The Demographic Dividend in India

And how you can profit from it.

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We’re hearing the term ‘Demographic Dividend’ bandied about quite a bit, when describing India. What does it mean, and what are the implications?

What’s happening here?

In the last 10 years India has added 181 million people to its population. The population of India, at 1,201 billion, is almost equal to the combined population of the US, Indonesia, Brazil, Pakistan, Bangladesh and Japan put together (1214.3 million).

A news report – India will account for the highest working age population in the next 10 years, the International Labor Organization (ILO) has said in its report. And … between 2010 and 2020, the working age population between 15 and 64 years in a group of countries will increase by 212 million and “over 64 per cent of the increase will occur in only one country – India.”

India is going to experience this Demographic Dividend (DD) over the next few years. This has a few different forms and implications.

  • A large number of people will enter the working population age, providing labor availability across skill sets – unskilled to highly skilled industries and jobs
  • There will be fewer kids per family. This means families will upgrade lifestyles, providing better food, education and medicine to the fewer family members. Also, more women will enter the workforce in this period.
  • In the working age of 20-60, people save more, and the economy has more resources freed up to invest in productive loans, projects, infrastructure and industrial asset creating.

How do you as an investor gain from this?

The Demographic Dividend in India is both a risk and an opportunity. As an investor, your best way to play this trend is to look for the winners on the economic industrial landscape that will gain from this.

Here is a group of firms – some winners, some not.

Sector/ Stock Likely Trends and Outlook
Banks Larger Banks are plays on the overall economy. Reserve Bank of India, the regulatory authority, expects average industry growth rate to be 20% during FY11.The banks sector will gain tremendously from the DD.
  • HDFC BANK
This fast growing bank combines rapid credit growth with high asset quality, hurtling ahead with 30% year on year growth on key parameters. More people with jobs and salaries and growing businesses means continued growth for HDFC Bank.
  • ICICI BANK
This bank has emerged from a two-year cleansing up of its balance sheet, and has vowed high growth balanced with better asset quality. It already has the widest reach across India in terms of Bank branches. Looks certain to gain from DD.
  • Yes Bank
Yes Bank is an aggressive high potential new generation bank. The recent fall in prices by 28% makes this an attractive entry point for long-term investment. See article – Note on Yes Bank
InfoTech/ IT software Indian software services firms started off looking for business all over the world, riding on technology staff shortages and cost arbitrages. The newer trend is to move up the value chain and strengthen sales & marketing in India, to ride on a maturing domestic industrial and services base.
  • INFOSYS Technologies
This large, well-managed Indian software services firm will gain from DD in the form of controlling costs of skilled software resources. INFY reaches out far and wide across India, hiring top talent. They also come closer by setting up in smaller towns, offering better working conditions, while servicing global customers.
  • WIPRO
Wipro reaches out to customers offering the full suite of software services, BPO and engineering solutions. Expected to gain from DD in terms of controlling resource costs and domestic business growth.
  • (iGate) PATNI COMPUTERS
This firm has been among the larger players in Indian software services, but has not seen the scaling up associated with the other top players. Nor been able to grow fast in new locations in India. But the acquisition by iGate should see a reversal, and improve the long-term prospects. But in the next 1-2 quarters, there will be higher costs of integration and attrition, before the dust settles.
  • MAHINDRA SATYAM
With a corporate restructuring and change of ownership behind it, this firm will hope to resurrect its battered reputation over the next few years. The wheels of justice grind slowly in India, so there’s still uncertainty in the air.
Others
  • TATA MOTORS
This India based automobile major has extended its business from trucks and commercial vehicles a decade ago to passenger cars and SUVs, as well as acquired the marquee brands of Jaguar Land Rover. This acquisition looked expensive 2 years ago, but displayed a stunning turnaround last year.The innovative ‘Tata Nano’ project has stabilized and will gain from DD, offering an affordable safe transportation to middle class Indians. Export plans look feasible and profitable.A slew of new product launches in the commercial vehicles in India helps Tata Motors maintain an astonishing 65% market share in the category. DD drives increases in logistics investments, and TTM is the leader here.Global plans, good technologies and the Indian manufacturing base can make TTM an understated global leader of the future.
  • DR REDDY
DD for the Pharmaceuticals sector is very positive as a lot more people spend a lot more on healthcare & medicines. For RDY, rapid growth in domestic business shows this firm is on top of DD trends. RDY should also gain from M&As in a very fragmented domestic industry.Growth from exports also shows the firm is gaining from Indian industry advantages – like lower cost of manufacture, as well as the market opportunity from a number of blockbuster drugs in developed markets going off patent.Recent acquisitions are aimed at growing the global generics business.
  • Petronet LNG
Petronet LNG is a gem of a stock that has given equity investors safe and high returns for the last 7 years.See link – Note on Petronet LNG
  • Bharti Airtel
Bharti is the top telecom company in India by revenues and market share. It has weathered the storm of hyper competition of 2008-10 like a leader, maintaining prices, and signaling the reversal in 2011. It’s a cost and efficiency leader, also pushing into new businesses like DTH, Telemedia (broadband, IPTV and fixed line) and Enterprise (end to end telecom services). With it’s acquisition of Zain, it has now got access to the growth engine of the next decade – Africa.  See link – Note on Bharti Airtel

Some of the above firms will certainly continue to win in the next decade.

Happy investing!

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