When Facebook paid $5.7 billion for a 10% stake in Jio Platforms, the digital technology arm of Indian conglomerate Reliance Industries, it signalled Silicon Valley’s growing enthusiasm for India’s consumer market. Facebook’s main interest in the deal with India’s largest mobile network was to process payments for millions of local retailers via its WhatsApp messaging service, which already has more than 400 million users in India. Google soon followed, with a $4.5 billion investment in Jio. Meanwhile, Walmart spent $16 billion for a majority stake in e-commerce unicorn Flipkart, and Amazon invested around $6.5 billion to become a major player in Indian e-commerce.

These companies are hardly alone. India’s entrepreneurial culture and vast pool of technology talent has given rise to a host of domestic competitors, some with significant private equity funding. Now, as they extend their scale, many are lining up in the initial public offering queue. If successful, these deals could help support the digital ecosystem and diversify India’s equity markets. Among the most active in e-commerce are Flipkart, food delivery services Zomato and Swiggy, online insurer Policybazaar, logistics firm Delhivery, and cosmetics retailer Nykaa.

New public companies are part of the further diversification of India’s equity market away from state-owned enterprises to private-sector banks, technology companies, consumer stocks and energy businesses. Health care is a fast-growing area of the economy, dominated by manufacturers of generic drugs. A significant pool of new foreign portfolio investments is helping drive the market well above the broad emerging markets benchmark.

 

Indian stocks have outpaced emerging markets^[1]

India could be poised for double-digit growth

The last decade has been challenging for India’s manufacturing, construction and infrastructure sectors as the investment cycle slowed down. That weighed on gross domestic product growth, which reached a decade-low 4.2% in 2019. Consumer demand driven by easy finance, runaway credit growth for an aspirational population, and government spending have been key supports for economic growth. So what are the prospects for India’s market and economy?

In our view, industrial firms’ aggressive cost-cutting during the past few years has laid the foundation for change. Companies have slashed capital expenditures and reduced leverage. The Indian government has implemented much needed labour reforms. Meanwhile, bank balance sheets are healthier and interest rates are low. Against this backdrop, Indian manufacturing is probably entering a multi-year growth period with recovery in margins, profits and ROCE (return on capital employed). This should drive the new investment cycle.

At the same time, the COVID-19 vaccine rollout is restoring consumer confidence. India has navigated the pandemic well despite dire forecasts. After what has been dubbed the harshest lockdown in the world, the economy has bounced back more quickly than expected.

1. Sources: MSCI, RIMES. As at 31 January 2021

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