This article is archived and some details may be out of date.
Article

Investing in India: high growth stocks in a data-transformed nation

April 2022

Key points

Baillie Gifford spots investment opportunities in a smartphone-transformed nation.

All investment strategies have the potential for profit and loss, capital is at risk. Past performance is not a guide to future returns.

 

Recent commentary on India has been dominated by the macro risk from higher oil prices and how this energy-importing Achilles’ heel could hurt the country’s current account. This threat must be balanced with bottom-up analysis. That can be difficult of course: The recent market environment undoubtedly challenges one’s ability to maintain a resolutely long-term outlook.

The interesting question about India over the past decade is about what change has made the biggest difference. To us, there’s no contest: the explosive growth in mobile data use. From roadside stalls accepting digital payments to taxi drivers, glued to their small screens while waiting in the shade, smartphones are everywhere. The profusion of great entrepreneurial companies in the wake of this change matters more than macroeconomic ups and downs.   

The spur for this new tech-enabled wave was the rollout of the country’s fourth generation (4G) cellular network in the mid-2010s. Reliance, then best known as an oil refining business, spotted the potential of connecting the masses and invested $40bn in building and launching its Jio network in 2016.

As Reliance shareholders, we backed the move. The network created millions of potential consumers, almost overnight brought the internet to the masses, catalysing an unprecedented wave of Indian innovation that has given the country its current 54 ‘unicorns’ – companies with a valuation above $1bn – more than any other country apart from the US and China.

Thus ‘old India’ became midwife to the ‘new’. Industrial stalwarts such as Reliance, car maker Tata Motors and mining giant Vedanta still present substantial growth opportunities. Reliance has moved into retail and media, and Tata is the leading player in country’s nascent electric vehicle market. Nevertheless, it’s the plethora of new generation technology companies that excites us most and provides a counterweight to current concerns about the effect of higher energy prices on a big energy importer such as India.

With our internal tracking predicting that between $200bn and $300bn of tech-based private companies are likely to list on India’s stock market in the next two or three years, we see a vast increase in opportunities. Of the many more unicorns we expect to emerge, the majority will come from the tech space.

It helps that India’s Ministry of Electronics and Information Technology has made access to online products and services easier through Aadhaar, the world’s largest biometric database. Meaning ‘foundation’ in Hindi, Aadhaar is a 12-digit ID number, linked to digital photographs, fingerprints and iris scans which allows Indians to pay for goods and services by mobile phone.

Opening a bank account now takes as little as 10 minutes thanks to Aadhaar. I’m somewhat envious when I contrast that with the six weeks it took me to open an account in the UK to take out a new mortgage.

Tax reforms also helped India’s tech sector to grow. Previously, prohibitively high interstate taxes meant companies rarely expanded beyond state lines. In 2017 the national Goods and Services Tax (GST) simplified the regime, allowing regional businesses to flourish into national players. 

Building relationships with founders and their management teams has been at the core of our endeavours in the country. For example, through our relationship with Info Edge (one of the country’s leading internet companies), we met many of the tech entrepreneurs we’ve since backed. Working with private equity firms such as Sequoia Capital’s Indian operations also broadened our reach.

Relationships were also key to our investment in food delivery service Zomato. We met founder Deepinder Goyal for the first time back in 2012 when the company was the country’s leading restaurant review site. It was clear from our discussions that Zomato had far greater ambitions and would use its valuable user-generated content to build something that outgrew its existing business by an order of magnitude.

Fast forward to today and our investment has been richly rewarded. Zomato transformed itself into the country’s largest food delivery company with 16 million users by the end of September 2022, a market share of around 40 per cent and backing from companies that include Alibaba and Uber.

© TBC.


Technology also underpins Star Health Insurance’s thriving business. India’s largest private health insurer is an incredibly well-run company that uses internet connectivity to distribute its health and travel insurance, along with online medical consultations, giving it about 30 per cent of the market in individual health insurance. Scale and distribution of this sort presents huge barriers for competitors. Given the low penetration of health insurance in the country, this is a company that could grow for decades.

The growth of India’s middle class is crucial to our thinking. About 70 per cent of India’s population is under 40. India’s retail market is one of the fastest growing in Asia and is tipped to go from about $800bn today to $1.2tn by 2026. Ecommerce penetration sits at only about 5 per cent of the population today. In a decade it could reach half the population.

Not only is the retail market growing by 10 per cent a year, but the online market could increase tenfold over the next decade. Those changes create big opportunities for tech businesses and their innovative founders. Should these expectations be realised, hundreds of millions of smartphone-fixated consumers will soon have a lot more content and services to keep them busy. The stage is set for the country’s entrepreneurs to complete the transition to the new India.

Important information

Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA). Baillie Gifford & Co Limited is an Authorised Corporate Director of OEICs.

Baillie Gifford Overseas Limited provides investment management and advisory services to non-UK Professional/Institutional clients only. Baillie Gifford Overseas Limited is wholly owned by Baillie Gifford & Co. Baillie Gifford &Co and Baillie Gifford Overseas Limited are authorised and regulated by the FCA in the UK.

Persons resident or domiciled outside the UK should consult with their professional advisers as to whether they require any governmental or other consents in order to enable them to invest, and with their tax advisers for advice relevant to their own particular circumstances.

Financial intermediaries

This communication is suitable for use of financial intermediaries. Financial intermediaries are solelyresponsible for any further distribution and Baillie Gifford takes no responsibility for the reliance on thisdocument by any other person who did not receive this document directly from Baillie Gifford.

Europe

Baillie Gifford Investment Management (Europe) Limited provides investment management and advisory services to European (excluding UK) clients. It was incorporated in Ireland in May 2018. Baillie Gifford Investment Management (Europe) Limited is authorised by the Central Bank of Ireland as an AIFM under the AIFM Regulations and as a UCITS management company under the UCITS Regulation. Baillie Gifford Investment Management (Europe) Limited is also authorised in accordance with Regulation 7 of the AIFM Regulations, to provide management of portfolios of investments, including Individual Portfolio Management (‘IPM’) and Non-Core Services. Baillie Gifford Investment Management (Europe) Limited has been appointed as UCITS management company to the following UCITS umbrella company; Baillie Gifford Worldwide Funds plc. Through passporting it has established Baillie Gifford Investment Management (Europe) Limited (Frankfurt Branch) to market its investment management and advisory services and distribute Baillie Gifford Worldwide Funds plc in Germany. Similarly, it has established Baillie Gifford Investment Management (Europe) Limited (Amsterdam Branch) to market its investment management and advisory services and distribute Baillie Gifford Worldwide Funds plc in The Netherlands. Baillie Gifford Investment Management (Europe) Limited also has a representative office in Zurich, Switzerland pursuant to Art. 58 of the Federal Act on Financial Institutions (‘FinIA’). It does not constitute a branch and therefore does not have authority to commit Baillie Gifford Investment Management (Europe) Limited. The firm is currently awaiting authorisation by the Swiss Financial Market Supervisory Authority (FINMA) to maintain this representative office of a foreign asset manager of collective assets in Switzerland pursuant to the applicable transitional provisions of FinIA. Baillie Gifford Investment Management (Europe) Limited is a wholly owned subsidiary of Baillie Gifford Overseas Limited, which is wholly owned by Baillie Gifford & Co. Baillie Gifford Overseas Limited and Baillie Gifford & Co are authorised and regulated in the UK by the Financial Conduct Authority.

Hong Kong

Baillie Gifford Asia (Hong Kong) Limited 柏基亞洲(香港)有限公司 is wholly owned by Baillie Gifford Overseas Limited and holds a Type 1 and a Type 2 license from the Securities & Futures Commission of Hong Kong to market and distribute Baillie Gifford’s range of collective investment schemes to professional investors in Hong Kong. Baillie Gifford Asia (Hong Kong) Limited 柏基亞洲(香港)有限公司 can be contacted at Suites 2713–2715, Two International Finance Centre, 8 Finance Street, Central, Hong Kong. Telephone +852 3756 5700.

South Korea

Baillie Gifford Overseas Limited is licensed with the Financial Services Commission in South Korea as a cross border Discretionary Investment Manager and Non-discretionary Investment Adviser.

Japan

Mitsubishi UFJ Baillie Gifford Asset Management Limited (‘MUBGAM’) is a joint venture company between Mitsubishi UFJ Trust & Banking Corporation and Baillie Gifford Overseas Limited. MUBGAM is authorised and regulated by the Financial Conduct Authority.

Australia

Baillie Gifford Overseas Limited (ARBN 118 567 178) is registered as a foreign company under the Corporations Act 2001 (Cth) and holds Foreign Australian Financial Services Licence No 528911. This material is provided to you on the basis that you are a ‘wholesale client’ within the meaning of section 761G of the Corporations Act 2001 (Cth) (‘Corporations Act’). Please advise Baillie Gifford Overseas Limited immediately if you are not a wholesale client. In no circumstances may this material be made available to a ‘retail client’ within the meaning of section 761G of the Corporations Act.

This material contains general information only. It does not take into account any person’s objectives, financial situation or needs.

South Africa

Baillie Gifford Overseas Limited is registered as a Foreign Financial Services Provider with the Financial Sector Conduct Authority in South Africa.

North America

Baillie Gifford International LLC is wholly owned by Baillie Gifford Overseas Limited; it was formed in Delaware in 2005 and is registered with the SEC. It is the legal entity through which Baillie Gifford Overseas Limited provides client service and marketing functions in North America. Baillie Gifford Overseas Limited is registered with the SEC in the United States of America.

The Manager is not resident in Canada, its head office and principal place of business is in Edinburgh, Scotland. Baillie Gifford Overseas Limited is regulated in Canada as a portfolio manager and exempt market dealer with the Ontario Securities Commission ('OSC'). Its portfolio manager licence is currently passported into Alberta, Quebec, Saskatchewan, Manitoba and Newfoundland & Labrador whereas the exempt market dealer licence is passported across all Canadian provinces and territories. Baillie Gifford International LLC is regulated by the OSC as an exempt market and its licence is passported across all Canadian provinces and territories. Baillie Gifford Investment Management (Europe) Limited ('BGE') relies on the International Investment Fund Manager Exemption in the provinces of Ontario and Quebec.

Oman

Baillie Gifford Overseas Limited (‘BGO’) neither has a registered business presence nor a representative office in Oman and does not undertake banking business or provide financial services in Oman. Consequently, BGO is not regulated by either the Central Bank of Oman or Oman’s Capital Market Authority. No authorization, licence or approval has been received from the Capital Market Authority of Oman or any other regulatory authority in Oman, to provide such advice or service within Oman. BGO does not solicit business in Oman and does not market, offer, sell or distribute any financial or investment products or services in Oman and no subscription to any securities, products or financial services may or will be consummated within Oman. The recipient of this material represents that it is a financial institution or a sophisticated investor (as described in Article 139 of the Executive Regulations of the Capital Market Law) and that its officers/employees have such experience in business and financial matters that they are capable of evaluating the merits and risks of investments.

Qatar

The materials contained herein are not intended to constitute an offer or provision of investment management, investment and advisory services or other financial services under the laws of Qatar. The services have not been and will not be authorised by the Qatar Financial Markets Authority, the Qatar Financial Centre Regulatory Authority or the Qatar Central Bank in accordance with their regulations or any other regulations in Qatar.

Israel

Baillie Gifford Overseas is not licensed under Israel’s Regulation of Investment Advising, Investment Marketing and Portfolio Management Law, 5755–1995 (the Advice Law) and does not carry insurance pursuant to the Advice Law. This material is only intended for those categories of Israeli residents who are qualified clients listed on the First Addendum to the Advice Law.


Ref: 17973 10008438

About the authors