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Enam estimates private consumption will soar to $3.6 trillion by 2020 from the current $790 billion; median household income will rise to $8,000 per annum from the current $3,400; and 40% of Indian households will be in the middle and upper middle classes
In a detailed report released late November, Enam says that India is entering the hyper-growth phase. Three factors-the income effect, demographic dividend, and propensity to spend-will propel private final consumption to $3.6 trillion by 2020 from the current $790 billion. This forecast implies that the average household income will double and the number of people in the middle and upper-middle classes will also double to 110 million, with their propensity to spend rising exponentially, driven by a fall in the dependency ratio, rapid urbanisation, rising income levels and the ability to leverage.
Since it is the middle class that will drive higher consumption, Enam concludes that categories with low levels of penetration and high middle class appeal will have the highest growth; this means automobiles, consumer durables, processed foods, personal care, mortgage, decorative paints, media, organised retail, and real estate sectors will flourish.
Enam stresses that unless 'enablers' are present, the prospective consumerism may falter. These enablers include employment, development of education and skill sets, infrastructure (electricity, roads), and more importantly financial inclusion, which means more credit reach or loan availability to people.
Based on these arguments, Enam lists the following as its top picks over the next five years as Voltas, Bosch, Sobha Developers, Pantaloon, Dish TV, HDFC, Maruti, Shoppers Stop, Exide, Titan, Asian Paints and Nestle.
The report says that "brands that will capture the imagination of the middle class will be relative winners." It lists a chart where global brands such as Thomas Cook and Cox & Kings currently cater to the upper-middle class in travel and tourism, whereas Kesari caters to the middle class. Or where Kwality Walls caters to the upper-middle, Amul caters to the middle. It says that the size of the pie, both at the top and bottom of the pyramid, is large.
Enam believes that focusing on the middle class does not necessarily mean low EBITDA and RoE for companies; some examples are Maruti, Bajaj, Bajaj, Dabur, Jyothy Labs. It also gives a chart listing the top 10 wealth creators in the consumption space in the past five years that have a significant exposure to the middle class-these companies include UniTech, Shriram Transport, United Spirits, Asian Paints, HDFC, Nestle, Hero Honda, Maruti, ITC and Tata Motors.
The report draws comparisons between the US in the 1960s, China in the mid 1990s and India now. It says that a demographic shift (increase in the working population and a lower dependent population) led to a rise in per capita income and disposable surplus in the US in the late 1960s. Urbanisation and changing values (spending versus saving) fueled rapid discretionary spending. All this translated into high growth in companies with highest exposure to discretionary spending-such as personal care, housing, healthcare, food, tobacco, etc. In the case of China, while the size of the working age population remained the same, the dependent population fell dramatically leading to a huge acceleration from the mid 1990s. Enam believes that India has entered its 'window of opportunity' with the dependency ratio set to fall from 58% to 49% in the next 10 years. India's working class population today is as large as China's in 1995.
It gives some interesting statistics: Nearly half of India's population will be urban by 2025-today, India's 30% urban population produces 44% of its income; every job created in the IT-ITES sector creates four additional jobs in the rest of the economy; financial inclusion should create huge job opportunities in the BFSI space itself.
Enam talks about 'auxiliary enablers' which also lead to rapid growth. These include rising affordability-for example, the price of a car, Hyundai Santro has actually fallen from Rs3,00,000 in 2000 to Rs2,77,000 now; prices of other products such as motorcycles, TVs, cell phones, air-conditioners, have also fallen; availability has increased due to higher distribution reach, and awareness is rising because of rising literacy levels and penetration of the cable network.
The areas where Enam expects massive growth are also areas where penetration is the lowest in India currently. These include skin creams, fruit beverages, health supplements, deodorants, two-wheelers, DTH, DVD players, automobiles, PCs, air-conditioners, insurance, mortgage, organised retail, e-learning, and home internet access.
(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife)
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