Archive for the ‘Emerging Markets’ Category

Investment Ideas from Mega Trends in India

Wednesday, July 26th, 2017

Investment Ideas from Mega Trends in India

By Himanshu Khandelwal


Stock markets in India have been soaring as the economy enters a prolonged period of political and economic stability. At elevated valuations, near term returns seem uncertain but investors should focus on riding the Mega trends.


India’s per capita income has grown by 300% in rupee terms in the last decade creating an aspirational consumer of goods and services. This coupled with government policies have kick-started Mega trends that will drive India’s growth story over the next decade creating massive investment opportunities.


#1 Formalization of the economy: Unorganized sector accounts for nearly 75% of trade and 90% of employment in India. With initiatives like GST, the tax arbitrage available to the smaller traders will slowly erode increasing addressable market for the organized companies. Opportunities for established players in the consumer, healthcare, textiles, jewellery is immense.


Organized Hospital and Diagnostic companies control only 10% of overall market which is growing at mid-teens every year. With only 3-4 large players in the country, they are expected to catapult 5-6x in the next decade.


Dr. Lal Pathlabs is the second largest pathology service provider growing at an impressive 27% revenue growth in the last five years, 11% above the industry growth. It generates a healthy cash flow and has seen a PE contraction recently to 30x against 45x historically providing a good entry point to long term investors.


#2: Housing Boom: Low cost housing is the focus area of the government and the best way to play this is through housing finance companies (HFC). Mortgage to GDP is less than 10% in India versus an Asian average of 20%. Owning a house is still a dream for most Indians, hence most of home buyers are end users resulting this sector delivering the best risk-adjusted returns. Consider this, HDFC, a blue chip industry leader has delivered a compounded annual return of 23% in USD terms for the last 15 years.


Recently, my favourite has been Canfin Homes, the fastest growing mid-size HFC focused on lending to salaried class first time home owners. Canfin’s USD 2 billon balance sheet has grown its loan book by 30% annually and stock price at 100% (USD terms) every year in the last five years with a NPA of just 0.2%!


#3 Physical to Financial Savings: Demonetization may not have achieved much on black money, but it did put money to work! Banks received USD 230 billion of new deposits and a major portion of the same has stayed in the banks. Falling currency holdings and low deposit rates are pushing more savings into capital markets chasing better returns. Household savings percentage in mutual funds and equity markets have increased fourfold since 2011. This is another mega trend which will re-shape the financial services industry.


The direct plays on this theme would be capital market oriented companies like IIFL holdings, and Edelweiss which have been doing well. Since their model is more cyclical in the long run, I prefer a pure play on this theme, the recently listed Central Depository Services Limited (CDSL).


CDSL is the only listed play on the depository services which is a duopoly market in India. It is been growing at an impressive 23% in the last three years with expanding margins of 54%. Its annuity revenues with operating leverage make it a cash generating machine. The stock trades at 35x earning, but expect it to be lapped up by institutional investors on every correction.


For those who feel markets are at the top, you risk missing the bus. India has one of the highest real rates since 2002 which provides room for last few rate cuts by RBI. The spread between the 10 year paper and nifty earning yields at just 60 bps, one of the lowest levels in history. This is the reason valuations of Indian equities shall remain high compared to previous years and other emerging market peers.


The elevated PE levels or the recent IPO boom may signal revival of animal spirits in the economy or an over exuberant market. Historically, bull markets in India have never peaked with interest rates bottoming out, rather this happens mostly at the initial phase of a bull cycle.


“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.” This Bill Gates quote is apt for investors who focus too much on the short term noise and miss the Mega trends.



India’s macro-economic rise: Accidental or Structural?

Monday, July 11th, 2016

By Himanshu Khandelwal, Investment Director, Asas Capital.


Milton Friedman once said, “Only a crisis, actual or perceived – produces real change”. This is very true in an Indian context. The Indian economy, one of Morgan Stanley’s “fragile five” in 2013, mired in a balance of payment crises with a rupee in free fall, now boasts 7.6% GDP growth and a slight current account surplus.  Ever since the end of India’s License Raj era in 1991, foreign investors have pinpointed India’s growth performance as accidental and not structural. This is no longer true. India’s growth momentum is domestic and secular, not dependent on bullish global market cycles alone.


Emerging markets have been facing difficult times especially with the rising dollar and collapse in commodities. Uncertainties from the Chinese economy have increased with manufacturing burdened by overcapacity albeit cushioned by a strong consumer. From Latin America to the Middle East, productivity gains can only be achieved through improving business environment and infrastructure led growth to diversify away from the vagaries of commodity markets.


The distinctly visible direction of global politics has triggered a new era of de-globalisation and closed economic policies. Emerging economies in this era cannot export their way to prosperity. They have to rely on domestic markets which would focus on services led growth diverging away from manufacturing where automation will reduce jobs.


India’s top down story could stand out as a key differentiating factor in a world starving for domestic demand led growth uncorrelated to cyclical commodities. The government along with the central bank is addressing some key structural problems which make economy more resilient and low risk even at the cost of short term pain like rural stress and a delayed recovery in private investment. Few areas which stand out:


Crushing crony capitalism: For most of India’s independent history, crony capitalists have cornered key resources in large sectors of the economy. Modi led government which made tall promises during election rhetoric has been addressing this issue through transparent, policy oriented approach and even draconian legislation. Corruption in India is now a more bottom up problem than a top down problem.


Focus on financial stability: Indian policymakers have been complacent with high growth often at the cost of high inflation and financial stability. Since 2013, with relentless focus and help from commodity crash, the sticky consumer price inflation has come down from 10% to below 6% which coupled with lower fiscal deficit has allowed the interest rates to fall 150 bps. A relatively stable currency attracts investments.


Financial inclusion: Considerable progress has been made in the last two years with over 220 million new bank accounts covering over 90% of unbanked families. This would further help reduce the $40 billion subsidy bill through direct benefit transfers. With Indian corporate reeling under a balance sheet recession, the retail credit is clocking growth of over 18% which emphasises the consumption recovery.


Lowering the cost of capital: India despite having a high savings rate is burdened by a high cost of capital as over 50% of India’s household savings are in locked in land or gold. The orderly real estate correction and measures to curb gold demand has meant more savings into the financial system. This means India’s cost of debt capital is coming down structurally.


Note that Indian capital markets reflect these new macro realities while Dalal Street falls on global risk aversion, these declines are a buying opportunity. Its implied volatility has fallen dramatically over last two years as it attracts more sticky long term investors. At 16 times earnings, India is not cheap but its valuation is anchored by the tail wind of earnings recovery and structural reform.


In 2015, India attracted $63 billion in green-field FDI, a global record that beat even the US & China. India is unquestionably the world’s most attractive consumption driven growth story with macro-economic stability. As a parliamentary democracy with a demographic dividend of 1.2 billion people and an entrepreneurial tradition that preceded the East India Company by centuries, India is on a roll on the global economic stage. Brexit trauma only reinforces the Indian story since it precludes a traumatic rise in US dollar interest rates and places a premium on secular growth story. This is India’s new tryst with economic destiny.




Dr. Raghuram Rajan’s lost passage to India

Monday, June 27th, 2016

By Matein Khalid


It is dangerous to speak truth to power in a time of cholera. It is dangerous to tell the truth, to call billionaire oligarchs who have looted state owned banks “crooked”, to call the Maharajah’s political courtiers “venal”, to criticize religious intolerance when a lifelong RSS zealot is the Indian Prime Minister. So Raghuram Rajan, the most brilliant central bank governor to serve India’s 1.2 billion people, obviously had to go. Billionaire oligarchs and the RSS’s brown shorts, stick wielding ideologues are the real kingmakers in Modi’s India seven decades after a RSS assassin gun down Mahatma Gandhi.


Raghu, as he once asked me to call him the only time we met at a New York conference in 1999, stabilized the Indian rupee, slashed inflation and the repo rate, saved India a sovereign credit downgrade, restored monetary credibility with the offshore fund managers who bankroll its 7.6% GDP growth rate, was the most respected Asian central banker at the IMF, the World Bank, the Fed, the Bank of England, the political chancelleries of the world. But a bigot BJP lawmaker, a nonentity who lost his teaching job at Harvard for his communal, extremist poison, branded him “not mentally fully Indian”. This would be hilarious if it were not so tragic that a peanut brained intellectual joke dares to judge Raghu, who I am almost certain will win the first Noble Prize in economics for India since Cambridge’s Dr. Amartya Sen.


This world class economist, a gift from the gods to India and my professional dismal science tribe, was not given a term extention while his predecessor, whose money printing cost Indians a 50% free fall in the rupee and who inflicted the draconian regressive tax of double digit inflation on 500 million poor Indians, served a full five years. Raghu, a man hailed as a genius by the cognoscenti of Wall Street, Liverpool Street and, yes, Dalal Street is sacked by the Prime Minister while men who have plundered India’s public banks and inflamed religious intolerance grace the inner sanctums of the BJP. This is wrong. This is shameful. This is unreal. This will haunt India for decades after Modinomics is exposed as nothing remotely similar to the Reagan/Thatcher economic revolutions that embraced the free market and rolled back the state in the 1980’s. But, friends, Romans, I publish this column to bury Dr. Rajan, not to praise him.


Raghu returns to the realm of ideas in Chicago where he is happiest. I do not blame him. A man who refuses to toady up to the political masters as RBI Governor is anathema to both Congress and the BJP’s imperious, imperial court. Arun Jaitley is a loyalist and a lawyer, not even an economist but he and not Arun Shourie is the Finance Minister. Men who value ideas and beauty do not crave petty power or black money slush funds in a Swiss private bank. Raghu should have heeded the advice of Lord Tennyson and the lesson of the Light Brigade. Ours is not to reason why, ours is but to do and die. We need meek, timid, compliant yes men at the RBI who do not call oligarchs and banksters “crooked”, who do not brand the Netaji Crooks R Us Brigade “venal”, who do not evoke the memory of the Nuremberg Laws (strange, I will be in Nuremberg next week!) in New Delhi 2016. We need men who can bat and ball, hail Caesar on command, dutifully scream yes sir, no sir, three bags full sir (sirji, in Pakistan, in the court of King Assi Tussi!).


Modi should really appoint another Tamil to be governor of the RBI. Dr. Subramanian Swami would be an ideal Indian ambassador to Wall Street. Rekha would be even better, a lady of grace and beauty even greater than Swami’s. It does not matter who is the next governor of the RBI because now we know why they get the job.


My Indian friends tell me Dr. Rajan’s sacking in a storm in a teacup, that he was no jewel in India’s crown, that it is rude to expose Emperors who wear no loincloths. I passionately disagree. As an investor in emerging markets, I live and die by the Latin world credere – belief. Without credere, there is no credit. So Modi and Jaitley have gravely damaged India’s sovereign risk and raised the risk premium for inflation, G-Sec issuances and the rupee. Yet this is far less important than the BJP’s power of politics and patronage – the Congress was no different, only far sleazier. The next RBI governor will have to curry favour at the court of the BJP princes, not insist that India’s powerless be defined in the image of the powerful, as they have been for all these centuries. I hope to shake Raghuram Rajan’s hand for the second time in my life. Raghu, you are my hero. India will never forget you.