India Consumption Trends
by Ankit Jain (Fund Manager – Mirae Asset Great Consumer Fund) & Neelesh Surana (CIO – Equities)
Indian consumption story has always been narrated as an attractive long term opportunity mainly driven by its large size of population and favourable demographics. Median age of India’s population is 27 years. 47% of India’s population is below 25 years, and 64% of population is below 35 years. India has the best demographics among its peers, with its working age population ratio set to surpass other countries including China’s, in the next decade. In the next five years, India’s labour force addition will be 1.5x that of the rest of the Asia-Pacific region, the US and EU combined. The latest Economic survey puts demographic dividend impact in excess of 1.5% to the GDP.
As per socio-economic classification of Indian population, only ~35% of the Indian owns items like LPG stove and two-wheelers, and for most of the other discretionary categories, this would be even lower given relatively low per capita income. In effect, since India is a country of 250mn households, the target consumer base is restricted to 75mn households or 350-375mn people for most of the consumer categories. It is also interesting to note, while the population growth rates are expected at ~2%, the growth rates in target consumer base is expected to be much higher, primarily the reason for the bullishness on the India consumption story.
Analysis of Indian consumer between urban and rural subsets helps in identifying differences in consumption pattern because of wide difference in income levels. Rural India accounts for ~69% of the country population, though only contributes to 47% of the GDP. This implies Urban India’s per-capita income is 2.5x that of Rural India. While India’s per capita GDP is low in absolute terms (nearly one-fifth of China), the uneven division of GDP across rural and urban area implies that even branded daily-use products like toothpaste and soaps have a scope for further penetration in rural areas. Even if we were to consider the GDP in urban areas, it is still merely one-third of China. The key driver in urban areas is the combination of penetration gain and premiumsation.
Companies with focus on products at price points delivering high value to the Indian consumers has been able to scale well. This is quite evident in categories like biscuits and snacks where companies has been able to penetrate rural areas by delivering higher value to consumers and being present at lower price-points, typically Rs 5. Even in case of apparels, a lot of value fashion formats has been able to scale-up its store count at quite a fast pace once it had enhanced SKU’s largely sold at price points well-below INR1,000.
The other trend which has been disruptive is the preference for natural ingredients based products which has led to phenomenal rise of Ayurveda players. The trick here is to provide a product with good efficacy and reasonable price-points. It kick-started the age-old trend of Ayurveda and revived demand for some of the older product categories like Chyawanprash and Honey.
In our view, the key themes to play would be businesses that could address higher strata of population with a good product portfolio delivering higher value to consumers. Categories which have a higher proportion of the unorganised share would have an added advantage of shift to the organized players.
In the near-term, growth potential for consumer companies would be more driven by the pace of recovery in the rural segment. Rural growth drivers in the near term are; 1) Healthy crop production in FY18 on the backdrop of two consecutive years of normal monsoon. Although, an important monitorable would be impact of prices on overall farm income; 2) Increasing DBT disbursements and farm loan waivers which should further increase in the run up to state elections; 3) Enhanced capex of state governments aiding non-farm income; 4) Rural housing (targeting more than twice the normal run-rate in FY18); and 5) Normalisation of businesses post GST implementation.
GST is a significant reform as few categories (hair care, skin care, detergents etc.) are now in the lower tax bracket of 18% tax bracket (from earlier 28%). An important trend would be to monitor the price elasticity of demand in such categories, and share gains for the large players at the expense of partial/non-fully compliant fragmented unorganised companies.
Financial savings mix in the overall savings pool is bound to increase from present ~40% given low positive real returns in physical assets over last couple of years. This coupled with Govt initiatives to formalize the savings pool augurs well for growth in the businesses like insurance and mutual funds etc. Moreover, trends of shift in business from private lender to the institutional lender augurs well for loan growth uptick in retail oriented banks.
To conclude, India has the best demographics vs peers. With large number of job seekers entering workforce, we remain positive on its impact on growth over the next few decades. We believe that hopes based on India’s demographic dividend which has the crux of the bullish story for Indian markets, is justified.