Accessing India's growth: why you need more than a GEM strategy

India's economic prowess has become a focal point for institutional investors eyeing long-term growth. Traditionally, investors lean towards Global Emerging Market (GEM) strategies to tap into this opportunity. However, as India’s economy and the listed equity universe has evolved, these universal investment vehicles are likely to become less useful. A more nuanced approach can provide direct exposure to those companies which are at the forefront of India’s transformation.

FSSA, with its team spanning Hong Kong, Singapore, London and Edinburgh, has spent 30 years delving into India’s investment landscape.

A nation braced for change

India is expected to deliver attractive growth and emerge as the world’s third largest economy by 2030. Its allure as an investment destination is underpinned by a large population of aspirational and young consumers. Over half the country’s citizens are under the age of 30, and as the economy formalises and per capita incomes grow, their consumption preferences are changing.

Dominant franchises in sectors such as fast-moving consumer goods (FMCG) are poised to gain market share as the economy becomes more formal and affordability of premium products increases. For example, Colgate-Palmolive (India)¹ has been present in the country since 1937 and has a dominant position in India’s oral care industry. Per-capita consumption of toothpaste in India is half of that in other developing countries, and average selling prices are substantially lower as well. We believe consumers will begin to upgrade their products from basic formulas to more premium versions. Given that the Colgate brand has more than a 50% share of the Indian market and strong pricing power, profitability should improve over time. The company also has the opportunity to enter other categories including personal care which forms a large part of the parent company’s product portfolio globally.

With rising per capita incomes, Indian consumers are also spending a larger share of their incomes towards more discretionary products. This is creating opportunities for companies such as Blue Star², one of the leading air conditioning brands in India. The penetration of air conditioners remains exceptionally low in the country at 7%, compared to over 70% in many other developing countries. With higher incomes, the growth in the air-conditioning industry has strengthened in recent periods. Blue Star has gained market share consistently over the last decade by introducing new variants and expanding its distribution. It also operates a leading portfolio of commercial air-conditioning and refrigeration products which is benefiting from the growing infrastructure development in India. Over the coming decade, we believe the company has the opportunity to grow multi-fold and improve its profitability significantly as it gains operating leverage from its scale.

Infrastructure development and financial services

However, it’s not only FMCG companies which are poised for growth. Other industries such as infrastructure suppliers, particularly paint and cement companies (for example, Kansai Nerolac India³ and Heidelbergcement⁴) stand to benefit from the nation's quest for improved quality infrastructure.

Well-managed companies in these industries, boasting high returns and low debt, should thrive as India develops. The spotlight also falls on the financial sector, where private banks are expected to capitalise on the increasing penetration of financial services across the country.

FSSA’s investment in India’s largest private sector bank, HDFC Bank⁵, is particularly relevant. State-owned banks which still control 60% of India’s banking deposits and loans, are often inefficient and even corrupt. As a result, proficiently managed private banks such as HDFC Bank have expanded their market share significantly over the last two decades and this is likely to continue. The management of HDFC Bank has consistently demonstrated a conservative approach towards managing risks, while sustaining top-tier return on assets (ROAs) through various economic conditions. We believe that HDFC Bank, along with other prominent private financial institutions in India like ICICI Bank⁶, possesses considerable prospects for growth in the future.

A dedicated strategy offers more opportunities to tap into India’s growth

India, with its diverse economy and vibrant culture, presents a unique set of opportunities for investors. While GEM strategies offer broad exposure to emerging markets, they may not provide the targeted focus needed to navigate the intricacies of India’s dynamic landscape. Despite recent market rallies, India remains a compelling investment destination for an active, bottom-up investor. The nation’s impressive growth, strengthened corporate governance standards and large universe of companies earning high returns on capital contribute to its appeal.

Source: Company data retrieved from company annual reports or other such investor reports. Financial metrics and valuations are from FactSet and Bloomberg. As at 28 March 2024 or otherwise noted. Portfolio holdings data as at 29 February 2024.

¹ Largest holding in the consumer staples sector
² Largest holding in the industrials sector
³ Largest holding in the materials sector
⁴ Largest cement company in the portfolio
⁵ Largest holding in the financials sector
⁶ Second largest holding in the financials sector