Megatrends and Leadership · 2019-11-27 · Megatrends decoded 6 Megatrends are structural shifts...
Transcript of Megatrends and Leadership · 2019-11-27 · Megatrends decoded 6 Megatrends are structural shifts...
Megatrends and Leadership
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Delhi, 8 November 2019
Utpal Sheth
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
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Learnings from History
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Learnings from History
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Learnings from History
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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
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”
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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
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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FY03 FY05 FY07 FY09 FY11 FY13 FY15 FY17 FY19TCS Infosys Wipro HCL
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
Assurance Services
Assurance Services
Biz Process Outsourcing
Biz Process Outsourcing
Biz Process Outsourcing
Biz Process Outsourcing
Biz Process Outsourcing
Infra services Infra services Infra services Infra services Infra services
Biz Intelligence
Biz Intelligence
Biz Intelligence
Biz Intelligence
Biz Intelligence Biz Intelligence
Enterprise Soln
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Enterprise Soln
Enterprise Soln
Enterprise Soln
Enterprise Soln
Enterprise Soln
Application Dev & Main
Application Dev & Main
Application Dev & Main
Application Dev & Main
Application Dev & Main
Application Dev & Main
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
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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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JPMorgan
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
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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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Indian IT & ITES Export Rev ($BN) – Source Nasscom, *SMAC – Social, Mobility, Analytics, Cloud
Dot Com Crash GFC Digital
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Accenture + Capegmini Top 4 Indian IT Cos
Incremental Revenue of Top 4 Indian IT Vs ACN+Cap (INR Bn)
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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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Global GDP Growth Indian Top 4 IT Revenue Growth
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
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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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
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
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
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)
Thank You
Utpal Sheth
R^RE Enterprises
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