India at an important inflection point of digital transformation

August 20th, 2021

India’s internet economy could grow 10-fold over the next decade. The digital ecosystem has provided businesses with opportunities for unique customer engagements, customer acquisition and developing highly personalised customer experiences.

Siddharth Mehta, founder and CIO of Bay Capital, an India- focused investment manager, says the key drivers over the next decade and beyond in the country will be democratisation of information and consumer preferences for greater online adoption.

India’s internet economy could grow 10-fold in the next decade to $800 billion and significantly improve shareholder wealth, Mehta told Moneycontrol’s Sunil Shankar Matkar in an interview.

Edited excerpts:

Why are you excited by the India story? Is it the right time to invest in India than other emerging markets and developed markets?

We have been enthused by the India story for more than two decades now and in this time we have seen some phenomenal businesses being created and have seen them getting larger and more dominant. Apart from the usual factors such as the demographics and the under-penetration, one of the key drivers for the next decade and more is going to be the digital transformation that is happening in India. The democratisation of information and shifting consumer preference for greater online adoption are going to very, very powerful drivers. The creation of so many scaled, successful direct-to-consumer brands is a testimony to this. Businesses will need to think ‘digital’ if they are to compete and grow over the next decade.

We are extremely excited by the digital opportunities and believe that there are some incredible businesses that have been created, which will go on to become much larger in the next decade and more.

We are not market timers and believe that this is indeed the right time to invest in India. Near-term factors aside, over a 10-year period, the returns from India (relative to emerging markets as well) are likely to be very good.

Why are you so enthused by the digital transformation that is under way in India?

India finds itself at a very important inflection point. An intersection of factors from the Jio effect to the creation of the India stack to the pandemic have seen very strong digital adoption across products and categories. The democratisation of information has provided many businesses with reach that was previously not possible. The digital ecosystem has provided businesses with many opportunities for unique customer engagements, customer acquisition and for developing highly personalised customer experiences.

It’s safe to say that the next set of 500 million internet users in India will be from Bharat, i.e., the tier-1, tier-2 towns and small towns and cities and that provides a very long and wide runway for growth. The digital transformation is only just accelerating and we believe the internet economy could grow 10x in 10 years from here on (to get to $800 billion), resulting in many large business accreting significant shareholder wealth.

The nature and shape of the Indian economy and financial markets will be very different in 2030 than they are today.

Have you spotted any investment opportunities in India’s internet/digital ecosystem as a result of digital transformation?

Yes, indeed, there are many outstanding businesses that have created tremendous scale and are seeing their paths to profitability getting accelerated. We are particularly interested in those businesses that are solving uniquely Indian problems in uniquely Indian ways and those that are targeting the next billion internet users in India.

Zomato turned successful in IPO fundraising as did quick service restaurant chain operators Devyani International and Burger King India. Paytm and Nykaa filed IPO papers recently. Do you expect more such startups to launch IPOs and can you suggest which ones investors should be worried about because they are lossmaking?

It’s a bit of a misnomer to call some of these businesses startups! In many cases, they are valued at several billion dollars with significant growth prospects ahead of them. While the landscape is exciting, we also believe that it’s important for us as investors to be discerning as there may be many businesses that might not be able to scale and succeed from here on for a combination of reasons. We are wary generally of cash-burn businesses which use discounting as a tool for customer acquisition.

As long-term investors, we should not really worry about near-term losses as some of these businesses with very large total addressable market opportunities can scale very rapidly once the scale barrier is breached and get to profitability very quickly. Typical public market investors who are used to looking at businesses from a linear perspective may not be factoring in the power of powerful network effects in some of these businesses that can help them scale exponentially.

Do you think the Reserve Bank of India will maintain status quo in the rest of FY22? Also, should one ignore inflation concerns now?

Monetary policy is in line with expectations. While we are seeing signs of pulling back on some of the emergency measures, we think that the focus on growth is welcome. While inflationary pressures are indeed there, by the RBI’s own assessments, these are thought to be transitory. For us investors, more importantly, our portfolio businesses have an exceptional track record of managing volatile input cost conditions and many businesses, notably in the consumer staples space, have been able to pass on these input cost increases without affecting margins or volumes. Therefore, we are not unduly perturbed by macro conditions beyond a point.

Excerpts from the interview have been covered here on the Moneycontrol website :-

Posted by Siddharth Mehta, Founder & CIO