For someone who maps India’s consumption patterns so closely, what has been your read through because it has not really been an across-the-board move when it comes to consumption. Rural consumption is picking up, but it is still patchy. Two-wheelers are doing good, passenger vehicles are not, but premiumisation continues to rule the roost.
Saurabh Mukherjea: In the first couple of years after Covid, we benefited from two different things. One was obviously revenge spending. People saved up in those two years of sitting at home during Covid and when they came out of their houses, from Diwali ‘21 to Diwali ‘23, the revenge spending piece played out. But also, what helped consumption in that aftermath of Covid was easy availability of credit. The RBI increased money supply to deal with Covid and that made the system flushed with cash.
So credit demand, consumer borrowing, personal loans, credit cards, the whole piece took off and we had three blazing years, 2022, 2023, and the early part of 2024, three blazing years for consumption. As we all know, government capex also added to the party atmosphere. That consumer borrowing piece, especially in urban India, is under pressure as the results of the banks and NBFCs show delinquencies are up, first cheque bounces are going up even in affluent cities like Hyderabad and Bangalore.
The IT job creation story is non-existent and even bigger banks are letting go of people. So, the lack of job creation, the depletion of savings are very clear in RBI data. The net household savings are at 50-year lows and that is the driver of urban consumption being under the pump. You are right in saying the rural piece is recovering. The rural piece did not take off as much after Covid and therefore, now that the damage of Covid on rural India has gone. The rural piece seems to be showing signs of life and we are optimistic that a good monsoon will give further fillip to rural consumption.
How do you manoeuvre this dwindling consumption pattern right? As an investor, how do you approach the entire basket because it is going to have a multiplier effect?
Saurabh Mukherjea: There are three things that we are trying to do and I will quickly highlight them. The first piece is if you want a place to play the highest quality end of Indian consumption, then look at the two best private sector banks – HDFC Bank and ICICI Bank. We have both in various portfolios. Their asset quality is holding up. The liability piece is stronger than ever before. I suspect again that once again the public sector banks are going to fall behind. But it is interesting, that this time barring HDFC and ICICI, the rest of the private sector banks also look to be struggling on both sides of the balance sheet. This is very interesting.
On both sides of the balance sheet, we are seeing the private sector banks having a challenge. So, the best of Indian consumption, and in a way, the best of Indian retail has been locked in by these two premier private sector banks. The second piece is, as is always the case in an economic downturn, the pharma, healthcare piece holds up and the good thing about India now is that it is no longer just pharma, hospitals, and diagnostics. Those are good places to be, the rise of medicare, the rise of medical insurance, the government doing Ayushman Bharat has created a big and fast growing private sector hospital, diagnostics ecosystem. There is money to be made by deploying funds there. There are obviously valuation issues, but there are still attractive valued plays there. The third piece is, we are going abroad. We are investing significant sums of our own money and encouraging clients to join us in investing in European and American small and midcap companies which are available at half the valuations prevalent in India and for double the earnings growth. For example, in America, household debt is at 25-year lows and the consumption piece is holding up nicely and valuations there are half of what we are getting here, for double the earnings growth.Considering you so closely look at consumption as the theme, where is it that you are still finding that valuation comfort?
Saurabh Mukherjea: The healthcare piece is actually very exciting. We are at the beginning of the healthcare story. Neither the state government nor the central government is adding meaningfully to the hospital beds piece in India and naturally with the population growing at 2%, with growing desire of the middle class to be treated well, we will see the private hospital sector grow leaps and bounds. We have been long-standing shareholders now in Narayana Hrudayalaya; it sits in many of our portfolios. But there are other smaller high-quality hospital chains that we have owned in the past, we might own them in the future.
So, Rainbow Healthcare, which focuses on maternity gynaecology, is a well-run company, but there are plenty of plays in hospitals and more and more of these private hospital chains are going to go public. As is well known, every PE company, every PE investor in India is building a hospital platform. Diagnostics has been a long source of wealth creation for our clients; Dr Lal PathLabs for many years has been a big part of our core portfolios. We also believe Vijaya Diagnostic in southern India is doing a good job. Through acquisitions, they have grown in Pune and Kolkata. Southern India is now roughly twice as rich as the rest of India and naturally as in richer parts of the country, the desire for diagnostics and healthcare is greater.
So, path labs and hospitals are plenty to play for. Valuations are still in the realms of sanity rather than in the realms of fantasy.