Welcome to the Tata PMS blog. From now on, we will be sharing our thoughts on trends and development that affect businesses and markets.

In our first piece, we have penned our thoughts on the following:

 

• Reasons for growth and prospects of businesses in the tech space.

• Differences in listed and private markets and how these affect business outlook for companies in respective spaces.

• Falling communication costs.
• Desktop and mobile penetration – led by semiconductor devices that keep getting powerful and cheaper.
• Open-source technology that makes common building blocks of software freely available (consider in contrast that more funding was needed for tech development in 2000. Today the cash is spent on discounts for customers instead).
• Capital.

Capital is a big enabler of tech growth. Cheaper and plentiful capital in a world awash with liquidity and low interest rates help lower hurdles rates for measuring investment prospects. More businesses get funded. Structurally, there are forecasts for only decreasing interest rates over time. It certainly has played like that in the last few decades. This is despite the rising rates scenario that we are seeing now. Inflation is rising, interest rates will be tightened, like we are experiencing now, but the dominant trend may be lower eventually.

See the data below for an interesting pattern. Healthcare and technology are two areas that have a relatively higher dependence on intangible assets (people and technology). A typical manufacturing company would have much more dependence on tangible, fixed assets. This data is for the top 1000 companies in the US (constituents of the Russell 1000 index) for the calendar year 2020. They found that the fastest growers had greater than 60% representation from the healthcare and technology categories, across all the three “top” categories while accounting for only ~29% of all the companies in the index.

To recap, there is merit in looking at the tech space. There will be significant wealth creation at the expense of other business models, in addition to entirely new offerings created for customers. Valuations have corrected in this space, as seen in most of the tech IPOs that got listed recently. We reckon that there will be cooling off that will also give better opportunities in at least a few of them.

II. Differences in listed and private markets and how these affect business outlook for companies in respective spaces

With that being said, we move to the aspect of capital. We are interested in the impact of capital on existing business models. We explain our thoughts with an example from the consumption space. (Disclaimer – we are not necessarily recommending any investment action for any of the businesses mentioned below).

We checked Amazon’s Choice labelled products in ceiling fans on the Amazon website. A upcoming brand called Atomberg has a ceiling fan that has more than 15,000 reviews with 4.5-stars rating. A well-known brand, Orient Electric, has around 14,000 reviews for their 4-star rated fan on Amazon.

You could challenge us by asking us whether we are looking at a specific customer segment that is more comfortable going beyond the offline world, that this is not representative of the entire customer base. You would be right. The two fans were at different price points. Customers targeted appear to be different. At the same time, this is change happening in front of our eyes.

 

Atomberg has primarily driven its business through online marketing efforts. We urge you to see the links below.

 

• Case Study on Atomberg
• How Atomberg is Fanning a New Wave in Home Appliances

 

Atomberg started in 2012 and had a turnover of approximately Rs. 300 cr in FY21. They grew their monthly revenues by 5x compared to pre-Covid-19 numbers per a Dec ’21 news report. In comparison, fans contribute to Rs. 1,500 cr of revenue to Orient Electric (60% of total sales). Atomberg has raised capital to the tune of USD 45 mn (approximately Rs. 330 crore up to Series C).

• Is Atomberg profitable today? We are not sure due to the paucity of public data.
• Can capital raising for PE funded companies get tougher in the coming 12-18 months? It is likely in our view
• Over the next 5-7 years though can they continue to raise capital? Yes, in our view. The VC/PE funding environment is cyclical, and it will get better again even if the coming year has tightening liquidity.

By the way, this is not about Atomberg specifically. We chose a name and a category to only illustrate a view that extends wider. You will find more examples like this in other consumer goods categories. This is not only in consumer discretionary goods but even in staples. Retail platforms are launching their private label brands in staples categories like soaps, handwashes, and food.

 

Our mandate at Tata PMS is to focus on the public markets. As the private market becomes larger in India, we cannot afford to myopically look at the listed companies only. Risk to listed companies can come from private markets. The very characteristics of the private and public markets are conferring different advantages or disadvantages to the companies respectively.

 

Nowadays, it is routine to hear of USD 25-100 mn private market rounds (and even higher) at early stages in a company’s lifecycle. It is much rarer to hear of such examples through preferential allotments or QIPs in the listed space for comparably sized companies. There are challenges. The expectations of the investors differ respectively. The private market space is characterized by high return-high risk outcomes. The money that it attracts is different. Most listed companies would face challenges in raising large amounts of capital with little promise of profitability for the next 4-5 years. In fact, there are examples of listed stocks in various sectors, that have tanked the day a mega-announcement for capacity increase or new product area expansion was made. Managements have even had to backtrack after seeing the market’s reaction.

 

In any case, for all companies, there is a changing selling environment. Are the number of stars backed by customer reviews for a product on ecommerce platforms conferring believability in its quality? Are the “answered questions” on a product page giving us comfort in the purchase process? Is this trend increasing? The answer is in the affirmative. As distribution, rightfully a moat in the offline world, is provided by the big retail platforms to any new company with a product offering, what happens to the “moats” of the incumbents? Will there be more challenges in the times to come? We think so.

 

There will be differences between changes in the offing for low involvement and high involvement products. There are certain products that have an embedded service element. For example, in paints, samples are painted on bare walls to show the customer how a particular shade looks in their dwelling. The customer relies on an intermediary - a painter. There is back and forth in shade selection, and then the final quantity of paints is purchased. Surely, you do not need to do this in an electrical appliance like a fan. There will be differences in the ease with which a particular product category can be taken online. Accordingly, risk to a category will differ.

 

We are reminded of our own Indian hockey team performance in yesteryears after a change in the game environment in the 1970s. To quote from a news article from that period:

 

“For the first time in their Olympic history, India finished outside the podium, at seventh.”

 

What had changed? The surface changed from grass to astroturf. Experts said that this was a major reason for impacting the team’s performance - from winning medals routinely to failing to do so in Montreal Olympics ’76. India was a resource-poor country and players had minimal exposure to the new surface which was costly to install and maintain.

 

Are the rules of the game changing for consumer-focused companies? If capturing attention, creating habits, or enabling network effects in certain cases requires capital, are public markets at a disadvantage in an easy liquidity world?

 

The listed consumer space in India trades at the expensive end compared to its own history. Is there a chance that at least some of these companies may not deliver stable, high rates of revenue growth for many years like they used to in the past? It could well be that they may need to spend more if they decide to fight it out online too. Margins could be impacted. Even after spending they may not be good at it compared to their younger, online brethren in a changing arena. This is surely worth considering.