Indian economy stands at a very interesting juncture at this point of time. The economy is just coming out of excess capacities that were created during early part of the decade.
NPA mess, which was created due to superfluous credit growth and subsequent evergreening of unviable projects, is being tackled, and we are at the tail end of provisioning cycle by corporate banks. At the same time, the system is going through a huge regulatory churn.
Reforms like GST coupled with insolvency & bankruptcy code, automatic route for FDI, electricity for all, increasing banking penetration, improving tax-to-GDP ratio, acceleration in dedicated freight corridor (DFC) completion, changes in transportation policy, etc. have created a fertile ground for the next leg of upcycle.
If we analyse the potential impact of all these changes, three broad themes are emerging as potentially rewarding investment opportunities.
2. Value Addition
3. Adoption Of New Trends
Due to GST & good road / rail connectivity, the velocity of trade moves up i.e. the turnaround time from planning to production to distribution improves dramatically. This results in better asset turns, and perhaps inventory rationalisation & drop in the logistic costs. As a result, cost structures of many businesses are likely to benefit & their overall profitability should witness a meaningful jump.
For Example, earlier, trucks had to wait for hours while crossing state borders. In a post-GST environment, interstate movement of goods is faster. On an average, long haul trucks have started clocking 300 to 325 km per day against an average of 225 km (approx.) per day. While this is a welcome development, we are still way below global averages. It has multiple implications.
For logistics providers, it creates additional capacities in the existing infrastructure as they can move more tonnage with the same fleet.
For a tyre manufacturer, demand for TBR tyres ( truck & bus radial ) goes up since trucks are running more kilometers per day & the replacement cycle for tyres will drop.
To simplify it further – if we assume that the truck needs to change its tyres after running for 1 lakh kilometers, the replacement cycle will drop from 15 months (approx.) to 10 months (approx.) if it starts clocking additional 100 km per day.
Product manufacturers have to keep less inventory of raw materials as well as finished goods, since delivery speeds have improved. Hence – less working capital, less labor & storage space per unit.
This is just one example of the debottlenecking theme. There are other potential opportunities in coal mining, fertilizers, railway manufacturing as the regulatory bottlenecks correct themselves out.
Due to its sheer size, Indian consumption & production both deal in huge volumes in several categories. Large domestic markets allow players to achieve production at scale and become cost competitive. This opens export possibilities as well.
With 1.8 crore (approx.) two-wheelers sold every year, we have the largest market in the world. If we look at availability of two-wheelers per 1,000 persons, it’s very high in urban centers. At the same time, the availability of public transportation is set to improve as almost 50 cities gear up for metro’s over the next decade.
We may see softness in two-wheelers volumes. Now the game is likely to shift from economy/high mileage motorcycles to premium ones. While the industry may witness slowdown in volume growth, but the change in consumption mix from low-end to high-end products will shape up the future for motorcycle manufacturers and its ancillary ecosystem.
India’s domestic tourism, home improvement, apparel consumption, agri commodities are few other areas where there is high volume which can throw new winners as we start seeing these segments move up the value chain.Adoption of New Trends
Several notable changes are happening in consumption patterns in both urban and rural areas. Combination of access to high quality electricity and piped gas / cylinder gas availability is going to change the way Indian kitchen is organized.
Culture of eating out is exploding in metro cities and beyond. Home delivery of food has already picked up due to apps like Swiggy and Zomato. However investors have very few options to participate in this opportunity. So investing via consumables like tissue papers, basmati rice etc. can be a rewarding alternative.
As we move towards four trillion dollars economy, the transition is going to be very different from the past. Under-rated sectors are likely to make a comeback as capacities get filled up and regulatory bottlenecks are resolved. At the same time, lot of new winners will emerge as we move beyond $2,000 per capita income threshold.
Profitable stock-picking involves having bottom up approach and in-depth scrutiny of every company. However, having a top-down framework to find out themes with long runway is a must. Investing in silos, without looking at external environment may prove costly when multiple market-driven disruptions and regulatory changes are coming our way.(The author is the founder & CIO at Alpha Invesco, a SEBI registered investment advisory. Views are personal.)