Insight on Indian consumers

The May 1, 2006 issue of BusinessWorld has an insightful article on Indian consumers, written by Rama Bijapurkar based on a report published by Hansa Research. Trust me, it's worth going through the hassle of free-registration to read this article. In this study, consumer segments are defined according to what people consume/own, as opposed to how much they earn. The efficacy of this methodology is best summarized in Rama Bijapurkar's own words -

I have said ad nauseum, and beg leave to say again, that consumption data is like maternity — a certainty; while income data is like paternity — often a matter of opinion.

Income-based segmentation suffers from systematic under-reporting and typically misses out the black money component. In a market like India where the majority are employed in the unorganized sector, the resulting errors can be significant. Without further ado, I reproduce 3 pictures from this article, that speak a lot more than 3000 words from yours truly. The first two pictures go together and lay out various consumer segments, classified according to assets they own and products they use. Here's the user's manual to decipher what they mean (I couldnt understand the Sanskritised segment names myself):

The basis is a construct called HPI (Household Potential — or affluence — Index), which calculates for each household a score based on the consumption or non-consumption of a basket of 50 FMCG and durable products. A higher score is awarded for a less penetrated one (e.g. air conditioner or ketchup) and a lower score to a widely penetrated one (e.g. colour TV or toothpaste). Households with similar HPI scores have been grouped together to create eight consumer classes. Each has been further described in terms of specifics of ownership

I find this data fascinating -

• If you are reading this on a home PC, you probably belong to the top 1% of Indian households (2 million out of 200 million)
• 18-20 million households in India have 'motorized transport' - wonder if this defines the Indian middle-class?
• You can make out the pecking-order of consumer durables - ACs & flat TVs at the very top, followed by 4-wheelers/PCs, washing machines, 2-wheelers/phones/refrigerators
• The data is unclear on the distinction between mobile phones and fixed line phones. However, if you juxtapose the current mobile phone base of 90 million against the pyramid, the scale achieved in a mere 5 years is staggering (Remember that the pyramid shows # of households - each household has ~5 people). I would guess that the top 3 segments account for the bulk of the postpaid consumers (20-25% of total) and have more than one cellphone per household. After you deduct these, you still need to account for over 60 million prepaid connections. This means that cellphones have actually penetrated the 'Sangharshi' segment (2nd from bottom)! To put this in perspective, half of this segment does NOT use toothpaste (before the ignorant cast aspersions on their personal hygiene, they do use tooth powder)! Kudos to our cellphone operators.

Those who are interested could dissect this data in many ways & come up with even more amazing inferences. I am off to buy the entire "Guide to Indian Markets 2006" report.

Motilal Oswal

From pontificating on reservations in higher education, I am back to my more mundane day-job world to announce another India investment. Along with New Vernon Private Equity, Bessemer has invested in Motilal Oswal Financial Services, one of India's leading stockbroking firms serving both institutional and retail investors. Mr Motilal Oswal and Mr Raamdeo Agrawal founded the company in 1987. Multiple bull-and-bear markets later, Motilal Oswal is arguably the best 'Indian' stock broking house, competing effectively against India-operations/JVs of various global firms (including the bulge bracket ones). On the retail side, they have an extensive reach of over 500 branches/franchisees across India. On the institutional side, Motilal Oswal serves a wide range of global asset managers who invest in the Indian markets. As a regular reader of their equity research, I can personally vouch for its high quality! For a more unbiased opinion, in March 2006, AQ Research (a UK-based firm that analyses the accuracy of a broker’s research call) declared Motilal Oswal the best research house for Indian stocks. Beyond stock broking, Motilal Oswal offers commodity trading and wealth management services, and is setting up its investment banking operations.

In terms of the market, our thesis is that rising consumer incomes will translate into disproportionately higher allocation of these funds into equities. Right now, under 3% of India's retail assets are invested in stock markets. Cash, bank deposits, real estate and gold dominate the pie-chart on how Indians invest their wealth. As economies develop, this % rises to as high as 30-35% in the US. Further, the stock broking industry is highly fragmented and seeing a gradual consolidation. Motilal Oswal's growth has outpaced that of the industry and the company should continue to gain from this consolidation.

The main concern with the brokerage business is cyclicality. Trading volumes drop sharply during a downturn. When (notice that I havent said 'if') the Indian stockmarket enters the next bear phase, Motilal Oswal and its competitors will clearly be affected.

Then what? We wait! Ups-and-downs are a part of this game, and one of values of patient capital is to be able to support a company through a potential downmarket. The secular shift towards greater equity investment will continue and we expect growth across a cycle to be robust. Further, leading firms are better placed to weather a downturn and may even be able to accelerate industry consolidation by rolling up smaller firms that have been affected to a much larger extent.

For those who havent been to their website yet, check out the two rules on the top-left of the page!

Press coverage on the same can be found here, here and here.

Level playing fields

I've avoided writing about political issues here, but cant resist expressing my views on the suggestion to increase caste-based reservation in higher education. Frankly, it doesnt matter whether the basis is caste or something else. Like several others, I strongly oppose the very notion of anything other than merit being the admission criteria. In the spirit of full disclosure, I fall into what's called 'general category' and made it through assorted entrance tests without any benefit from reservation (though, a generous dose of luck may have played some role)!

Here's a quote that I heard at my earlier job - to get somewhere (in life), you need to either 'know something' or 'know someone'. Thanks to 40+ years of license raj, the 'knowing someone' angle has been particularly relevant in the Indian context. Coming from a typical middle-class family, the disadvantages of not 'knowing someone' become apparent fairly early. Several activities - getting school admission, driver's license, job, housing, even movie tickets - seemed a lot easier for others who 'knew someone'. Of course, one could always get to 'know someone' fairly quickly and really well by paying bribes, but a combination of ethics and affordability limited the use of this route.

A few months past my fifteenth birthday, my parents generously gifted me my first set of IIT JEE preparation material and not-so-gently suggested that I start working through the same. Then, I didnt fully realise the wisdom of their suggestion, but like any dutiful son, did as they prodded. Somewhere along the process, even I realized something very curious about this whole IIT-thing. This was the first case where 'knowing someone' didnt matter. It only mattered whether I 'know something'. At first, I couldnt even believe it. Here is one place where I didnt have any disadvantage over my schoolmates (even the ones whose dads were IAS officers, politicians, wealthy businessmen or could otherwise afford to pay capitation-fees). In retrospect, it was one of the few truly level-playing-fields I encountered. All I had to do was to use the brains I had inherited and work really hard. I still may not succeed, but at least, it wont be due to any 'extraneous' factors. This very notion of a pure 'meritocracy' was (and still is) quite liberating. Over time, a whole bunch of people (including Silicon Valley among others) figured this out, and IITs are what they are for this reason.

I realize that my words about 'meritocracy' and 'level playing fields' are meaningless to most of the Indian-poor. For them, the world is fairly 'unlevel', starting right from access to primary education. While the middle class by-and-large has reasonable and equal access to the IITs and IIMs, the same is not true of the poor. Similarly, large parts of our education system remain 'unlevel' even for the middle class (think of all the capitation-fee colleges). These are clearly difficult and critical problems that the government (and all of us) need to address.

But, let's not mix these up with what the government is trying to do right now. Instead of spending their time on areas where equal opportunities are not available to all, the government is instead trying to f*&k up one of the few level-playing-fields that actually exist. To me, this is ridiculous and retrograde.

What if we run out of fools?

The Indian stockmarket is going berserk. There's a Sergei-Bubka-type phenomenon of setting new records & breaking the same the very next day. While I broadly think India's going places and all that, the stockmarkets have gotten way ahead of fundamentals. Here are my top 5 signs that the Indian markets are overvalued:

1. Equity analysts are justifying valuations on the basis of FY08 and FY09 earnings multiples. Companies havent even declared FY06 results and for most Indian companies, FY07 numbers are wild-guesses at best. I've seen reports that say '25x FY08 earnings sounds reasonable' with a straight-face!

2. Every report that I read in Jan 06 showed year-end estimates for the Sensex at under 11,000. The authors of these reports dont seem overly worried that we've reached the 12-month target in 3 months.

3. Mutual fund branding has reached ludicrous levels. Tiger, Lion, Hi-Fi, Future Leaders are all names of new mutual funds. Advertising for these funds draw analogies to Birbal's wisdom and building the Taj Mahal!

4. Pre-revenue startups are hiring investment bankers to raise venture capital.

5. One out of 3 people I met at a party last week had raised an India-fund in the last 3 months.

The greater fool theory is being played out right now, as each investor hopes to find a sucker who'll buy the same shit at a higher price. What if we run out of fools? I guess that's never happened in the history of civilization!