PRINT THIS PAGE The Indian growth phenomenon14/02/2007. Source: Actis Capital.
While much has been written about India’s booming consumer class, Actis explores why income and demographic trends are fuelling sustained growth
and looks at the exciting opportunities this presents. With 1,000 new cars a day crowding onto the streets of India, and one million passenger vehicles sold in the 12 months to March 2006, there is very real evidence of escalating consumer demand, driven by increasing affluence, available credit and a growing propensity to spend. Yet at the other end of the scale India is still home to some of the world’s poorest people.
A recent Time magazine cover story on India reports that while last year per capita income in India was US$3,300, prosperity and progress have not yet touched rural India, which is home to two thirds of the country’s one billion population.
This was the rationale for CK Prahalad, in his book The Fortune At the Bottom of the Pyramid, to hypothesize that by inverting the pyramid and doing business with the world’s poorest people would provide new growth opportunities for multinational corporations and, at the same time, lift billions of people out of poverty and desperation.
While this would require innovation in corporations’ technology and business models, not to mention a rethink in terms of products and distribution chains, the reality is that India’s existing consuming classes continue to grow at a phenomenal rate, presenting ample growth prospects for consumer businesses. What’s more, growth in this sector is also being fuelled by the climbers, who represent 37% of India’s households, not to mention the aspirers who are joining the market economy for the first time.
The statistics are impressive. According to the Marketing Whitebook* there are 208 million households in India, of which consumers and climbers account for a significant 153 million. In the decade from 1995 to 2005 the number of households that were classified as climbers and consumers grew from 77 million households to 153 million households.
This is the engine of the consuming classes and what is driving the excitement of so many multinationals to spend time in the Indian market place. The trend behind the trend is India’s demographic advantage: India’s working age population will continue to grow for the next two decades at least, unlike most emerging economies which will see their working age populations decline as a proportion of the total.
It is the young working populations that drive personal consumption. These are the individuals that are driving the purchases of televisions, cars and mobile phones. It is this group that has made a generational leap built on buying now – possibly using a new brand of credit card that just did not exist in India a decade ago – so they can pay tomorrow. Meanwhile, money is going further as competition for consumer spend is rising, leading to static and often falling prices for typical purchases. This is manifested by the purchasing power of the rupee, where its PPP (purchasing power parity) value is about 80% more than the prevailing exchange rate.
Unsurprisingly, India is one of the most sophisticated media markets in Asia. From Bollywood films to a thirst for news that supports a huge number of publications, there is a platform for a vibrant advertising market that is growing rapidly. Products work hard to position themselves as brands in India, with Zenith Optimedia forecasting US$4.1 billion of advertising in 2006. Dr Pawan Goenka, President of Mahindra & Mahindra, the vehicle manufacturer says: “We used to be a nation of savers, but now we’re willing to spend,” on the projected 15% growth per annum in the Indian car market.
Other consumer products experiencing unprecedented growth include the personal care market, growing at a compound rate of 14% per annum industry wide. But some product categories such as skincare and haircare are enjoying increases of more than 30%, demonstrating the growing strength and confidence of the consumers. The consequent investment opportunities Statistics such as these lie behind the sustained growth of Actis’s portfolio in India, where we have two funds with a total of US$475 million investing in companies in India and South Asia.
An example is Paras, a leading Indian personal care company based in Gujarat. The company has a track record of developing innovative products and is one of the top ten brand advertisers on Indian television, in a league table that features Suzuki, Pepsico, Procter & Gamble and Nokia. The rationale for this investment is based on our belief that Paras can benefit from the sustained growth in the personal care sector.
Girish Patel is chief executive of Paras and says: “We have a strong relationship with the Actis team and welcome them as an active partner. We are sure that the association will help us take the business to the next level of growth in terms of expanding our business and strengthening our brand and product portfolio.”
JM Trivedi, Partner of Actis, who is based in Mumbai is excited by the opportunity that still exists in India, but cautions that the consumer opportunity requires a disciplined approach. “The excitement and scale of opportunity sometimes clouds judgment and means many companies fail to prioritise. Management of growth in an orchestrated and deliberate fashion together with focus on prioritised initiatives is the need of the day.”
For those that can sustain the focus, the future is exceptionally bright.
Actis is a leading private equity investor in emerging markets. We invest globally in many emerging markets; however, we are most active in Africa, China, South and South East Asia. We also specialise in the energy sector. Actis was created in 2004 following our self-funded management buyout of the business from CDC Capital Partners. We invest and manage capital on behalf of over 30 investors, and currently have US$3.3 billion of funds under management. Read more online at www.act.is
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