Guest Post: In India, consumption-driven growth to scale greater heights in the coming decade

Guest Post: In India, consumption-driven growth to scale greater heights in the coming decade

Vijay Dhanuka, Director, MO Alternate Investment Advisors

India’s consumer opportunity is anchored by household consumption and driven by increase in per capita income levels and a very large and aspirational middle-class population. If we were to consider the first two decades of this century, Indian households have added around $600 billion and $850 billion in incremental consumption spends, respectively, to reach a total consumption of $1.9 trillion in 2021. Taking a cue from this, the coming decade will unlock an even greater scale of domestic consumption-driven growth, and we will likely witness Indian consumption crossing the $4-trillion mark.

India’s demographic dividend will keep compounding

By 2030, India will have a median age of 28 years and one of the highest proportion of workforce globally with a 60% working population. This will ensure that consumption of goods and services across categories continues to grow. The current and future workforce is becoming more aspirational with Internet- and media-driven pickup of affluent lifestyle vectors such as travel, fashion, brand awareness, social media participation, and daily interactions with technology platforms. Also, with a booming startup ecosystem and a large base of talent pool skilled in technology, there is a huge influx of high-quality founders who are aspiring to create high-quality and sustainable businesses and usher in a new wave of economic value creation in the country. These two mega-trends will lead to a large number of existing and new brands scaling to more than Rs 1,000 crore revenue over the next 10 years. Proliferation of such brands will be supported by secular trends that influence present day consumer behaviour.

Shift from unorganised to organised

India continues to witness a huge shift from unorganised to organised, which results in growth of value-for-money brands that provide better quality and standardisation. Some stark examples of this trend are visible in creation of pan-India brands in categories such as incense products (agarbattis), dry fruits, fashion jewellery, premium tiles, gifting, packaged foods, and footwear. At MO Alts, we have recognised these shifts and have invested in a top three ranked Indian company in each of the above categories: N Ranga Rao & Sons (Cycle Agarbatti), Happilo Dry Fruits, Kushal’s Fashion Jewellery, Simpolo Vitrified Tiles, Join Ventures (IGP.com, Interflora.in), Ganesh Grains, and Asian Footwears.

Under-penetration in certain sub-segments

Another important trend driving consumer spends is the volume growth for branded plays in under-penetrated sub-segments. While on the one hand, we have categories like soaps and detergents where the penetration is as high as 90%, there are categories like mattresses, ice-creams, and kids and adult hygiene products etc where the penetration still is sub-30%. As India’s per capita income inches towards $4,000 (from the current $2,200) in the coming decade, penetration across these categories will increase. Our investments in regional champions such as Dairy Day Ice Cream and an unannounced hygiene brand are based on this theme of increasing penetration. To give you a sense, as per our internal research, India’s per capita consumption of ice-creams is 500 ml and of baby diapers is <60 units as against the US average of 15-20 litres and 1,000 units, and China’s average of 3 litres and 400 units, respectively.

Faster distribution across channels driven by digitisation

The last four to five years, particularly the COVID-affected years of 2020 and 2021, have resulted in a huge uptick in digitisation of consumption across the value chain. Be it optimisation of supply chains, production planning, inventory management, and contract manufacturing; or ease of targeting specific consumer segments through digital marketing; or geo-tagged management of fleet-on-street salesforce, distributors, and retailers for offline segment; technology is enabling faster distribution of products and services all across. This is enabling consumer businesses across categories and price points to scale up much faster at 35-40% growth rates vs the typical 20-25% growth a decade earlier. India already has over 650 million people accessing Internet at lowest costs globally. This will result in close to 350 million first-time online shoppers over the next five to six years. And as technology systems and platforms mature, and more and more consumers/ vendors/ suppliers become digitally equipped, we’ll witness large scale outcomes being created in shorter time spans.

Keeping this in mind, we have doubled down on our consumer investments with over $200 million committed across six businesses in 2022 alone, which is more than 2/3rds of the fund’s total consumer investments in its 15-year lifespan. And we are keen to continue our current pace of deployment by making two-three more investments in the next two years with ticket sizes in the range of $25-50 million.

Growth investments in consumer sector will provide attractive exits

Given the huge opportunity and secular nature of the consumer space, we believe that growth equity investments in the sector will continue to result in successful exits with attractive IRRs. Over the last decade, a number of consumer-focused growth-stage PE/VC funds have come into existence or entered India, and most of them have successfully raised subsequent funds after the initial launch on the back of good exits from their consumer portfolios. MO Alts has also exited three of its 12 consumer investments so far, with an MOIC of 4.1x and a gross IRR of 27.3%.

Given the resilience of India’s public markets despite high interest rates, global inflation, and recessionary trends in the developed markets, and large global PE funds and pension funds increasingly looking to do late-stage investments, the market for exits is going to be robust over the next decade. And, the virtuous cycle of smart money attracting good talent, good talent creating high-quality businesses, and high-quality businesses delivering stellar exits will continue to augment.

Vijay Dhanuka is a Director at MO Alternate Investment Advisors Private Limited (earlier known as Motilal Oswal PE) 

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