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https://www.bloombergquint.com/bq-blue-exclusive/india-incs-failure-to-disrupt-is-a-wealth-erosion-risk-says-nikhil-vora

Large listed consumer-focused businesses in India have matured and face the risk of wealth erosion as they have been found wanting in their ability to innovate and disrupt, according to investment fund manager Nikhil Vora.

Disruption is not happening in the listed space, but only among startups, Vora told BloombergQuint on the sidelines of Alpha Ideas 20-20. “You will have exceptions, but exceptions don’t make the rule.”

I think the failure in India is the inability of the leaders to take the risk of disrupting their own existing businesses and losing what they are at today, to the obvious risk of losing the entire business tomorrow – Nikhil Vora, CEO, Sixth Sense Venture

And it’s true for India’s entire business landscape, said Vora, founder and chief executive at Sixth Sense Venture, citing the example of banking and financial services. Disruption in the sector is not being led by State Bank of India and HDFC Bank Ltd., but by a Bajaj Finance Ltd. and a Paytm.

Similarly, he said, Hindustan Unilever Ltd. and ITC Ltd. are not leading disruption in consumer businesses, but startups have taken the lead. When such new ventures successfully disrupt niche areas, he said, their ability to scale up becomes more apparent.

Vora has invested in a host of ventures in early states, including B9 Beverages Pvt. Ltd., the maker of Bira beer; One97 Communications Pvt. Ltd., the parent of Paytm; online retailer Nykaa; and Gowardhan Diary, the producer of Go Cheese.

He is amazed hoteliers or automobile companies have not been effective for consumers on a 10-year-forward basis. Hoteliers are not able to create the relevant supply, and haven’t gone where the consumer is going, he said. Even if the disruption was caused by technology-enabled models, there is no reason why market leaders couldn’t do what Ola, Oyo and others have done, according to Vora. He hopes, but doesn’t believe, that the leaders of today will change and disrupt.

That’s also a reason why he isn’t worried by the ongoing slowdown in consumption, reflected in declining car sales to easing volumes of the makers of staples to shampoos.

Things are not all gloom and doom if looked at from the perspective of disruptors, according to Vora. Numbers will appear lagging for soaps and shampoos, beverages, oral care and cigarettes, but those are not the categories where growth is happening, he said. Those are the categories that have saturated, and incremental growth is always going to be price-driven, not volume-led, he said.
People are consuming products in a very different fashion than traditionally, Vora said. “We need to look at consumer companies’ volumes through inclusion of different categories, and not the traditional ones.”

Brand loyalty is at an all-time low but brand awareness is at an all-time high, said Vora, reiterating that how large listed companies aren’t disrupting existing brands to create relevant ones for tomorrow.

He cited Titan Company Ltd. as an example. The company is evolving, but Titan as a watch brand it will struggle, unless it evolves into categories and sub-brands which the customer of tomorrow will be open to adapt, he said. “Companies need to start mushrooming newer brands, as the days of lesser and bigger brands may be behind us.”

“HUL thirteen years ago started to talk about the superbrand strategy, and contracted the brand offerings from 110 brands to 30 brands. Maybe, the time is right to say that 30 brands is not good for India. Consumers have a choice—consumers want a choice,” he said.

Companies can’t force-feed the consumer anymore, according to Vora, as they will not be able to push brands through the distribution channel. They will have to give what the consumer wants, leading to evolution of brands, he said.

If I were Sanjeev Mehta (chairman and managing director of HUL), I would be worried—that suddenly half a million customers who were buying offline, who were buying in traditional stores, where Lever’s (HUL’s) strength is, have moved online. The customer has moved, companies haven’t.

And there lies is advice for investors. Given the changing dynamics, he expects time correction, not price correction, for a bunch of companies in India. ITC Ltd. has gone through a period of price correction over the last 10 years, Vora said, adding that he expects that for a lot of other consumer businesses. “One can see a prolonged period of time correction in them.”

Here’s the full transcript of the conversation:

You mentioned that the listed space is either dying or will be dead soon, those companies will probably not create value. That’s strange coming from someone who has been in listed market throughout his life.

That’s pretty ironic, I keep thinking about this. I have spent almost 90% of my working life in listed market, was 25 years in listed market and yet when I look at the market, I have looked at it for some time now. I feel that India is at the zone where listed businesses are pretty much businesses which are mature and lived their life cycle. The ability to innovate and disrupt existing businesses is found to be wanting. I don’t see them playing the disruptor role, which is so critical in a market like India, where disruption is seen as an apt thing to do. I keep reflecting this, if I look at Fortune 500 and I have talked about this often. I see 90 percent of them die or become irrelevant over a period of time. I see listed market in India pretty much symbolic of Fortune 500 companies. They die or become irrelevant over a decade in cycle. The market behavior that one has seen over the last three to four years, while it pains all of us, our investors also, but it doesn’t really surprise me so much. This is something which was just waiting to happen. It happened faster then what one should have envisaged, but I don’t see that changing drastically. I am not saying as market momentum and stuff, but I think businesses slowly will erode unless and until they change and disrupt. And I don’t see the ability to disrupt existing leadership to be of a very high order or its in a very few spaces and I see that happening at a galloping space in private companies, private entrepreneurs, first generation entrepreneurs who are really taking this opportunity to disrupt market leaders. That’s the reason why Sixth Sense was formed. We thought we will invest in disruptors in consumer space. So, you know what I said in the Alpha 20 Ideas is pretty much what I believe in. Existing players, existing listed companies even if they are leaders, their ability to maintain leadership and sustain value that leadership is going to be extremely challenging. You will have exceptions, but I believe exceptions don’t make the rule.

It may well be that the current set of examples that you are seeing in listed space are not doing that because being listed is not a pre-requisite to not be disruptive. At some point of time over next 2-4 years even large listed companies could probably throw out a niche or two could be disruptive and change the model?

Yes, I agree. Like I said exceptions will be there. But when I look at broader businesses in our country right now, look at banking. You have a dominant leader in State Bank of India or HDFC Bank, but the disruption in financial services is not being led by an SBI and HDFC. It is being led by players outside that context. It’s being led by a new age consumer finance company let’s say Bajaj, which has evolved in last 7-8 years, or Paytm in some form or lot of other Fintech companies as we look at it. Disruption in financial services, which should ideally have been led by existing leaders is not being done by them.

Disruption in consumer businesses, which is close to my heart is not being led by Levers of the world or ITCs of the world and the Colgate of the world, is being led by new age businesses who are doing it in niche, in spaces which they are very comfortable doing, but the more they get comfortable in particular niche, the ability to do scale becomes more apparent. So, a Lever is not disrupting the space or ITC is not doing it. You see newer players, a Veeba is doing it in some form. You start to see it in Bira for instance, I am being biased because we own stakes in these companies. Bira is doing it in alcoholic liquor space and Parag is doing it in milk and so on. These are all relatively new age businesses which have evolved, and you will see lot many develop.

My fear and this true in a lot of it. Look at print, which Is very close to you guys, I have looked at that space not a single print player and we are talking about large existing players like the Bennett Group, Times. Look at HT for example, Jagran, so the top 3-4 players and not a single player and I am being critical of them. Not a single player has innovated and disrupted how print should be in India for the next 10 years, how Indian consumers will consume print over next 10 years. They are not going to consume print by reading a newspaper any more or that is becoming slightly irrelevant over a period of time. You have seen players evolve in that category. So, Inshorts has evolved whereas the leaders have not really done the development. Look at Auto, very interesting example. In world where top 3 Auto companies actually lose money, the GMs, the Fords and the Chryslers of the world actually lose money. You have it in India where the largest players the Tatas, Mahindra, Maruti for instance have done practically zero innovation or zero disruption in the category. Auto is a space which is getting disrupted almost completely with the advent of the Olas and the Ubers of the world. Ironically, I remember, Mr. Mahindra at some stage talking about the fact that they will have consumption issues because the sharing capability of Ola and Uber will increase and thereby people will not have cell phone cars. I fail to understand why a forward looking corporate like Mahindras could have not created an Ola in India.

But none of the hotel chains thought of creating Airbnb, aren’t these essentially tech companies which are coming out and consumer tech companies which have managed to do this. Your complaint is legitimate that the original product owners could have also thought about being consumer tech but have not thought of doing so.

Precisely my point. Hotels, beautiful example of a business like the Taj and Oberoi and all other chains that we look at. They have been static players, they have been brilliant at the product, so nothing taking out from all the guys who have done whatever they have done. But the fact is they have been ineffective for the consumer 10 years forward. What have they done to ensure that the costumer base that they have established in Taj or Oberoi moves along with them. They can move along with them only when Taj sets up another Taj. They have lost the costumers because in India you have a situation where there is so much of balance sheet that has been invested in our country. All of us somewhere have invested balance sheet capital, created asset. An Oyo proved that they could create a model, I am not talking about how Oyo succeeded financially. They have done it in terms of capital raise and so on. I think they have shown the way of what one could do with the balance sheet capital investing in our country. I fail to understand why a Taj or look close to one of our portfolio companies Saffronstays, they have created this premium holiday home play which is about literally all the assets created by us who bought the next holiday home and so on. There is no reason why Taj should not be doing that, there is no reason why Mahindra Holidays should not be doing that. They have members, they have demand, they failed to create supply which is the worst thing that can happen in the business. Businesses struggles when they don’t have demand, here, ironically, we have all leaders who are struggling because they could not cope with the relevant supply that the consumer was wanting. They have demand. A banking channel has demand that’s why you are talking about unbanked bank, micro finance and tertiary banking and so on. Automobile have it, Ola and Uber are proving that. they have not gone to where the consumers are going.

Even if it means pure tech or significantly tech enabled, there is no reason why leaders could not do that, and you had startups doing that role. I think the failure in India as of now is about leaders’ inability to take the risk of disrupting their own existing businesses and the fear of disrupting their own business and thereby losing where they are at today, to the obvious risk of actually losing the entire business tomorrow. I think that I very ominous to them and I frankly hope, but I don’t have too much belief while I hope of that, but I don’t have too much of belief that leaders have ability to change. It is very tough; it requires someone to take that ownership. Professionals very rarely will take that ownership, it must be the entrepreneurs, the promoters who must take that call and hope some of them do.

Lets draw the conversation to consumption, two things. When I look at the set of portfolio companies that you are invested in they are anything but traditional. When I look at the listed space the only pocket where valuations are still held out despite trends starting to come off is consumers. How do you see this dichotomy, or these things shape up?

India has never or very rarely let me say that has been a value market. India has been a growth market. All of us somewhere get trapped in believing that value is what we want to protect, and we are good at capturing the value. Our failure is when we don’t catch growth along with that value and to me Indian market is symbolic of that form. We think that because markets have collapsed the values are becoming very enticing. I think that is not really the case. It’s about saying whether the values are falling, the growth is still sustaining. We don’t have that happening right now. If I look at consumers or frankly any business for that matter is that in the listed market also, while everything around us has possibly collapsed by 50 percent if not more over the last 3 years, we have invested in two listed companies in the same period. We have made 7 times and 10 times the money in two listed companies in the same period. Not saying we did something Earth shattering about it, but the fact is that there are pockets of businesses and sponsors which we think are playing the disruptions which the leaders are not able to do, and they can’t participate in that disruption. So, for instance we invested in contracting, that was a big thing because consumer contracting has become very large.

We believe that the leaders will find it a struggle to grow beyond where they are. They will not grow meaningfully. If they don’t grow meaningfully then they have to let go of what is tertiary to them because they have to grow and keep sustaining their brands and so on. They will protect their 60 percent ROI business which is brands and let go of manufacturing which is 16-17 percent of ROI business. That’s the great opportunity we thought will happen. We have invested in company called Hindustan Foods which has now become possibly the largest consumer contracting company in India in 3 years. We have invested in JHS, we sold that at 7 times, but we have invested in it which is largest oral care manufacturing company in India. They control 15 percent of oral care. I think it was about opportunity in businesses. Whereas the largest players in the businesses will get disrupted or are not changing too much for their own good, we thought there is still an opportunity. So, I think what investors, all of us need to really look at which is while there can mayhem in listed space, there is opportunity which is getting created because of mayhem. And in very point in time, someone’s loss is someone’s gain. I think there is opportunity in crises, there is crises in listed market, but there is opportunity in listed may be rare, may be few. But there is significant opportunity in guys who are disrupting the listed guys which are which is in private.

So, you are saying that companies should fan out all the alternative brands and invest in new age category because that’s where the Indian consumer space is growing, and we are not capturing that?

It brings back to me may be a decade back or 12-13 year back. If you remember when the HULs started talking about the master brand, super brand strategy getting only 30 brands in the portfolio instead of 110 that they had and they literally course corrected in three years to get that done. May be the time is right to actually say that 30 is not good for India. What makes any consumer company think that 30 is great for India? India is a 130 crore pop market, it’s a market where the consumers are experimenting, where consumer have a choice and want a choice. Disruption is happening in distribution, so it’s no longer the funnel which is becoming critical. Its no longer the HUL stranglehold, I am giving it as an example. HUL, ITC or Colgate, I think they control the distribution and thereby they thought that the product that they have put through the distribution funnel was all that the consumer wanted. That’s not true. The distribution was only an enabler, they didn’t push the brand, they didn’t put product categories, they did not innovate. Because it’s tough to innovate when you do well for yourself, you can’t disrupt yourself. I think that is changing as distribution channels change you will see lot more evolution of brands happens and thereby the costumer choice, the consumer choice will get met now. Look at what Nykaa and Purple has done in the beauty space. Unheard of. They were not brands, they were selling HUL brands, P&G brands, they were selling L’Oréal, they were selling everything around the brands created by all these guys. Today they are the platform, they are the brand. So, Nykaa is the brand which sells let’s say Rs 2,000 crore of produce. A Purple is a brand which sells Rs 500 crore of produce. They are the brand and they will get the value because they are the platform and platform has become brand. I can’t believe why a Lakme could not have done the same, or why L’Oréal should not have done it. You are killing your own brand by still targeting traditional ways of consumption and distribution because the consumer is no longer traditional. He has changed, and I think brands have not changed.

What do you think is happening to the Indian consumption space?

I think it’s very interesting. You know that I have done consumers all my life. I am not debating but I want to challenge the point which is that all the large consumer companies in India, and all of us look at that as data point and think that they their growth has slowed down from let’s say around 8-9 percent volume growth to 4-5 percent and thereby they are degrowing. But what we are looking at growth. We are looking at growth of soaps, we are looking at growth of beverages, in oral care, we are looking at growth in cigarettes and stuff like that. That is not where growth is happening. Those are markets, those are categories which have saturated themselves. So, incremental growth is always going to be slightly price-driven rather than volume-driven in those categories. But the fact is that the consumer is changing. The consumer is now consuming product in a very different fashion to what they have done historically. So, if growth is happening in the category of dips and sauces, is HUL present in dips and sauces? No. Is Knorr a brand in dips and sauces? It’s not. Is Kissan a brand in dips and sauces? It’s not but the category is growing because Indian consumers taste buds have changed because of the Pizza Huts and McDonalds of the world. We all know what mint mayo is, what a Southwest tastes like. Ideally an HUL should be capturing that space, they have not. It has taken Veeba to take leadership in the space. Maybe HUL will wake up they will get into that space sometime at some stage, but they have lost that race somewhere. That happens in every category that one looks at. Look at Bira, closer home. We all think that beer has only two price points, strong beer and mild beer, literally there is nothing else. It’s not like alcoholic space where there are multiple price points and multiple categories. But Bira has disrupted category which is almost owned entirely by United Breweries. I am not saying that they have cracked it completely, but we think they are on the way to crack it. They cracked the brand, they cracked the product proposition of saying that I am new age, I am funky, I am something which is there for the next consumers, not for the consumer of today. If I drink Kingfisher, if I did, my kids are not going to drink Kingfisher. Not because Kingfisher as a brand is poor brand or the product is poor. Its just that they don’t want to be associated with a legacy brand. So, is the case with Titan. Titan thankfully is evolving as a company, but as a brand I would think Titan in watches will over a period of time will struggle. I can’t see how legacy brands will continue to effectively use legacy for the good of growing the brand franchise that they own today. I find that to be a struggle and that to me brings core thought which is about the fact that brand loyalty is at all-time low in India. Brand awareness is at an all-time high. A perfect recipe for disruption to happen in brands.

Do you believe that the revenue scalability of these smaller business is because these are still small business. They don’t have still pan India presence, they don’t have turnover might. Do you think in next 4-5 years these businesses will grow in terms of growth and their valuations will grow further and whether the valuation of their existing businesses will come down, do you see that happening?

I remember my last call on ITC, almost a decade back. I said ITC is a sell. Not because of anything else but consumer businesses tend to behave in a particular fashion. They only do time correction; they don’t do price correction. ITC is at the same price as it was ten years back, business has grown and stuff like that, but it is at same price. So, the value has not changed but the time correction of ten years has happened. So, fundamentally they have underperformed for 10 years. The same will happen in lot of consumer businesses. You will see underperformance or time correction happening for a long period of time. It doesn’t crack as much as a lot of other businesses do because these businesses don’t require capital. It is almost like a sellers’ market in some form. That is bit of a challenge. Having said that you are in the market to make money, you are in the market to generate returns, and I am generally being overcritical of this because I want to make a point, I may be dramatizing it a bit more. What the opportunity is, it’s about the what we’ve seen in the last ten years in India. So, you look at and I don’t have precise numbers, let’s say listed market unicorns were around 25 or something in India ten years back, private market unicorn was one at that time. Today private market unicorns are 30 and listed market are just the same number. So, values are getting created. Whether these are bubbles or are actual values that investors can tangibly monetize, it’s pretty much a question right now. Having said that, the fact is that the values are precursors for what the business model delivers. I think there is disruption happening, it is slightly silent right now, but it is happening. It will become a bit noisier as we move into it because the more entrepreneurs start to feel that they have cracked the business right, they know that they have got solution for a consumer problem. Vini Cosmetics, the one with Fogg deo, they have done it in 5 years. They have done at the same point when Axe was the leader. Axe sold the product saying that you spray Axe and there will be 10 girls chasing you. Fogg came in and they said girls don’t chase you, but I am not cheating you. I will give you more buck for the product that you buy. No gas. They have changed the industry. It took one level of disruption to change what the market would be. Now Vini possibly has the ability to live through a lot more product categories. They have become innovators in that categories, whether they succeed fail is again up for debate, but the fact is that what these smaller players are showing what has never happened in India for over 50 years. The only disruption in India was Nirma which was 25 years back. There was no disruption in India for 25 years and even leaders do not disrupt their own category. You will see lot many disruptors happening because each category is calling for disruption. Look at foods, HUL has almost zero presence in food, but you will see a lot many players challenging that status. Look at personal care, personal products you have seen Purple, Nykaa really challenge that status and consumers are moving there. If I was HUL, if I was Sanjeev, I would be worried that suddenly half a million customers who were buying offline, who were buying in traditional stores which is where HUL’s strength is, suddenly moved to online Purple and Nykaa. Customer have moved, companies have not. I think, somewhere the challenge of addressing the customer’s needs, wants and attributes is not getting as defined and refined as oppose to existing leaders of listed companies as they should have been. As investor I would be worried about, as a listed market investor I would be surely worried about it. It’s not like that companies don’t disrupt themselves. I think there will be some players who disrupt their own businesses or at least be aware of disruption and capture opportunities. Look at Info Edge for example, I think they have done beautiful job from what they are doing as of now. They had a milking cow in Naukri.com and they moved in to it, they moved into Policy Bazaar and other categories. Makes complete sense of what market was calling for. I think that is what you want leaders to behave as. You want leaders to evolve and change with the time which regretfully the existing players has not really done a great job.

How are you doing that in Sixth Sense? How are you choosing businesses?

What we are doing is what pretty much what I talked about. Looking at disruptors in some form and we are not really looking at people who are trying to create an innovative product in India and thereby the change the way India consumes. We are not looking at that. We are looking at the fact that India is a great market. India is a 2 percent marke. Two percent of consumer behavior needs to be changed to a different mode of consumption and that will create one of the largest markets in India. If 2 percent of large consumer business companies start to think that contracting is the way to go, that will create a huge opportunity for contacting companies. If 2 percent of market starts thinking that drinking a new age beer is a great product to go with, we’ll create largest beer brand in India with Bira. If 2 percent of India starts to think that dips and sauces to go with, Veeba by default will be the largest category player. We have looked at lot of those players have looked at. Two percent of India says that female hygiene is the category which needs to get lot more penetrated in rural and urban India. We will create a great category pool in Paree which is Soothe Healthcare and what we have invested in. We try to invest in pockets which we believe can become large by its own nature. Obviously given the fact that these are still nascent businesses or early stage of disruption businesses, some of them will really evolve and crack it. Some of them may possibly survive from where they are today to scale up ten times and maybe plateau. But that’s how markets are. We hope that the business we have built at Sixth sense will have longer life. We hope to monetize them. We have objectives for our investor, and we will do that. But I am very happy with the way we have construed ourselves to be. We have not faulted too much till now. Hopefully we don’t or maybe we do, but we just think we have higher probability of cracking it right because we think we are getting sponsors who understood where the consumer minds are going five years forward. And that to me is the only way a consumer company can really evolve or succeed over a period of time.