Oh, not again!

India’s e-commerce pioneer’s ownership change underlines Indian enterprises’ struggle to achieve scale

 The churn of big-bracket investors at India’s first digital marketplace continues. The price tag for 77% stake by the new buyer puts a valuation of over US$ 21 billion, making it more expensive than decades-old Old Economy companies such as Tata Motors and Coal India. In the absence of listing, the transaction size becomes a function of the buyers’ capacity for risk and projection of outlook for the business on one hand and the sellers’ doggedness to get the desired price or impatience to exit to cut losses on the other. After all at the turn of the century internet properties were assigned discounting based on eyeballs rather than cash flow. Foreign direct investment in multi-brand retail is not high on the current government’s agenda. At the same time, the fastest-growing economy in the world is too important to ignore by global companies in search of growth. Offline retailer D-Mart in fact is supposed to have mimicked the low-cost model of US peer Walmart, the new buyer of Flipkart, with great success. Despite keeping prices low, the net profit margins are near about 4%, highest for any discount retailer in the world, and are projected to increase 1% point and  the return on equity by nearly half in another three years. The sparkling performance is in stark contrast to the cash-guzzling and loss-making e-commerce pioneer. Interestingly, there was no panic selling in Avenue Supermarkets, indicating that competition from cyber space is not expected to affect D-Mart in the immediate term.

What the transaction instead does is trigger a tinge of regret that India is yet to produce a Jack Ma in the e-commerce space. Alibaba’s US$ 21-billion IPO four years ago is the largest capital-raising exercise so far. Hint of further capital infusion is as an acknowledgement of the Indian consumption story as much to the difficulty in cracking the market. Walmart is known to get is calls wrong. It had to wind up physical presence in Germany due to inability to understand local tastes. Its online investments in the US and China are more of counter-strategies to stave off Amazon and Alibaba. The coexistence of brick-and-mortar retailers with e-tailers highlights a strange paradox of post liberalization India: a nation ready to embrace innovations and at the same time conservative in accepting change. If the two-wheeler segment demonstrates the ability of local companies to beat foreign brands, the consumer durables space is a tale of meek surrender: regulations reduced domestic labels to assemblers of knocked-down kits. The typical reaction of an entrenched Indian enterprise that prospered on patronage to any threat to market share is to scurry into unrelated areas such as telecom, aviation and oil and gas.   

The many bright sparks in the non-digital space are mostly first-generation entrepreneurs. Their horizon is not restricted to the Indian borders. Naturally, they are from sunrise areas. Some degree of success has been achieved by generics makers exporting to the US. The old and new coexist in healthcare, but the money-spinning diagnostic centers have the stamp of start-ups. The personal-care segment is a testimony to the innovative spirit of Indian entrepreneurs so much so that even multinationals are looking at home-based remedies. Similarly, the food business is seeing a replay of David taking on Goliath, with a tilt in preference for Indian savories of regional brands over foreign labels. Though reminiscent of the crowded 2G spectrum era about a decade ago, the money-transfer business looks set to become the next big theme after private banks. More often, an unexpected success sees re-rating of the entire sector. The over 100% subscription and listing returns of Avenue Supermarts brought into fashion Shoppers Stop, V Mart and Future Retail. French giant Lafarge’s entry through ACC and Ambuja Cements prompted a relook at a mature market. The lining up of suitors for distressed steel assets is taken as a sign of recovery. Unfortunately, not all missions have had a happy ending. Many have succumbed under the weight of their ambitions as well as due to the hostile environment post the global liquidity crunch. Suzlon sold itself to Sun Pharmaceuticals, another new-age venture. The wireless business has proved to be a graveyard across generations of would-be telecom czars. Airlines remain work in progress as promoters without baggage of experience struggle with regulations and a brutal marketplace. Yet, the notable take-away from the Flipkart trade, representing 5% of the total assets of mutual funds end March 2018, is that deals in India are going to get bigger. Money is waiting. The question is if Indian promoters are ready to loosen their grip to let in big-ticket investors to achieve scale. Ma owns only 7% equity shares in Alibaba.   

-- Mohan Sule

The run-up

Despite lousy macros, the market’s near-quarter gain in slightly over a year to the last general elections was on hopes of a Modi win

The market returned more than 25% from mid April 2013 till the Lok Sabha poll results were announced. As the world’s most populous democracy begins the countdown to elect the next government, the question is how equities will move in the run-up. If history repeats, the benchmark will be near the 40,000 mark five months into next year. Stocks had surged despite the infamous policy paralysis that turned UPA 2 into a lame-duck government for the last two years of its term after a spate of scandals. The Supreme Court early 2012 cancelled the 122 licences for 2G spectrum issued in 2008. Over the first part of the year, CBI investigated if coal blocks allotted between 2004 and 2009 were by bidding. These scams came on top of the discovery of financial irregularities in the 2010 Commonwealth Games and that apartments in the Adarsh housing society in a prime south Mumbai location were given to politicians and bureaucrats instead of war widows and army personnel. There were allegations of a surreptitious environment tax to pass capital-intensive projects. Macro factors, too, had had turned hostile. The 10-year government paper yielded 7.75% and home loans were being disbursed at above 9.70%.  Oil had crossed US$ 100 a barrel. The fiscal deficit in the March 2013 quarter was 3.14% of the GDP (totaling to nearly 5% for the entire year). The current deficit was at 3.58%. The gloom did not restrict equities from scaling new highs. By the time the calendar year ended, the Sensex had crossed the 21,000 level, last seen before the global financial meltdown of September 2008.

A contributor to the rally was the US Federal Reserve finally initiating the anticipated roll-back of the liquidity injection that was introduced to prevent the US from sliding into recession due to the credit crunch as too-big-to-fail banks collapsed. Foreign investors were pleased with the victory of the BJP in Rajasthan, Madhya Pradesh and Chhattisgarh assembly elections, hoping that Narendra Modi as prime minister would pencil broad reforms to boost the economy. There are many similarities with the period five years ago. SBI’s base rate is about 8.7% and yields on government bonds are slightly below even though consumer inflation is at a five-month low of 4.28%. Brent crude is hovering above US$ 70 and looks set to rise further due to slide in output even as the global economy gathers strength. The stark differences include weakening of the rupee to the 66.40 level from 53.5 at end April 2013. The fiscal deficit is projected to decline to 3.3% in the year ended March 2018 from 3.5% in the previous year. Still off the original target of 3%, it is lower than 4% in FY 2015 and 1.5% points down from the penultimate year of the Manmohan Singh-P Chidamabaram regime. The current account deficit was 2% of GDP in Q3 and is expected to be 1.5% in FY 2018 from a low of 1.3% in FY 2015 but much more comfortable than what it was in FY 2013. After hitting a lifetime high of above 36,000 early 20018, the stock market corrected over 10% on higher bond yields in the US and India.   

Another striking dissonance is that small and mid caps have been at the forefront of the current rally. In 2013, investors preferred large caps. Implementation of the long-term capital gains tax on equity instruments and dividend distribution tax on equity mutual funds is a downside. Yet, mutual funds are replacing overseas funds in propping up stocks: their investment in equities was double that of foreigners in 2016 and 2017. Since the start of 2018, domestic institutions’ debt exposure has outstripped that of their non-local peers, who have been exiting from both equities and debt. The Sensex’s jaunty ride in 2016 and 2017 was as much due to global liquidity finding its way to high returns emerging markets as to the cleansing of the real estate sector, roll-out of GST and shepherding defaulters to insolvency by shortening the outstanding loan recovery process. Later reforms such as opening up coal mining and putting Air India on the block as well as forecast of good monsoon have not energized on concerns of what farmers’ loan waivers and guaranteeing minimum support price 1.5 times the cost of food-grain production will do to the fiscal health. High-growth stocks are expensive even after correcting more than 10% from their peak. As such the triggers for the market are more likely to come from the US (pause in the scheduled three rate hikes by the Fed) and China (maintaining the manufacturing momentum). Overriding economics will be politics. The tailwinds of the BJP passing the test in Karnataka can only get stronger if Modi wins the three-state sweep-stake at the end of the year.

-Mohan Sule