By AltG Research On Behalf Of Poornima Vardhan & Taponeel Mukherjee
India Is A Barbell Shaped Economy & Investment Landscape
On the one hand, are the top 100 million consumers whose lifestyles are at par with their Western peers and on the other hand are the other 1.3 Billion people who have just crossed $2000 per capita income and are the growth engine of the country; one side is millions and millions of high-margin high-growth small businesses generating over $1 Trillion in revenue and 95% of India's employment and on the other hand are the Mega businesses such as Reliance, Airtel, ITC, Jubilant Foods, TATA etc that are multi-billion dollar empires.
Similarly, in the investment space, we see mega billion-dollar private equity deals such as Manipal-Temasek, Advent-Suven Pharma, Blackstone - DLF, Brookfield - Worldmark. Conversely, India's MSME businesses in the private markets, with revenues ranging from $1 million to $20 million, offer impressive EBITDA margins but have zero investments. These existing unlisted top 30,000 companies in India's private markets generate over $1 Trillion in revenue and over $100 Billion in profits.
Current State Of India's Investment Landscape: Billions Of Dollar Investments With No Return
This is where the most significant problem comes in for financial investors: Due to a lack of high-quality deals (both in Private Equity and Venture capital), there is a lot of competition for these deals. This drives the valuation and the entry price to absurd levels for investors. Temasek bought the Manipal Hospital stake at a 30x Revenue multiple! Therefore, such high multiples and valuations leave investors with no returns as all the growth has been priced in. Also, with limited deals, investors have no choice but to chase these or will be unable to make any investments.
So Where Are the Investment Returns in India?
The Holy Grail Of Generating 100x Investment Returns in India: Small Deals & Large Platforms
India's MSME businesses in the private markets, with revenues ranging from $1 million to $20 million, offer 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 $150 Billion in profits.
The 30:1:2 Structure: $30 Million Investment; $1 Billion Valuation In 2 Years
High Growth Sectors:
While India is growing at 7%, some sectors are growing at 15-20% annually, and there are companies within those sectors growing at 30-50% annually via India's private markets. As an investor, the real opportunity for India to unlock growth further and for global investors to generate returns is partnering with 100s of these small companies to provide the required capital to help them grow. That's the opportunity in India's private markets.
Consumer Infrastructure Businesses
For investors, the Indian consumer story is the one to play in. Whether home ownership or auto ownership, the aim must be to allocate capital effectively to sectors that can benefit from growth.
We build and invest in businesses with inelastic demand, where consumers' need for the products or services remains relatively constant regardless of market fluctuations. These "Consumer-Infra" businesses, representing a small portion of consumer spending, are characterised by competitive moats, acting as the backbone of essential industries.
With a focus on businesses that offer annuity-like income streams, we at AltG identify opportunities akin to the "picks and shovels" during a gold rush, ensuring multiple returns over time.
Identifying Local Monopolies
The real moat is finding companies that are exceptional "local monopolies" that serve an exclusive customer base by providing an essential service. A "local monopoly" implies that they have customer stickiness for the product, and the cost of replacing this business for a customer is exceptionally high.
Creative Deal Making:
The opportunity is to roll-up, operate, and scale a large number of small independent enterprises into a centralised industrial powerhouse by using strong managerial capabilities, industrial organisation, innovative capital structures, cutting-edge technology and clever brand management techniques to grow the businesses. Essentially, a roll-up structure is ideally suited to scale and build India's small independent companies into mid-market champions.
The Investor Operator Approach
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 Supermarts, 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.
Why Is the Time Now For Creating Billion Dollar MSME Roll-Ups?
Digitisation in India is just starting to take off massively. In addition to digitisation, the economy is rapidly formalising with the GST tax regime fully implemented. Much of the formalisation and scaling of traditional free cash flow generating businesses involves using technology as an essential glue that holds the company together. India is at an inflexion point that comes once in 1000 years of a nation's history, with per capita income crossing 2000 USD per year (like in the case of China, which saw an exponential growth since 2006). India is well-positioned to benefit from this milestone.
In Conclusion, 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, sourcing proprietary deals and price discipline.
Disclaimer: In the article "Invest In India: The #1 Mistake Private Market Investors Make in India Again And Again!?" 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.