Taking Stock

The disruption storm

Disruption will hit pretty much every sector in times to come and this will change the composition of the benchmark indices too

The disruption storm

In February 2014, HDFC Bank's top boss Aditya Puri had said that what kept him awake at night was digitisation, big data and customer expectation. This was much before high-speed internet data (4G) explosion happened in India. I suspect he is still worrying about all these things as much, if not more. It takes smart CEOs and entrepreneurs to recognise well in advance what can possibly move their cheese or the customer. HDFC Bank has been an early mover in the technology space and has been leveraging it to solve legacy problems, both for its retail and corporate customers. But worried all banks should be as 900-plus fintech start-ups are today present in the space of lending, payments, insurance and investments. Is market share at risk? Yes, for only those who don't change the way they do business.

Disruption has hit some sectors much ahead of others. Still many view it something amorphous that happens to other businesses, not theirs. But this isn't anywhere close to reality. According to a study by Accenture, 44 per cent companies in India are experiencing disruption and another 38 per cent are highly susceptible to future disruption. And at stake could be an enterprise value of $1.8 trillion. While many company are aware that disruption is coming, only 20 per cent chief strategy officers globally feel they are ready to respond, while 93 per cent agree their industry will be disrupted in the next five years. The reason why disruption will arrive in India sooner than later in most industries is because the disruptors tend to bring down prices through new and innovative cost structures. They also offer innovation in products. While all industries are not equally exposed to disruption, Accenture believes that all sectors should prepare for it.

Investors, especially the long-term ones, today need to ask one question: will this company still be in business five or 10 years from now or will it be disrupted/displaced by a more nimble player?

Irrespective of the sector, companies will be challenged by ever-changing consumer preferences in the digital era, as new-age players will attempt to solve problems that legacy players have been too slow to address or which were too expensive to address in the physical world. For instance, insurance companies are already a worried lot as they expect millennials to behave very differently from Generation X. In order to succeed, insurance companies will have to invest in technology and look at the risk very differently, if they have to remain relevant 20 years hence. One CEO of a leading private insurer claims he looks for inspiration in television series Black Mirror because the future could very well be that.

My conversation with this insurance boss took me back 10 years, when the founder of a large IT services company had said that what worried him most was not quarterly performance but his struggle to put in place a long-term strategy that would effect the shift away from the low-end application and maintenance model to one that was based on problem-solving. The sector is still grappling with this reality and while some may pivot, many others may struggle. This is true not just for technology companies but also all sectors. There are some companies that will transform and remain on top of their game, while others may not. The going may be a lot tougher for public-sector banks. According to a BCG report, only two out of the 21 PSU banks were able to generate profit in FY18 and the total net loss of these banks stood at Rs 87,000 crore.

In some sense if we look at 1991 reforms as a form of disruption, then it is easy to see how it impacted the listed universe. According to an analysis by Ambit Capital in 2015, in the decade following the 1991 reforms, 67 per cent (20 replacements) of the 30-share Sensex changed. The churn, which dropped to 27 per cent (8 replacements) between 2004 and 2014 could well pick up in this decade as some will exit the benchmark indices and make way for new companies. Ambit expects 50 per cent of companies to exit in this phase of churn. And the lesser-known companies will generate the greater returns, as they did in the decade starting 1991. So some of the large-cap bluechips may falter and exit the benchmarks, making way for the new BFSI or e-commerce upstarts that could go on to become the next Infosys or HDFC Bank. Ambit expects some stalwarts like Bharti Airtel, Vedanta, Hindalco, SBI and Tata Power to exit the Sensex by 2025, it expects some of the private insurers like ICICI Pru, Paytm, Cafe Coffee Day to enter the Sensex through IPOs. Some existing names that could enter the benchmark include HCL Tech, Asian Paints, Kotak Mahindra Bank, IndusInd Bank and Page Industries, among others. Also, IT, high-tech, software & platforms and communications are highly prone to disruption today, but tomorrow's casualties may be different. Capital markets, insurance, utilities and automotive may be the hit by disruption in times to come. So tighten your seatbelts.

The author is the editor of Value Research Stock Advisor.

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