Big becoming BIGGER by Bay’s Founder Siddarth Mehta
February 28th, 2020
One of the defining features of the last decade (if not more) in the world of investing has been about big becoming bigger. This trend has only accelerated in India in the last 3-4 years as there has been a gravitational shift in businesses across sectors.
The most recent rounds of consolidation have been brought on by external forces in some sectors such as government regulations and in other instances by lax governance standards and leveraged balance sheets. In certain instances the quality aspects of the leading businesses are so strong that their dominance is likely to persist for the foreseeable future.
In the financial services space, the 4 largest credit card players now account for close to 75% of the installed user base. This trend is not likely to change in the foreseeable future. The top 5 asset management companies in India now account for close to 60 % of the total AUM and are significant disproportionate beneficiaries of the financialization of savings that has accelerated since demonetization in 2016.
In 2020, the number of PSU banks stands reduced to 12 from 27.
Veteran investors in India might well remember the wipe out of the NBFC’s in 1996-1997 with names such as CRB Capital Markets and Alpic Finance ringing a faint bell at the back of the mind. Banks such as Global Trust Bank and Centurion Bank might also ring some faint bells too as investors recall how these have been wiped out.
From a 10 player plus universe, due to adverse government regulations and other factors, the telecom sector has been perhaps the most brutalized sector over the last decade. There are now 3 companies that are left standing with one of them teetering on the brink with a hugely leveraged balance sheet.
The death of Jet Airways preceded by that of Kingfisher Airlines may have rattled the larger investment community. However, if one were to look at the evolution of the sector over the last 25 years, it’s fair to say that this is the 3rd wave of consolidation. Industry watchers might remember the early 1990’s where the likes of East West Airlines and Damania Airways flourished and then died. This was followed by the dominant emergence of Jet Airways, Kingfisher and Air Deccan and the death of Sahara and the near demise of Spice Jet. The death of Jet Airways has unsurprisingly coincided with the rise of Indigo, the resurrection of Spice Jet and the emergence of Vistara. This is one industry where creative destruction plays out repeatedly.
The consolidation of the real estate sector and the wipe out of ¾ of the sector has been the story of the last 5 years. The triple whammy of demonetization, GST and RERA has obliterated the marginal and peripheral players. Consequently, there are but a handful of well capitalized, well governed and financially strong businesses left in the space. The fall of Unitech is a sad one given the meteoric rise and the equally violent fall from grace of the company and its sponsor group.
India is now the second largest producer of steel in the world and India’s steel production is higher than Japan’s. The 3 largest private sector players now account for approx. 65% of India’s total steel production. Once again here the creative destruction stemming from fraud, abysmal governance, excessive leverage on balance sheets has resulted in this consolidation. As with the aviation sector, steel too is one of those sectors that is witnessing the 2nd or 3rd phase of cleansing over the last 20 years.
What is playing out in India in many ways in not too different from what has happened internationally. The banking industry in the US is a classic example where the big have got bigger. The JP Morgan Chase of today is really an aggregation of JP Morgan, Chase Manhattan, Chemical Bank, Manufacturers Hanover and Bear Stearns to name a few.
Similarly the Walt Disney Company of today is really an agglomeration of the erstwhile Disney, ABC, ESPN, Marvel, Lucasfilm, Pixar, Sky Group, Endemol (jointly owned) and Fox Entertainment!
This consolidation and the process of the big getting bigger is only likely to accelerate in the coming years and will have profound implications for investors. As we have always maintained, businesses’ which think in decades and those that are agile and ever innovative will be these that survive. As the large businesses’ in India today see founders and CEO’s retiring and stepping aside for the new generation to take over, one of the features about legacies is that the businesses far outlive the founders. JP Morgan and Disney are classic global examples of companies which have far outlived their founders and gone on to become global behemoths.
Founders in India will need to think carefully too about the legacies that they wish leave behind and the foundations that they will need to deepen to ensure that those endure the test of time. The key question therefore is this: will a lot of the large and highly respected companies of today be around 50 years after their founders have departed?
Posted by Siddharth Mehta, Founder & CIO