU). In 2014, the annual airline domestic seats per capita in India stood at 0.08 vis-a-vis 2.59 in the US (as per the Centre for Asia Pacific Aviation, or CAPA).
Bridging of the gaps in these infrastructure sectors is the opportunity investors must set their eyes on. Despite the low airline domestic seats per capita, CAPA maintains that, in terms of tickets sold, India is the third-largest and fastest-growing domestic aviation market in the world. This gives one an idea of the business opportunity. With the expected increases in incomes in the foreseeable future, these opportunities will only become more attractive.
Despite a large aggregate market size, the lower per capita income in India leads to a low revenue per user. This phenomenon poses a challenge for prospective businesses. Vodafone presents an interesting case in this regard. In fiscal 2016-17, of its total global subscriber base of 341.7 million, 209 million were in India (about 61 per cent). Yet, revenue earned here was 6.16 billion euros, or just 12.9 percent of its total global revenue of 47.6 billion euros.
In a business such as telecom that requires significant capital expenditure, a low average revenue per user is a real challenge. The fact that the large subscriber base can deliver value in the future as the average revenue per user grows cannot compensate for the fact that sustaining businesses in the short to medium term can be confounding.
This apparent paradox of an attractive business from a macro perspective beset with challenges at the micro level, is not unique to just the telecom sector in India. This is a challenge that businesses in general face in a country that has a large aggregate economy, but low per capita income.
The key to success for business in India is determined by the ability of an investor to circumvent the divide between an opportunity at a macro level and the ground-level challenges. Strategies to succeed should revolve around both sides of the balance sheet. From an asset perspective, businesses need to potentially bundle services and products so that customers are willing to give the company a larger share of their wallet.
For example, for a telecom business this could mean offering connectivity and entertainment as a package, a trend that is currently emerging. A second strategy could be to acquire the assets of or merge one's assets with another similar company to create economies of scale, a strategy Vodafone has adopted.
On the liability side of the balance sheet, businesses can innovate through prudent capital structure management to generate access to relatively inexpensive debt. Global interest rates are still at historic lows despite the recent rate hikes in the US. The global financial investor base is awash with liquidity and hence willing to provide high quality businesses attractive borrowing terms. A high-quality company in India can create a moat around its business by borrowing for the long term at relatively low interest rates and reap long-run benefits.
India does present a unique set of opportunities and challenges for global investors and businesses. That said, it is a major economy and in the years to come is projected to have one of the highest growth rates globally. One estimate is that the India's will be the third-largest economy globally by 2050. A global business searching for growth will need to have significant market presence in India. We would advise patience and a differentiated strategy for success.
(Taponeel Mukherjee heads Development Tracks, an infrastructure advisory firm. Views expressed are personal. He can be contacted at email@example.com or @Taponeel on Twitter)