By AltG Investment Research Lab On Behalf Of Poornima Vardhan & Taponeel Mukherjee
“In a market focused on providing growth equity to businesses, many mature companies in India that captured the post-1991 liberalisation growth are ready for the next phase. While all existing investments till now were built around an industrial economy, India is now entering a phase of the intellectual property economy”
So how do we unleash the next phase of Value Creation For Investors And Operators?
2 Simple Words: Capital Allocation & Franchising!
What’s common to India’s leading Movie Theater Chain, preschool, and QSR Businesses?
Hyper-growth driven by operational improvements and scale is over. It’s time for Capital Allocation and Capital Structures to start receiving increasing attention.
Many new-age businesses that emerged in India after the 1990s are hitting the GDP + 2% growth stage now. These businesses were able to grow their toplines aggressively in the double digits over the last ten years, but going forward, sustaining a high revenue-to-FCF conversion rate via a simple strategy of expanding footprint won’t be enough.
The Operational Value creation levers of capturing the consumer wallet while also improving the quality of the FCF and making it compound at higher rates through revenue growth, cost-cutting and capturing pockets of demand are reaching a saturation point.
The issue is structural for specific industries, such as movie chains, with technology and consumption patterns rapidly transforming the landscape. For others, such as QSR, there’s competition and the need to penetrate the market deeper.
Given that operational levers and risk-management levers for creating value are beginning to exhaust, where does future value creation come from? The simple answer is Capital Allocation and Capital Structure.
As we have highlighted here https://bit.ly/3PUKMMJ, Capital Allocation and structural changes in strategy present a real opportunity for investors willing to partner with such businesses.
The underpinning of the Capital Allocation Play will be the ability to source the right capital and make flexible capital available at the optimal cost. Fundamentally, linear businesses with solid economic franchises and brands stand to benefit immensely from such a focus on investment decision-making.
The other massive area of focus is the Capital Structure decision. Essentially, the big play here is “Franchising”. India is ready for franchising, and “franchise capital” is available. While this wasn’t the case two decades ago, the nature of capital availability with high amounts of “promoter capital” in the market means opportunities abound for investors.
So far, franchising in India has been piecemeal, barring a few exceptions. However, the APEXX Formula sees a significant opportunity to create massive businesses that separate the fixed-income yield play at a franchisee level from the high-growth brand play at the franchisor level. Here’s more on this: https://bit.ly/4aISJwi.
For QSR, education, and lifestyle-focused businesses to scale in India and create the next phase of high growth and value, a focus on “Capital + Franchising” systems will be crucial.
As India takes off, the markets today Misprice a dollar of FCF in many legacy businesses. Significant growth and Billions of dollars will be unlocked via the twin combination of Capital Allocation and Capital Structures for many of the high-growth industries of yesteryears.
Disclaimer: In the article "What Is The Next Phase of Growth For Indian Businesses?" 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.