India: selective exposure to a key market

As with any investment, your capital is at risk.

In more recent years, however, this has started to change, thanks to a combination of modestly rising incomes and easy access to the stock market, often through mobile apps. Indian mobile data costs are among the lowest globally, which helps a lot. In fact, over the past five years or so, around 100 million Indians have become shareholders for the first time.

Roughly one in five households now holds equities, up from just one in 14 five years ago. This is highly significant in the context of a country where GDP per capita is well under $2,500. Mutual fund advertising has gone from sleepy to relentless. India’s Unified Payments Interface (UPI) has created a seamless digital infrastructure that links identity, banking, and investment, often into a few taps on a screen. This is no longer a country of gold and fixed deposits. It’s a country discovering risk and return.

The newer raft of local buyers has, at least in part, helped to push the stock market up very strongly. Foreign investors have also clearly been flocking there over recent years. Whilst this has moderated more recently, it’s still striking that Indian equities are valued at nearly double the level of the Emerging Markets average. Small and mid-sized companies have seen their values run up particularly strongly over the last five years - often ahead of their actual operational progress - outperforming the Nifty 50 (larger caps) significantly. Where we have managed to find companies capable of meeting our return hurdles from their current multiples, these have typically not been at the smaller end of the market.

A lack of overall exposure here has been unhelpful for your Emerging Market portfolio returns. Overall, this has been as much a sin of commission as one of omission, but nevertheless it now poses a clear portfolio construction dilemma. The underweight hasn’t been the result of a bearish call on the country, rather the predicament that investing there presents. India is richly valued, competitively intense, and (at times) overhyped. But in many ways, it is also resilient, innovative, and increasingly attracting global heavy weights. You will likely have seen that Apple has recently announced they will move more of their iPhone production to India: a case in point.

Being honest, the scale of your Indian underweight now feels somewhat uncomfortable, given the possibility of outperformance from a market that may well be perceived as a safe haven amid global turbulence. For instance, a scenario of a weak USD and weaker oil prices tends to play well for India.

Importantly though, we are not minded to chase performance in highly valued assets here. So, what have we been doing? We have been reviewing your exposures closely and revisiting the opportunity set in search of new prospects at palatable valuations, which stack up not just in an India context, but an EM context. Several team members have been to India this year and we’ve recently been digesting a variety of recent work on a range of companies. This has included discussions on banks, several non-bank financials, airlines and logistics companies, amongst others. In many cases, we’ve identified what look to be very strong business models, often with commendable management, but most have had valuations that made us pause. Many investment ideas are in companies where the market appears to be pricing in perfect execution; others have felt a few years too far along their growth runway.

Delhivery, India’s e-logistics disruptor, continues to divide the room. It has very strong management and a compelling total addressable opportunity, but there are also concerns around cost advantage erosion and eventual competition from its own customers. And PB Fintech, the insurance and lending platform, has also received a lot of our attention. This still feels like a business in its infancy, but we’ve been impressed by its promoter and find it increasingly hard to ignore in the context of India’s financial inclusion story.

Where does this all leave us? Are we suddenly bullish across the board on India? Certainly not. Do valuations remain a constraint? Very often so. However, we are finding areas to selectively add to your Indian exposure from here, as we look to narrow an increasingly uncomfortable underweight position.

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