09 Oct 14 Opportunities in India – Construction and Building Products

As the Indian economy revives from its slump (Fitch Ratings recently forecast India’s GDP growth at 6.5% for FY16 and FY17 – making India one of the few markets to see rising growth), portfolio investors as well as corporate entities (both Indian and foreign) are re-evaluating their investment plans.

Needless to say, growth rates of 6% per year or higher will provide opportunities in almost all sectors. However, these carry different risks. For instance, even if the investment cycle revives, infrastructure will still be bedeviled by issues surrounding land acquisition, environment and other clearances. Among the many sectors, one which I’m quite bullish on is dependent on housing construction.

This is linked to two broad secular themes – of domestic consumption and urbanization. Let me explain.

The first is fairly obvious and has been well researched and understood. With a growing middle class, increased spending power and rising aspirations, consumer products of all kinds are likely to see growth that is higher than that of GDP. This trend has been in evidence for more than a decade, and will continue, if not accelerate.

Coupled with this is the fact that India is rapidly urbanizing. While many look at this merely from the prism of share of urban population, the reality is that rural areas are becoming more and more urban. The 2011 census classified almost 4000 villages as census towns, based on population density and pre-dominance of non-agricultural occupations. What these statistics reveal is that the lifestyles and aspirations of rural Indians are converging with those of their urban cousins.

Nowhere is this more evident in how they house themselves. Every Indian would like to have a “pucca” house, one which keeps the rain out and provides both safety and privacy. Across India, the materials used in construction and desired amenities in rural homes is rapidly converging with those of urban homes.

What does this mean in terms of opportunity?

More than half the Indian population lacks proper housing. Given this huge backlog, demand is only constrained by affordability, which is directly linked to rising incomes. Interestingly, even through the downturn of the last few years, housing has remained a relative bright spot. Further, the current government has promised a home for every Indian family by 2022. Even if they achieve a small part of their target, demand will surge.

The construction industry is likely to be a big beneficiary, but given the lack of regulatory transparency and land issues, such businesses require strong local connections. Housing finance is another direct beneficiary, including micro-finance. Cement would be another obvious one, but is highly commoditized and capital intensive.

These are the obvious opportunities, but what could be more interesting – both for investors and entrepreneurs – is the plethora of downstream opportunities, in a host of construction or building related products.

Houses need to be painted, so paint companies are on a good wicket. Homes need many other things – tiles and flooring materials, taps and faucets, sinks and other types of sanitary-ware, water-proofing, roofing materials, windows, doors, air-conditioners, consumer durables, security systems, furniture, furnishings, fans, kitchen ware, pipes, water tanks, false ceilings, lighting, electrical items like switches and safety devices, inverters, and so on – I’m sure you get the picture.

What’s very interesting about most of these sub-sectors is that they’re highly fragmented with a large number of small, local players (with the exception of cement, paints and probably air-conditioners). While this may lead to severe local competition and price sensitivity, the fragmentation also provides significant long term opportunity for deep-pocketed players with the patience to build brands and distribution networks for the long run. We’ve seen a few companies that have managed to do this, enjoy extra-ordinary success. Some names that come to mind off-hand are Asian Paints, Hawkins Cookers, Havell’s, Kajaria Ceramics, Sintex (tanks).

Of course there are threats, particularly cheap Chinese imports and rising input prices. But then, every business has its risks…. The question to answer is: How many industries (or sectors) can you find where growth is likely to be in double digits, for at least a decade – if not a couple of decades?