Alpha Moguls | How To Play The Great Indian Consumption Story? Here’s Nikhil Vora’s Take

Investing in consumption-based companies is all about betting on leaders of tomorrow today.

A customer sits outside a store at a local market in Hyderabad, India. (Photographer: Dhiraj Singh/Bloomberg)
A customer sits outside a store at a local market in Hyderabad, India. (Photographer: Dhiraj Singh/Bloomberg)

Investing in consumption-based companies is all about betting on leaders of tomorrow today. That is Nikhil Vora’s investment philosophy.

The founder of consumer sector-focussed venture capital firm Sixth Sense Ventures said that if a consumer business is good, it will need funding only twice. First, at the seed stage, and second, at the growth stage.

If any business requires capital a third time around, then it is not a consumption-based business. “That’s a certainty I can guarantee,” said Vora, who was an early stage investor in companies like Paytm, Vini Cosmetics Pvt., Parag Milk Foods Ltd.

Better Vice!

From an Indian investor’s perspective, liquor is a better vice to bet on than cigarettes, Vora said on the latest episode of BloombergQuint’s special series Alpha Moguls. Globally, liquor businesses trade at higher multiples than cigarette companies. In India, it is the other way round, he explained.

Watch the entire conversation here.

Here are the edited excerpts of the conversation:

We all know about the presence of the great Indian consumer. Everybody has been talking about it since the last 15 years. But it is not reflecting in profits the way that it probably should have. Do you think the next 10 years will see an increase in the profit pool of some of these consumption stories?

We were looking at a situation where the depth in the Indian consumer market was not really there. In the last five-six decades, we have had a situation where the entire Indian market has been symbolised by a duopoly in every category, right from a fairness cream to a soap to hair lotions, which is weird because there is no intellectual property attached to any consumer product. I could make a Dove as good as the Hindustan Unilever Ltd. makes it. So, there is no IP attached to any consumer product and yet it was symbolised by a duopoly. It only happened because there was a fear of taking on the leader in the space. There was a mortal fear of taking over HUL or ITC Ltd.’s distribution. Thereby we did not find enough players jostle for the same brand space because the shelf space would have been very expensive for any player to compete with HUL or ITC.

Life is changing disproportionately as we speak and will change significantly over the next few years. Because of distribution opening up, we will see a lot of new brands evolve and we haven’t seen brand evolution happen in India since the last five-seven decades. Henceforth, we will see that happening with a lot of entrepreneurs coming in and taking their own spaces. The moment they start to do it, the entire business land in India will get reinvigorated. I am very positive about the way values can be created in consumer businesses. There will be an underlying thought that challengers will always grab more market share than the leaders do. To me, there is a lot of wealth which is at the bottom of the pyramid in consumers and I am not saying that from a markets perspective. I am saying that as far as values of those businesses are concerned, I think there is a lot of wealth which is hidden there that will significantly seize up.

For example, let’s say in the case of Patanjali, it has created disruption in marketplace, not that I am a big fan of the way the business is run. They have not really troubled any consumer company because they don’t take more than 10 percent market share in any category, but they are relevant. Patanjali has evolved in the last five years. Vini Cosmetics’ Fogg brand has evolved from the underbelly and taken on the leaders like Axe and HUL. You will see a lot more of that happen. Biba, for instance, has almost created a category of its own. You will see a lot of players come in and take on relevant market leadership in their domain which is not really the domain of the larger consumer company. So, you have to be able to demarcate the difference between the two. One is the static large consumer play like HUL or ITC and the second one is to see where the consumer movement is happening over the next five-ten years. It will take place in the new age entrepreneurial-run companies which will occupy the niche and will become full blown over the next 10 years. That’s where the values lie.

Would you bet on disruptors that are challenging two-three verticals of behemoths like HUL, ITC or would you believe that there is enough potential even in behemoths while they continue to see disruptions and challenges from focussed niche players?

If earlier, one has lived with the mortal fear of taking over leaders, I think that fear does not exist anymore. This means that as new and more players evolve, their ability to take relevant market share in differential categories, will always be disproportionately higher than the leaders’ ability to protect their market share. To me, the value resides in what the future of consumer behaviour will be. For instance, I don’t want to be doing a higher number of black tea sales because they mean nothing to me. I would much rather get into categories which are very futuristic, and thereby a lot more sustainable while entailing higher growth. If I have to look at dips and sauces as the category, I think Veeba might do a better service than what HUL might end up doing over the next five-ten years because they have not even evolved in that category today. So, the challenge is not so much about the category growing at 10-12 percent today. It is great but not as alluring as it was in pre-days.

The challenge is about identifying categories which are going to be relevant in the next five-ten years and whether the large entities are present in those categories. Like are they doing great innovation categories in that fold? I don’t see a significant innovation happening from larger companies for sure. Irony is that disruption can happen from challengers and not from leaders. HUL cannot disrupt their own businesses, nor can ITC do it or Infosys for that matter. You will always have disruptors who are challengers, who will by default be able to take relevant market share by creating a relevant market because the noise value in that category will be a lot larger than what HUL can create in that category. So, the value also resides there. If you come early into those categories, and they require capital only twice, you have the potential to buy a dozen potential HULs in the making. Not of that size and magnitude but of a relevant size and scale which is extremely valuable for all the business which one would look at.

I’m guessing that’s what you’re trying to do at sixth sense as you have closed one of your funds and are in the Round 2, essentially in the second fund you have. I’m also told that you returned the money that you took from the investors well before the schedule timeline. Is that right?

Yes, we are possibly the only fund in the country which has returned capital back within 1.5 years of fund closure for a seven-year fund. So, it looks a fairly decent track to go with. It is in the early days of the journey, but we are happy.

Do you believe that as a fund house, whether through your fund 1 or fund 2, you are betting big on the disruptors as opposed to betting on behemoths and tried and tested models which exist in the country?

There are two options to invest. If one is investing for the next five-ten years, one is really looking at these two things. One is, whether we are betting on innovators who will become relevant in the next 10 years or we are betting on disruptors who are fundamentally just changing the rules of the existing game. We, at sixth sense, are betting on the disruptors. I think that India is not a great innovative market. I haven’t seen any relevant innovation happening in India for the last five-seven decades. If any, it could possibly be counted on the number scale right now.

The fact that the market has been so static for the last five decades, really calls for disruption. There could be disruption in differential modes like product packaging, pricing, positioning. It looks like a fantastic opportunity to us. We want to bet on a kick-ass promoter in a big-ass market with a smart-ass product. It is essentially about these three attributes which we love, and you will find it a lot more in disruptors. For example, let’s look at the last one decade in India. There are five brands which have come up in last decade which are Patanjali, Paytm, Go, Paperboat, Fogg. There are only these five-seven brands that have got created in India and none of these brands were created by MNCs. All of them are domestic brands created by first-generation entrepreneurs. So, there have been disruptors. The space has existed...the space for deodorants, milk food and the entire space for Patanjali has existed. They created disruptors in their space to become relevant. Our fund theory has been to identify these disruptors very early on in their life cycle and participate in their journey over their mid-term life cycles.

Is it company, theme or product specific?

At lot of points, it is theme specific. Let me give you a good example of what we bet in the first fund. In the first fund, we have done 10 investments, two of which are listed and eight are private. The two listed investments are up by 7 times and 9 times in two years. They were JHS Svendgaard and Hindustan Foods. We follow the theme in that and it worked beautifully. We think that it will become larger and magnifier in the next five years, contracting. I am a big believer of the fact that India has never seen brand disruption happening over the last five decades. Brand disruption did not happen because distribution was controlled. No one came in and did anything to unsettle leaders in the space. With the opening of distribution, we will see a lot more brands coming into play. As brand battle increases, none of the companies are investing in back-end. Back-end capability is non-glamorous and non-sexy for people to invest capital in. The next generation is surely not investing in back-end as much. So, we think existing strong capable back-end players, contracting companies will become very large and dominant. Most of the brands are getting into the space of trying to attack each other, whereas no one is addressing the back-end part.

Today for consumer companies, 60 percent of their manufacturing is controlled in-house while 40 percent broadly is outsourced. That 60 percent is also up for grabs. As the larger companies like Reckitt Benckiser, HUL, Coalgate, ITC try to address the brand battle with a Patanjali or a PNG or whoever is around them, they will let go off the manufacturing assets. That’s the lower ROI business for them potentially against the brands but it’s a great ROI business for the contracting companies. If they can generate 18-20 percent ROI on their businesses, keeping it sustainable over the life cycles of their businesses, then it accounts for a fantastic cash flow for those companies. Eventually, it will get concentrated because there are very few relevant contracting companies in this country. We think it was a great thing and we played that out in JHS which is an oral care contracting company, which does not work for Patanjali and Dabur. We’ve done that beautifully in Hindustan foods which is the largest consumer contracting company right now.

In the consumer durable space, who wins the bet as there are opportunities for investors across both, one is brand owners and other the contract manufacturers?

There is space which is created by all existing players in this country. There is so much space and room which they have created, as they love to have 70 percent gross margins, 100 percent ROI in their businesses. The fact is that they have created so much space for players to come and nibble into them. So, there is opportunity everywhere. We think that there is a great theme in contracting which is what we have invested in. There is also a great theme to invest in businesses which are relevant in the next 10 years and where the larger players are not present.

Which are these pockets?

We love dips and sauces as a category and it is a great business to be in. There could be a lot of other businesses which can become super niche. Let’s say in oral care category, why is there nothing for kids? It’s a complete vacuum and it is a category which will call for disproportionate attention in the next five-ten years. We think that there will be certain players which will do very well in oral care kids category. In dairy too for that matter. It is a value added category which does not seem to be present right now as significantly as it should be. So, there will be niches which will come in. There are a lot of categories which will call for attention. We invested in a few of them. We think there will be a lot of thickness in being in the space. It is not an either/or opportunity. It is not that we will buy contracting companies and not buy brands. We have loved brands and that’s what we have always done. We will invest in a few of them. They all seem to have done well. As long as we come early, and we think that we can add value to those businesses, we are most happy to go with them.

Do you believe there is multi-year growth in the dairy industry and valuations even if they seem expensive right now, could only get cheaper with time?

What fund has to really be seized about is that the opportunity that the fund is trying to address is large enough, dominant enough and sticky enough for the next five-ten years. As long as we get that parameter right, then we just have to believe that there is enough shelf space for these players. I have invested a bit in Parag Milk which was a private company. What really intrigues you is that if you can get shelf space against Amul on one side and Nestle on the other, then you have cracked it. Amul is the company which will not gun for profits and Nestle is the company which will always gun for profits. If you get shelf space between the two of them, then it is as good as it can get.

If you see today Parag Milk or Go as products, they are at number one or two in tier two cities in India. It is a great way to address the business opportunity. You will see that in a lot many pockets. For dairy, India is naturally blessed and there is a need for people looking at value for dairy products. That is the category which will grow disproportionately. It is the category which also requires a lot of sustenance. So, the larger guys will make them work better for them and ironically it is the category where the largest players have been absent. So, ITC and HUL have done nothing in that category which is a poor statement on the larger guys, but it is also the statement of risk taking appetite of next-generation entrepreneurs in that space.

You have invested in the liquor space. Why have you done that and what are your thoughts?

Almost 10-12 years back, we were the first guys to look at liquor. At that time the attractiveness was you can’t buy the entire Indian liquor space for a couple of billion dollars which was the value of United Spirits Ltd. at that time. It was ridiculous because it is an opportunity which will grow. But we had the dominant player which was plagued by its management issues. But the space is not going anywhere. It will remain and grow. So, we bet on it which played disproportionately very well. I think it is still in extremely early days of that life cycle. Globally, liquor businesses are at a multiplier to cigarette business. In India, it is reverse. In India, cigarette businesses are at a multiplier to liquor business. So, one wants to buy into social vices, then liquor is a better vice than cigarettes for investors. Liquor still has a long way to go.

There are operating hurdles in this country which will remain for foreseeable future, but it will also create opportunity for new players who are able to navigate themselves through this journey. You will have opportunity in various spaces in liquor. We have seen what happens in spirits, beers. Maybe at some stage, we will see the same happening in other categories too, wine perhaps. So, you will have a lot of opportunities in that category. In this category, you will get symbolised by 40-50 percent dominant market share leader. The good part is because these businesses will not need too much of a capital, it is always going to become a seller’s choice market. It will remain valuable. If you compete with global MNCs in that space, by default, the operating standards move up a bit more than what you'd expect to happen otherwise. The moment the operating parameters go up, it becomes a business which is slightly more transparent than before and a lot more valuable than before.

Have you invested in any retail company at all?

We have invested in Ethos which is a brand-play rather than a retail-play, but it is pretty much in that positioning.

We are in the throws of having one of the largest retail player of taking over an incumbent in the Indian online retail space to compete with another behemoth. Any thoughts here?

It is going to be a fantastic time in the Indian e-commerce business or retail business in generic, both online and offline. I have always believed that Indian retailers, let’s say Future Group, has missed out a fair bit of the Indian retail growth story. Because by the time they got relevant and large, it got overtook by e-commerce. So, they did not benefit from the great Indian retail boom. At some stage, over the next three-five years, you will see a significant alignment happen on offline and online retail. The first moves are getting made which is happening with Flipkart, Walmart etc. You will see a lot more happening in that space. While this large behemoth gets created, it also gives great opportunities for vertical specialists to become relevant. Target group of Flipkart to Amazon to Paytm to Snapdeal is almost similar. But there is a great target market evolved because of the e-com boom and those are meant for vertical specialists who will become extremely valuable.

Anybody existing right now?

In the beauty market, the TG is very different to the TG of Amazon, Flipkart or Paytm. So, that category will become relevant. We have very few players like Nykaa, Purple which are dominant players in that category. They will also become valuable. These platforms will become brands and they will have their own parameters. Every brand has its life cycle and the next-generation will not want to own brands which the earlier generations use to wear. The moment you move off from theoretically a Titan, the only way is to go up, which is to wear a Swiss watch which makes Ethos a very relevant player in that category because they are the largest distributors of Swiss watches in the country. So, you will see the evolution happen. It could be offline or online but there will be a great surge for vertical specialists who have TG market which is only theirs to become relevant, dominant and valuable.