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India market and sector outlook

July 2018

Trip notes: Indian explorer

Thoughts from the Indian equities team.

Returning last week from a trip to India, a fair summary might be that whilst the skies over Delhi were full of dust, Mumbai was in full monsoon season. We bring this up because this is a very apt analogy for our investment related takeaways. How so?

Observation 1: election fever building up

Delhi is the political capital of India and, as such, it’s here that we see a lot of growing confusion around who will win next year’s national elections. Coincidentally, just as Delhi’s dust storms originate from neighbouring states like Rajasthan and Uttar Pradesh, it’s these same states where incumbent Prime Minister Modi stands to lose potentially many seats. For those India watchers, this also explains why there are not only growing expectations of voter-pleasing handouts but also increasing farmer agitation – two sides of the same coin.  From an investment standpoint, this appears to be translating into greater government support towards rural areas and agriculture and we are seeing specific companies benefiting.

Observation 2: domestic investment in Indian equities

Mumbai is the financial capital of India and has witnessed a massive inflow of domestic savings to mutual funds and insurance policies. While part of this shift could be cyclical, it’s potentially structural too. Historically, Indians have under-invested in the stock market and we see this changing, especially via the mutual fund and insurance plans.

Indians have under-invested in the stock market.

On this note, we visited one of the fastest growing insurance companies in India, which we hold in the portfolio. It helps that the largest bank in the country is its parent and is opening its customer base to help them sell more policies. They also plan to increase the protection business materially, which we view as a really under-served high-margin opportunity in India. While selling through the banking channel is their natural strength, it was heartening to note their industry leading productivity levels for agents.

Observation 3: automation still patchy

Another theme we encountered was automation. We visited an India-Japan joint venture factory producing aluminium wheels. It was interesting to hear that they replaced a segment of their workers with robots – which wasn’t motivated by a desire to reduce wages, but more to reduce error rates. This illustrates another point, that productivity is increasingly being driven by the use of machines in the manufacturing sector. 

At the same time, the services sector continues to take advantage of cheap labour. For example, we met PayTM, an Alibaba-Softbank funded start-up which has a huge on-street presence to promote its business. PayTM is the largest mobile wallet company with 100m1 users and could turn out to be a fintech giant. On a lighter note, we still encountered workers inside some lifts whose only job description is to press the floor buttons for the lift users...

Observation 4: regulatory meetings

The portfolio has significant exposures to Indian power utility companies whose returns are regulated. It was comforting to visit the regulator and get a sense of their thought process. In particular, this is because it’s one of the fairest regulators that we’ve come across, managing to keep the interests of all stakeholders at par.  This would be a pretty challenging undertaking at any time but is critical as the regulator begins to think about the 2020-25 period tariff formula.

Observation 5: aviation growth

Finally at the start and end of our trip, we couldn’t help but notice how busy the airports were. Mumbai airport is bursting at the seams, which is less surprising taking into account that passenger traffic growth is at the ~15-20% rate2.

Aviation remains a great long-term growth story.

Aviation remains a great long-term growth story which we are invested in through the largest low-cost carrier in the country. We visited their offices and found their Operational Command Center (OCC) particularly impressive. It tracks not just the flights but also social media comments. Their board room was notably full of trophies earned through the years for its low-cost operational excellence. Our positive view on the company was reinforced by our meeting at the Ministry of Civil Aviation; the Ministry has been responsible for opening up 25 new airports in the last 2 years, thus opening up a number of potential new markets for the company we had just met.