12 Oct 17 Manage your India investment risk

India’s economy is huge, and growing. The reforms and policies led by the Narendra Modi government will certainly push growth. These include:
– Make in India
– A new bankruptcy law
– An ongoing exercise to simplify laws
– Huge emphasis on low-cost housing
– Massive government spending on infrastructure
– Rollout of the goods and services tax (GST)
– Opening up of defence to the private sector
… and many more.

The confidence in India’s economy is evident… FDI in FY17 crossed $60bn (a record!), which was 60% higher than in FY14. Major corporations like Aramco, SAP, Mastercard, Rosneft, Softbank, etc have announced big investment plans for the country.

Indeed, the business opportunities that India offers multinational and domestic companies are vast. Yet, the risks involved are significant. But how risky can it really be to do business in the country? Are the markets that complex to navigate?
– 29 states and seven union territories, each differ culturally, socially & economically
– Extremely heterogeneous customer landscape (language, tastes, etc) makes it tricky to identify the right customer segment
– 67% of the population live in rural areas, where infrastructure is poor
– Markets are fragmented with a large number of small and unregistered enterprises
– Unorganised (or informal) sector contributes nearly 50% to GDP and over 80% to employment
– Industry data and statistics are largely undocumented, unreliable and hard to come by
– Highly cost competitive markets

While it isn’t easy to accurately assess the risks that come with doing business in India, there are ways to mitigate some of them…

An Asian motorcycle manufacturer required a background check on a potential partner. Our due diligence research revealed some alarming facts – inflated sales figures, criminal cases against the promoters, and a history of broken joint ventures.

On another occasion, an international PE fund was looking to invest in India’s retail property market. Our research proved that the euphoria in the sector at the time was not going to last much longer. The client abandoned the idea, saving themselves several millions of dollars.

There are several examples to demonstrate how market intelligence can save clients millions when the stakes are high –
– detailed research in selected industries helped a private equity investor evaluate investments better
– dwindling sales prompted an auto component manufacturer to conduct a user perception study… our findings helped re-design their product, and approach to pricing and marketing
– our research helped convince a tile manufacturer that the Indian market wasn’t ready yet for certain premium tiles

A relatively small investment in market research or due diligence can certainly help investors better manage their ‘India’ risk.