Viewpoint: Why it's time for private market investors to bet on India's consumption theme

Viewpoint: Why it's time for private market investors to bet on India's consumption theme

Image by gpointstudio on Freepik

The author, Abhishek Sharman, is Founder & Managing Director, Carpediem Capital.

Consumption expenditure accounts for around 70% of the GDP of India, which is the sixth largest consumption market in the world, behind the US, China, Japan, Germany and the UK.

Coupled with the fact that India is on pace to remain the fastest-growing major economy in the world tracking around 7.3% GDP growth in FY2024, it makes for a highly dynamic investment landscape, especially along the consumption theme.

COVID-19 was a systemic shock, which led to an abrupt change across the world economy. India’s GDP growth prior to the pandemic was on a roughly 6.6% YoY growth path. 2020 saw India’s GDP contract by 5.8% followed by a partial recovery in subsequent years. Despite the growth achieved, the country remains behind its pre-pandemic path, lagging by 1.2 years while narrowing the gap across time.

Reasons for the lag include stagnant real rural wages, and weak services inflation. While wages make up for 40% of household incomes in India, another 35% can be attributed to operating surpluses from owned enterprises, which saw a markedly higher downturn. This variety of factors as a result of global business disruption ultimately led to a structural decrease in consumption, which India continues to recover from.

Over the past few years, labour supply has risen steadily. An estimated 12 million additional workers became available for work annually between 2019 and 2023. There remains a demand shortfall of 14-15 million workers or around 3% of the workforce. As businesses recover, nominal wages grow, and rural wages lag but ultimately follow trend, the macroeconomics legislate for consumption to play catch-up.

The consumption comeback

Consumption is set to make a large comeback as India narrows the gap towards its pre-pandemic GDP pathway. With all indicators signalling a rise in household income, discretionary consumer spending, in particular, is set to experience strong tailwinds. To add, towards the close of 2023, consumer sentiment recorded the highest levels in the last four years, indicating optimism.

India Consumer Confidence – Current Situation Index

Signals from the public market

The public market has already factored in some of this optimism, with 2023 experiencing an outperformance of segments of the market tied towards consumption.

The Nifty 50 returned around 20% in 2023—one of the strongest years for public investors in recent history.

The Nifty Consumption Index, however, returned over 26% during the same period, outperforming broader benchmarks by some margin. The three years from 2021 to 2023 saw 168 public listings on the main board of Indian stock exchanges, 50 of which were only listed during the second half of 2023—indicating an increasingly active IPO market.

The Nifty Consumption Index returned 26% in 2023.

Of the 168 listings, 74 can be tied to the broader consumption theme including FMCG, Retail, Finance, Healthcare, and Pharmaceuticals. Over 53 of these consumption companies had a trading history of over six months. The average annualised gains recorded a return of 34% over the IPO issue price and a 20% average return over the opening day market price. Overall, this represents an outperformance of around 19 percentage points and around 5 percentage points respectively over the equivalent Nifty 50 performance.

The public markets have seemingly recognised the return to consumption and have begun pricing in the anticipated consumption comeback.

Implications for private equity

The public markets are a useful barometer for sentiment, valuations, and the broader economy thereby influencing the dynamics of private investment. Stronger IPO activity translates to favourable outcomes for private equity funds seeking public exits. In addition, this spurs liquidity across the industry and drives fundraising and M&A activity as capital is freed to be reallocated from public exits.

The year 2024 can be seen as an opportune time to allocate capital towards the consumption theme in private markets—specifically across consumer discretionary segments that are driven by stronger tailwinds given the increasing cushion for spending across households.

Themes across food & beverages, retail, women’s consumer discretionary, and financial inclusion should offer compelling themes for private investors seeking their next frontier of investments.

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