On a recent trip to India, we found that while Covid-19 impacted near-term developments in India, key sectors are offering compelling investment opportunities. Here are five emerging trends to watch.
Expanding digital infrastructure with the India Stack
Digital infrastructure in India is driven by the penetration of smartphones and the availability of low-cost data. Over the past decade, the Indian government has pushed the creation of the ‘India Stack’, a series of free public digital goods that enable a digital economy for those who have historically been outside the formal economy.
The India Stack has several layers. First, biometrics identification layer, then a payments layer, which has allowed for greater financial inclusion though bank accounts, direct benefit transfer, and peer-to-peer (P2P) payments. The emerging layers today are focused on the Open Network for Digital Commerce (ONDC) digital infrastructure, with new services connecting to allow private companies to tap in and use the existing infrastructure for identity verification and payments.
The net impact of the India Stack is that street vendors are now more likely to be inside the formal economy, accepting digital payments for goods, and can now use those sales as a verification of income for credit access.
The expansion of digital infrastructure, combined with the pandemic (which increased remote work globally), also led to more outsourcing to India. India essentially became the office of the world as corporations became more comfortable with work being performed outside of the office.
Historically, this global offshoring model was primarily used for managed tech services such as networking, servers and on-premise enterprise resource planning (ERP) implementation. Now, outsourced work includes knowledge-based, higher-value-add services, including digital transformation efforts such as software engineering and data analytics. This work not only leads to cost efficiencies but also incremental revenue generation.
From biscuits and toothbrushes to luxury goods: A tale of two Indias
Rising incomes have tended to translate to increased consumption levels. In addition, strong GDP growth, as we have recently seen in India, can lead to rising incomes and booming consumption. But where incremental spending goes is mostly dependent on current levels of income. India’s GDP, measured by the purchasing power parity (PPP), is about $2,000 and there’s a high level of inequality. This relates to the idea of ‘two Indias’.
While overall income levels in India have risen, there is still a large disparity between the highest earners and the average Indian. Much of the population is still low-income by global standards and most incremental consumption goes toward products lower on the pyramid.
Thus, spending is likely to go toward necessities, such as food products. Only a small portion of the population is at the income level where incremental dollars go to ‘discretionary luxuries’, such as fast-food or sportswear. That’s why our biggest overweights in India’s consumer sector are consumer staples companies. We see fewer opportunities in branded sneakers and more opportunities in basic consumables.
Is solar the future?
India is a sun-rich country and as solar energy continues to become more competitive, it can help reduce India’s need to import oil and natural gas. Solar energy negates the need for high emission fuels, which impact on people’s health and cause environmental concerns.
Greater investment in renewable power can also facilitate low-cost loans for other projects in India. But large-scale renewable projects will likely encounter similar challenges to traditional infrastructure investments. As a result, India will likely focus more on residential and light commercial projects (such as banks, restaurants, and small shopping centres) and industrial solar projects.
Modernising India’s urban infrastructure
India’s infrastructure has fallen behind due to an unreliable power system, significant road congestion, an inefficient railway and ports network, and a limited number of airports. The World Bank estimates that India needs to invest at least $55bn annually into urban infrastructure to support its rapidly growing population.
India, however, is investing heavily to modernise and expand its infrastructure, with roughly 13% and 22% infrastructure capital expenditure growth (including energy, roads, water, railways, shipping, and sanitation) built into the Union Budget of India for fiscal years 2023 and 2024, respectively.
Prime minister Narendra Modi also instituted a National Infrastructure Pipeline (NIP) in 2019, which includes thousands of projects and is meant to drive roughly $1.8trn in investment from fiscal 2019 through fiscal 2025. These investments, along with other schemes by the government (such as production-linked incentives), will go a long way in driving private capital investment and economic growth and supporting manufacturing growth.
Growth opportunities in rural areas
As in urban areas, rural infrastructure in India continues to be a challenge, but we believe this presents an opportunity for companies that can address India’s infrastructure challenges.
For example, monsoon season in India requires extensive waterproofing and the challenge becomes greater as paved roads and greater urbanisation eradicates natural rainfall collection areas. The growth rate in industries, ranging from waterproofing adhesives and coatings to piping and concrete, continues to be greater than India’s GDP.
In addition, rural farming remains a primary source of income in India and improving agricultural efficiency is another strong growth trend. Investable examples include innovative agricultural chemical manufacturers and distributors.
Potential beneficiaries of India’s housing expansion and rural infrastructure efforts include construction material providers with strong brands and companies selling paint, waterproofing materials, piping, and HVAC manufacturers.
The case for India
India’s economic transition might be a bit messy, nonlinear process, but we believe it is ripe with areas of investment opportunity. Uncovering these opportunities requires local expertise and on the ground presence. As bottom-up asset managers, we are excited about India’s economic potential and remain focused on seeking out quality companies that may create sustainable value.
Jeremy Murden is a global equities portfolio specialist at William Blair Investment Management. The views expressed above should not be taken as investment advice.