May 1, 2012
Interviewed by: David Snow
Video Clip
Login to view full video

Investing in Indian Consumers

The biggest driver of growth in the emerging markets is rising consumer-spending power. In India, a huge population is spending money on new goods and services, which spells opportunity for entrepreneurs and private equity backers.

In this video, two investors—Parag Saxena, Founding General Partner and CEO of New Silk Route, and Sev Vettivetpillai, CEO of Aureos Capital (a division of Abraaj Capital)—discuss how India consumer trends compare with other emerging markets.

The biggest driver of growth in the emerging markets is rising consumer-spending power. In India, a huge population is spending money on new goods and services, which spells opportunity for entrepreneurs and private equity backers.

In this video, two investors—Parag Saxena, Founding General Partner and CEO of New Silk Route, and Sev Vettivetpillai, CEO of Aureos Capital (a division of Abraaj Capital)—discuss how India consumer trends compare with other emerging markets.

DAVID SNOW: One of the biggest themes in investing in the emerging markets– and certainly including in India, where both of you are very active– is the rise of consumer spending power. Both at the highest levels of Indian society and also people who are just coming out of, maybe $1 a day existence.

I’m interested in how the power of the Indian consumer has informed your investment decisions and your investment themes. And maybe starting with Parag Saxena from New Silk Route, can you talk about how you think and define that and how it informs your investing?

PARAG SAXENA: We are interested investing in anything that we understand well. And much of that is driven by the rising GDP per capita of the average Indian. And there’s been a lot written about it already thoughtfully.

Bottom of the Pyramid was a very interesting book that pointed out that even the poorest person likes, now and then, to shampoo their hair. It’s a question of the price point. So if you can give that to them as a single sachet, it’s something that they’re going to use.

But of course, if you look at the investments that people make, we make– telecommunications– what are we betting on? We’re betting on the fact that 10 million new cell phones and more– the number’s gone up to 16 and 17 million– a month are being sold in India. And so that’s driven by the desire of people that have those telephones.

The same thing you’ll probably see in two years as data replaces it. So telecommunications as a theme, really driven by consumer usages. It’s those iPhones and BlackBerrys. And today it’s the phones that they’re using that drives that.

Similarly, one of the areas that’s been very attractive for us is food and beverages. And it’s a great opportunity for buy and build oriented firms like us. It’s an opportunity– in the latter– because there aren’t any companies of scale. We’re invested in Cafe Coffee Day, which has got 1,250

If you look at the next company, it is 400 stores. So that’s a stunning difference. And so the ability to scale things is an ability that’s extremely important.

And if you have an entrepreneur, if you have a plan that can take you there, that opportunity is huge. It’s huge across any– whether it is service or product– along that. You know?

Health care services, we all know the macro. Single digit penetration of health care insurance but rising very rapidly. As more and more people get that you’re going to have that. And you’re going to see things, of course, at a very, very different price point.

Because you will see the price point– in the case of heart procedures you see it at 10%. In the case of eye care, there is a company called Aravind which does it at 1% of cost in the West. And so you see lots of these models go up as GDP per capita goes up, and as Maslow’s hierarchy starts to take place. They feed themselves, they cloth themselves, start taking care of their health, and then they start getting into other things.

DAVID SNOW: Sev, can you define how your firm defines and understands consumer behavior? Both in India and other places in the world where you invest?

SEV VETTIVETPILLAI: For the last 50 odd years many of these markets has had a big difference between the very poor and the very rich. And over the growth over the last 10 years we’ve seen that middle class growing, growing substantially. Between 2002 and 2005 Mexico had 25 million people move into the middle income level.

You have a young population in Southeast Asia that are average age of 27, 30 years old that are coming into the middle class income. And what does that do demographically? As well as the products and services the country offers to the public.

Now the same point applies to India. And India is a much bigger market. And in perspective are the concentrations of cities. You have the ones with 5 million and more and 10 million and more or 2 million and less. And if you look through it, the general GDP for India as a whole may be low compared to if you were to dissect it by cities. We are looking at it from that perspective to understand.

For example, whereas Bengal is equivalent to East Africa. That we are looking at East Africa saying what’s working? And how does that relate to West Bengal? What are the areas we should look at?

So the similarities can be used in that and then focused on the bottom up as to which of the businesses that we know is operating in that sector of industry as a good management team that we can back and scale up.

And history has said if the GDP per capita as a country reaches over $4,000 that the consumer demand changes where they have more surplus capital. So certain other wide goods and other products becomes of demand. So it is a major point, because that’s the real driver for growth. And the smaller mid-market tend to be the first to start taking advantage of it, because they’re a lot closer to that segment.

You mentioned, earlier on, sachet and beverage. And we invested in a company in Ghana in ’93, ’94 that did bottled water. And the owner of the business decided that the bulk of the population lived in the bottom of the pyramid. And their working capital ability is a day by day. Not the usual one where you buy for the month and keep it in the fridge. They can only afford it on a day by day.

So he came up with a sachet. The individual’s going for work and wants clean water, because of health. Buys it for the money that they have earned for that day and does it every day. Benefit? You have no receivables. Its cash. So finding those nuances as the per capita increases is so key. And local entrepreneurs are very good in figuring out what would work over the next five years, take advantage of it. Of course innovating on that point is important.

Register now to watch this video and access all content.

It's FREE!

  • CHOOSE YOUR NEWSLETTERS:
  • I agree to the Privcap terms of use and privacy policy
  • Already a subscriber? Sign In

  • This field is for validation purposes and should be left unchanged.