How to profit from India’s high-tech recovery

published 27 September 2021

Consumption patterns and corporate strategy in India have changed significantly in response to the pandemic, and keen-eyed investors have noticed. Widespread smartphone usage, combined with lockdowns, have accelerated the advent of e-commerce and digital banking. India’s young population are early digital adopters, and the country’s advanced tech ecosystem is first-class. Data is cheaper than anywhere, and per-capita usage is the highest globally; 99% of all online activity happens on smartphones.

Similarly, India’s next generation of vehicle buyers will not be wedded to the merits of combustion engines and will willingly “go electric”, since most will be first-timers. An open-minded society combined with a vast population of consumers (50% of which are under 25) suggests that vehicle manufacturers will see India, not Europe or China, as the real market of the future.

Another side-effect of the pandemic has been the urgency with which multinational corporations are diversifying supply-chain risk away from China owing to mounting political tensions with Western countries. This bodes well for India, a winner in sectors such as electrical equipment, speciality chemicals and pharmaceutical production. This is largely due to an English-speaking workforce, lower labour costs (now one third of China’s) and ongoing deregulation fostering enterprise.

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Affle (Mumbai: AFFLE) is a digital-advertising technology agency that operates only via smartphone. It stands to profit from an increase in post-Covid-19 digital spending. It adopts a targeted advertising approach, and is rewarded only when customers are converted to a service or product. It uses artificial-intelligence (AI) algorithms to create a virtuous circle whereby the more data is applied the more conversions occur, which in turn encourages more advertising through its platform. Affle is expected to grow sales by an annual 47% over the next three years. Profits should grow at a similar pace.

Equally affected by consumers’ changing habits is Sona Blw (Mumbai: SONACOMS), an automotive-component manufacturer; specialisms include starter motors. It is a direct beneficiary of electric-vehicle (EV) adoption globally, as its precision-engineered parts are critical to an EV’s high-torque requirements. As the sole supplier to Tesla’s China plant (as well as to other car manufacturers globally), Sona is a recent example of Indian companies exporting to China. Profits are set to grow handsomely as EV sales ramp up globally.

As well as being an outsourcing solution for the global branded manufacturers needing to reduce manufacturing costs, it also provides a supply-side alternative to China, and enables these companies to penetrate India’s huge consumer market. We expect Dixon to generate annual sales growth of more than 45% over the next three years while maintaining its industry-leading return on capital of over 30%.

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David Cornell has extensive experience in asset management, with a particular interest in emerging markets.

David lives in London these days, but previously lived in Mumbai, where he was the principal advisor at Ocean Dial Advisers Asset Management, an India-focused investment company, and manager of th eIndia Capital Growth Fund.

In 2013 David became the MD and CIO at Ocean Dial. He held this title for nine years, in which time he successfully increased the growth and profitability of the business.

David graduated from the University of Durham with a degree in English and history.

Before beginning his investment career, David served as a captain in the British Army.