Please find below our key excerpts (Selection & emphasis ours) from a series of blogs written by Marcellus Investment that explain the Rise of Indian SMEs, Formalization of India economy and Comparing India's current junction with how industries evolved in America during 1880s - 1940s and after world war.
Key Excerpt 1 - On Evolution of US Economy
"“Though not a single household household was wired for electricity in 1880, nearly 100 percent of US urban homes were wired by 1940, and in the same time interval the percentage of urban homes with clean running piped water and sewer pipes for waste disposal had reached 94 percent. More than 80 percent of urban homes in 1940 had interior flush toilets, 73 percent had gas for heating and cooking…In short, the 1870 houses were isolated from the rest of the world, but 1940 houses were ‘networked’, most having the five connections of electricity, gas, telephone, water and sewer…"
Key Excerpt 2 - Changes in Retail Industry and cause of death of Kirana Stores
"(a) modern retailers like Dmart who are buying directly from major FMCG brands at better prices than the kirana store can get; (b) online retailers like Amazon and Flipkart who are supplying basic home essentials (cutlery, crockery, stationary, toys, etc usually imported from China) cheaper than any unorganised local store can; and (c) the modernisation of the supply-chain post GST wherein it has become much harder to avoid taxes and thus boost profit margins. Furthermore, the progeny of kirana store owners and distributors no longer want to toil for 15 hours a day in a dingy establishment; their aspiration is a job in an air-conditioned office – typically a call centre or a KPO."
Key Excerpt 3 - Changes in Indian Demographics Causing Formalization of Economy
"India seems to be going through period comparable to what America went through in the 50 years post the Civil War. Over the past ten years, the length of roads in India has increased from 3.9 million km to 5.6 million km (implied CAGR of 4.2%). The number of mobile phone subscribers has increased over the same period from 234 million to 1.2 billion (CAGR of 20%). The number of broadband users has increased from 3 million to 363 million (CAGR of 70%). A decade ago around 50 million Indians were taking flights each year. Now 3x as many Indians are flying each year (CAGR of 12%). 15 years ago only 1 in 3 Indian families had a bank account; now nearly all Indian families have a bank account."
"These factors have made it easier for smaller companies to build pan-India franchises. Businesses that were local in nature are trying to become regional; those that were regional are seeking to become national."
Key Excerpt 4 - On future Profit Margins of Retailers
"Such an expansion will also change the balance of power between manufacturers and retailers in India. So far the manufacturers had ruled the roost as the retailers were small and fragmented. However, as companies like Reliance Retail and Dmart grow, they will pull away profit margins from the big FMCG companies and pass on more of the working capital strain on to the FMCG giants (at present many of the FMCG giants have negative working capital cycles). Therefore, the ROCE hit for FMCG giants might be substantial in the years to come."
Key Excerpt 5 - On which types of companies will benefit from this formalization of economy
"The winners will be those who have: (a) the work ethic to build a pan-India brand and national distributor-dealer networks; (b) the capital allocation skills to rationally & patiently invest in building long term competitive advantages rather than buying a flat in London; and (c) the skill and the drive to run efficient manufacturing operations and keep working capital cycles tight."
"Companies who uses their spare free cashflows to move into adjacencies i.e. a new product segment which uses the same distribution channel. As explained in the bestselling book “The Unusual Billionaires”, Coffee Can stocks like Asian Paints, Marico and Astral Poly have created a template that these emerging champions can follow to take their leadership in one category and extend it across multiple categories."