Key themes
Buoyant outlook and .small town. optimism
The Indian consumer displays relatively broad-based optimism across the range of income
brackets. Households, on average, expect income growth to double next year, while more
than 70% find the current environment conducive for making major purchases. Smaller
cities are the most optimistic. They also display greater inclination to purchase big-ticket
items. Being relatively insulated from global volatility, they have outperformed larger cities
in terms of growth and could continue to do so. First mover advantage is huge. Companies
with the right products, brands and deep sales/service roots can best capture growth in
these cities. Maruti Suzuki, Hero Honda and Bharti Airtel are the best ways to play this
theme, in our view, given their market leadership (higher share in smaller cities), focus on
semi-urban/rural consumers and wide distribution reach. In the near term, Bharti and Hero
Honda look the most attractive and are similarly placed, with concerns on market share
and margins set to ease in the next few quarters.
Growing comfort with leverage
Indian consumer balance sheets are still significantly underleveraged. However, we see
an increased appetite for credit in big-ticket purchases such as property and cars. Growing
comfort with debt will have an obvious impact on the savings culture . which tends to
decline as economies mature. Financial sophistication will increase as companies widen
their portfolio of products, improve service levels and expand reach. We expect greater
scrutiny at lower income levels and stringent regulations as the government watches out
for consumers. well-being. We like HDFC Bank for its stronger-than-industry credit growth
combined with declining credit costs leading to rising RoEs. It is also well placed in a rising
rate environment with CASA share at 51% and low leverage to treasury.
Focus on value proposition, even as Indians uptrade
While there is a gradual trend of uptrading within automobiles, we find Indian consumers
excessively focused on .value for money.. Image (prestige) and power performance seem
to matter the least. A tough combination of better but reasonably priced cars means India
is not a plug-and-play market. Incumbents with the best cost structure and right products
would benefit the most. New entrants would need to go through investment cycle of setting
up / expanding manufacturing facility within India in order to become profitable. We believe
Maruti is best positioned to cater to the unique needs of the Indian consumer, aided by
strong brands, an efficient cost structure and a wide sales network. We note that despite a
jump in competitive intensity over the last 12 months, market share loss for Maruti has
been negligible (about 100 bp YTD). While our concern on the influence of the parent
company (royalty, currency exposure, export strategy) remains, we believe Maruti is the
best way to play the domestic car market in the near-to-long term horizon.
Education is a key priority
Education is a priority that stands out for the Indian consumer. The allocation of existing
spending is by far the highest at around 7.5% among the countries surveyed. Government
focus on higher education (graduate /post-graduate) has lead to an inverted pyramid
structure in the quality of state education in India. A huge opportunity lies in the underserved
K-12 system (kindergarten to higher secondary). Increasing penetration as well as
innovation in teaching techniques together offer significant potential. In this space, we
highlight Everonn as our top pick. Everonn is differentiated from competitors in the sector
from its end-to-end value positioning. At 10.5x FY3/12 P/E for a three-year EPS CAGR of
about 45%, we find the stock attractively valued. While education is a multi-year theme,
we see short-term catalysts in the form of strong growth and school/college additions in
the December 2010 and March 2011 quarters for Everonn.
Safe Harbor Statement:
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
Nothing in this article is, or should be construed as, investment advice.
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