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Women, Tech, and Markets: The Forces Fuelling India’s Economic Boom

India is undergoing a remarkable economic transformation, marked by technological advancements, policy reforms, and shifting consumer behaviours. This transformation is not just reshaping the country’s economic landscape but also offering a plethora of opportunities for investors. In this blog post, we’ll delve into the key factors driving India’s growth, the rise of small and medium enterprises (SMEs), the democratization of demand, and how investors can navigate this evolving market.

The Rise of SMEs and Digital Transformation

In recent years, particularly since the onset of COVID-19, SMEs in India have experienced unprecedented growth. Three pivotal factors have contributed to this surge:

  1. Digital Marketing and Mobile Penetration
    • Mobile and Internet Users: India has over 700 million smartphone users and more than 600 million internet users, creating a vast digital marketplace.
    • Social Media Influence: Platforms like Instagram, Facebook, and Twitter have become powerful tools for sales and marketing, allowing even small companies to build pan-India brands rapidly—a process that used to take decades. Example: Zudio, a fashion brand launched by Trent Ltd. (part of the Tata Group), targets younger consumers with affordable fashion priced between ₹200 and ₹500. By leveraging social media for marketing and offering fast fashion that updates every 15 days, Zudio has been opening a new store every two days, capturing market share from smaller, traditional retailers.

2. Unified Payments Interface (UPI)

  • Adoption Rate: Launched in 2016, UPI’s adoption skyrocketed during the pandemic, with transaction volumes increasing from 100 million per month in 2017 to over 7.3 billion in October 2022.
  • Cost Efficiency: UPI made transactions costless, frictionless, and instantaneous, even for the smallest businesses.
  • Impact on SMEs: The digital audit trail created by UPI transactions enabled banks to assess the financial health of SMEs more accurately.
  • Bank Lending: Lending to SMEs has doubled between 2021 and 2024, with small businesses now accessing loans at interest rates of 10–11%, down from 20% in the informal sector.

3. Access to Formal Financing

  • Increase in SME Loans: Banks and financial institutions have extended more than ₹20 lakh crore in loans to SMEs since 2021.
  • Interest Rates Reduction: The shift from informal to formal lending reduced interest rates for SMEs by nearly 50%, enhancing their competitiveness.
  • Economic Contribution: SMEs now contribute approximately 30% to India’s GDP and employ over 110 million people.

Democratization of Demand – The consumer base in India is expanding beyond the privileged sections of society. Several factors are contributing to this democratization:

  • Increased Aspirations: Exposure to media and the internet has raised aspirations across socioeconomic strata. People with lower incomes now desire products and experiences once reserved for the affluent.
  • Affordable Offerings: Companies are responding by offering products at more accessible price points without compromising on quality. For example, Tanishq, a jewellery brand under Titan Company Limited, has maintained higher making charges (about 30–35% more than competitors) but continues to attract customers due to its focus on quality and trust. Despite higher prices, affluent professional women prefer Tanishq, showcasing the brand’s strong value proposition. Tanishq’s revenue has grown from ₹4,000 crore in 2010 to over ₹20,000 crore in 2022.

Shift Towards a Knowledge-Based Economy – Over the past three decades, India’s economy has transitioned from low-tech manufacturing to a higher-tech, knowledge-driven economy. This shift is evident in several sectors:

  1. Information Technology (IT) Services: The IT sector’s contribution to India’s GDP has increased from 1.2% in 1998 to over 7.7% in 2022. The sector employs over 4.5 million professionals.
  2. Financial Services and Pharmaceuticals:
    • India’s pharmaceutical industry is the world’s third-largest by volume and fourteenth-largest by value.
    • The financial services sector has expanded, with the banking sector assets reaching over $2.4 trillion by 2022.

Note: Unlike the U.S., where market capitalization is heavily dominated by big tech companies (the MAG7), India’s growth is more balanced across various sectors.

Corporate Governance and Investment Strategies – Corporate governance plays a crucial role in driving long-term success for companies. Investors should focus on companies with strong governance practices to ensure sustainable returns and avoid companies with poor corporate governance, even if they show short-term gains.

Key Checkpoints for Investors:

  1. Auditor Verification:
    • Research the Auditor: Check the company’s auditor and their track record.
    • Red Flags: If the auditor has a history of auditing companies that have underperformed or been involved in scandals, exercise caution.
  2. Return on Capital Employed (ROCE):
    • Calculation: ROCE = (Earnings Before Interest and Taxes) / (Total Debt + Shareholder’s Equity).
    • Benchmark: A ROCE below 15% could be a red flag indicating inefficiency.
    • Importance: Companies with higher ROCE are generally more efficient at generating profits from their capital.
  3. Market Position and Pricing Power:
    • Industry Analysis: Assess the company’s dominance in its sector.
    • Competitive Landscape: Companies operating in sectors with few competitors and high entry barriers are more likely to sustain profitability.
    • Consumer Feedback: Engage with customers or retailers to understand the brand’s market perception.

Balancing Investment Portfolios – Investors often grapple with balancing their portfolios between mega caps and faster-growing smaller companies. Also, Adopt a long-term perspective, focusing on consistent compounders rather than getting swayed by market hype or short-term trends.

Suggested Allocation:

  1. 50% in Indian Large Caps:
    • Valuation: Many quality large caps are trading at forward P/E ratios around 35x with earnings growth of 25% quarter after quarter
    • Stability: These offer stability and consistent returns.
    • Examples: Companies like HDFC Bank, TCS, and Infosys.
  2. 30% in Indian Small Caps:
    • Potential: Small caps have shown significant growth, with some doubling or tripling in value over the last two years.
    • Caution: Despite high returns, they carry higher risk due to volatility and valuation concerns.
    • Market Valuation: The BSE Small Cap Index has seen a surge, but valuations are stretched.
  3. 10–15% in Overseas Equity and Venture Capital:
    • Diversification: The low correlation (around 0.2) between U.S. and Indian markets makes this an effective strategy.
    • Opportunities: Investing in U.S. companies outside the MAG7 can be beneficial, as they are trading at P/E multiples of 17x with profit growth of 17–18% in dollar terms.
  4. Cash Reserves:
    • Safety Net: Maintain liquid funds or fixed deposits equivalent to at least twice your annual spending. Example: If your annual spending is ₹30 lakh, keep ₹60 lakh in liquid assets.

Sectoral Insights

  1. Information Technology (IT):
    • Impact of AI:
      • Efficiency Gains: AI is expected to allow IT companies to accomplish more with fewer employees, improving profit margins.
      • Job Impact: There have been significant layoffs in the sector, especially in roles related to coding and testing.
      • Uncertainty: It’s unclear whether Fortune 500 companies will reduce outsourcing to Indian IT firms due to AI advancements.
    • Investment Approach:
      • Selective Exposure: Investing in companies like Cognizant that are adapting to AI.
      • Monitoring Demand: Keep an eye on whether AI reduces the overall demand for Indian IT services.
  2. Banking:
    • Fintech Disruption:
      • Limited Impact on Core Banking: Fintech has significantly impacted asset management, broking, and wealth management but hasn’t displaced traditional banking functions like lending and deposit collection.
      • Boots on the Ground: Banks like HDFC Bank emphasize physical presence, planning to open 1,200–1,300 branches annually.
      • Market Share: HDFC Bank continues to gain market share due to its focus on conservatism, caution, prudence, and reliability.

Current Market Valuations and Foreign Investment – Investors shall look for risk in; while increased foreign investment is positive, it’s important to monitor for potential bubbles, especially in small-cap stocks where valuations have surged without fundamental support.

  1. Market Conditions:
    • Valuation Concerns: In sectors like power, infrastructure, metals, and real estate, valuations are in a “stratosphere” and hard to justify.
    • Nifty Index: The Nifty 50 shows a polarized situation where low-quality stocks trade at very high valuations despite weak fundamentals.

2. Foreign Investment:

  • Capital Inflows: India has seen foreign investors bringing in approximately $20 billion annually over the past decade.
  • Comparison with China: Foreign investors have invested $3.5 trillion in China but only $700 billion in India. However, with China’s economic concerns, investors are redirecting funds to India.
  • Potential for Growth: Even a 20% shift of foreign investment from China to India could double foreign investment in Indian markets over the next five years.

Future Growth Drivers: The WESCCO Framework – To understand India’s growth trajectory over the next decade, consider the WESCCO framework. Collectively, these factors are set to propel India’s economy, offering investors multiple avenues for growth.

  1. Women Empowerment: Female labour force participation is increasing, with women now earning more in certain sectors than men. Also, women are creating more small companies, driving self-employment.
  2. Education:
    • Democratization: The rise of well-educated individuals from diverse backgrounds is reshaping corporate strategies.
    • Workforce Changes: No longer dominated by elite IIT/IIM graduates; regular graduates are leading companies.

2. South India’s Ascendancy: The seven southern states, including Maharashtra, account for 25% of the population but contribute 50% of GDP and two-thirds of economic growth. Cities like Bengaluru, Hyderabad, and Chennai are becoming global hubs. Improved airports, affordable housing, and clean infrastructure in tier-two and tier-three cities are contributory factors.

3. China Plus One Strategy:

  • Companies are diversifying their supply chain by shifting production from China to India.
  • Key Sectors are (i) Mobile Phone Manufacturing; India’s mobile manufacturing could contribute an additional $100 billion to GDP. (ii) Medical Devices; which are expected to grow to $50 billion by 2025 and (iii) Pharmaceuticals APIs; everyone including India is reducing dependency on China through boosting domestic production.

4. Outsourcing Expansion: Currently, there are 1,600 Global Capability Centers (GCCs) in India, expected to grow significantly. These centres are a $200 billion ecosystem, projected to become a $1.5 trillion ecosystem in the next 5–6 years.

Lessons from Past Trends and Investment Approach

  • Avoiding Poor Governance:
    • Historical Pitfalls: Companies involved in scams like the 2G spectrum and Coal Gate eroded investor wealth.
    • Due Diligence: Always scrutinize the management and corporate governance practices before investing.
  • Investing in Quality Companies:
    • Long-Term Growth: Companies like Titan, HDFC Bank, and Asian Paints have provided substantial returns over decades.
    • Valuation vs. Quality: It’s better to invest in high-quality companies even if they seem expensive, as they tend to deliver consistent returns.
  • Staying Disciplined:
    • Market Cycles: Avoid getting swayed by market emotions—both excessive optimism and pessimism.
    • Emotional Detachment: Keep a rational perspective, focusing on long-term objectives rather than short-term market movements.

We can come to the conclusion that India’s economic transformation is multifaceted, driven by technological innovation, demographic shifts, and strategic policy decisions. For investors, understanding these underlying trends is crucial for capitalizing on the opportunities presented. By focusing on companies with strong corporate governance, balancing portfolios thoughtfully, and staying informed about sectoral developments, investors can position themselves to benefit from India’s growth story.

References:

  1. National Payments Corporation of India (NPCI): https://www.npci.org.in
  2. RBI Annual Reports: https://www.rbi.org.in
  3. Ministry of Finance Data: https://www.finmin.nic.in
  4. Economic Survey of India: https://www.indiabudget.gov.in/economicsurvey
  5. Ministry of Statistics and Programme Implementation (MoSPI): http://mospi.nic.in
  6. BSE: https://www.bseindia.com
  7. NSE: https://www.nseindia.com
  8. Department for Promotion of Industry and Internal Trade (DPIIT): https://dpiit.gov.in
  9. World Bank Data: https://data.worldbank.org
  10. IMF Foreign Direct Investment Data: https://www.imf.org
  11. Industry Reports by Consulting Firms like NASSCOM or McKinsey: https://nasscom.in
  12. International Labour Organization (ILO) Reports: https://www.ilo.org

Note: The content in this blog post is for informational purposes only and should not be considered investment advice or a recommendation to buy, sell, or hold any specific securities. It does not constitute investment research or financial advice. Always consult with a qualified financial advisor or conduct your own research before making any investment decisions.

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