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Weekly Insights #26- Thoughts on Opportunity Size

In investing when analyzing any business, one of the key aspects to understand is the end opportunity size for the business. The reason why this is very important is two-fold;

  1. Opportunity size determines the longevity & rate of growth for the business.

  2. It is an important metric that feeds into the terminal valuation of a business and thus the valuations


The most ideal scenario for businesses is to be in a situation wherein they have a very small share of the overall industry which is growing decently and wherein the business is gaining market share. Generic term used for such a scenario is “Shark in an Ocean”


And the reason why it works is because if you are a small pie of a growing end industry then even if you outgrow the industry growth rate for many-many years, you will still command a relatively small portion of overall industry ensuring growth even beyond that high growth period.


Following is a snippet from one of our stock initiation’s research reports highlighting how even if the business outgrows the industry by 3x for next decade, it will still command a very small pie of the overall industry, ensuring that there is ample opportunity to grow at good rates even beyond the coming decade.

And there are so many examples of such kind of situations, Titan is one of the most talked about. Another good example is that of Power Exchanges wherein the annual increase in power demand is equal to current market share of power exchanges in the overall power market.


Second best scenario is one wherein a business is a dominant player in their existing industry, but are continuously pivoting to additional business/products leading to opening of additional opportunity pools for the company. This way the company at an overall level can continue to grow by capturing one or the other opportunity pool.


The following chart explains is very well; basically, the company keeps adding more & more S-curves over existing ones.

Some of the good examples here is that of Astral and Varun Beverage. Astral is a dominant player in plastic pipes, then it ventured into adhesives, then into water tanks, then into sanitaryware and most recent paints. Similarly, Varun Beverages went from selling in just certain states to covering entire India, then to international geographies, then to additional product lines like energy drinks, now dairy beverage and snacks being the future.


A third good scenario is when the end industry is growing at a very rapid pace and thus even the dominant players have enough room to grow at strong growth rates. Some of the past good examples of such scenarios is Avanti Feeds with the growth in shrimp farming industry, Kaveri Seeds with adoption of hybrid cotton seeds and most recently EMS players like Dixon with the PLI schemes.


Now apart from understanding these scenarios, it also very important for us as investors to be very objective when looking at opportunity size. And I think Mr. Kishor Biyani has explained this so well in the following podcast with consumption industry as an example; see from 58:50-1:02:20


He provides two important thoughts here-

  1. Within the broader opportunity size there are multiple sub-segments and not each business or product category has the same opportunity size as the broader opportunity size.

  2. The point he made about equity investors (extreme wisdom here), that our perspective from the outside does not necessarily captures the true underlying dynamics.


And I can totally agree on both points. In terms of consumption, I personally believe that the next level of consumption growth will come from discretionary & luxury, as most of the basic consumption baskets are relatively well penetrated and covers entire India-1,2 & 3.


We had shared some detailed thoughts around this in an earlier edition of Weekly Insights here-


On the second point, there have been many cases wherein companies, investment bankers & investors have shown & reflected on some exaggerated numbers in terms of opportunity size.


A good recent example that comes to my mind is that of Map My India, wherein the company always talks about this opportunity size of billions of dollars; but the truth is that the company’s existing set of products & services only captures even a very small part of this opportunity & neither does the company has initiatives that might allow it to capture that remainder of the so-called opportunity.


Following is a snippet of me trying to understand the opportunity size for the company in its 1st concall post IPO, which captures my thoughts on why we believe that the presented opportunity size is not a true reflection of actual opportunity size for the company-


Another good example here is one that Mr.Nithin Kamath of Zerodha has always highlighted when he talks about the opportunity size for fintechs in India. He says that most of the fintechs comes with presentations highlighting the 100 crore Indian population as their opportunity size, however the fact is that a majority of this population does not have a legitimate income trail or any savings at all, less than 10 crores Indians file their tax returns and thus the real opportunity size is much-much smaller than what they think & present.



In summary, opportunity size is an extremely important attribute to consider, there are certain ideal scenarios and we need to be very objective when we evaluate the opportunity size.




That’s it for this week, new insight coming up next week. So stayed tuned!


 

Surge Capital is a trade/brand name used by Ankush Agrawal (Individual SEBI Registered Research Analyst INH000008941) to provide equity research services in the Indian Equity Markets.


“Registration granted by SEBI, and certification from NISM in no way guarantee performance of the Research Analyst or provide any assurance of returns to investors”


“Investments in securities market are subject to market risks. Read all the related documents carefully before investing.”


“The securities quoted are for illustration only and are not recommendatory”



Stock specific investment disclosure:

Astral- Not Invested. Not Traded in last 30 days. Not an active recommendation in Research Service

Varun Beverages- Not Invested. Not Traded in last 30 days. Not an active recommendation in Research Service

Avanti Feeds- Not Invested. Not Traded in last 30 days. Not an active recommendation in Research Service

Kaveri Seeds- Not Invested. Not Traded in last 30 days. Not an active recommendation in Research Service

Titan- Not Invested. Not Traded in last 30 days. Not an active recommendation in Research Service

Dixon- Not Invested. Not Traded in last 30 days. Not an active recommendation in Research Service

Map My India- Not Invested. Not Traded in last 30 days. Not an active recommendation in Research Service

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Rajat Banerjee
02 de set. de 2023

A very well written topic on opportunity size, consumption theme and change in consumption habit to premium. I firmly believe that as the Indian economy will grow, we will see more consumption of premier pdt. Nicely written.

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