Markets with Bertie: Nowhere to hide

Regular readers know about Bertie’s skepticism when it comes to using low per capita consumption as an investment thesis to buy stocks. With 1.4 billion people in the denominator, the per-person consumption of anything from beer to cement is bound to be low. The charts look seductive, though, especially when placed next to the same number for China and developed countries. A ‘happily ever after’ tale starts taking shape in the reader's mind, and the resulting warm, fuzzy feeling leads to the pressing of the buy button. But in those moments of temptation, it is worthwhile to remember what Yogi Berra told us, “In theory, there is no difference between theory and practice. In practice, there is.”

Bertie has seen similar charts for the consumption of medicines in India. With more doctors, the argument goes, doctor visits and formal medical diagnoses are increasing. This means more prescriptions get written, and, hence, more drugs are sold. This is sound in theory, but the reality is that the growth in value of medicines sold has barely grown mid-single digits in the last three years. Being a stickler for detail, Bertie double-clicked this number to find that volume growth has been barely positive.

Unable to reconcile the seductive charts and insipid reality, Bertie posed the question to the CEO of a large pharma company. The two had interacted for several years and played an occasional game of badminton together so Bertie could ask the CEO to deliver the bitter pill without the sugar coating.

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“We have been victims of our success, in a way,” the CEO began. “Effective combination drugs and better delivery mechanisms like extended-release capsules mean that the number of pills you have to take has gone down. Remember the time when you swallowed three pills three times a day? Now it’s generally twice a day and probably just two of them.” Bertie nodded.

“But shouldn’t that get adjusted in price?” Bertie’s sharp mind countered.” Lower volume but higher prices should take care of overall growth, right?” The CEO smiled. “In theory, it should, but the industry is competitive. One plus one adds up to less than two. On top of that, now there are barbarians at the gate.” Bertie’s face wore a question mark. “Trade generics which market their cheaper products directly to the distributor and even cheaper Jan Aushadhi which is generic generic.”

“But aren’t they small in the overall scheme of things?” Bertie’s mind was toggling between sharp and confused. “Yes,” replied the CEO, ”but we are not talking size here, Bert. We are talking growth, and these things can easily shave off a couple of percentage points.” Bertie nodded again as the CEO looked grim. “The home market is slow, and the 47th President is threatening us with tariffs starting next month. It’s like there is nowhere to hide.” To show his solidarity, Bertie bought a strip of vitamin tablets that evening, although he didn’t need them.

Bertie vs RWA

Bertie recently purchased an electric car. The ease of buying the vehicle was more than negated by the unexpected hassle of installing a charger in his parking spot. Our man inhabits one of the many large apartment complexes in suburban Mumbai where septuagenarians throng the Resident Welfare Association (RWA). Being a street-smart person, Bertie knows that if one has to lead a peaceful adult life, the two constituencies that have to be always kept in good humour are the Human Resources department at one’s place of employment and RWA at the place of residence. This is why Bertie always turns up in a bright kurta every Diwali to heartily applaud the rangolis and wishes every member of the RWA on their birthday in three languages.

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However, this soft diplomacy did not stop the RWA from vetoing Bertie’s proposed charging set-up. The reason offered was that Bertie’s allotted parking was in the basement of the building, where, in case of a fire, the fire tender would be unable to reach. Bertie argued that there were other electrical appliances like lights and exhaust fans in the basement and that there were handheld fire extinguishers installed to take care of any emergency. But the other commonality between the two aforesaid constituencies is that once they make up their mind about something, they do not budge.

An infuriated Bertie called up friends who stayed in similar apartment complexes, and each one narrated some variation of the same story. For now, Bertie has managed to locate a fast charger in the vicinity, but his frustration spilt out in a meeting with an IPO-bound electric two-wheeler company. The young CEO agreed that this is a common tale amongst the high-rises in large cities and one of the impediments to higher penetration of electric vehicles in the country. Bertie felt relieved to hear that there were fellow sufferers, but as an investor, he instantly noted the growth headwind in the sector.

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“So where is the growth coming from?” Bertie asked. “It’s mainly from outside the metros. Where people stay in independent houses or low-rise buildings that do not have basements.” As Bertie flipped through the pages of a pink paper the next morning, he spotted a story about the rapidly increasing EV penetration in China. He wondered how RWAs in Shanghai addressed the problem of making fire tenders reach building basements. He also spotted a property ad in the classified section flaunting ‘3 parkings with electric chargers installed’ and seeking a premium for this privilege.