By AltG Research On Behalf Of Poornima Vardhan & Taponeel Mukherjee
Warren Buffett, one of the world's richest men and the world's most successful investor, has recently been in the news for losing INR 800 Crores of his $300mm investment. Berkshire Hathaway, the Warren Buffett owned investment major, has sold its entire stake in One97 Communications Ltd, the parent company of fintech major Paytm, with a loss of more than ₹600 crores (INR 800 Crores In Total Dollar Returns Equivalent). Instead, if Warren Buffett had invested in the SENSEX, he would be taking home a profit of $150 Million or a massive 50% return on investment (in $ Terms).
Warren Buffett is no stranger to worldwide success - whether betting on Apple stock at the launch of the iPhone, betting early on Coca-Cola (one of his most successful investments to date) or his recent Japan trade. His investment style has been imitated by millions of investors who aspire to have the same money-making trajectory as him.
However, Warren Buffett has not been able to replicate his success in India the same way. So what is the reason for his lack of success in a country that is the world's growth capital today and has seen the SENSEX deliver a 73% return since Berkshire's Paytm investment?
1. Investing in India has unique characteristics that do not conform to patterns of investment in other countries:
The 'X For Y' model, the holy grail for private market investments in India, does not work in India due to its unique market dynamics. Unlike other countries where demand comes from the top, India's growth is determined by a bottoms-up formula driven by what A Billion Indians consume - from goods to data to credit. This is where the MSMEs win - their hyperlocal nature and proximity to the customer gives them an advantage over the Amazon and Walmarts of the world. As of February 2023, almost 13.8 million micro-enterprises were registered on the Indian government's Udyam registration portal, accounting for 96 percent of the MSME sector. Today, these MSME contribute approximately 30% of GDP, predicted to rise to 60% by 2050.
Thus, a deep understanding of the local markets, how a Billion Indians consume what they value, and structural factors driving growth in India are crucial to investing in India. To win in India, the biggest advantage is to combine a local operator's entrepreneurial knowledge at the micro level with global trends in business, economy and finance at the macro level. This is evident across the sectors over the last 50 years. Baba Ramdev revolutionised India's FMCG market beating FMCG giants by creating India's second-largest brand, Patanjali, whose 2021 revenue was INR 242 Billion. Walmart has tried to enter India multiple times but has been unsuccessful, whereas India's answer to Walmart, RK Damani's DMart Avenue, has been a blazing success. Pepsi has dominated the snack market worldwide, but Haldiram's beat Pepsi in India with its range of local Indian snacks.
Unfortunately, like Walmart and Pepsi, Warren Buffett does not have this advantage in India.
2. Purchase Price Matters - India's investment is a barbell structure - on one side are billion-dollar buyouts (think Manipal - Temasek, Advent - Suven Pharma) that attract fierce competition, multiple bids at crazy multiples (Temasek acquired Manipal Hospitals at a 30x revenue multiple) at often leaving little room for significant gains. On the other side are India's MSME businesses in the private markets, with revenues ranging from $1 million to $20 million, offering impressive EBITDA margins and cash flows. These existing unlisted top 30,000 companies in India's private markets generate over $1 Trillion in revenue and over $100 Billion in profits.
Paying up for deals at high multiples will leave investors open to being lucky as the only option to generate investment returns. More than in any other place, investing in India needs price discipline at the point of entry. This is possible only via proprietary deal flows and creative deal-making via an India-centric Investor-Operator Approach.
As Warren Buffett's timeless wisdom reminds us, the true treasures lie in simplicity and overlooked opportunities. India is the greatest growth story of the 21st Century. Yet, the difference between the winners and losers will be the India Centric Investor-Operator Approach and price discipline. Not even the legendary Warren Buffett gets a pass!
Disclaimer: In the article "2 Reasons Why The World’s Greatest Investor, Warren Buffett India Investment lost 800 Crores" above - Any views, comments or communication (above or in the past) should not be construed to be investment advice by Alternative Growth (hereafter referred to as “AltG”) in any form whatsoever. AltG does not make an offer to sell or solicit to buy any securities.