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The India Consumption Story

Padmanabh (Paddy) Sinha


Managing Partner
Tata Opportunities Fund

This presentation was made at one of the events hosted by the Fund in end 2012
Disclaimer: While every reasonable effort is made to ensure that the information provided in
this presentation is accurate, no guarantees for accuracy of information are made.

The India Consumption Story


India a large economy with attractive long-term growth prospects

Growing Consumer Discretionary Spend


Consumer spending driven by macroeconomic and demographic factors
Themes of Consumer Spending

Premium v/s Value Spending

Urban Centers v/s Rural India

What has worked in India ?

Inflection point in select industries

Adaptation is key to success

Both Local and MNCs have benefitted from consumer spending growth
Global companies are leading the pack in many categories

Consumer Discretionary sector has seen the highest number of PE deals

|2

The India Consumption Story


India a large economy with attractive long-term growth prospects

Growing Consumer Discretionary Spend


Consumer spending driven by macroeconomic and demographic factors
Themes of Consumer Spending

Premium v/s Value Spending

Urban Centers v/s Rural India

What has worked in India ?

Inflection point in select industries

Adaptation is key to success

Both Local and MNCs have benefitted from consumer spending growth
Global companies are leading the pack in many categories

Consumer Discretionary sector has seen the highest number of PE deals

|3

India, a large economy with attractive long-term growth prospects

Source: The Economist, World Bank, CIA, Goldman Sachs estimates

|4

has seen sustained growth momentum over last two decades


Indias annual GDP growth rate has been robust in past two decades
Avg.

6.0%

5.7%

9.5% 9.6% 9.3%

8.5%
7.3%
6.1%

6.4%

5.7%

8.0%

7.5%

8.5%

6.8%

5.8%
4.4%

4.3%

8.3%

6.5%

3.8%

1.4%
FY90 FY92 FY94 FY96 FY98 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

with rising FDI levels signaling a long-term Positive Outlook


India: FDI
(USD bn)

35

42

47
38

35

23
2

FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

Source: Reserve Bank of India Report, Ministry of Commerce and Industry Report

|5

India showing characteristics of China with a decades lag


India Vs China

China 2000

India: Approaching point of inflexion

India 2010

GDP Per Capita


(USD)

Savings Rate (%)

950
1,265

37.5%
33.5%

Median Age (yrs)

31.4
25.0

Urbanisation (%)

31%
31%

FDI (USD bn)

Point of
Inflexion

38
38

Source: NSO, IMF, US Census Bureau, World Resource Institute, China Statistical Institute, Morgan Stanley Research, World Bank

|6

The India Consumption Story


India a large economy with attractive long-term growth prospects

Growing Consumer Discretionary Spend


Consumer spending driven by macroeconomic and demographic factors
Themes of Consumer Spending

Premium v/s Value Spending

Urban Centers v/s Rural India

What has worked in India ?

Inflection point in select industries

Adaptation is key to success

Both Local and MNCs have benefitted from consumer spending growth
Global companies are leading the pack in many categories

Consumer Discretionary sector has seen the highest number of PE deals

|7

Higher growth in Consumer Discretionary Spend than in Essentials


Consumer Spend Essentials v/s Discretionary
FY00-05
15

FY05-10

FY11-16CL

(% CAGR)

13
11
16

9
12

7
5

14
12

10

10

3
Total Consumer Spend

12

Essential Consumer Spend

Discretionary Consumer Spend

Increased Discretionary spend is driven by increasing disposable income


Total personal loans have increased to ~USD150 bn in 2012, growing at a rate of 12% since 2009,
but have remained constant at ~9% of GDP
Household savings rate has moved up from 16% of GDP in FY97 to about 24% and has been steady
for five years

Source: NSSO, CLSA ASIA-PACIFIC MARKETS

|8

Big Winners in India Consumption Story


(in USD bn)

3X growth in key consumption categories

450
742

400
350

~2X

~3X

344
295

300

2011

250

2025

206

200
150

126

107
100
52

47

50

100

100

21

66
37

74

65

24

23

96

80

43

31

26

CAGR (%)

5.7

Source: Kotak Research

6.0

6.7

7.4

7.5

7.6

7.8

8.0

8.0

8.2

Leisure

Hotels

Housing

Healthcare

Communications

Transport

Education

Household Goods

Alcohol & Tobacco

Clothing & Footwear

Food & Beverages

8.4
|9

Illustration of India Consumption Story Fast Food Category


Fast Food chains are growing fast
70
60

% YoY Revenue Growth

50
40
30

60

50

20

32

10

27

32

22

0
FY09

FY10

FY11

with growth coming from Same Store Sales


40
35
30
25
20
15
10
5
0

(%) growth - Same Store Sales

37
22

30

6
FY09

Source: IIFL Research

FY10

FY11

FY12

| 10

Illustration of India Consumption Story Leisure Category


Both domestic and foreign tourist traffic
have increased
Domestic travel spending contributed to ~82%
of direct Travel & Tourism GDP in 2011
On domestic tourist front, India registered a
growth of ~14% in 2011 (y-o-y)
Despite the economic slowdown, foreign tourist
arrivals registered a growth of ~9% in
2011 (y-o-y)

THE TAJ MAHAL PALACE, MUMBAI

which helped the hospitality industry


to grow as well
80
70
60
50
40
30
20
10
0

(in 000s)

27

29

Number of hotel
rooms available in
major cities
31

34

35

40

42

70
59
50

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12
Source: HVS Research

| 11

The India Consumption Story


India a large economy with attractive long-term growth prospects

Growing Consumer Discretionary Spend


Consumer spending driven by macroeconomic and demographic factors
Themes of Consumer Spending

Premium v/s Value Spending

Urban Centers v/s Rural India

What has worked in India ?

Inflection point in select industries

Adaptation is key to success

Both Local and MNCs have benefitted from consumer spending growth
Global companies are leading the pack in many categories

Consumer Discretionary sector has seen the highest number of PE deals

| 12

Consumer spending driven by Demographic and Macroeconomic Factors


Larger working population base
Age dependency (Prop. of nonworking to working population)

Age dependency
bottomed out for:
Japan 1974
Singapore 1996
China 2012
India - expected in
2040

India
China

% of Total Population

and favorable demographics


60
50

50

Aged 24 and Under

44

40

34

32

20
10

31

30

30
18

Aged 60+

15

21

23

0
India

Indonesia

Source: World Bank, CLSA ASIA-PACIFIC MARKETS

Europe

China

USA

Japan

| 13

Consumer spending driven by Demographic and Macroeconomic Factors


Large Middle class and growing Affluent class
Number of Households
by income category,
2010 (millions)
Total
225 mn

Affluent
4%

Middle
28%

Lower
68%

Household annual income


(constant 2000 dollars)

Number of Households
by income category,
2020 (millions)

> $45,000

$20,000 - $45,000

26

15

$12,000 - $20,000

42

48

$6,700 - $12,000

75

110

$2,500 - $6,700

86

36

$1,000 - $2,500

19

< $1,000

Source: Euromonitor, BCG Analysis

Total
257 mn
Affluent
12%

Middle
45%

Lower
43%

| 14

Consumer spending driven by Demographic and Macroeconomic Factors


Indian Consumption will be dominated by Middle and Affluent Class
Share of total consumption by income class
>$20,000
100%

1
13

$4,000 - $20,000

$1,800 - $4,000
12

18

80%
32

< $1,800
20

Affluent
Class

59

Middle
Class

43

60%
51
40%
36

54
20%
24

17
10

0%
1995

2005

2015

3
2025

Middle and Affluent class people together will contribute 80% of total consumption
by 2025, up from 25% in 2005

Source: Mckinsey Global Institute

| 15

Consumer spending driven by Demographic and Macroeconomic Factors


On Reward/Effort basis, it is economically beneficial to focus on Urban centers
Middle & Affluent class households
70

(in mn)

Rural

Urban

60

57

56

50
40

39
33

30

20

10

Both urban and rural contribute


~50% to the GDP
However, Rural population lives
in ~650,000 villages, while
Urban population is in ~4400
towns/cities
There are 42 cities with
population >1mn today
Top 5 cities contribute ~20% of
GDP (Mumbai, Delhi, Kolkata,
Bangalore and Chennai)

2011

2015

Because of higher density of Middle and Affluent class in Urban India, most of the MNCs
focus more on the Urban Centers

Source: Kotak Institutional Equities Estimates

| 16

The India Consumption Story


India a large economy with attractive long-term growth prospects

Growing Consumer Discretionary Spend


Consumer spending driven by macroeconomic and demographic factors
Themes of Consumer Spending

Premium v/s Value Spending

Urban Centers v/s Rural India

What has worked in India ?

Inflection point in select industries

Adaptation is key to success

Both Local and MNCs have benefitted from consumer spending growth
Global companies are leading the pack in many categories

Consumer Discretionary sector has seen the highest number of PE deals

| 17

The Emergence of Super-rich


Number of USD Millionaires in India
300

200

(in 000s)

Presence of Luxury Brands

242
158

100
0
2012

2017

Luxury market is ~ USD 5.8 bn


today and spreading beyond the
metros into the traditionally
conservative cities like Surat,
Chennai, Kolkata CII ATKearney
Luxury market is going to grow to
2.5x from its current size in next 5

years Technopak
Source: Credit Suisse, Bain & Company

| 18

The Emergence of Super-rich (Luxury Cars)


Luxury car market growing despite
economic slowdown
120,000

Number of Cars Sold

100,000
80,000
111,677

60,000
40,000
20,000

40,648

2012

2017

even when comparative price is 2X of


that in the U.S.
Model

Price in
India

Price in U.S.

$120,000

$52,000

$260,000

$140,000

Q7 3.0 TDI

760 Li (7 Series)
Luxury cars include BMW, Mercedes, JLR and Audi
1 USD = INR 50
Source: ATKearney, TATA Capital Analysis

| 19

The growing Affluent class


Smartphone growth
300

Smart phone users

(in mn)

57% CAGR

200
100
0

178

48
2
2006

2011

2016

Increasing Eating out Spend


7

(in USD bn)


~30% CAGR

6
5
4
3

6.0

2
1

0.5

1.5

2006

2011

Source: Credit Suisse, Bain & Company

2016
| 20

Value Conscious Middle Class


Low Cost Business Model to meet
Middle Class needs

By 2030, highly value conscious


middle class to

Open heart Surgery


100,000
treatment Cost
(in USD)

Comprise ~45% of total

~10

Telecom Avg.
Rate per minute
(in USD cents)

population
Free
incoming calls
~1

Contribute ~65% of total


consumption

~4,500
U.S.

U.S.

India

India

Indians are value conscious as seen in higher Compact Car Sales


Passenger Vehicle Sales, 2010-11 (% by segment)
China

Brazil
Indonesia

35

10
2

51
60

10

1
46

India

Compact
Mini

22

42
10

18

87

Thailand 0

12

20

19
30

40

50

Midsize

32
8
60

Others

32
70

80

90

100

Source: Mckinsey Global Institute, ATKearney Analysis, MEGStrat Analysis, IRDA, WHO, Morgan Stanley Research, PUG Research

| 21

Value Conscious Middle Class


Compact Car forms the largest selling car segment in India

Top selling car models in China in 2011

Top selling car models in India in 2011

GM Excelle
253,500

Suzuki Alto
308,000

VW Lavida
247,500

Suzuki Swift
154,000

GM Cruze
221,000

Suzuki Wagon R
145,000

VW Jetta
218,000

Hyundai i10
130,000

VW Bora
207,000
Source: SIAM, Annual Reports, Media

Suzuki Dzire
110,000
| 22

Urban Centers
India Urbanization by 2030

5X

the number by which GDP will have multiplied

590mn

people in cities, nearly twice the population of the U.S. today

$1.2T

capital investment is necessary to upgrade urban infrastructure

270mn
70%

people net increase in working-age population

contribution to India GDP

Source: Mckinsey Global Institute

| 23

Urban Centers - Housing Sector


Housing sector has grown
250
200

Number of residential
houses launched in top
7 cities (000s)

150

247

100

130

88

50

209

2008

2009

2010

2011

but Outstanding loan to Housing sector (% of GDP) is miniscule


90

Value (USD Bn)

80

4.5%

3.8%

70

4.1%

% of GDP
4.5%

4%

85%
77%

80%

Mortgage Debt to
GDP ratio (2010)
64%

60
50
40
30

5% 100%

56

60

69

81

20

3%

60%

2%

40%

1%

20%

0%

0%

4%

10
0
Jan-09

Jan-10

Jan-11

Jan-12

Source: RBI, IMF, Jones Lang Lasalle, European Mortgage Federation

UK

U.S.

Spain

India
| 24

Changing landscape of retail delivery channels in Urban India


Current Retail Market
10%

2011

3%
5%

with low organized penetration


40%

Food & Grocery


Apparel

5%
7%
69%

20%

Jewellery &
Watches
Consumer
Electronics & IT
Pharmacy

38%

% of total segment size


20%

18%

17%

16%

15%

10%
3%

0%

Others

Others: Furnishing, Food Outlets, Footswear, Beauty, Fitness, Other

but changing at rapid pace


(USD bn)

CAGR (2011-16)
Organized (Modern)

26%

E-commerce is

Unorganized ('Mom n
Pop Stores')

6%

contributing
591
444

300
10

2006
Source: Technopac Analysis

but growing at

84

26

less than 1%,


over 23%

2011

2016
| 25

Organized Retail presence Largely focused on Metros and Tier I/II cities

Global Brands

Source: Tata Capital Research

Cities Landscape

Domestic Brands

Cities Landscape

Top 2 Metros only

13 cities

Top 2 Metros only

15 cities

4 Metros only

16 cities

4 Cities

20 Cities

18 Cities

38 Cities

8 Cities

90 Cities

8 Cities

130 Cities

| 26

Rural India - still houses ~70% of Indias population and contributes ~50% to
the GDP
India still lives in its villages
80.0
70.0

(% of total population)
71.9
71.5
71.0
70.5

69.9

68.8

60.0
50.0
40.0
Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12

Rural India contributes half of Indias GDP

Industries finding growth from increase in


rural penetration
Indias newspaper circulation is largest in the world
(110 mn) and growing at the fastest rate
44%

(% of India GDP)
Urban

Dependence on
Agriculture has
reduced from
59% of the
Indias GDP in
1960 to 14% in
2011-12

Rural

Growth between
2005-2010
14%

52%

48%

Source: Cesnsus India, Technopak Report, World Bank Report

India

China

U.S.A.
-15%

| 27

The India Consumption Story


India a large economy with attractive long-term growth prospects

Growing Consumer Discretionary Spend


Consumer spending driven by macroeconomic and demographic factors
Themes of Consumer Spending

Premium v/s Value Spending

Urban Centers v/s Rural India

What has worked in India ?

Inflection point in select industries

Adaptation is key to success

Both Local and MNCs have benefitted from consumer spending growth
Global companies are leading the pack in many categories

Consumer Discretionary sector has seen the highest number of PE deals

| 28

Inflection point in Telecom & Media


Number of mobile connections
1000

(in mn)

New Wave of Growth


909

CAGR 63%

800

400
200
0

(in mn)

584

600
261

52

2002

2005

2010

2016

5X

2
2008

2011

Laptop/ Notebook

12

61

2012

India drives presence of 5 Telecom


players in Global Top 20
Rank

2006

Smart Phone Users

4X

48

178

Name (Connection in mn, Q2, 2012)

VODAFONE (368), India - 152

Bharti Airtel (250), India - 186

Reliance Comm (154)

14

Idea (117)

20

BSNL (88)

Access to Internet

3X

32

101

Access to Digital TV

Source: TRAI, Crisil Research, Cellular Operators Association of India (COAI), Technopak, Economic Times

300

2X

182

364

| 29

Inflection point in Satellite Pay TV (DTH)


Affordable Pricing,
58

58

offering of over 500 channels

Avg. Revenue per User


(in USD)

47
28

25

22.0 19.0

13.0

4.0

and moving into Premium Services


like HDTV

Source: Equity Research

has helped DTH grow to ~35mn


subscriber base

| 30

Adaptation is the key to success in India


Company/
Industry

Adaptation

Indianized
Food Menu

One-time
use packs Sachet

Source: Tata Capital Research

| 31

Adaptation is the key to success in India


Company/
Industry

Salty Snacks/
Namkeen

E-commerce

Source: Tata Capital Research

Adaptation

Desi (Local)
Flavors

Cash on
Delivery

| 32

Adaptation is the key to success in India


Company/
Industry

Adaptation

Tata Starbucks

Competitive
Pricing, local
touch on the
Menu &
Ambience

Local flavor
like pudina,
tomato &
garam
masala for
oats

Source: Tata Capital Research

| 33

Adaptation is the key to success in India


Company/
Industry

Adaptation

Launching
Indian Sari to
cater to
Indian Women

Launching
Bandhgala

Source: Tata Capital Research

| 34

Both Local and MNCs have benefitted from Consumption Growth in India
Revenue is expected to continue to grow at faster pace
2012 Revenue Growth Forecast (%)

34

Median 21%

16

18

18

18

19

ITC

Colgate

Asian Paints

HUL

Dabur

22

22

Nestle

Marico Ltd

24

25

United
Breweries

Titan

Godrej
Consumers

and Projected ROE indicate healthy returns for investors


2012 ROE Forecast (%)

Median 39%

116

88

ITC

39

39

37
Colgate

Asian Paints

73

HUL

Dabur

28
Nestle

Marico Ltd

17

44

United
Breweries

Titan

26
Godrej
Consumers

United
Breweries
Source: UBS Investment Research

| 35

Global Companies are leading the pack in many categories

# 1 Passenger car producer in India (~42% market share)

# 1 Mobile handset brand in India (~45 mn handset sold in a year)

# 1 Smartphone Mobile handset brand in India (~42% market share)

Combined revenue in India ~USD 2 bn

#1 in dental care products in India (54% volume share in toothpaste)

Leader in several Household & Personal Care segments in India


(market cap: USD 23 bn)

Largest retailer and leading manufacturer of footwear in India


(serves over 120,000 customers every day)

Source: Crisil Research, News articles, GfK-Nielsen Research

| 36

Private Equity investments rising in Indian Consumer Discretionary Spending


Theme
PE investment in Consumer Sector has been on a upward trend
2500

Value (USD mn)


124

Number of Deals

140

119

120

122

2000
100
94
1500
76

2312

2148

1000

80

79

1551
500

60

40

1163

1025
20

681
0

0
2006

2007

2008

2009

2010

2011

Consumer Sector includes Automobiles & Components, Consumer Durable &


Apparel, Consumer Services, Media, Retailing
Source: VCCedge Analysis

| 37

Private Equity investments rising in Indian Consumer Discretionary Spending


Theme
PE investment in Discretionary Consumer Sector is 2nd highest
Top 5 Sectors in
2011 by Value
(USD mn)

IT
Utilities

Consumer Discretionary
Industrials

Sector has seen ~ USD 2.3 bn


of PE investment, only 2nd to

Financials

Consumer
Discretionary

Industrials (~ USD 2.5 bn)

while in deal volume, Discretionary Consumer Sector has surpassed all other sectors
Top 5 Sectors in
2011 by Number
of Deals

Financials

Consumer
Discretionary

Consumer Discretionary
Sector has seen highest
number of PE deals

Industrials

(119 deals)
IT

Source: VCCedge Analysis

| 38

Thank You

Padmanabh (Paddy) Sinha


Managing Partner
Tata Opportunities Fund
email: paddy.sinha@tatacapital.com