Market Share & Entrepreneur-driven businesses
India is a land of entrepreneurs, and entrepreneur-run businesses form a large part of any business vertical in India. However, there are verticals where their presence is weak, for example mining, which is almost completely under government control, high-tech engineering and FMCG, which are dominated by MNCs.
Since entrepreneur-run businesses are omnipresent, any analysis that looks at broad averages will not throw up the story of their successes. Broad averages can be compared with the performance of an entrepreneur-led economy with that of an economy run by professionals or PSUs. The growth rates achieved by economies, which are run by professionals, is higher than economies run by PSUs. The fact that entrepreneurs are more successful in driving businesses is established and even in professionally run businesses, the leadership is encouraged to think like entrepreneurs by measures such as ESOP plans and profit-linked commissions.
In India, let us compare the performance of entrepreneur-run businesses with that of others in sectors like banking, pharmaceuticals and FMCG. In banking, where there are a lot of MNCs and PSUs, private sector banks have increased market share. Some of the new private sector banks are now the most valuable banks in the country. Valuations of banks like Kotak, IndusInd and Yes bank are some of the highest that the industry has seen in India; and in some cases, globally.
In pharmaceuticals, some of the most valuable and fastest growing businesses are promoter driven, and these are some of the most valuable businesses in the country. MNCs now have a small part of the market and PSUs have been almost eliminated. In industries like metals, which were earlier dominated by PSUs, private sector now accounts for a larger part of the capacity. In areas like construction and infrastructure, they dominate. However, here, while a large part of the industry is promoter driven, bad asset allocation decisions have brought to the fore a big weakness in such businesses, that is, lack of proper controls and lack of focus on financials in the quest of growth.
Overall, while promoter-driven businesses have generated higher sales and operating profit growth than any other ownership class, they have not been as focussed on capital efficiency as MNCs. However, for similar industries, promoter-driven firms have done well. Capital efficiency of businesses like Dabur, Godrej and Marico, which are promoter driven, is high and compare well with MNC businesses. Similarly in autos, promoter-driven businesses of Hero group and Bajaj have high capital efficiencies that compare very well with any other ownership classes. Markets have rewarded these businesses well and their market share in overall market capitalisation in India has been expanding for a long period of time.
Government’s thrust on digitisation and focus on establishing institutes imparting technical education coupled with two big initiatives – Skill India and Make in India, will go a long way in creating young entrepreneurs in the country. This will help reinforce the Indian growth story and herald a new entrepreneurial India, which will give birth to new business models. New ideas emerging, the focus will entirely be on fomenting entrepreneur skills. Indian entrepreneur story in a young and vibrant economy is thus here to stay for the next foreseeable decades.
This gives a big solace for the investor fraternity, which will now enjoy a far wider and larger portfolio of home-grown entrepreneur-driven companies to invest in the times to come. The sectors, which see natural fit and alignment, will be businesses: auto and ancillaries, life sciences and pharmaceuticals, retail, FMCG, financials, IT and cement.
To reinforce this point, our Indian Entrepreneur Portfolio (IEP) an equal weight portfolio of 20 such entrepreneur-driven names has delivered one of the most consistent performances seen in India. The portfolio is amongst the fastest growing portfolio in the country and has an unparalleled track record of consistency and performance as shown in the chart below. To summarise, entrepreneur-driven companies has performed better vis-a-vis PSU and MNCs.
Financial performance of these set of companies has been significantly better than market averages. The chart aside captures the performance over past two quarters and brings out the fact that the growth achieved by these businesses is sustainably higher.
Author: Prateek Agrawal is the Business Head & CIO at ASK Investment Managers Pvt Ltd.
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