This was written by Bloomberg Intelligence equity strategists Gaurav Patankar and Michael Casper. It first appeared on the Bloomberg Terminal.
Unlike the prevailing pessimism, we see a combination of policy, incentives and coordination among India’s tech industry, regulators and government fueling a robust digital future that could be worth $375 billion. Digitization of consumption, de-conglomeration of traditional industries and fintech are the dominant themes as India emerges from Covid-19.
Tech, consumer discretionary will look like China
If India catches up with China’s digital market cap as a percentage of GDP, we see a $375 billion opportunity, and here’s how it could play out: De-conglomeration like Reliance; IPOs such as Happiest Minds and Route Mobile; and listed fintech. India’s tech sector has mostly been about IT service exports, and consumption has been mainly physical. Between Covid-19, tech nationalism, geo-strategic realignment and the opportunity to create digital value, we see a different script. So far, digital consumption platforms like Amazon.com and Flipkart have been foreign or in the private markets, something we expect to change.
In internet and social media, it’s mainly been tech multinationals such as Apple, Facebook, Google, Alibaba and Tencent, or private companies that have dominated; that will change as some have partnered locally.
Digital ecosystems will drive consumption 2.0
Given India’s population pyramid, mobile and broadband penetration and underdeveloped infrastructure, digital consumption is taking hold post-virus. Reliance Industries has already set the template, and with news about Tata coming in, we expect this trend of “ecosystem/platforms” to gather momentum. While listed new-world digital companies, such as Infoedge, may eventually gain scale, we see the overall investable universe expanding with IPOs of privately owned unicorns (Happiest Minds and Route Mobile will likely have followers). Established consumption proxies may also begin to defend turf by pivoting to digitization via ecosystem partnerships.
Fintech view will include legacy banks, unicorns
India’s legacy banks are saddled with high nonperforming assets and operating costs. With the biggest opportunities in rural areas and at the low end of the urban consumer pyramid, digitization will drive the destiny of financial intermediation. We see the emergence of a new breed of fintechs in the private ecosystem, yet there are very limited opportunities for public-market investors in payments, lending or wealth-tech.
Two trends should take hold: First, some large legacy players like Kotak Mahindra, ICICI, Bajaj Finance and HDFC could more tightly integrate fintech models or acquire new-age players; Second, a combination of new fintech platforms could emerge from among micro-cap or private companies, in conjunction with consumer-focused digital platforms entering the market.
Big Tech to offer hardware, software expertise
Jio’s U.S. technology investors could provide hardware and software expertise to accelerate Reliance’s initiative of digitizing India. On the hardware side, its alliance with Google may lead to the development of affordable Android-based smartphones, while Qualcomm may help speed Jio’s 5G infrastructure rollout.
Software innovation could come from a joint Jio-Facebook project to develop a super-app akin to Tencent’s WeChat which may form the core of Jio’s ecosystem and open up business opportunities in payments, social media and online advertisement.