Technology, Venture Capital, Private Equity

Perspectives from an Indian VC

Why I’d go long on Tata Motors

Posted by Arun Uday on May 14, 2007

So, Reliance has set some kind of a record by selling a million cell phones in a week. The Indian telecom story never ceases to amaze one. If there is any phenomenon that has caught the fancy of the international business community (investors and companies alike) in recent times, it’s been the mobile wave in India. It is common knowledge that India is today the fastest growing mobile market in the world, adding more than 7 million customers a month! It has made companies around the world stand up and take notice of India’s potential as a market, so much so, that India is now touted as the next major consumption led growth economy (see reports by Morgan Stanley and McKinsey for instance).
It is clear that the single driving factor that has led to this mobile wave in India has been the ongoing steep declines in the prices of both cell phones and calling rates. It helped that India being a late adopter of technology, was able to procure telecom equipment at a fraction of the cost as compared to developed markets since by then equipment manufacturers had already monetized their IP from other early adopters. As a result, telecom operators in India were able to beat down prices and deploy networks at a price at which it would appeal to the price sensitive Indian consumer. It now doesn’t matter that Indian ARPU’s are the lowest in the world. The numbers more than make up for the low ARPUs, as reflected by the healthy margins that Indian telecos enjoy.
However, it is not necessary to always rely on technology alone to drive consumption here. The innovation in packaging of shampoo into sachets by Cavin Kare, which drove sales in early 90’s is well known.

The point I am making is this – when we talk of India as a huge market, it’s not really the metros or the upper end of economic pyramid that we are referring to. The huge numbers really lie at the “fat belly” of the pyramid – consisting of those that have annual incomes around the Rs 100,000 to Rs 200,000 p.a. The top apex could be appealing for some niche products like luxury goods but not for products of mass consumption. The “long tail” (base of the pyramid) really doesn’t have the buying power at this point in time to attract companies to go after. It is when goods get priced at a price point within the reach of the “fat belly”, that waves of consumption get unleashed.
This is also the reason I think the one lakh car from Tata has the potential to be a wave a-la the mobile or FMCG waves in the past. It’s price is at striking reach of the current two wheeler users in India, who could graduate to the four wheeler category in gargantuan numbers to make the economics seem very attractive. On a side note, I don’t trade in stocks. But, by the foregoing analysis, I’d be tempted to buy this one. As of today, Tata Motors trades at 721 and has a market capitalization of Rs 27,500 crores. Lets revisit a couple of years after the 1 lakh car hits the market and see how this one pans out.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: