This Article was originally published in The Global Analyst
Stocks of Zomato, India’s leading foodtech firm, gained nearly 80% in the last 6 months, while PayTM shares rose 44% during this period. What is driving investor frenzy for Indian Consumer Tech stocks?
After Telecom companies like Airtel and Reliance Jio, if there is one sector that touches the life of an ordinary citizen significantly, it is Consumer Tech. It is the umbrella term generally used to describe using technology to reach retail customers. Main categories include food delivery, ticket booking, gaming, education, and healthcare.
The space is inundated with start-ups. India is home to some 27,000 tech startups growing at an annual clip of 1,300. Nearly 100 of them have grown to claim the status of unicorns (company with more than $1 billion in valuation). Presently, it is estimated that about 25 listed Consumer Tech companies are available for investors.
The interesting aspect of consumer tech is the confluence of technology with several verticals like finance, healthcare, education, entertainment, etc. Technology has no borders and can essentially disrupt almost all industries. Hence, the outsized interest in this new emerging opportunity called Consumer Tech.
There are several macro tailwinds that are aiding this interest. First and foremost, India is the most populous country in the world followed by China. The per capital income for India has been increasing slowly but steadily from $1,400 in 2014 to $2,200 in 2014 and to $2,450 in FY2023; it is expected to nearly double (to reach $4,000) by FY2030. However, what is interesting is the increasing number of households, which is projected to increase from 190 million (2022) to nearly 300 million by 2030. That is a large enough pie for any business opportunity leave alone Consumer Tech. In fact, studies show that India is emerging as a good landscape for high income households as well. The number of high-income households is projected to grow from 15 million (2002) to nearly 30 million by 2030, lending support to opportunities in luxury tech. Concomitant with this is the growth in disposal income and internet penetration that makes the business case very strong.
Companies that are in the Consumer Tech business seamlessly integrate three types of technologies i.e., core, adjacent and transformative. A good example of core technology would be Customer Relationship Management (CRM) while that of adjacent technology will be VR (Virtual Reality) while Generative AI can be touted as transformative technology.
While the story of technology companies started very broadly with e-commerce, the hectic growth has now sprouted several sub layers within the space. Notable among them would be D2C, Quick commerce, Live Commerce, and Social commerce. The D2C refers to direct to consumers where one can eliminate the middleman, which would lead to higher margins for the service provider. Brand power is an important attraction here. Quick commerce promises faster deliveries (10 minutes in some cases!) and hinges on efficient coordination among technology, operations, personnel, facilities and promotions. Social commerce hinges on enabling far flung consumers to enjoy the fruits of un branded products based on social media synergies. Live commerce is conceptualized on live interaction to enhance consumer willingness to engage. The idea is just to explain how the business model of Consumer Tech is a complicated mix of business and technology and hence not easy to interpret.
China can be an interesting example of how Consumer Tech has evolved since it happens to be a close comparison from a population point of view. The new e commerce comprises segments like D2C explained earlier. India has lot of catching up to do when we look at the comparative numbers with China. This also spells tremendous opportunity going forward.
Consumer Tech Startups: Not too many success stories
Consumer Tech companies face several challenges including funding. Hence, most of them commence their journey as startups and are invariably funded by Venture Capital companies (VC’s). In any typical VC funding profiles, the success rate is only about 10% and hence investment in tech startups is laden with huge risks. While the 100+ unicorns can be good case studies of success, it should be looked in the context of 27,000 startups, a meager percentage indeed. In this fiercely competitive environment, companies resort to Growth At All Costs (GAAC) leading to significant price wars and discounts. The idea is to capture good market share (in what is generally described as Total Addressable Market) which many a times results in winners take it all (like Amazon). Also, most of these startups may show impressive growth due to low base effect but can fail flatly on profitability measures. Therefore, the universe of profitable consumer Tech companies remains small.
Tread Cautiously
How can one make an investment case here? Since most of them are startups, main funding happens at a VC level. Hence, if you are a VC player you will be most probably be having excellent familiarity with the sector. However, many of these VCs eventually look to cash in their investments and hence we can see many IPOs periodically coming up. A look at all the recently listed Consumer Tech companies reveal some very interesting aspects. It is a mixed bag with both successes and failures strewn over the place. However, we notice a great bounce back during the last six months (from September 2023). Among the companies with the best returns, one can notice Easy Trip Planners that provided an annualized return of 60% since IPO, though its market cap is very small. Among the losers, we can look at PayTM that listed at Rs. 2,150 and is now quoting at Rs.864 leading to an annualized loss of nearly 40% since IPO. The list is too small to conclude. However, given the macro backdrop described, the potential or growth is huge.
From a portfolio perspective, investing in these companies during IPO can mean that odds are very much against investors. For highly oversubscribed issues, the probability of allotment reduces and hence the final investment value can be very low to make any significant impact on our portfolio. Also, in hindsight it may be possible to see the winners and losers but in prospect, it is almost always impossible to identify them (and this logic applies to all other listed stocks as well). Hence, a prudent portfolio strategy is to investment some consistent amount in Consumer Tech companies after they are listed (preferably in a systematic way). Post this, one can continue to top up successful companies and eliminate loss making companies in the portfolio. The success and failures should be measured from a stock market return perspective.
However, as the investible universe expands from a measly 25 listed stocks at present, investors can look to reap great rewards going forward.
Happy Investing!