What are the addressable market opportunity and their key drivers?
This is a very important aspect to research the kind of themes that can play out in the future. Someone who had invested in Colgate in the 70s did the right investment. They anticipated dental hygiene growth in India. However, with a 50% plus market share of Colgate in India, the growth opportunities are now limited. The same theme will not extend in the future.
The investor must evaluate the current economic environment to understand what can play out in the future.
One of the ways to look at sectors is to filter those that have a history of generating a high return. Or the other way is to avoid sectors that generate a low return. Here is a McKinsey report that shows ROIC across sectors. Focus on sectors that generate more than 15% per annum.
Here are a few of those themes:
As per the recent Morgan Stanley report, the number of households earning more than US$35,000 per year (~Rs 25L) is likely to rise fivefold in the coming decade, to over 25 million. This has a lot of implications but simply speaking, there will be more surplus income. This will lead to more business for asset management, broking, depositories, and wealth management companies.
Here is a report indicating Performance Linked Incentives (PLI) across the industry announced by GoI in March 2020. This can be one way to look at sectors that can reap the benefit of PLI and China + 1 theme. The story of Apple manufacturing the iPhone in India is a reality now. In the future, we may hear more such news. Be on the lookout for companies that operate in the sector to reap the benefit.
Watch out for electronics and semiconductor space in India.
The government’s initiative across digitalization (eSign, Aadhar, UPI, ONDC, OCEN) is bound to help the financial sector. India stands to gain due to the push of digitalization. This should help in creating ease of transaction, and an increase in client base for banks/NBFCs with reduced NPAs due to the tracking mechanism.
As per Paris Accord, our Prime Minister Narendra Modi announced five key commitments: 1) to increase the country's non-fossil-fuel energy capacity to 500GW by 2030; 2) to fulfill 50% of its energy requirements from renewable sources by 2030; 3) to reduce its total projected carbon emissions by 1bn tons by 2030; 4) to reduce the carbon intensity of its economy by 45% by 2030, and 5) to achieve net zero emissions by 2070.
These are extremely high targets and we may not be able to achieve them all. However, even if we partially achieve this, it will help reduce the oil import bill and manage inflation better.
Sectors that operate in the renewable energy space including EVs stand to benefit.
India should hit a major inflection point for the next residential property boom in 2030 – a confluence of high per-capita income, a mid-30s median age, and higher urbanization. After a long gap, the real estate sector is showing positive signs. With growing commercial and residential real estate demand with improved regulations (RERA), the real estate sector stands to benefit.
The investor must evaluate ancillary sectors as well. This means from an industry standpoint, not just developers have to be evaluated but also cement, paint, sanitaryware, faucet ware, plywood manufacturer, etc. stand to gain.
The government has plans to procure Rs5trn of military equipment domestically over the next five years. India aspires to become an importer of defense equipment to exporters now. A lot of money has already moved into the defense sector over the last few quarters. This is a long-term theme and a prudent investment in the same stands to be beneficial.
As the general wealth of people is increasing in India, there is increased spend across sectors including travel, apparel, eCommerce, jewelry, food, beverages, etc. Over the next decade, we may see multi-baggers from this theme.
Each sector and its associated sectors have to be evaluated like a detective. The idea should be to reject the sectors for any issue such as high leverage, slow growth, low ROIC, poor management, corporate governance, etc. In case you are not able to reject, then start doing an in-depth analysis.