Is Credit Driven Consumer Boom the Next Big Thing? Saurabh Mukherjea thinks so

I think urban consumption will work as a theme, because consumers are getting a fair deal. – Saurabh Mukherjea

Super-star investor Saurabh Mukherjea of Ambit Capital seems to think that Credit Drivien Consumer Boom is the Next Big Thing in India right now in 2016. In an interview on NDTV, he explains his thesis, as follows:

  1. No Capex: In the last 6 months or so, there has not been any capex or new industries, and hence lenders have nowehere to go but to SME and consumer.
  2. High Liquidty: Currently there is high liquidity in the markets, and Banks and NBFCs are able to borrow at low costs.
  3. Easy Financing: Currently a surge in easy financing options is one the rise – for example, low intrest unsecured loans, zero percent financing in retail stores, convenient EMI financing in online retail portals and so on.
  4. Unleveraged Balancesheets: In the SME space as well as among Indian consumers, there is not much borrowing, and hence there is huge potential.
  5. Crackdown on Black money: Given the huge crackdown on blackmoney, a lot of money which was earlier going into jewellery and real-estate, is now being diverted to aspirational consumption products.

These factors combined is leading to a consumption recovery and potential boom in the credit driven consumer retail space. (1)


He explains further: “I do not think there is a big lift from earnings because of the drag on the capex side, but what is clear is that a certain part of the economy — especially the consumer-centric part and the consumer credit part — is on a fairly strong wicket.” (5)

With regards to black money crackdown Saurabh Mukherjea very nicely explains how the crackdown on black-money will affect Indian economy in the short-run as well as in the long-term. He says:

“what Prime Minister Narendra Modi seems to be trying to do is mount a novel attack on these supply-side rigidities by seeking to: (1) shift India’s savings landscape away from gold and land, and towards the formal financial system by enacting new legislation later this month, which specifically cracks down on black money hidden overseas and by amending the Income Tax Act to make it harder to conduct black money transactions in real estate; (2) disrupt the Indian model of crony capitalism by visibly tightening law enforcement in the seedy borderland, where commerce and politics intersects in India; and (3) redefine India’s subsidy system through the direct benefits transfer mechanism while arresting the growth in subsidies (between FY05-14 subsidies compounded at 19 per cent per annum).” (4)

Saurabh believes that we are quite early on in this consumption driven recory and he does not realistically expect any recovery from the capex or industrial side. He also cautions that unless there is job-creation and income increases in the next 3 years, rising this boom could well turn into a retail credit crisis.

Earlier in Dec 2015, in another interview Saurabh Mukherjea had shortlisted ubran consumption recovery as a promising sector (other two being road engineering, procurement, construction (EPC) and manufacturing export sector). He says:

“The third theme which we are looking at quite carefully, it is a little fragile at the moment is this urban consumption recovery. As crop prices, as minimum support price (MSP) stay under pressure, as things like the Pay Commission click in, as fuel prices throttle off, interest rates fall a little bit the urban consumer will have a little bit more money in its pocket and he will spend a part of that and hence we are looking for plays around that. We have been buyers of Trent ; we have been buyers of Titan for a while. I know Titan is in the news for the wrong reasons today but I think well run retail players like Trent and Titan are worth looking at as urban consumption centric plays.” (2)

Saurabh Mukherjea in his concept note “The rise of the three speed economy” has classified Indian economy into three categories (3):

  1. The low speed economy (share in GDP ~40%): Agriculture, Construction, Public administration and Banks appear to be decelerating or growing at the slowest pace of all the sectors in the economy;
  2. The mid speed economy (share in GDP ~30%): Commercial Transport, Manufacturing, Residential Real Estate and Mining appear to be growing at a middling pace; and
  3. The high speed economy (share in GDP ~30%): Personal Transport, Hotels, Commercial Property and Business Services appear to be growing at a relatively rapid pace.

With regards to the high speed economy, he explains why there is a solid case for a consumption boom (3):

“At the other extreme is that segment of the Indian economy which is benefitting from Private Equity & Venture Capital inflows into the Indian tech sector plus large investments being made by firms such as Google, Amazon, Alibaba and Uber in India. If we combine these two streams, I reckon around $20-25bn of foreign capital has been pumped into the Indian economy over the past 12 months. Whilst this is obviously benefitting the e-commerce companies, the money they are spending is benefitting other sectors such as airlines (domestic passenger traffic growing at more than 20%per annum), hotels (utilisation levels are at six-year highs), commercial real estate (demand for office space has recovered over the past year), cars (number of cars sold is growing at 7%per annum) and urban consumption in general (retailers such as Trent and ShopperStop are reporting double digit same-store – sales growth).

It is hard to ascertain how sustainable this e-commerce driven boom. Whilst overseas PE/VC flows have already started tailing off, deep-pocketed companies like Amazon, Alibaba, Softbank and Google are obviously not going to give up on India in a hurry. Furthermore, it appears that the Indian banking system has pretty much stopped directing credit towards corporate India. That in turn means that our banking system is now almost entirely focused on seeking its growth by directing credit to the retail borrower.

These two factors –foreign equity capital inflows into the e-commerce sector and domestic credit flow –should keep the high speed economy centered around urban consumption in reasonably good shape in CY16.”

Saurabh Mukherjee is quite positive on this space and seems to think that there is a solid 2-3 years growth in the retail consumer space. He says: “Building materials, high-end cars, aspirational consumption seem to be on a fairly strong wicket. I think we got two to three years of steady rise in consumer spend especially on expensive items… We have a pretty high degree of certainty is on the aspirational consumption space, the shift from black to white space. As for the boom in smaller lenders, I think there is a high degree of visibility there and we are confident that the earnings will come through” (5)

You may also like


(1) Saurabh Mukherjea On How To Select Stocks [Aug 25, 2016]
(2) Watchword for mkt should be caution, not aggression: Ambit [Dec 17, 2015]
(3) The rise of the three speed economy
(4) Saurabh Mukherjea: Modi hits the ‘reset’ button [April 15, 2015]
(5) Three themes that can make big money for you in markets: Saurabh Mukherjea [Aug 24, 2016]

A Few Last Words

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Subhodeep Mukhopadhyay

I am a Management Consultant in the Education Sector. In my previous corporate career, I have worked in Banking, Private Equity and Software industry. I am an MBA in Finance/ Computer Engineer and enjoy doing equity research and financial analysis in my free time.

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