Rapid growth in the once-derided Hindi-speaking states of northern India is now an established fact (FY08-12 state domestic product CAGR of 13.7% for Uttaranchal, 6.9% for Uttar Pradesh, 9.3% for Jharkhand, 11.1% for Bihar, 8.4% for Chhattisgarh and 9.4% for Madhya Pradesh). This growth has created
a new economic elite with a very different set priorities compared with the large corporate houses in Mumbai and Delhi.
Regional experts highlight that each state in northern India has around a dozen highly cash-generative corporates who are central to the economic and political well-being of the politicians who run that state.
This construct is then replicated at the district level i.e. in each district, there will be, say, half a dozen families who control the key businesses in that area, account for the bulk of bank deposits arising from that area, control the majority of land in the district and hence control the bulk of jobs created in that area. These district-level business families usually have family members or associates embedded either in the village panchayat and/or at the district-level zilla parishad (just as their larger counterparts at the state level will have MLAs in the state legislature and their still larger cousins at the national level will have sitting MPs).
In my recent trip to Lucknow and Kanpur I met
The ‘Ghari’ team: Rohit Surfactants’ market leading detergent brand ‘Ghari’, created only 25 years ago, now has a market share of 17% in the Indian washing powder market. Ghari’s revenue growth of around 25% per annum over the last three years has made it comparable in size to leading FMCG players such as Dabur and Marico. Undented by the downturn, Ghari’s volume growth continues at around 10% per annum. Having conquered the north Indian detergent market, the company has now successfully moved into dairy products and shoes.
The Kothari family: The promoters of the market-leading pan masala brand, the once ubiquitous Pan Parag brand, also own for Rotomac. In spite of having a market share of 32% of the Rs5-15 pens market, Rotomac is still clocking volume growth of 15% per annum in India, thanks to 2,500 distributors across India. Including exports, Rotomac’s volumes are increasing at 20% per annum. The family also owns 32 multiplexes in north India and shopping malls in Kanpur.
The Gupta family: Through their ownership of the Dainik Jagran Group ($450 million market cap, with the promoter family ownership at 54.4%), the Guptas control the largest Hindi-newspaper group in northern India. Outside the listed entity, the Guptas are building large-scale luxury real estate developments in Kanpur as well as shopping malls.
The Mirza family: Through their ownership of the supremely profitable Mirza International ($34 million market cap, with the promoter family ownership at 66%), the Mirzas control one of the largest shoe manufacturers in India. A family member also sits on the board of the Dainik Jagran Group. Outside the listed entity, the family also owns healthcare and agrotech businesses.
Apart from these leading lights in the Kanpur-Lucknow region, I met three other auto dealers who not only sell vehicles for three companies but also double up as liquor dealers (30-50 stores each) and as small manufacturers (footwear, plastic pipes, etc). Even these smaller business families are likely to have a net worth running into tens of millions of dollars.
Why does any of this matter?
The rise of these regional elites is changing the way policy is shaped not just at the state level but also at the Centre. Take the recently passed Land Acquisition Act (which goes into effect from 1 January 2014) for instance.
Most BSE100 promoters believe that this Act will increase the cost of acquiring land, not just because of the pre-determined acquisition price of ’4x the prevailing market prices‘ for greenfield rural land but also because of the ’Rehabilitation & Resettlement‘ obligations for the purchases.
However, for the regional elites, the Act represents an enormous windfall, as now they become gatekeepers to corporate India’s land rush. Not only can these families (many of whom were farmers until a decade or two ago) encash their personal landholdings at enormous premia to the purchase cost, they can also control the implementation of the Act at the state level, thereby, making land available in a phased manner to corporate groups close to them. In effect, the Land Acquisition Act entrenches the power of 60-70 elite north Indian families who now control the Hindi speaking heartland.
What are the investment implications?
Power and wealth in India are shifting towards a new regional elite. The dynamics of coalition politics will allow these elites to pull more federal taxpayers’ funds their way and bend policy in their direction. New Delhi being forced to cede more power is no bad thing because given the differences in economic structure and wealth, policies suited to state-specific needs are more likely to be created in the state capitals than in New Delhi.
More specifically, as the Hindi-speaking states continue their rapid economic ascent, the large beneficiaries other than the local barons would be:
* Lenders with a disproportionate focus on this region. For example, 28% of M&M Financial Services’ loan book arises from this region.
* Auto companies with a disproportionate market share in the north. For example, Eicher Motors is disproportionately strong in north India.
* As rural prosperity in northern India deepens and as its towns expand to become cities, sales of anything to do with homeware should expand. Natural beneficiaries of this would be: (a) Asian Paints, by some distance the leading paints manufacturer in India; (b) TTK Prestige, the leading manufacturer of kitchenware in India (c) Havells, the leading electricals company in north India; (d) Bajaj Electricals, the #2 electricals company in north India.
(Saurabh Mukherjea is CEO of Institutional Equities at Ambit Capital. The views expressed here are personal.)
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