But does it have that kind of depth? The same question also applies to Pharma – does it really have the depth to compete for banks purely in terms of market performance?
Sridhar Sivaram: Yes, that is the question. When we go back, say 20 years, banks were not 40% of the index. Index composition evolves over time – gradually. So we don’t know for sure if it has the depth. New sectors will arise. As some participants believe, it could be the New-Age economy that takes over. I don’t know – maybe. People have different views. Personally, I find it hard to believe that financial data will remain the leader. It can be a different sector the new-age technology companies. Many of them will be mentioned in the coming years; Some have already reached the index. So they can lead. But at the moment it is all staring Crystal-Ball.
What within pharmaceutical interests you? Rational, with an aging world population and India that also comes in around 30 years, Pharma is logical as a theme. But what specifically fascinates within pharma?
Sridhar Sivaram: Pharma is very bottom-up. Every company has its own dynamics. But CDMO – Contract Development and Manufacturing Organizations – is something we like. This entire segment that supports Big Pharma with research and production is quite attractive. A number of new companies have entered this space and even older players go there. There are also many opportunities that arise from the patent cliff in the US. Much has been written about GLP-1 drugs and what could happen if those patents canceled a huge opportunity. Many Indian pharmaceutical companies are therefore linked.
Now there is good, bad and ugly. Some believe that these drugs have side effects – but that is up to the supervisors to evaluate. Our point is that there are considerable opportunities. Even if you look at companies such as Glenmark, who recently announced the out-licing of one of his products using newer technologies, others will probably follow. So, in addition to CDMO and generic medicines, Indian Pharma could take effect a whole new era of drug discovery.
Because R&D has traditionally been a pain for Indian pharmaceutical companies, right?
Sridhar Sivaram: Yes, exactly. R&D investments are traditionally focused on winnings in the short-term one quarter or next year. But new drug discovery takes four to five years, sometimes even longer. With the recent successes of some companies, however, we believe that more players in that space are starting to invest. That’s how we approach it.
We were just talking about New-Age Technology Companies-Sommigen from them already achieved the index. But in the field of consumption, Staples have not shown great income so far. Do you think this signals a shift, where New-Age companies can surpass stamps?
Sridhar Sivaram: On staples my personal opinion is that they are too focused on protecting margins, and that is at the expense of volume growth. If you look at companies such as Dmart or Jio, they have their own private labels, which remove incremental growth. Go to one of these stores and you will see clones of famous brands in different forms. And the quality is not bad.
As soon as a down trades from the consumer, it takes a long time before they return to the original brand. Much has been written about this. It is not that the middle class has shrunk – as a CEO claimed – it is that their bags have shrunk. So they are down, while these basic companies remain obsessed with margins. If you continue to concentrate on margins and give up the market share, it is well documented that regaining that share is difficult.
It is up to these companies to decide what they want to do. As investors we have many options. I don’t need to be invested in a company that grows with a volume of 4-5% and trade on the valuations north of 50 times. Why should I? Of course there are investors with index benchmarks – they may not have a choice. But we don’t have that coercion.
But as you say that the bags of the middle class are shrinking, we also see a strong trend of premiumization – whether it is cars, luxury real estate or even within consumption. Luxury goods perform better than staples. So how do you reconcile this argument – fragmenting bags but rising premiumization?
Sridhar Sivaram: If you look at the actual volume of premiumization, it is largely limited to the top 3% of India. That is not India. The remaining 97% has a completely different dynamic. You have to travel to the India countryside to understand this. Most of us live in cities and assume that that is the whole picture, but it is not.
The average annual income in many parts of the countryside of India is £ 1.00,000 to £ 1.20,000. You cannot sell premium goods there. That is why local brands – those lower price points are – eat the sales and margins of larger companies. They understand the price sensitivity of these markets better and deliver accordingly.
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