In Don’t blindly bet on the winners of the last bull run, Amay Hattangadi and Swanand Kelkar of Morgan Stanley Investment Management, look at the previous boom-bust cycles of the Indian stock market to tell us if the darlings of a previous bull run were able to repeat their performance in the subsequent following one. Here they focus on the current market situation.
As investors, we know that our job of stock picking becomes infinitely easier if we are able to catch some of these mega trends early. Some trends fail to live up to their initial expectations whereas others could become game-changers.
Gazing into the crystal ball we can only guess what could be the ‘new thing’ in the next bull market. Deals in the private equity space may be an indicative guide.
We list below trends which might throw up interesting investing opportunities in the coming decade.
1. Shift to the organised sector
India has traditionally had a large unorganised sector. A shift to the organised sector is irreversible, and could get accelerated with the introduction of a unified GST (Goods and Services Tax), aided by a new generation of entrepreneurs who want to do business differently and more legitimately. Increasing financial inclusion and plugging of leakages through the use of UID (Unique Identification) cards will also help this shift. The shift towards the organised sector is being witnessed in areas such as cable television, inter-city bus connectivity, city radio taxis, small-ticket size lending and low cost housing.
2. The power of brands
Indian consumers are aspiring for, adopting and getting addicted to brands, albeit at different price points. At the lower and mid-range, brands provide an assurance of quality and consistency, whereas at the higher end it may be about snob effect. For a range of products like hair oil, fabric wash, tea, milk and ready-to-eat snacks, the Indian consumer is now making a shift from unbranded to branded. Companies that are able to create and sustain great brands will see huge re-rating potential in the stock market.
3. E-commerce and digital platforms
While policy makers in India may be wary of large format retail stores and the implications on small traders, the real revolution may already have begun in the e-commerce space. Given the congestion issues in our cities and towns, India may well skip widespread adoption of large format retailing. With a large proportion of India’s population accessing internet through smartphones, e-commerce will go beyond online travel, which is currently 70% of total e-commerce transactions. Adoption of digital platforms will significantly alter the operating cost structures of companies and open up new distribution channels. With multiple players, including multinationals in this space, one may want to wait and watch to see who the real winners will be.
4. Specialised infrastructure and related services
The last decade saw the rise (and fall) of infrastructure companies involved in more plain-vanilla businesses like road building and real estate. In fact most infrastructure companies were really direct or indirect plays on property prices, from where they derived bulk of their value. In the coming decade more specialised infrastructure companies and allied services involved in areas such as metro rail, gas distribution, city transport and logistics could see some winners. The challenge is to find companies that have niche technology and a capital-light balance sheet.
5. Convenience, leisure and entertainment
Consumer wallet share towards discretionary spending will rise in the coming decade. Companies that are able to grab the first mover advantage and scale up will be the winners. A wide array of products and services will compete for the customer’s wallet share ranging from travel and tourism, quick service restaurants, specialized education, multiplexes and medical diagnostics. Investors should focus on companies that adopt an expansion strategy that does not lose sight of profitability and cash flows.
This article has been contributed by Amay Hattangadi and Swanand Kelkar of Morgan Stanley Investment Management.
