India’s Digital Consumption Boom: Opportunities for Investors
India’s young and aspirational population, with 1.4 billion consumers who are propensities for online spending, have attracted many global companies and digital platforms. As private consumption underpins economic growth in India, financial investors are now targeting new ways to tap into it. These digital-savvy consumers are making the most of India’s cheapest mobile data rates in the world and are embracing the growth of social media and personal entertainment.
Shivam Vahia, a 24-year-old engineering graduate from Mumbai, can’t remember the last time he left home to go shopping. He spends about INR 30,000 ($364) a month buying necessities like groceries, clothes, and gadgets, all by tapping a few buttons on his mobile phone. “My only offline spends are bars and restaurants, when I go to meet friends,” he said.
India has nearly 700 million smartphone users who, according to rating agency ICRA’s estimates, consume an average of almost 17 GB in mobile data per day, higher than the 13 GB in China and the 15 GB in North America. In 2022, India’s online shopping market hit $50 billion, with an online shopper base of 180-190 million – the third-largest in the world after China and the U.S.
“For investors, not only new-age Indian tech companies but also traditional consumer firms that are adding digital capabilities offer a route to tap the consumption theme,” said Kunjal Gala, Head of Global Emerging Markets at Federated Hermes.
Opportunities for Investors
Traditional businesses that are currently suffering from poor penetration and low per capita usage offer a promising avenue for investors. India’s per capita consumption of food was at $314 in 2020 compared to $884 for China, while that of clothing stood at $53.9 versus $212.9 for China, according to data from CLSA. Per capita spending on health-related items in India was $56.8 in 2020 and $389.3 for China, the data showed.
“A pattern will continue to repeat for years in India: industry after industry emerging from a long period of under-penetration” and moving up the per capita consumption scale, said Vikas Pershad, Portfolio Manager for Asian Equities at M&G Investments. “The range of industries will span healthcare delivery (hospitals) to cars and two-wheelers to housing finance companies and cement.”
As the incomes and wealth of Indians rise, their aspirational needs will see demand ramp up for packaged food and beverages, branded goods, travel, preventive healthcare, and personal care, said ICICI Prudential’s Fund Manager Priyanka Khandelwal and the fund’s Chief Investment Officer S Naren.
Foreign Investors Jump In
With private consumption accounting for 60% of India’s $3.5 trillion GDP, foreign portfolio investors have been quick to latch on. They pumped in a net $2.7 billion in four key consumption sectors – automobiles, consumer durables, consumer services, and FMCG, in the first 11 months of the financial year 2022-23 (April-March), according to data from India’s National Securities Depository Ltd. In contrast, the broader Indian equity markets saw an outflow of $5.9 billion.
David Chao, global market strategist at Invesco Asia Pacific, sees “outsized” growth in segments like quick service restaurants and consumer durables. He believes that Indian equities remain quite expensive both on a historical and relative basis compared to China, for instance. Nonetheless, he advises investors to take a longer time horizon and look beyond valuations.
Challenges for Investors
It has not been all smooth sailing for investors as they chased India’s consumption boom. Shares of new-age technology companies have tumbled since their listings, and while they now trade at more reasonable valuations, they are still pricey compared to the industry median. Most traditional consumer-focused companies also trade at valuations above the benchmark index.
Conclusion
As India’s young and aspirational population goes digital at a breakneck pace, traditional businesses and new-age tech companies that are adding digital capabilities offer investors a route to tap into India’s consumption theme. India’s per capita consumption levels are significantly lower than China’s, and the growth potential for traditional businesses is enormous. Although India’s equities remain quite expensive, investors who take a longer time horizon are likely to reap the benefits of India’s consumption boom.
