As we wrap up the third quarter of 2024, the investment landscape has been reshaped by pivotal events in the US and China. For India, these changes have come at a time when the country’s economic momentum has shown signs of slowing, but robust economic fundamentals and an evolving consumer landscape continue to present a range of exciting opportunities. Our on-the-ground research in India has revealed fascinating insights into the country’s evolving economic fabric, from the rise of an aspirational consumer class to the transformation of key industries. In this month’s report, we delve into some of these trends, exploring emerging sectors like healthcare outsourcing and financial services beyond traditional banking. We are thrilled to present you with our insights and hope you enjoy the read.
The MSCI India Index was up 2.15% (in USD terms1) over the month of September but underperformed regional peers. The NIFTY continued to reach all-time highs throughout the month, exceeding 26,200 levels before tapering as the market shifted its focus towards China. Sector-wise, Materials and Utilities were the top performers, while Energy and IT were the relative underperformers.
Growth in India’s manufacturing industry remained in expansionary territory, but the September manufacturing purchasing managers’ index (PMI) cooled to an eight-month low of 56.5 (vs 57.5 in August).2 The decline was primarily due to slower growth in factory production and sales, as well as the slowest expansion in international orders in eighteen months. Despite intensified competition, manufacturers are leveraging sustained domestic demand and strategic investments to drive growth. Additionally, mild cost inflation has allowed companies to maintain healthy margins, enhancing profitability and operational resilience.
Similarly, India’s services sector continued to see historically strong rates of expansion in September, but services PMI tempered to a lower rate of 57.7 (vs 60.9 in August).3 Despite a modest slowdown in new business and international sales growth, the services sector demonstrated resilience through healthy domestic demand and continues to benefit from solid job creation and strengthening business confidence.
Headline inflation rose slightly to 3.65% y/y in August (vs 3.54% y/y in July) but remained below the RBI’s target of 4.0% for the second consecutive month. The uptick was primarily driven by an acceleration in food prices, which increased to 5.66% from 5.42% in July. India’s Goods and Services Tax (GST) collections experienced a modest slowdown in September, registering 6.5% growth y/y, with gross revenues reaching INR 1.7 trillion (~US$20 billion). However, a rebound in GST revenues is anticipated with the upcoming festive season.
Previously, despite our view of a soft landing for the US economy, we anticipated that markets would experience a near-term air pocket due to slowing money supply growth and high real interest rates across key geographies. However, two significant pivots over the past month have reshaped the market landscape with greater optimism:
For India, these changes have come at a time when the country’s economic momentum has shown signs of slowing. While markets have performed well over the past quarters, we expect some near-term consolidation as investor attention shifts toward China. Consequently, our portfolio remains largely unchanged, maintaining long positions in sectors poised to benefit from ongoing consumption shifts, industrial growth, and strong financials.
Adding to this economic context, recent regulatory changes in India’s derivatives market, including increased minimum contract sizes and reduced weekly options, aim to curb excessive speculation. These measures may initially dampen market enthusiasm, especially among retail traders. Furthermore, the possibility of Prime Minister Modi’s party facing setbacks in upcoming state elections could contribute to short-term market volatility. However, we believe any resulting market correction may present attractive entry points for long-term investors as India’s strong economic fundamentals and growth prospects remain intact.
Corporate confidence and strategic diversification propel India’s growth
Our recent travels across India have provided valuable ground-level insights. Corporate confidence remains high, even as consumer confidence exhibits signs of softening. Consumers are increasingly venturing into new categories such as concerts, travel, and other discretionary spending areas that were previously limited. After nearly 15 years, we are witnessing plans for significant capacity expansion in the infrastructure space by the Indian private sector. Notable projects include JSW’s 2.4x port capacity increase to 400 MTPA and Adani Green’s 4.5x expansion of renewable capacity to 50GW by 2030.4
Concurrently, large business groups are exploring diversification into new verticals, reflecting a strategic pivot to enhance business resilience and capture emerging opportunities. A notable example is Aditya Birla Group, which is committing a US$20 billion investment run rate across its traditional sectors —cement and finance— as well as new areas such as property, paints, and retail.5 Although scaling these opportunities takes time, they contribute significantly to India’s long-term secular growth narrative. Another interesting insight is that because of the buoyant capital markets, several private companies, including subsidiaries of multinationals like Hyundai Motors and LG Electronics, as well as new-age internet companies, are pursuing a local listing over the next 12-18 months. In the near term, this may increase the paper supply, but from a medium-term perspective, it provides investors with opportunities to participate in the differentiated growth stories.
Navigating change: The future of healthcare in an aging India
Earlier this month, the Indian government announced a significant expansion of its flagship fully subsidized healthcare program, Ayushman Bharat, to cover all senior citizens aged 70 and above, regardless of income. This development marks an important step toward achieving universal health coverage for all Indian citizens.
Post-pandemic, private health insurance coverage has risen dramatically, complementing government schemes. According to government data, over 70% of India’s population now has some form of health insurance, leading to increased demand for higher-quality healthcare services. This trend has primarily benefited branded players in hospitals, diagnostics, and pharmaceuticals.
While recent growth in India’s healthcare sector has been driven by improved access to primary and secondary care and greater insurance penetration, future growth is expected to be propelled by the rapidly increasing senior citizen demographic. Despite India’s reputation as a young country, the elderly population is growing faster, with projections suggesting their proportion could nearly double to ~20% in the next two decades. Thus, the combination of increasing insurance penetration and demographic shift towards an aging population, coupled with rising life expectancy and income levels, positions India’s healthcare sector for robust long-term growth.
Building on our positive outlook, we’ve maintained substantial long-term exposure to India’s hospitals and pharmaceutical sectors. Over the years, we’ve witnessed these industries evolve through significant investments in R&D, fostering innovation in medical treatments and drug discovery. Additionally, the expansion of healthcare infrastructure has increased access to quality services across the country, while competitive pricing strategies have made healthcare more affordable for a wider population.
Our investment team brings you firsthand observations and key takeaways from their recent travels and engagements across India. Here’s what we’ve discovered.
Aspirational consumer class shows robust discretionary demand
Our India analysts recently experienced firsthand the overwhelming demand for live concert tickets in Mumbai. Coldplay’s concert sold out within 30 minutes as 13 million Indians competed for 150,000 tickets, despite prices reaching up to US$400. The surge caused the online ticketing platform to crash, and some tickets were later resold through unauthorized channels at 5-10x their original price. Similarly, a concert featuring Dua Lipa and a local favorite, Diljit Dosanjh, sold 100,000 tickets in under 15 minutes. This surge in discretionary spending is driven by rising per capita income and is fueling growth not only in the entertainment industry but also in premium categories such as alcohol, durable goods, travel, cosmetics, and jewelry. Flights as we travelled across India were packed, airports were busy with state-of-the-art infrastructure, and discussions on stock markets were commonly heard.
As discretionary consumption continues to expand, we are only beginning to tap into this strong theme, which is set to drive growth over the next decade.
Here are some recent photos we took at the Sardar Vallabhbhai Patel International Airport in Ahmedabad – a tier 1 city in India. This airport has undergone significant upgrades, transforming it into a modern, passenger-centric hub that mirrors the amenities and retail experiences found in leading international airports. These enhancements focus particularly on consumption and the introduction of premium consumer stores, signaling a shift towards catering to India’s growing aspirational middle class.
We had the opportunity to engage with some of India’s most interesting unlisted and recently listed companies, providing us with invaluable ground-level insights. Despite robust demand in certain discretionary categories, the broad feedback is that consumption has been subdued this year. However, optimism remains as we expect an improvement in consumer spending with job revival in the coming quarters.
Like developed economies, we noticed a shift in the ratio of price/volume-led growth in India towards the other end, where consumer companies have raised prices over the past three years. This shift has been coupled with a scarcity of rural innovations, highlighting the need to expand beyond the current focus on the top 30 million consumers. Presently, approximately 200 brands launched annually concentrate on these affluent and brand-conscious consumers. However, there lies a substantial opportunity in tapping into the next 60-70 million consumers in Tier 2 and Tier 3 cities, where similar ROIC can be achieved with 30% fewer footfalls.
For unlisted companies, the goalposts have been shifting over the last three to four years, with few investments in Series A, Series B & C getting funding, while Series D has been getting less funding. As the IPO market in China has cooled, Indian companies are under increased pressure to pursue IPOs to provide liquidity for private equity investors.
The startup ecosystem in India is also evolving rapidly. Four years ago, 90% of early-stage startups originated from Tier 1 cities, but this has now diversified to 70%, reflecting broader geographic participation. Additionally, while five to six years ago, 75% of startups were founded by first-time entrepreneurs, recent trends show that 25% are now spearheaded by experienced founders, enhancing the maturity and resilience of the ecosystem.
During our research, we encountered several standout companies exemplifying innovation and growth:
These meetings have solidified our confidence in India’s longer-term growth potential as we see emerging businesses driving progress through investment in innovation, customer engagement, and superior service delivery. This strong foundation positions them to effectively capitalize on emerging opportunities and will continue to drive dynamic developments in India’s economy.
Each quarter, we highlight ideas that showcase exceptional growth potential in Indian equity markets. These themes represent opportunities we believe will deliver substantial value over the coming years. Here are the ideas we’re featuring this quarter.
Emerging opportunities in healthcare outsourcing
The outsourcing landscape in India’s healthcare sector, encompassing both Contract Research and Manufacturing Services (CRAMS) and medical device manufacturing, presents a robust investment opportunity poised for substantial growth. The global pharmaceutical and medical device industries are increasingly adopting outsourcing strategies to enhance efficiency, reduce costs, and mitigate supply chain risks. This trend is further amplified by the “China+1” strategy, where international companies seek to diversify their manufacturing bases beyond China to ensure greater supply chain resilience. Additionally, stringent regulatory requirements and the rising complexity of medical research and device manufacturing drive demand for specialized outsourcing partners that can deliver high-quality, compliant solutions.
We believe Indian firms operating in the healthcare outsourcing space are uniquely positioned to capitalize on these opportunities. Leveraging cost-effective production capabilities, extensive portfolios fortified by numerous patents, and adherence to global regulatory standards such as USFDA, these companies offer competitive advantages that attract multinational clients. Their strong emphasis on R&D fosters continuous innovation, enabling them to expand their product offerings and enter new therapeutic areas. Investments in state-of-the-art manufacturing facilities and strategic expansions into high-demand areas like infusion therapy, blood management, and dialysis care underscore their capacity to scale operations effectively. As these companies continue to enhance their technological prowess and operational efficiencies, they are well-equipped to sustain their competitive edge, drive revenue growth, and deliver attractive returns for investors.
Financial services: Opportunities beyond traditional banking
The financial services sector in India offers compelling investment opportunities beyond the realm of traditional banking. For instance, the housing finance industry stands at the cusp of significant growth, driven by factors such as low mortgage penetration, a burgeoning young population, the transition towards nuclear family structures, and increasing migration to urban and semi-urban areas. With housing loan demand projected to grow at 15% CAGR over the next five years9, the affordable housing segment is poised for accelerated expansion. Government initiatives promoting affordable housing and financial inclusion further bolster this growth, creating a robust runway for companies that cater to underserved and self-employed customer segments.
Simultaneously, the mutual fund distribution and financial advisory segment also presents interesting opportunities, fueled by India’s robust economic growth, rising disposable incomes, and a gradual shift towards diversified investment portfolios. India’s burgeoning wealth management sector is poised for significant growth as the country’s affluent population grows and the rising middle class seeks more sophisticated financial services. Despite the mutual fund industry experiencing rapid growth of 20% CAGR over the past decade, penetration remains relatively low, with only a small percentage of the population actively investing in mutual funds and other financial instruments.10 This underpenetration signifies vast growth potential for distributors that facilitate access to a wide array of financial products, including mutual funds, insurance, and structured financial instruments. Leveraging extensive distribution networks and advanced technological platforms, leading companies can efficiently reach and serve a broader customer base, enhancing AUM growth.
For sophisticated investors only. For informational purposes only. The information presented in the material is not, and may not be relied on in any manner as legal, tax, investment, accounting or other advice or as an offer to sell or a solicitation of an offer to buy an interest in any investment product or any other entity sponsored or managed by Shikhara Investment Management. This material doesn’t constitute and should not be considered as any form of financial opinion or recommendation.
Shikhara Investment Management LP is currently an Exempt Reporting Adviser that is exempt from registration as an investment adviser with the U.S. Securities and Exchange Commission. This material is prepared by Shikhara Investment Management LP (“Shikhara”). This material does not constitute an offer to sell or the solicitation of an offer to buy in any state of the United States or other U.S. or non-U.S. jurisdiction to any person to whom it is unlawful to make such offer or solicitation in such state or jurisdiction.
Investment involves risk. Past performance is not indicative of future performance. It cannot be guaranteed that the performance of the investment product will generate a return and there may be circumstances where no return is generated. Investors could lose all or a substantial portion of any investment made. Before making any investment decision, investors should read the Prospectus for details and the risk factors. Investors should ensure they fully understand the risks associated with the investment product and should also consider their own investment objective and risk tolerance level. Investors are advised to seek independent professional advice before making any investment.
Shikhara’s investment products are suitable only for sophisticated investors and require the financial ability and willingness to accept the high risks and lack of liquidity inherent in Shikhara’s investment products. Prospective investors must be prepared to bear such risks for an indefinite period of time. No assurance can be given that the investment objectives of any given investment product will be achieved or that investors will receive a return of their investment.
Certain of the information contained in this material are statements of future expectations and other forward-looking statements. Views, opinions and estimates may change without notice and are based on a number of assumptions which may or may not eventuate or prove to be accurate. Actual results, performance or events may differ materially from those in such statements.
Certain information contained in this material is compiled from third-party sources. Whereas Shikhara has, to the best of its endeavor, ensured that such, information is accurate, complete and up-to-date, and has taken care in accurately reproducing the information, Shikhara takes no responsibility for the accidental publication of incorrect information, nor for investment decisions taken based on this material. Neither Shikhara nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein, and nothing contained herein should be relied upon as a promise or representation as to past or future performance of any investment product or any other entity.
The contents of this material are prepared and maintained by Shikhara and has not been reviewed by the Securities and Exchange Commission of the United States.
The fund managed by Shikhara does not hold the securities mentioned under the “Ground-level insights: Exploring India’s emerging business landscape” section of the article.
This website is published exclusively for the purpose of providing general information about the management services carried out by Shikhara Investment Management LP, Shikhara Capital (Hong Kong) Private Limited and its affiliates (collectively “Shikhara Investment Management” or “Shikhara”). The information presented on the website is not, and may not be relied on in any manner as legal, tax, investment, accounting, or other advice or as an offer to sell or a solicitation of an offer to buy an interest in any investment product or any other entity sponsored or managed by Shikhara Investment Management. This website doesn’t constitute and should not be considered as any form of financial opinion or recommendation.
Shikhara Investment Management LP is currently an Exempt Reporting Adviser that is exempt from registration as an investment adviser with the U.S. Securities and Exchange Commission and Shikhara Capital (Hong Kong) Private Limited has been approved by the Hong Kong Securities and Futures Commission. This website does not constitute an offer to sell or the solicitation of an offer to buy in any state of the United States or other U.S. or non-U.S. jurisdiction to any person to whom it is unlawful to make such offer or solicitation in such state or jurisdiction.
Investment involves risk. Past performance is not indicative of future performance. It cannot be guaranteed that the performance of the investment product will generate a return and there may be circumstances where no return is generated. Investors could lose all or a substantial portion of any investment made. Before making any investment decision, investors should read the Prospectus for details and the risk factors. Investors should ensure they fully understand the risks associated with the investment product and should also consider their own investment objective and risk tolerance level. Investors are advised to seek independent professional advice before making any investment.
Shikhara’s investment products are suitable only for sophisticated investors and require the financial ability and willingness to accept the high risks and lack of liquidity inherent in Shikhara’s investment products. Prospective investors must be prepared to bear such risks for an indefinite period of time. No assurance can be given that the investment objectives of any given investment product will be achieved or that investors will receive a return of their investment.
Certain of the information contained in this website are statements of future expectations and other forward-looking statements. Views, opinions, and estimates may change without notice and are based on a number of assumptions which may or may not eventuate or prove to be accurate. Actual results, performance, or events may differ materially from those in such statements.
Certain information contained in this website is compiled from third-party sources. Whereas Shikhara Investment Management has, to the best of its endeavor, ensured that such information is accurate, complete, and up-to-date, and has taken care in accurately reproducing the information, Shikhara Investment Management takes no responsibility for the accidental publication of incorrect information, nor for investment decisions taken based on this website. Neither Shikhara Investment Management nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein, and nothing contained herein should be relied upon as a promise or representation as to past or future performance of any investment product or any other entity.
The contents of this website are prepared and maintained by Shikhara Investment Management and has not been reviewed by the Securities and Exchange Commission of the United States or the Securities and Futures Commission of Hong Kong.