India Shining for MNCs
A new paper from Harvard Business Review argues that MNCs need to act now, talk local to harvest the gains from India's imminent economic rise. EPISODE #136
Dear Reader,
A very Happy Monday to you.
According to IMA, the niche market research firm, in the last five years MNCs or multinational companies have increased their on-ground presence in India, partly as a result of diversification away from China.
This debate got a fresh twist following the publishing of in the Harvard Business Review, wherein three professors posed a blunt question to global CEOs: Does your company have an India strategy?
Citing examples like Unilever, 3M and Nestle, the paper argues that the Indian subsidiaries of these MNCs are outperforming their parent company. Given the gloom and doom about most western economies and the potential exhibited by India, the authors make out a strong argument about India shining in the balance sheets of MNCs.
It is no longer about a chorus of voices betting on India. Instead, companies, for a host of reasons are beginning to walk the talk. This week I explore this phenomenon.
The cover picture is of a shopping mall in Gomti Nagar taken by Elvish Yadav and sourced from Unsplash. It captures a growing consumer economy that goes beyond the super-metros of Delhi, Mumbai.
A big shoutout to Madhu, Niranjan, Balesh, Laxmi, Monica, Aashish, Gautam, Vandana and Premasundaran for your informed responses, kind appreciation and amplification of last week’s column. Once again, grateful for the conversation initiated by all you readers. Gratitude also to all those who responded on Twitter and Linkedin.
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India Shining
In a paper published in the Harvard Business Review (HBR), three professors posed a blunt question to the CEOs of MNCs or multinational companies: Does your company have an India strategy? And, if they did, what were they doing to adapt it to the conditions peculiar to India.
These professors—Vijay Govindarajan (VG), Rajendra Srivastava, Anup Srivastava and Aman Rajeev Kulkarni—have a simple proposition: India’s moment in the sun has arrived and if MNCs wanted to join the party, they either evolve an India strategy or revisit their existing one.
Yes, all of them are of Indian origin. But, their claim is not backed on rhetoric. Instead, they furnish empirical proof.
Positing the performance of the India arms of the MNCs vis-a-vis the parent company, they demonstrate that the former is outperforming the latter—dramatically in some instances.
This is a fascinating pivot. It is not the usual talking up of India’s potential. Instead, these professors are asking MNCs to walk the talk.
India vs The World
The metric these professors employed is the price to books ratio—it measures the market valuation of a company relative to its book value.
I interviewed Anup Srivastava, a finance professor at the University of Calgary and co-author of the paper, for the upcoming episode (this Thursday at 7 pm) of Capital Calculus on StratNews Global and asked him to unpack this metric in lay terms:
“Let's say you buy a car for $100. That is your book value.
The question is, what is the price that an investor would be willing to pay for this asset? An investor would be willing to pay a price for that car based on its cash flow potential—what kind of cash flows? What kind of profits will it produce from today, all the way into future?
So price for a company represents not the value of its assets at historical costs. But what is the present value of profits that you can get?”
Srivastava then went on to argue:
And the present value of profits is a function of three things.
How you utilise the assets to produce profits?
What rate will the profits grow?
And what is the cost of capital?
The HBR paper, cites several examples, to argue that in terms of the P/B ratio, investment into India is a slam-dunk. The graphic above makes clear that the India arm outperformed the parent substantially.
The authors take the example of Unilever to show how its India arm checks all the boxes:
Over the last five years, the Compounded Annual Growth Rate (CAGR) in revenues for Unilever India was 9.6%, which is four times faster than that of 2.2% of Unilever parent. Note that parent’s growth rate includes that of the Indian subsidiary, without which, its growth rate would be even lower.
Return on assets for the Indian subsidiary is 11% against 8% of the parent.
What is surprising is that the higher profit margin for the Indian subsidiary, of 17%, against 13% of the parent. It is surprising because Unilever’s products are priced cheaper in the India market, because of lower purchasing power of its target segment.
The good news is that for several MNCs India is emerging as the top destination as they begin to de-risk their investments in China.
According to IMA, the niche market research firm, in the last five years, MNCs have increased their on-ground presence in India, partly as a result of diversification away from China. This is based on a survey of 100 CEOs who primarily represent foreign B2B-focused firms and released earlier this year.
Betting on India
India’s attractiveness as an investment destination is amplified because of the inclement circumstances impacting most of the world. On top of it, China, the high performer for decades, has clearly peaked. In other words, the era of record double digit growth is history.
The geopolitical reset, which has triggered the initiation of de-coupling between the Western block of nations and China, has only accelerated this process.
Yes, India is growing only in single digits. But, remember, it is now a $3.5 trillion economy, so even single-digit growth is substantive. Second, as Srivastava pointed out, the power of compounding a steady 6-7% growth can be dramatic. Exactly, why it will scale Mount $5 trillion very soon—remember it recorded $1 trillion in 2007.
Third, the sheer size of its population (1.4 billion) provides it with immense heft. So when it pares poverty—it is lifting population, the size of countries and continents. The proportionate growth in the middle class, thanks to the alleviation of poverty, once again, translates into incredible numbers—and this is nothing but emerging consumer demand.
India’s Attractive Middle
The biggest attraction to every MNC is the sheer size of the Indian consumer economy, especially its potential. The size of its middle class presently estimated at 432 million is projected to grow to a staggering 1 billion by 2047.
Over the last decade and more India has managed to de-risk its economy to a considerable degree.
Besides political stability—which has ensured policy stability and sustained economic reforms—it has demonstrated unprecedented resilience to bounce back from the unprecedented back-to-back setbacks posed by the once in a century pandemic, which had dodgy origins in Wuhan, China, the Russia-Ukraine conflict and the rapid tightening of the interest rates by the US Federal Reserve—triggering flight of capital from emerging markets and causing sharp depreciation in most international currencies, including the Indian rupee.
India’s ability to grow infrastructure, particularly rural roads and highways, at a stunning pace in the last nine years has only added to the belief that India is crossing a tipping point.
The sobering part though is that India is growing at different speeds. As the graphic above shows, the bulk of India is still stuck at a per capita income of $1,500. This could in part explain the caution with which both domestic and foreign companies are approaching their investment plans.
However, the flip side is that once (not if) the country starts firing on all cylinders, economic growth will take off. This is the potential that the rest of the world sees in India.
The HBR paper is arguing that if MNCs have to partake of these rich offerings then they need to act now, think local.
Recommended Viewing
Sharing the latest post of Capital Calculus on StratNewsGlobal.
It is a follow-up to the newsletter from the week earlier detailing India's incredible effort in lifting 415 million people out of poverty in 16 years ended 2021. I had argued that India's public policy is poised for a pivot: From handing out free fish, it is shifting to a strategy of teaching people how to fish.
Several readers had queries regarding the methodology employed with respect to the Multidimensional Poverty Index—which captured this massive reduction in poverty—put out by NITI Aayog Official.
How did it differ from the money-metric poverty measure? How does MPI stack-up against global metrics to measure poverty and so on.
To answer this and many other queries I interviewed Himanshu, assistant professor at Jawaharlal University in Delhi. A development economist, he is one of India's foremost experts on poverty.
Do watch and share your thoughts.
Till we meet again next week, stay safe.
Dear Anil,
Excellent as always!! Fully agree with you.As a developing country, India provides a very stable and sustainable environment to the MNCs. We have highly skilled engineers who understand the technical aspects of production, educated English speaking youth who provide customer care services and a huge middle class as the customers.
The policy reforms, government investment in infrastructure, cheap and skilled labour force are all responsible for India being an attractive destination for MNCs.One more factor i would like to add.
Our geographical location also is an advantage as we are close to markets of South East Asia, middle East and Europe.
Well written !
Covered almost all the accelerators yet succinctly !