[Kotak] GameChanger RUPEES - The India Consumption Story

  • View
    144

  • Download
    2

Embed Size (px)

Transcript

GAME CHANGER

THE INDIA CONSUMPTION STORY

`110 tn consumption market by 2025 2.5X the current size in real terms Premiumization to be the key trend Upgrade from low cost to high value products High, well-distributed growth critical Productive job opportunities essential

Introducing KIEs RUPEES Estimator

Akhilesh Tilotiaakhilesh.tilotia@kotak.com +91-22-6634 -1139

ForewordBuying power by the billion Slowly, but certainly, the story is unfolding: Indian consumption is meta-morphing. Already India is one of the largest global markets, but by 2025, we expect it to be two-and-a-half times larger. It will also be a vastly different, richer, more colorful marketfor good reason. Incomes will increase dramatically, and most people will spend more than just to keep body and soul together. Higher incomes will open the sluice gates of far-reaching consumption change. KIEs RUPEES Estimator, a predictive model that projects Indian consumption, among other things, anticipates significant transformation by 2025: The affluent will spend more on enhanced lifestyles, less on staples. That means more buying in sectors such as leisure, hotels, housing, household goods and healthcare. Indians will have more money in their pocket and the poorest of the poor class will shrink. The urban market will account for 60% of Indias consumption market, from less than 50% today, as rural areas morph into urban centers. Indian consumers will demand improved quality and more. Our model predicts a clamor for sub-categories of products, for differentiated products that cater to numerous consumer sub-groups. India will emerge, metamorphed, making it fertile soil for fresh, new brands. We are about to enter an era of buying power by the billion

ContentsA market meta-morphing The RUPEES Estimator telescopes dramatic change Buying power by the billion: Bucks for luxe Growing gains: What people want Rural India morphs into mushroom towns GameChangers: How to nurture the metamorphosis Appendix: The birth of a model 5 11 15 19 23 27 29

For Private Circulation Only. In the US, this document may only be distributed to QIBs (qualified institutional buyers) as defined under rule 144A of the Securities Act of 1933. This document is not for public distribution and has been furnished to you solely for your information and may not be reproduced or redistributed to any other person. The manner of circulation and distribution of this document may be restricted by law or regulation in certain countries, including the United States. Persons into whose possession this document may come are required to inform themselves of, and to observe, such restrictions.

4

KOTAK INSTITUTIONAL EQUITIES RESEARCH

Chapter 1 A market meta-morphingThe Indian consumption market is emerging as a rich, multi-faceted entity, that will grow two-and-a-half times by 2025E, to Rs110 tn from Rs43 tn, right now. More Indians will have a pocketful of money and a long shopping list, spending disproportionately on leisure, hotels, housing, household goods, healthcare and more, but less on bare necessities and staples, as a proportion of consumption. How do we know? We present KIEs RUPEES Estimator, a predictive model that plots Indias consumption story. It classifies households into: (1) Real-rich, (2) Upper class, (3) Prospering, (4) Evolving, (5) Emerging and (6) Surviving. However, inclusive growth (through productive job creation) is crucial to the stability of the process.

Buying power by the billionBy 2025E, more Indians will have a pocketful of currency and a heart full of dreams. That means a long shopping list. Some of the big items on that list will be (1) leisure, including hotels, (2) housing, education and healthcare and (3) communication, transport and other new categories, now small enough to be jotted under a Miscellaneous head. The share of staples and necessities will fall as a proportion of consumption spends. (see Exhibit 1).Exhibit 1: The big winners in the Indian consumption story CAGR and market size of various commodities, March fiscal year-ends (at FY2010 prices) Big items on the shopping list will be (1) leisure, including hotels, (2) housing, education and healthcare, and (3) communication and transportGrowth Categories Food and beverages Alcohol and tobacco Clothing and footwear Housing Household goods Healthcare Transport Communications Leisure Education Hotels Miscellaneous Total CAGR (%) 5.7 6.6 6.0 8.0 7.4 8.0 7.6 7.8 8.4 7.5 8.2 7.6 6.9 Rank 12 10 11 3 9 4 7 5 1 8 2 6 Market size (Rs bn) FY2011 17,190 1,056 2,348 5,012 1,848 2,152 3,715 1,136 1,550 1,198 1,319 4,766 43,291 FY2025 37,130 2,601 5,331 14,762 4,994 6,295 10,298 3,270 4,797 3,287 3,980 13,276 110,023 Opportunity (Rs bn) 19,940 1,545 2,983 9,750 3,145 4,143 6,584 2,134 3,247 2,089 2,661 8,511 66,732

Source: Kotak Institutional Equities estimates

What counts for consumption can also represent payment for capital value

What counts for consumption can also represent payment for capital value. In the housing component, for instance, a significant part of an Indians expenditure might include capital value (either as interest on loans or as rent). Therefore, growth in a sector (and its associated sectors, like finance) can be far more meaningful. Even if you consider other categories, such as education and car or two-wheeler purchases, finance can play an important role. Consequently, Miscellaneous will become a larger category of expenditure in Indias new scheme of things, and a significant proportion of the expenditure will be financial services like banking, investment and insurance. Segments like food and beverages, alcohol and tobacco and clothing and footwear will grow in their own right, by 5.5-6.6% a year, but as they trail overall spending growth, their proportion in the share of wallet will fall. Food and beverage, though, will be high on a consumers shopping list and account for a third of total spends.

6

KOTAK INSTITUTIONAL EQUITIES RESEARCH

GAME CHANGER

When the middle classes evolve beyond survivalIndias per capita income in FY2011 was Rs60,388. However, there is wide, and increasing, disparity of income: Indias Gini co-efficient (which measures the level of inequality in income distribution, in which 1 indicates complete inequality and 0 indicates equal income distribution across all people) was 0.395 in FY2010, having risen from 0.324 in FY1995. However, Indias large population and long tail of income distribution gives it a consumption market that houses a significant number of households across the spectrum (see Exhibit 2). We introduce the RUPEES Estimator (more details in the next section) to classify households into expenditure-based classes. Not surprisingly, there are more high-end urban households due to the dominance of the services economy in urban India as opposed to agriculture in rural areas.Exhibit 2: India will see a huge uptick in rich households Distribution of Indian households by consumption expenditure, March fiscal year-ends, FY2010-25E (mn)2011 2012 2013 2014 Rural households Real-rich Upper-class Prospering Evolving Emerging Surviving Total Real-rich Upper-class Prospering Evolving Emerging Surviving Total 5.5 6.2 21.2 6.0 6.3 24.8 0.2 6.3 10.2 26.9 0.7 6.4 10.0 32.8 1.2 6.4 9.9 38.4 1.7 6.5 9.7 46.0 2.2 6.5 9.7 53.3 2.7 6.6 9.5 60.9 94.7 174.4 3.1 2.0 4.8 20.8 41.3 18.8 90.8 3.2 6.7 9.2 69.2 87.7 3.8 6.8 9.0 77.4 80.9 0.3 4.0 6.8 9.0 85.9 73.7 0.9 4.0 6.9 13.1 90.2 66.4 1.4 4.1 7.0 17.3 94.0 59.6 1.9 4.1 7.0 21.4 52.4 2.5 4.2 7.1 25.2 45.6 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Indias large population and long tail of income distribution gives it a consumption market with a significant number of households across the spectrum

98.3 102.5

129.8 127.1 122.3 117.6 113.2 107.0 100.8 162.6 164.3 165.9 167.6 169.3 170.9 172.7 1.0 1.5 2.6 7.7 26.1 29.3 68.2 1.2 1.6 2.7 9.0 28.7 28.0 71.2 1.5 1.7 4.5 8.5 31.4 26.7 74.2 1.7 1.7 4.6 10.4 33.5 25.4 77.4 2.0 1.8 4.6 12.9 35.4 23.9 80.6 2.4 1.9 4.7 15.4 37.3 22.2 83.9 2.7 2.0 4.8 18.0 39.3 20.6 87.3

176.1 177.9 179.7 181.5 3.5 2.1 4.8 24.6 42.5 16.8 94.3 3.9 2.2 4.8 28.5 43.9 14.7 4.3 2.3 6.4 30.9 45.2 12.7 4.8 2.3 8.2 33.4 46.2 10.7

183.3 185.1 187.0 5.2 2.4 10.0 36.2 47.0 8.6 5.7 2.5 11.8 39.0 47.7 6.7 6.3 2.6 13.7 42.0 48.5 4.6

Urban households

98.0 101.7 105.5

109.5 113.5 117.6

Source: Kotak Institutional Equities estimates

By FY2019E, the number of households in the Surviving classalmost 70% of Indias current households (159 mn of the 231 mn households)will be eclipsed by the Emerging class with each class having108 mn households. By FY2025E the Evolving and Emerging classes will comprise about 210 mn households (out of about 300 mn households). The top three classes will have grown more than 3X, to 36 mn households (11.9% of households) from an estimated 11 mn households today (4.6%).

The top three classes will have grown more than three fold, to 36 mn households

KOTAK INSTITUTIONAL EQUITIES RESEARCH

7

they grow with big buying powerSurviving households form the largest segment by value (28%) in a Rs43 tn Indian consumption market, today. By 2025E as economic growth, assuming it is reasonably well distributed, increases the number of the Emerging and Evolving middle-class households, they will command almost half the Rs110 tn market, and the Surviving class will account for only 3%. The top three classes, which now account for about 30% of the consumption basket, will account for about 43% by FY2025E. As the share of wallet shifts to high-end customers, per capita expenditure in each category will expand (see Exhibit 3). This will create sub-categories: we expect to see this, especially in categories that will lead growth, at above-average levels. C