2021 : Is this the right time to invest in India ?
Our Cercle International event held in conjunction with IFCCI was extremely well attended and X-PM India’s Managing Partner, Ranjit Shastri moderated a rich discussion with Amit Jain MD of L’Oréal India, Arvind Uppal Chairman of Whirlpool and Brijesh Mehra Head of Wholesale Banking at RBL.
Director-General Payal Sharma of IFCCI reminded us that 600 French companies operate in India providing 350,000 jobs and a turnover of 10 billion EUR with large companies such as Total, Aéroports de Paris and Schneider Electric making recent significant investments.
Some key takeaways from the panel discussion are that COVID has been the catalyst to disprove India’s naysayers and that the ease of doing business in India has improved thanks to government focus on 13 key sectors and rapid digitisation which trumps any infrastructure shortfall. In addition to the well-known tech and BPO depth and at least 44 Indian start-up unicorns that created 106 billion USD in value, the collateral advantage of India as a significant player in the knowledge economy cannot be ignored. Many Fortune 500 companies have been investing in Indian research and innovation hubs – e.g., Accenture, Cap Gemini, Amazon, Apple, Hyundai, PepsiCo.
Billions are also being invested every quarter in long-term capital infrastructure investment in India by the world’s largest fund managers, GIC, Brookstone, Blackstone, Blackrock. Did you know that 20% of Unilever’s market capitalisation is from India or that GE did not make money in India for over 20 years?
It’s time to eradicate the residual memory of the old India with the right local management team and it’s no longer a long-term but medium-term bet. Although, credit is still inadequate and land acquisition is difficult the government is going out of its way to remove hurdles with the reduction in corporation tax, improved regulatory clearance procedures and of course the world’s largest broadband infrastructure. India offers an unmatchable opportunity and continued land and labour reforms will help.
X-PM's own clients in India can attest that doing business in India can be challenging, but the high return of investment in India, coupled with pro-business government policies, make it a top priority country for any company wishing to be a global player.
In summary, X-PM believes that:
1. India is getting more attention today from foreign investors
Despite a difficult experience with COVID-19 earlier this year, foreign investors are continuing to invest heavily in India. The drivers for this rise include the following:
• Favourable demographics, governmental/fiscal policy and geopolitical changes
• There is strong momentum in the financial and tech sectors in a country with a predominantly young population embracing digital start-ups
• US - China tension has caused some foreign investors to reallocate capital to India
• The positive experience of PE investors such as Blackstone have further bolstered India's attractiveness and PE investment in India is at a record high
2. The attractiveness of India is driven by a significant shift in consumer behaviour, an outstanding IT knowledge base and new government policies
• The main attraction for foreign investors in India is the Indian consumer and its IT prowess. Virtually every adult Indian has a cell phone and a government-issued biometric identity card, e-commerce is exploding. COVID-19 has only accelerated India's digital transformation.
• The change in consumer tastes is also changing the calculus of foreign companies. Indian consumers are now more like consumers elsewhere, so it is easier for foreign consumer product companies to sell to them. These companies now see merit in manufacturing their global product portfolio for the Indian market, rather than manufacturing India-only products in India or sourcing products from India that cannot be sold in India.
• Moreover, e-commerce has made distribution much easier. Just as India leapfrogged over the landline era into the mobile era, it appears to be skipping the era of physical malls and going straight to online shopping. Thus, one of the major barriers to entry into India has been lifted.
• Finally, the Indian government is now easing red tape in key sectors of the Indian economy. It has allocated over $26 billion for incentives to create national manufacturing champions in 13 key sectors :
1. Key Starting Materials (KSMs)/Drug Intermediates (DIs) and Active Pharmaceutical Ingredients (APIs)
2. Large Scale Electronics Manufacturing
3. Medical Devices
4. Electronic/Technology Products
5. Pharmaceuticals drugs
6. Telecom & Networking Products
7. Food Products
8. White Goods (ACs & LED)
9. High-Efficiency Solar PV Modules
10. Automobiles & Auto Components
11. Advanced Chemistry Cell (ACC) Battery
12. Textile Products: MMF segment and technical textiles
13. Specialty Steel
3. Return on capital employed is high and payback periods are becoming shorter
Despite the challenges of doing business in India, the returns for foreign investors have been excellent:
• Wall Street analysts expect Indian companies to increase their earnings (calculated in dollars) more than 22 percent over the next 12 months, a faster pace of growth than benchmark indexes in either China or the USA
• The MSCI India index is up about 30% in 2021, almost twice the return of the MSCI global index.
• According to Blackstone's CEO, Stephen Schwarzman, India has been Blackstone's best market for investment in the world
• While margins may be low, this is offset by the high volume of sales, so overall return on investment is high
• Historically, India was seen as a long-term opportunity for foreign investors. Today it is seen as a medium-term opportunity.
• The need for patience, India's old mantra, is less relevant in today's digitally transformed India – contact us if you need extra managerial bandwidth to understand the nuances of doing business in India.