As long as the Indian government stays out of the way of the Indian entrepreneur, there will be phenomenal returns for investors.
By Rahul Saraogi
There is a transformation underway in India today…
The nation is the world’s youngest large democracy. Those three words will determine how long India’s current streak will remain alive… and I truly believe it could be a 100-year investment opportunity.
Prime Minister Narendra Modi’s administration has worked tirelessly over the past three years to clean up the system…
Government spending has been improved dramatically using the biometric ID system.
Wasteful subsidies have been reduced.
The banking system is being cleaned up.
More decisions are being decentralized. Less power is now in the hands of the executive. Regulators are more powerful. And a meritocratic system is being built.
In 2016, India passed a path-breaking Insolvency and Bankruptcy Code (IBC) in 2016. The implementation of the IBC is in the hands of Independent Resolution Professionals, guided by the National Company Law Tribunal.
What this means in plain language…
For the first time in the history of India, sanctity is being established in a commercial contract between a borrower and a lender or a debtor and a creditor (even if the creditor is a vendor or supplier).
This is a game-changer for businesses… It dramatically lowers risk in the financial system and enhances return on capital. This magnifies potential opportunities and returns for investors, accelerating the compounding of capital.
The Goods and Services Tax (GST) combined with the e-way bill and the online GST network has transformed India into a single market. Tax compliance is accelerating at an unprecedented rate, formalizing the economy and broadening the tax base. This lowers average taxes borne by any one individual and multiplies market opportunities for organized players.
I believe that this has increased the addressable market opportunity in India for strong, listed companies by five- or even 10-fold.
So as that meritocratic foundation is built in the economy, India is like a coiled-up spring. And once it truly gets into motion, the runway for Indian companies is very large.
Right now, the country is a prime hunting ground for bottom-up investors… that is, investors who focus on individual stocks within a sector, rather than a big-picture, macro investor who simply “buys India.”
Even though India is only a $2.4 trillion economy, it has a big stock market with something like 6,000 listed companies. Every imaginable sector of the economy is represented because it’s relatively easy for companies to go public.
The most popular sector, of course, is the consumer sector. If you know anything about India, you know that with 1.3 billion people, it has a large and growing consumer market – the so-called “engine of consumption” behind its economic growth.
But the companies listed in the discretionary consumer segment of India’s stock market have probably benefited too much from this story. So while I don’t have a bearish view on consumer demand, these companies are likely getting ahead of themselves.
For the first time in the history of India, sanctity is being established in a commercial contract between a borrower and a lender or a debtor and a creditor.
In addition, financial services have also been very popular. In particular, non-deposit-taking finance companies… like auto financing and mortgage financing companies. However, I think there is gross misreporting of non-performing loans in this sector… The entire sector trades at between three to four times book value, while the better-known names created five, six, seven times book. This sector is clearly in a mini bubble of its own.
Finally, Indian pharmaceutical companies and IT support companies are well known, but they are also relatively better researched and more owned. In addition, the industry is suffering from overcapacity and demand has tapered off. The canary in the coal mine is margins… and right now, margins are compressing dramatically.
So I would encourage investors interested in India to look beyond these segments of the economy.
There are opportunities in those areas, but the real upside in India is elsewhere. For example, right now I see significant upside in…
Infrastructure and Housing: This is the single-largest opportunity in the Indian markets. Anyone who has visited India knows how underinvested Indian infrastructure is. And the fixing of India’s infrastructure deficit has been a long time coming…
To fix infrastructure, one has to fix laws and regulations, the financial system, land acquisition, permissions and approvals, and last-mile implementation.
It’s 15 years late, but the time for Indian infrastructure has arrived. I don’t necessarily believe that buying infrastructure-construction companies is the only or best way to participate in the boom ahead. There are opportunities in every cyclical industry linked to the imminent infrastructure buildout – including steel, cement, transportation, and so on.
Affordable housing is another gigantic opportunity and all the necessary building blocks are in place (no pun intended) for large-scale growth in housing.
Manufacturing: As I mentioned, India is a big consumer market, but it imports a lot of manufactured goods. The nation opened its external trade long before it opened up its internal trade. But now with the goods-and-services tax in place, India is becoming one national common market. That means that manufacturing presents a very big opportunity.
India has in the past wasted its home-market advantage. But today, India has recognized its mistake, and laws and regulations are rapidly being implemented to protect and give Indian companies the opportunity to grow with their home market…
This is likely to give Indian companies critical mass to then capture export markets. I see a repeat of what happened in China 20 years ago, with an Indian flavor. Disruptions in China have also been creating large opportunity for Indian manufacturing companies.
New Internet and Technology Companies: With more than 1 billion mobile connections with smartphone penetration increasing, public technology companies represent phenomenal opportunities. However, the nation does not have many Internet companies. Instead, you should focus on technology companies that have products and intellectual property. And interestingly, the valuations of the product companies are not high because they are misunderstood.
Discretionary Services Consumption Sector: By that, I mean everything from media, leisure, and entertainment companies… as well as travel and tourism businesses. This is a completely virgin opportunity and we are at the start of a massive boom in the leisure and entertainment industry in India. While consumption of manufactured goods has been captured by the stock market, the services/leisure consumption story is ahead.
The best thing about investing in India today is that it’s coming from a lower base than its most common comparison economy, China.
If China is at a 90, India is somewhere around a five. So it’s a lot easier for India to go from a five to a 10… and it’s still going to be a minnow compared to China. If there’s any sort of dip or bigger debacle caused by an emerging market crisis, that will be a massive buying opportunity in India.
However, even with the Indian stock market at all-time highs, there is still plenty of upside in India. The nation is building high-quality, high-management, high-governance enterprises that are likely to grow first domestically… and in the not-so-distant future, make their impact felt globally.
More important for the longevity of this opportunity, the government has realized that it needs to take a hands-off approach. It’s focused on consolidating, cleaning up, and building a strong foundation. That’s the right approach.
As long as the Indian government keeps taking that approach and stays out of the way of private enterprise, then I think private entrepreneurs will do their thing. And India will generate phenomenal returns for investors.
Rahul Saraogi is the founder and managing director of Atyant Capital. He has spent the past nearly 20 years focused on the Indian market – identifying the best 10 to 15 investment ideas from among the thousands of publicly traded Indian corporations.
Rahul’s value-based investment philosophy stands apart due to his belief in the paramount importance of corporate governance, specifically how management operates with its minority shareholders in mind. Rahul is the author of Investing in India: A Value Investor’s Guide to the Biggest Untapped Opportunity in the World, a definitive guide on navigating the Indian markets.
Rahul graduated from the Wharton School of the University of Pennsylvania with a degree in Economics. Outside of Atyant, he practices Vipassana, a 2,500-year-old meditation technique that helps people see things as they really are. Rahul splits time between Chennai, India and Miami, Florida.