India – The country with the biggest rising middle class

22 February 2023

Given its rapid economic growth, young and vast population base, India has the biggest growing group of middle-class consumers in the world in the coming decade.

The Indian economy will continue to fulfil its potential because:

  • It has had a decade of economic reforms that improves the ease of doing business. According to the World Bank ease of doing business rank, India’s ranking has improved dramatically over the last 5 years or so.
  • Infrastructure like roads, power supply and mobile internet network has improved significantly.
  • Consumers incomes are rising rapidly as productivity is picking up, and the economy is buying more than 100m mobile handsets a year, the fastest growing market in the world.
  • Companies are investing, and in fact, India is producing a lot of its own mobile handsets.

India is still a poor country economically speaking. Things people in developed countries take for granted, such as having an identity, being able to open a bank account and borrow money to start their own businesses, is something relatively new in India. Technology is transformational and is allowing more and more people to join the modern economy and lifting productivity for the economy.

As a side benefit of the growth of the modern economy, the government can collect more taxes which it is spending wisely on infrastructure to enable further growth.

GDP/capita is likely to continue in the coming 5-10 years from a low base of $USD2000. It is a country that can deal with inflation because they are used to it, and it has not over-stimulated during covid, hence the inflationary pressure is not particularly high.

The Indian economy is booming when most economies globally are seeing slowdowns in 2023.

A look at Reliance Industries:

At Ox Capital, we focus on emerging leaders with secular growth stories that trade on attractive valuations. While the markets are efficient most of the time, on the rare occasion, it can misunderstand prospects for businesses for a variety of reasons. Identifying these opportunities requires experience and diligent work. Reliance Industries is one example.

Reliance is a petrochemical giant out of Mumbai, that has transformed into the dominant internet and retail conglomerate in India. They have a Net Carbon Zero status target by 2035 and are embarking on a 15-year plan to build itself up as one of the world’s leading new energy and new materials companies.

It was easy to dismiss Reliance a few years ago. The market did not like Reliance when it decided to spend $USD35B on a gold-plated 4G network when it had no mobile customers. The market was so concerned about its foray into 4G that it ascribed negative value for this business. Our work suggested Reliance’s prospect was a great deal more favourable than the market gave it credit for.

  • We have covered Reliance Industries and the Indian Telco industry for over a decade, so we understood the context of the market.
  • India was underserved by both fixed line broadband and the 3G mobile data networks at the time, so a fast 4G mobile data network was always going to be popular with the consumers who like to be able to watch cricket and browse the net.
  • Despite the incumbent 3G operators having had first mover advantage, the Reliance has out-spent them in the next generation fibre and radio networks ensuring superior experience for consumers.
  • 4G handsets prices were falling as the technology matured. The ability to connect to the internet using the 4G handset was immeasurably cheaper than using a PC previously. Reliance had strong execution capability, and a pan Indian presence, so signing up subscribers will be smooth.
  • We tested the network on offer by Reliance and it was superior to the existing network on offer.
  • Our modelling suggested that the economics of charging a low $USD2-3 a month tariff made sense economically.

The reality played out as expected. Now Reliance has the biggest number of 4G users in India with over 400 million users. The market is consolidated, and growing subscribers by 100M per year and lifting prices.

The likes of Google, Facebook and Microsoft are forming joint ventures with Reliance to roll out the cloud and internet services in India.

Reliance retail operation is growing in double digits and is already the biggest in India, driven by advanced logistics and online/offline integration. As a leader in Telco, and an emerging leader in Retail, Reliance offers secular growth thematics, attractive valuation, and is set to grow at rate of 20% a year for a long time.

Dr Joseph Lai

Past performance is not a reliable indicator of future performance. For Performance of the Fund please see our performance page.

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