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Transforming India: A new breed of tech companies

For this regular visitor, there is no contest: the explosive growth in mobile data use. From roadside stalls accepting digital payments to taxi drivers glued to their small screens while waiting in the shade, smartphones are everywhere.

The spur was the rollout of the country’s 4G cellular network in the mid-2010s. Reliance, then best known as an oil refining business, spotted the potential of connecting the masses and invested $40bn in building and launching its Jio network in 2016.

As a Reliance shareholder, Pacific Horizon backed the move. The network created millions of potential consumers. Almost overnight, it brought the internet to the masses, catalysing an unprecedented wave of Indian innovation that has given the country its current 54 ‘unicorns’ – start-ups with a valuation above $1bn.

That is more than any other country apart from the US and China.

And so the ‘old India’ became midwife to the ‘new’.

Industrial stalwarts such as Reliance, carmaker Tata Motors and mining giant Vedanta still present substantial growth opportunities. Reliance has moved into retail and media, and Tata is the leading player in the country’s nascent electric vehicle market. Nevertheless, it is the plethora of new generation technology companies that excites us most.

So much so that Pacific Horizon increased its holdings in Indian companies from 7%of the portfolio in July 2020 to 26% at the beginning of April 2022, creating the trust’s largest position in a single country.

With our internal tracking predicting that between $200bn and $300bn of tech-based private companies are likely to list on India’s stock markets in the next two or three years, we see a vast increase in opportunities. Of the many more unicorns we expect to emerge, the majority will come from the tech sector.

Recently, tax reforms have helped India’s tech sector to grow. Previously, prohibitively high interstate taxes meant companies rarely expanded beyond state lines. In 2017, the national Goods and Services Tax (GST) simplified the regime, allowing regional businesses to flourish into national players.

One big winner from GST has been logistics firm Delhivery.

It is the largest and best-organised private logistics company in the country, used by all the major ecommerce players. Logistics in India are incredibly inefficient. The country spends the equivalent of about 14% of its gross domestic product (GDP) on logistics, compared to around 7% in the US. We expect Delhivery’s efficiency and national reach to make it the dominant player in the coming decades.

Our investment in Zomato, which has grown from the country’s leading restaurant review website to the largest food delivery company in the country, has been richly rewarded. Since meeting founder Deepinder Goyal back in 2012, Zomato has attracted 15.3 million average monthly users by the end of December 2021, a market share of about 40% and backing from companies that include Alibaba and Uber.

Content is king for the short video website Dailyhunt, known as the ‘TikTok of India’.

And linguistic diversity is key to Dailyhunt’s success. Some 70% of Indians do not speak English, so Dailyhunt delivers content in 14 of India’s 22 official languages.

Technology also underpins Star Health Insurance’s business. India’s largest private health insurer is an incredibly well-run business that uses internet connectivity to distribute its health and travel insurance, along with online medical consultations, giving it about 30% of the market for individual health insurance. Scale and distribution of this sort present huge barriers for competitors. Given the low penetration of health insurance in the country, the company could grow for decades.

The growth of India’s middle class is crucial to our thinking.

About 70% of India’s population is under 40. India’s retail market is one of the fastest-growing in Asia and is tipped to go from about $800bn today to $1.2tn by 2026. Ecommerce penetration sits at only about 5 per cent of the population today. In a decade, it could reach half the population.

Not only is the retail market growing by 105 a year, but the online market could increase tenfold over the next decade. Those changes create big opportunities for tech businesses and their innovative founders. S

hould these expectations be realised, hundreds of millions of smartphone-fixated consumers will soon have a lot more content and services to keep them busy. The stage is set for the country’s entrepreneurs to complete the transition to the new India.

Roderick Snell, manager of Pacific Horizon Investment Trust

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