Megatrends and Leadership · 2019-11-27 · Megatrends decoded 6 Megatrends are structural shifts...

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Megatrends and Leadership 1 Delhi, 8 November 2019 Utpal Sheth

Transcript of Megatrends and Leadership · 2019-11-27 · Megatrends decoded 6 Megatrends are structural shifts...

Page 1: Megatrends and Leadership · 2019-11-27 · Megatrends decoded 6 Megatrends are structural shifts that are longer term in nature and have irreversible consequences for the world around

Megatrends and Leadership

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Delhi, 8 November 2019

Utpal Sheth

Page 2: Megatrends and Leadership · 2019-11-27 · Megatrends decoded 6 Megatrends are structural shifts that are longer term in nature and have irreversible consequences for the world around

Megatrends and Leadership: Outline

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❖ Learnings from History

❖ Megatrends decoded

❖ Leadership decoded

❖ Economic cycles amplify Leadership

❖ Valuing Megatrends and Leadership

❖ Portfolio management for Megatrends and Leadership

❖ Gorilla Investing

Page 3: Megatrends and Leadership · 2019-11-27 · Megatrends decoded 6 Megatrends are structural shifts that are longer term in nature and have irreversible consequences for the world around

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Learnings from History

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Page 4: Megatrends and Leadership · 2019-11-27 · Megatrends decoded 6 Megatrends are structural shifts that are longer term in nature and have irreversible consequences for the world around

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Learnings from History

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Page 5: Megatrends and Leadership · 2019-11-27 · Megatrends decoded 6 Megatrends are structural shifts that are longer term in nature and have irreversible consequences for the world around

Learnings from History

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Top 3 total as % of market Others as a % of total market

1. There are sectors that have consistently outperformed broader indices over long-term due to structural change (Megatrends)

2. There are other sectors that have consistently reverted to mean while oscillating around the mean over long-term due to cyclical changes, whether Global or Domestic

3. In most sectors, Top 3 Market Cap as % of Sector Market Cap is high on a sustained basis, and in fact keeps rising inexorably over long-term (Leadership)

4. Hence, on an incremental basis, Top 3 Market Cap as % of Sector Market Cap is even higher reflecting that Leaders create most value across sectors over many cycles

Page 6: Megatrends and Leadership · 2019-11-27 · Megatrends decoded 6 Megatrends are structural shifts that are longer term in nature and have irreversible consequences for the world around

Megatrends decoded

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❖ Megatrends are structural shifts that are longer term in nature and

have irreversible consequences for the world around us

❖ Megatrends have multiple dimensions, layers and outsized

implications that are difficult to fathom at the very beginning

❖ Megatrends require both a broader perspective and a narrower focus

❖ Megatrends reset the rules, throw up new opportunities and threats,

bring about new winners and losers

❖ Megatrends transcend geographies, generations and governments

❖ The awareness of Megatrends in investment processes offers real

insights

Megatrends over time:

• IT revolution

• Urbanization

• Demographic evolution

• Consumption boom

• Women in the workforce

• Financial deepening

• Digital transformation

• Unorganized to Organized

sector shift

• Culling of “Dwarfs”

Page 7: Megatrends and Leadership · 2019-11-27 · Megatrends decoded 6 Megatrends are structural shifts that are longer term in nature and have irreversible consequences for the world around

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Megatrends Case study: IT Sector

❖ Confluence driving Opportunity size and Longevity:

➢ Benign supply side conditions

▪ Large engineering skills base

▪ Large cost differentials

▪ Precipitous drop in cost of data transit and data storage

➢ Changing demand side stance

▪ Focus on core competence

▪ Start of outsourcing

▪ GE pioneering outsourcing to India

➢ Innovative business model

▪ Offshoring

▪ Global Delivery Model

▪ Offshore Dedicated Centres

▪ Master Services Agreements

▪ Infrastructure Management Services

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Internet Prices/MBPS (Left) Hard Drive Price/ TB (Right)

Network and Storage Cost – Source BackBlaze reports.

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Infosys TCS Wipro

HCL Accenture Capegmini

Avg Salary INR Lac– Source Company

Page 8: Megatrends and Leadership · 2019-11-27 · Megatrends decoded 6 Megatrends are structural shifts that are longer term in nature and have irreversible consequences for the world around

Megatrends Case study: IT Sector

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❖ Scalability and Granularity: Growth drivers and enablers; that also De-risked and aided Scale

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Scale up in Revenue (INR Bn)– Source Company

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Infosys TCS Wipro

Scale up in Nos of 100+ mn Clients– Source Company

Indian IT market share in global IT services spend rose from 2.2 % to 13.0% from FY04 to FY19

From modest count of #2 clients giving $100mn annual business, industry today boasts of a roster of 79 clients

Hospitality Hospitality

Media & Enter Media & Enter

Energy & Utility Energy & Utility Energy & Utility

Hi-Tech Hi-Tech Hi-Tech Hi-Tech

Health Care Health Care Health Care Health Care

Transportation Transportation Transportation Transportation

Retail & Dist Retail & Dist Retail & Dist Retail & Dist Retail & Dist

Telecom Telecom Telecom Telecom Telecom Telecom

Manufacture Manufacture Manufacture Manufacture Manufacture Manufacture

BFSI BFSI BFSI BFSI BFSI BFSI

FY05 FY07 FY09 FY11 FY12 FY13

Digital

Asset Leveraged Soln

Asset Leveraged Soln

Engineering & Industrial

Engineering & Industrial

Engineering & Industrial

Assurance Services

Assurance Services

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Biz Process Outsourcing

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Biz Process Outsourcing

Biz Process Outsourcing

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Infra services Infra services Infra services Infra services Infra services

Biz Intelligence

Biz Intelligence

Biz Intelligence

Biz Intelligence

Biz Intelligence Biz Intelligence

Enterprise Soln

Enterprise Soln

Enterprise Soln

Enterprise Soln

Enterprise Soln

Enterprise Soln

Enterprise Soln

Application Dev & Main

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Application Dev & Main

Application Dev & Main

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Application Dev & Main

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Scale up in # Industries served by Majority of Indian IT – Source TCS, Infosys, etc

Indian IT successfully broke into newer verticals and scaled them wellScale up in Line of Biz (LOB) of Majority of Indian IT – Source TCS, Infosys, etc

Client bucket & vertical aggregation coincided with expanding set of LOB

Page 9: Megatrends and Leadership · 2019-11-27 · Megatrends decoded 6 Megatrends are structural shifts that are longer term in nature and have irreversible consequences for the world around

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Megatrends Case study: IT Sector

❖ Displacement:1. IT Outsourcing / Global IT Spend %2. Offshoring / Outsourcing Spend %3. Share of Outsourcing4. Share of Offshoring

USD Bn FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Global IT Services Spend 761 782 848 881 922 955 865 894 931 982

% of Global GDP 1.20% 1.18% 1.24% 1.26% 1.29% 1.30% 1.14% 1.15% 1.16% 1.14%

IT Outsourcing Spend 247 251 288 296 271 284 295 306

Offshore Efforts

TCS 44% 51% 51% 51% 53% 53% 52%

Infosys 76% 77% 76% 75% 75% 69% 71% 71% 70% 71%

HCL 73% 72% 73% 73% 74% 75% 75% 75% 75% 75%

Wipro 76% 78% 77% 76% 77% 77% 77% 77% 77% 77%

% of Offshore Employees

IBM 25% 33%

Accenture 46% 57% 60% 63% 66% 67% 72% 74% 75% 75%

IT Budget as % of Revenue - 2016-17 EBIT

Consumer Biz and Retail 2.0% 4.0%

Biz & Professional Services 5.80% 11.5%

Education & Non Profit 5.80% 10.4%

Tech and Communication 3.70% 11.0%

Insurance 3.60% 11.5%

Health Care Services 3.50% 2.0%

Energy and Resources 2.50% 8.7%

Construction 1.50% 4.5%

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Bank ofAmerica

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Citibank USBank PNC BB&T KeyBank Regions

IT Spend ($Bn) %Asset

Source Deloitte 2016-17 Global Survey, NYU Stern Databases Bank Tech Spending –% of AUM – Source UBS Report

Page 10: Megatrends and Leadership · 2019-11-27 · Megatrends decoded 6 Megatrends are structural shifts that are longer term in nature and have irreversible consequences for the world around

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Megatrends Case study: IT Sector

❖ Resilience:

➢ Dot com bust

➢ Global Financial Crisis

❖ Adaptability:

➢ Rise of Mini Computing

➢ Client Server Era

➢ Breakout of Internet

➢ Proliferation of ERP

➢ SMAC/Digital

❖ Transformation:

➢ Intrinsically Project business

➢ Granularity (Verticals, Customers, LoB, Wallet shr)

➢ Longer term contract rollovers

➢ Business model: Annuity streams @ Scale

❖ Global competitiveness, Leadership

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Page 11: Megatrends and Leadership · 2019-11-27 · Megatrends decoded 6 Megatrends are structural shifts that are longer term in nature and have irreversible consequences for the world around

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❖ Resilient Value Creation➢ Consistently high RoCE

➢ Consistently superior growth rate

➢ Competitive intensity mitigated by:

➢ Size of Opportunity

➢ Quality of Leadership

➢ Scalability

➢ Moats

➢ Innovation

Megatrends Case study: IT Sector

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Page 12: Megatrends and Leadership · 2019-11-27 · Megatrends decoded 6 Megatrends are structural shifts that are longer term in nature and have irreversible consequences for the world around

Leadership decoded

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❖ Leadership attributes – Intangibles > Tangibles

❖ Culture – Customers, Team, Risk, Governance

❖ Strategy and Execution

❖ Profitability, Scalability, Durability

❖ Battle tested through multiple cycles

❖ Resilience and Adaptability

❖ Capital allocation and Capital structure

❖ Management depth and transition

Leadership icons:

❖ HDFC Bank

❖ Asian Paints

❖ Titan

❖ Bajaj Finance

❖ TCS

❖ Nestle India

❖ Page Industries

Page 13: Megatrends and Leadership · 2019-11-27 · Megatrends decoded 6 Megatrends are structural shifts that are longer term in nature and have irreversible consequences for the world around

Leadership decoded: Icons setting examples

Leadership Attributes: Quantitative

❖ Market share → Asian Paints

❖ Delta Market share → Bajaj Finance

❖ Least cost player → Shree Cement

❖ Share of Profit pool → Page Industries

❖ Share of Cashflows → Maruti Suzuki

❖ Leadership Durability → Nestle

❖ Leadership in new Segments → HDFC Bank

Leadership Attributes: Qualitative

❖ Culture → Titan

❖ Innovation → Nestle

❖ Execution → TCS

❖ Expanding TAM → Bajaj Finance

❖ Elongating CAP → D-Mart

❖ Embracing Disruption→ Info Edge

❖ Redefine competition→ HUL

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Page 14: Megatrends and Leadership · 2019-11-27 · Megatrends decoded 6 Megatrends are structural shifts that are longer term in nature and have irreversible consequences for the world around

Economic cycles amplify Leadership

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❖ Schumpeter’s “Creative Destruction”

through economic cycles, non-linear shift

❖ 4D framework for economic cycle drivers:

➢ Debt

➢ Disruption

➢ Displacement

➢ Dis-intermediation

❖ Cycle duration shrinking; challenging CAP

❖ Incumbents vs. Challengers

❖Men are separated from the Boys

❖ Treadmill speed and incline keeps rising

❖ Value paradigm evolves

❖ Value migration accelerates

❖ Inflexion points expand TAM for Adapters

Macro Perspective of Cycles Micro Perspective of Cycles

Page 15: Megatrends and Leadership · 2019-11-27 · Megatrends decoded 6 Megatrends are structural shifts that are longer term in nature and have irreversible consequences for the world around

Valuing Megatrends and Leadership

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❖ Imperative to value Intangibles

❖ Value reinforced and magnified thru economic cycles

❖ Intersection of Megatrends and Leadership is a multi-sigma event, valuation

metrics cannot reflect this “Outlier” event appropriately

❖ Terminal Value impact disproportionate, hence difficult to capture in

conventional Valuation frameworks

❖ Favourable Value migration overshadows conventional Valuation frameworks

❖ “We overestimate change in the short run, and underestimate change in the

long run” → Valuations reflect this reality

Page 16: Megatrends and Leadership · 2019-11-27 · Megatrends decoded 6 Megatrends are structural shifts that are longer term in nature and have irreversible consequences for the world around

Portfolio management for Megatrends and Leadership

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❖ Focus on 3-4 Megatrends where you have high conviction

❖ In each Megatrend, focus on 2-3 players with Leadership attributes

❖ From amongst the above shortlist, classify them:

➢ Clear Leaders

➢ Near Leaders

➢ Emerging Leaders

❖ Ballast component of the Portfolio to comprise Clear Leaders

❖ Aspirational component of the Portfolio to comprise Near Leaders

❖ High-risk component of the Portfolio to comprise Emerging Leaders

❖ High Concentration in Portfolio to reflect conviction in Megatrends and Leadership

Page 17: Megatrends and Leadership · 2019-11-27 · Megatrends decoded 6 Megatrends are structural shifts that are longer term in nature and have irreversible consequences for the world around

Gorilla Investing

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❖ Many Monkeys in a jungle, but

very few Gorillas – Rare

❖ Gorillas are outsized as compared

to Monkeys – Dominant

❖ Gorillas are not challenged by

Monkeys – Moats and Knights

❖ Gorillas have a lifespan double

that of Monkeys – Longevity

❖ Right Jungle (Megatrend) + Right

Animal (Leadership)

Page 18: Megatrends and Leadership · 2019-11-27 · Megatrends decoded 6 Megatrends are structural shifts that are longer term in nature and have irreversible consequences for the world around

Thank You

Utpal Sheth

R^RE Enterprises

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