How to Capture Value When It 'Migrates'

Jan 9, 2017

In this issue:
» Are India's GDP estimates Meaningless?
» Demonetisation Hits MSMEs Hard
» ...and more!
Kunal Thanvi, Research analyst

Let us go back to the 90s...

June 20, 1991 - India on the verge of bankruptcy.

June 21, 1991 - PV Narashima Rao sworn in as prime minister.

July 24, 1991 - Finance Minister Manmohan Singh presents a historic budget...

It's historic for all the right reasons. For it began the liberalisation of the Indian economy. It also announced tax incentives for the export of services...

Now let's go back to the 70s...

In 1973, the first software export zone of India was set up in Mumbai.

The first few years weren't promising. Only a handful of people knew about it. Hardly anybody thought Indian IT would become 'a thing'.

Meanwhile, companies in developed countries were facing high domestic labour costs. Some started to consider outsourcing.

The historic budget of 1991 was a landmark event for Indian IT. It ushered in structural changes, and India was prepared to leverage its large English-speaking talent pool. The rest, as they say, is history.

The labour arbitrage improved profits of companies in developed countries and created altogether new opportunities in India.

It is said to be one of the most powerful examples of value migration. The value migrated from developed countries...and India captured it.

How we define Value Migration?

Value migration: Value Migration is defined as a flow of economic and shareholder value away from obsolete business models to new, more effective designs that are better able to satisfy customers' most important priorities.


There are numerous examples of structural changes resulting into value migration.

Royal Enfield migrated the value of Indian the two-wheeler industry towards premium bikes.

The concept of shared mobility and electric autonomous cars is migrating value in the automobile industry.

Page Industries entered the Indian innerwear textile segment (which was dominated by unorganised and local players), changed the industry dynamics, and captured the migrated value.

These are interesting shifts. The value migrates from one player to another, one sector to another.

  • Anticipating value migration arms you with impetus to change. It allows you to see threats to your business, to recognize the need to adjust to changing customer priorities. - Adrian J Slywotzky, Value Migration

Value migration creates opportunity. Proactive managers and businesses stay ahead and capture the migrated value.


I am a firm believer of this structural change and love to look out for industries going through these changes.

Often we find companies in the process of migrating values. This fundamental change in the business model of the company leads us to update our target price. In fact, the valuation multiple band gets revised.

One company we recommended to our HTR subscribers was on this hypothesis. The company has carved a structural advantage. It bought some industry disrupting practices. It is the only company in the world to make in house robots for manufacturing.

The stock reached its target price. However, given the structural advantage and growth opportunities, we recently revised its target price. It is still in our buy list.

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03:10 Chart of the Day

It is now common knowledge that demonetisation will negatively impact India's GDP growth. But by how much? This is the million-dollar question. No one seems to have a clear answer yet.

This is understandable. The post demonetisation economic data has only begun trickling in. It will be some time before a clear picture emerges. Until then however, the government seems to have decided to present a rosy picture.

Consensus estimates of GDP growth have reduced considerably in the last two months. The government on the other hand, believes that GDP growth for FY17 will be 7.1%, based on advance estimates. Mind you, this would still be below the 7.6% growth recorded in FY16. We believe, FY17 GDP growth could be significantly lower than 7.1%.

Here is what Dr Jim Walker, founder and chief economist of Asianomics Group, had to say about the government's estimates in his latest Asianomics Macro update.

  • The government's new growth forecasts are not only optimistic but downright bizarre. The market is concerned that even with the new (still optimistic) growth forecast of 7.1%, the government's budget deficit target of 3.5% of GDP will be overshot.

A while back, in an interview with Vivek Kaul and Rahul Goel, CEO of Equitymaster, Dr Jim Walker had shared his views on a variety of topics including the Indian and Chinese economies. It's worth revisiting.

Here's the thing... growth was slowing down anyway. The government has not factored in the negative impact of demonetisation in its advance estimates. It couldn't because it did not have the data to do so. So why put out a meaningless 7.1% growth number?

India's GDP Growth Could Decelerate Sharply

What's more, no one is willing to stick their neck out and make a FY18 GDP growth forecast. It would be foolhardy to do so without adequate data. The first such prediction will come from the government itself in the Union Budget next month. We are not sure if the government would have sufficient data on the impact of demonetisation to have an accurate GDP growth forecast in the budget. Watch this space.


Another important fallout of demonetisation is the loss of livelihoods of many people in the informal sector. As data comes in, it is evident that the impact has been severe. As per a study conducted by the largest manufacturers association in the country, the All India Manufacturers' Organisation (AIMO), micro, small and medium scale enterprises (MSMEs), have witnessed a 50% fall in revenue and have laid-off 35% of its employees.

It has projected a drop in employment of 60% and a revenue loss of 55% before March 2017. The AIMO represents over 3 lakh MSMEs across the country. Even if the final numbers are not as grave as the projections, the damage to India's informal sector has been immense.

The uncertainty of the GST roll-out has added to their woes. We believe, the government is not in a position to help the MSME sector with a special economic package in the budget. This is because most of the demonetised currency has returned to the banking system.

As reported in The Indian Express, the government is resigned to the prospect of only about Rs 750 billion in demonetised Rs 500 and Rs 1,000 notes not returning to the banking system. This is in stark contrast to the initial expectation of Rs 3,000 billion. The small fiscal benefit that the government will receive from demonetisation, could constrain it from announcing a bailout package for MSMEs in the budget next month.

This is very bad news for employment generation. But it is an indirect benefit to that part of the formal sector which will benefit from the reduced competition. We are talking about listed smallcap firms. Richa Aggarwal, who heads our Hidden Treasure service, wrote about this in an edition of the Research Digest a few weeks ago.

  • In our meetings with managements, one of the common challenges these companies tell us about is competition from the unorganised segment. The latter operate locally on a low scale and rely mainly on cash sales.

    With all the changes taking place around us, it is the informal segment and unlisted small businesses that will be worst hit. The cost of doing business for companies in the unorganised segment is likely to go up.

    And demonetisation is just the beginning.

    Accounting norms are likely to become clearer and stricter for all, and tax evasion will be more difficult. Meanwhile, India is expected to take further steps in the direction of a cashless economy.

    With GST close on the heels, the story of India, for listed small companies, has become better at the cost of unorganised segment.

Meanwhile, after opening the day on a flat note, the Indian share markets continued to hover around the dotted line. At the time of writing, BSE Sensex was trading down by 19 points and the NSE Nifty was trading down 4 points.

Sectoral indices are trading on a mixed note with stocks in the FMCG sector trading in the green. Stocks in the pharma and energy sectors were trading in the red. The BSE Mid Cap index was trading up by 0.3%, while the BSE Small Cap index was trading up by 0.5%.

04:55 Today's Investing Mantra

"Cash combined with courage in a time of crisis is priceless." - Warren Buffett

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1 Responses to "How to Capture Value When It 'Migrates'"


Jan 9, 2017

Please refrain from reporting such half information just because an article has to be written to fill up the spaces. Please Visit the rural areas to get a first hand information as to how the unorganised sectors are reorganising themselves to the changed market dynamics.The houses in the rural areas are opting for fixing up of small solar panels in the roof tops of thatched houses.People are opting for building toilets in the houses.All these are offering different employment Oppurtunities. The small time traders are changing over to sales through POS machines as it reduces the problem of counterfeit notes and issue related to handling of cash. The only drawback is the lack of adequate POS machines which the banks are addressing.It is the middlemen who had been pilferaging the money midway in the system who are hell bent upon not allowing the digital India to progress. It is sad to read repeatedly EQuity Master analysts writing such amateurish articles sitting in the confines of air conditionied offices of Nariman Point . Please dNext time let such articles be written with adequate proofs of which units have closed down with their names on account of demonetisation.

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