The investing community in India is inundated with reports citing our low consumption per capita vs. other larger emerging markets and developed markets, as the chief reason for investing in all sectors. While that story can be theoretically spun for almost any sector in India, it cannot be the mainstay of one’s investment thesis. Predicting the whims and fancies of millions of homo-sapiens is a fool’s errand as one can easily conjure numbers to fit any narrative their mind decides upon.
Ease of Forecasting
While the per capita consumption being low can be said for any product in India; can India, in its economic and social diversity be even seen as one market? Probably not. The demand for ice-creams in India should be robust considering its tropical climate. However, the lack of refrigeration due to unavailability of electricity throughout the day, largely limited the demand for the product. Beyond the infrastructural constraints, the country is home to people with varying sensibilities. There is the urban vs. rural divide in the nature of products consumed, a linguistic divide in the preference for content, a cultural divide in the choice of dietary intake. While India is a nation with 1.3bn people in it, it houses multiple markets. An endeavour to therefore quantify the market potential of a product requires a series of assumptions to be made, introducing a lot of variability in the forecast. Add to that, the question of whether these products and brands in their nascent stages would ever become mass products.
Beyond the bare necessities, predicting the consumption patterns of millions is work fit for astrologers. A simple example of this would be India’s alcohol market- why is it one of the very few countries where spirits consumption is far higher than beer? In non-alcoholic beverages- why is coffee consumption only really starting out now when in fact coffee plantations existed prior to tea plantations in India?
A plethora of factors at play make it impossible to accurately predict demand and the inflection point in it. The ‘J-curve of consumption’ theory is force fed to us at every conference. USD1500 GDP per capita was touted as the inflection point in consumption and when that passed we graduated to USD2000. China’s air passenger volume growth gathered steam in 2003 when the country was approximately at USD1300 GDP per capita mark. Brazil saw such an inflection only after crossing USD3600..
On the other hand forecasting supply in the medium term (3-4 years time frame) involves far lesser guesswork. The gestation period between announcement and commissioning of new capacities, affords investors the ability to logically compute a defined range of possible supply outcome in the medium term (sans regulation ofcourse).
Temper the Market Cap Fallacy
In the long run we are bullish on the Indian economy (which is why we are investors in the country) and therefore never fail to succumb (including myself) to the valuation justification of last resort- the market cap number. “The largest *insert a sector name* company in the US is at ‘x’ market capitalisation, India is at just a fraction” and so on. Tempering this thought process with an understanding of the supply side is crucial. If the addressable market opportunity is huge, won’t many more players enter the market? Won’t the company raise fresh capital (and dilute existing shareholders in the process) in order to create capacity to cater to the opportunity? These discussions on the supply-side scenario can help raise the ‘buyers at any price beware’ flag.
Interaction in an Emerging Market Context
Emerging markets are prone to abrupt changes in controls and regulations, and the first ripples of these are seen on the supply side. An anti-dumping duty on seamless stainless steel pipes has resulted in companies languishing at 30% utilisation levels to now witness factories being restarted. The more famous recent case study- an anti-pollution initiative by China led to shutdown of 30% of electrode capacity in China and a plan to close 20% of blast furnace steel production in China; spinning loss making enterprises into ones minting profits in millions of dollars.
While India could have the demand potential for most products, it is the supply side that enables us to better understand whether that opportunity makes for a good, logical investment today.
Markets by definition are formed when demand and supply interact with each other and therefore seeing either in isolation renders an exercise in comprehending the marketplace futile. Understanding the demand is fun but grappling with supply is imperative.
July 8, 2018 at 11:41 pm
Bharat Sangani M.D.
Encore Enterprises, Inc.
5005 LBJ Freeway, Suite 1200
Dallas, TX 75244
[Description: Description: Encore_Enterprises]
July 10, 2018 at 1:49 pm
Excellent! Lucid language and covering the topic with related examples just enhance our views. Deep thoughts reflect the minute studies and offer us a tool for our practical implementation. Great! Young lady, keep it up!