Weekend Reads from India: Will the Start-Ups Deliver?

Welcome to the inaugural Weekend Reads from India.

Every few weeks, I’ll endeavor to bring you a mix of the most important stories affecting local markets, the national discourse, and global sentiment about investing in India. I’ll also share my perspective on what’s important for global investors with exposure to the Indian market or those considering investing there. And I’ll be sure to fill you in on non-India investment-related news as well.

If you are already an India watcher, you’ll know that expectations have been high ever since Prime Minister Narendra Modi took office in May 2014. But when you are sitting thousands of miles away, it’s not always easy to decipher what is happening on the ground and whether it affects your portfolio. And India, as you well know, is a densely populated land of 1.3 billion with an intricate network of cultures, identities, institutions, and aspirations. I’ll try my best to disentangle the web and offer some fresh insights.

So what has been on my mind lately? Indian start-ups.

Not a day passes by without some discussion about them. Many popular daily newspapers in India run full front-page ads on some “limited period” start-up sale. Sometimes it is difficult to even find where the real front page of the actual news begins. From “cradle to grave,” there is always a special, ready-to-serve offer somewhere. And then there is the “cash-on-delivery” payments that start-ups allow. The priest, the policeman, and the porter — broad and diverse segments of Indian society, with little or no access to credit — are increasingly using the services that start-ups offer. Newspaper columnists try to remind us of the 1990s tech bubble. Experts also point out ballooning start-up valuations and the routine recurrence of venture capital forums at five-star hotels. But who is listening? Consumers aren’t investing, neither are most of India’s existing institutional businesses.

It is the venture capitalists who are fueling the binge. For the first nine months of the year, total venture investment in India was $7.6 billion, which is significantly higher than the $4.6 billion of net cash equity flow into India over the last 12 months. China has been getting a bigger piece of the total venture capital inflow. It is interesting to note that some Chinese investors, like the taxi-hailing service Didi Kuaidi, are now looking to “establish” stakes in Indian start-ups and play a dominant role in the country’s start-up space.

A large liquidity discount and changing growth expectations make start-up valuations unstable. For reference, the valuation for India’s biggest unicorn, or $1-billion-plus start-up, Flipkart, is now reportedly $15.2 billion, a 100% increase in just one year. This translates to about 1.5-times gross merchandise value (GMV) compared to Alibaba’s 1.8-times GMV ratio. It may be early to say which start-ups will endure and ultimately bring investor payoffs. But with sales pressure and price wars, for now the end consumer is coming out a clear winner. And the start-up space will be emulated: Disruptive ideas, cutting edge technology, and entrepreneurial vigor can force significant change, including on established blue chips — as Wal-Mart’s recent travails demonstrate.

India’s northern neighbor, China, a major engine of world growth for three decades, has been in the middle of a market recovery. As investors debate whether China’s latest GDP growth figures, the worst since 2009, is an indicator of more bad news to come or if the forecast for China is rife with green shoots, rising housing starts among them, there are others who perceive in the apparent slowdown a stage in the long, painful process of China’s evolution from middle-income economy to world economic leader. One other interesting data point to follow is China’s reported $1-trillion credit-asset pledged relending expansion program. While China’s central bank has said that the relending program is not a Chinese version of quantitative easing (QE), faltering earnings growth amid central bank policy support in general are among the developed world narratives that do not appear to be going away. What are the connections with the start-up money going around the globe and can dependence on monetary support become problematic ?

Here are some other interesting articles you may find illuminating. Happy reading!

Markets and Start-Ups

• “The Billion Dollar Startup Club”: Mapping the start-ups. (Wall Street Journal)
• Aswath Damodaran shares his thoughts on modeling start-ups and valuing ridesharing companies like Uber and Lyft. (Musings on Markets)
• Wal-Mart’s Amazon battle. (Motley Fool)
• Start-ups in India, now listed. (Economic Times)
• “Start-Up Ecosystem Is at a Very, Very Nascent Stage in India: Nikesh Arora” (Live Mint)

Investing

• Weaker earnings growth. (Wall Street Journal)
• The third biggest merger of all time. (Economist)
• The historically low borrowing rate and the debt binge. (Bloomberg)
• “Japanese Price Index Shows Inflation Surge amid Economic Gloom” (Financial Times)
• “The George Washington of Investing Wants You for the Revolution” (NPR)

Elections around the World

• The ruling center-right coalition loses ground in Portugal. (The Guardian)
• The Canadian elections mark a shift to the Liberals. (The New York Times)
• The Swiss elections results show a “slide to the right.” (The Telegraph)
• Data models suggest the Republicans will win the US presidential election in 2016. (Reuters)
• Elections in the state of Bihar represent an important battleground for India’s ruling Bharatiya Janata Party (BJP). How will a win affect markets? (Firstpost)

Management

• The Haier story: Zhang Ruimin discusses changing the company’s culture. (LiveMint)
• The Infosys leadership change presents some uneasy choices on succession. (Economic Times)
• “How to Prepare for the Right Business Heir” (LiveMint)
• “Business Lounge with Neeraj Aggarwal” (LiveMint)

On a Lighter Note

• Intolerance in India and returning awards. (Times of India)

The Prizes and Other Offbeat Readings

• The Man Booker Prize: A Brief History of Seven Killings. (The Guardian)
• The Nobel Prize in Economic Sciences: Angus Deaton on India. (LiveMint)
• The perspective of a civil servant on living with corruption: “Deconstructing Corruption in India” (LiveMint)
• A nice-to-know Wi-Fi lifeline map: “Where Are the World’s Wi-Fi Hotspots?” (World Economic Forum)
• “The Science behind Stealth Aircraft” (LiveMint)
• Navratri Festival: nine images from outer space courtesy of NASA. (DNA)
• “India’s Dancing Frogs, Walking Fish and Sneezing Monkeys” (Financial Times)

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©iStockphoto.com/sam_ding