Bimtek Capital's India Growth Fund: Investor Update Newsletter #19, July-2024

Dear Investors, Readers,

With the dust settled on the political events in India (read- Modi 3.0), the markets and investor focus is back where it belongs- business growth, fundamentals and valuations. Controversial as it may sound, doesn’t seem the focus is too sharp given the eye-watering valuations across some segments, PSUs in India and limited opportunities for value investment bottom up. Viewing the broadcast of the first of the Presidential debates b/w Trump and Biden had Bimtek holding head in hands: contemplating whether the American voter has any merit in leaning towards either of the ‘hard right’ or ‘soft left’ candidates at hand.

Macro Update (bottom line): Opportunity Knocks!

As anticipated, the political turmoil in India (almost) humbled the ‘mighty’ with no clear majority and brought to relevance the ever so important fact that alignment pro-growth and pro-reform, and pro-public interest would work better than blind faith in particular Demi-god names! In the markets, there were healthy jitters of c.10-15%+ short term corrections and more so in individual names! Bimtek’s India Growth Fund investors may have seen us lap up on some of our higher conviction ideas in their respective portfolio updates accordingly during this time. Fret not, such jittery days is what we prepare ourselves for. Almost borderline ‘greed’ shines in our eyes when we start seeing some of the value buys in a stock-pickers market environment, as stands. The fruits of which we shall reap in the years ahead.

As the ex-PM of India, Atal Bihari Vajpayee, aptly said:

“Sarkaarein aayengi, Sarkaarein jaengi, Desh chalta Rehna chahiye”

[English- Governments may come and go but India should continue to grow]

And grow it shall! somewhere b/w 6-8% p.a. for the foreseeable future along with inflationary growth and thereby the economy doubling every 5-6 years henceforth. Bimtek wouldn’t want to burn too many calories forecasting whether the core growth would be closer to 6 or 8 on the % scale. Ballpark right works just fine in our part of the world than being outright wrong!

The last few years have been rewarding for investors as the returns were frontloaded, albeit Bimtek remain bullish on the Indian economy which will continue to grow, and believes that the current economic cycle has healthy legs to run, a backdrop that should accrue to the benefit of long-term investors, especially ones who have dry powder to lean into the inevitable periodic dislocations that are likely to occur during a Regime Change.

As wise investors say:

“The markets take the stairs up and the elevator down”

Bimtek’s India Growth Fund Case Study: Quick Commerce Sectoral Analysis

In a span of less than a decade, India’s c$850Bn Retail industry like other international markets has seen major upheaval in the business model wherein ‘quick-commerce’ platforms have come in proxy to the traditional retail distribution channel and which are able to offer better pricing than traditional retail due to removal of intermediaries: thereby gobbling up sensible margins and passing on cost savings to consumers.

Industry Overview:

Quick commerce platforms in India operate in less than 30 cities at present, with plans to expand to 40-50 cities over time. These cities represent about US$150 bn in grocery and non-grocery Total-addressable market (TAM) for quick commerce platforms as of CY23. India’s retail TAM is c.$850bn, of which US$570 bn is grocery. Urban India makes up 36% of India’s population, but about 45% of grocery consumption (per NSSO data), or $260bn in TAM. Non-grocery retail in India is US$275bn in TAM; however certain categories such as large appliances, jewellery, parts of apparel/footwear segment, etc. should ideally be excluded from quick commerce TAM, since SKU size/assortment would make it difficult for such categories to be serviced within a short time window. The addressable non-grocery TAM in India is about US$90 bn of which urban retail is US$45 bn. Thus, total addressable urban retail market for quick commerce platforms (including both grocery and non-grocery) is c.$300 bn.

Affluent India: India has a total population of 1,400mn people (17-18% of the world population), however, only 5-6% of people order food online (71-72 mn people), which is significantly lower than compared to ~41% in China (~600 mn people), ~23% in the US (~75 mn people) and ~13% in western & central Europe (~38 mn people). With its large population base and improving affordability due to rising income levels, India has the?potential to reach more than ~600 million customers number in the coming years, which would be 8-9 times the current customer base.

Additionally, online delivery represents only a fraction of the broader food services and quick commerce market in India, highlighting the significant growth potential amid:

(a) changing consumer behaviour,

(b) evolving tastes and preferences,

(c) higher adoption in smaller cities, and

(d) an expanding working age population with a greater female workforce

?

Online grocery and food delivery are both amongst the largest TAMs within India Internet. We see this to be a function of the continued shift to online. Some of the players with dominant positioning in food-delivery, are leading the pack in quick commerce business as through better insights into potential high-demand locations, lower cost of customer acquisition, and access to a ready supply chain

India’s Quick-commerce Industry: Side-by-Side Competitive Analysis

More recently, scheduled delivery platforms have increased their focus on shortening their delivery times (‘convenience’): from scheduled deliveries in 1-2 hours to more of 10 to 20 minutes deliveries across competitors. With incumbents Reliance Retail, Amazon Fresh and Flipkart in the foray. Given the size of the industry, its likely that competition shall be a consistent feature of the online grocery industry, and no player likely having more than 20% market share.

The Exam Questions

Analysis showing number of platforms that can co-exist in quick commerce

?Will the quick commerce economics work?

Drawing a parallel from food delivery businesses such as Swiggy, Zomato, Bimtek infers that:

1.???? Average Order Value (AOV) to GDP per capita ratio in India is substantially higher than that for global peers as food delivery is predominantly used by only the top 3-4% of Indian population (from an income lens), whereas the distribution in other markets is more broad-based. Since costs are not strictly correlated to AOVs, higher AOVs drive better margins.

2.???? Rider cost to AOV ratio in India is amongst the lowest in the world.

Both these dynamics also hold largely true for quick commerce. In addition, there is a meaningful potential for high-margin advertisement income in quick commerce. For context, advertisement income in food delivery currently is at c.3% of GOV (per listed company disclosures), while for quick commerce is likely already higher at 3.5%-4% of GOV. Recent comments from brands and FMCG companies suggest high focus on ecommerce and quick commerce channels which could translate into increasing advertisement spends on these channels. For context, FMCG companies spend about 10% of their revenues on advertisement and promotions higher than the 3% to 6% in the restaurant industry (company disclosures, press); thus as online channel growth continues to outpace that of other channels. Thus the advertisement income to GOV ratio for quick commerce players could rise further and thereby better margins, profitability hereto. Key drivers of margin improvement in the business being higher take rates (better gross margin, higher advertisement income, handling fees) and fixed cost operating leverage (both dark store & replenishment and indirect costs).

What about the threat from ONDC?

In Bimtek’s view, ONDC is not particularly disastrous for incumbents even though it is clearly an attempt to democratise e-commerce and guard against monopolistic power. Leaning on the views of one informed observer close to the central government, ONDC is a conceptual risk not an execution risk, whereas the digital success stories represented by the Aadhaar ID card and Unified Payments Interface (UPI) were only execution risks. This is because nothing like ONDC has ever been tried before. For this reason, it’s likely to be either a complete flop or a massive hit. If it is the former it clearly represents no threat to e-commerce incumbents. Whereas if it is the latter, it represents a win-win for everyone involved since only 6% of the population currently transact online so the addressable market will soar.

Some other risks factors that may play out could be increased competitive intensity and slower-than expected adoption of online grocery.

As Bimtek Capital’s India Growth Fund investors are aware, Bimtek is long on some of these India Internet stocks, a granular investment memo with detailed investment thesis and financial analysis on them is accessible through your respective investment portal accounts on our website: here.

As always- if you’re interested in discussing investments in general or would want to evaluate investing with us through Bimtek Capital’s India Growth Fund- we’d love to talk. ?

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Kind regards,

Team Bimtek Capital