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India - Monthly Manager Views - June 2021

FSSA India webcast focus on the India Subcontinent Markets and Asia Pacific equities

How will India’s economy evolve over the coming decades? Over the past decade, India has had its fair share of crises and reforms. Despite all that, India’s structural growth story remains unchanged, and it is now the fifth largest economy in the world.

We have just returned from India – the first investment research trip in India for our entire team in over two years. It was a liberating break from constantly hearing “You’re on mute!” on video calls whilst simultaneously being forced to appreciate your kids’ music lessons in the adjoining room.

“We already have (exposure) to India via our Asia and Regional strategies.” We often hear this comment from prospective clients who are considering an investment in the FSSA Indian Subcontinent strategy, but are not yet convinced that a dedicated allocation would indeed be worth it. Call us biased, but we have been arguing in favour of a standalone investment in India for many years.

We have written about the spate of Initial Public Offerings (IPOs) in India and our reasons for staying away from them, for the most part. This time, we want to talk about why new listings are important to keep the market vibrant and to keep the entrepreneurial spirit in the country alive.

In the first three months of this year, 17 new companies have listed on the mainboard exchanges in India, more than in all of 2019 or 2020*. High levels of retail investor participation and continuing inflows for domestic mutual funds have meant that these new issuances have been lapped up by eager investors.

Year to date, 34 companies have listed on the Indian exchanges raising a total of USD7.2 billion1, a figure which has been surpassed in India only twice before in the last 12 years on an annual basis.

We had entered the meeting with a leading air-conditioner company in our portfolio worried about the risks to its growth and profitability, as the second wave of Covid-19 affected consumer demand and raw material costs rose sharply.

As with global automotive manufacturers, several Indian automotive original equipment manufacturers (OEMs) including Maruti Suzuki, Mahindra & Mahindra (M&M), Tata Motors and Eicher Motors have recently announced that the shortage of semiconductor supply has impacted their production schedules.

Land, Labour, Capital and Entrepreneurship. These are the well-known “Factors of Production” as defined by classical economists. The Entrepreneur (or Company) is the one that combines these factors to earn a profit.

Our investment philosophy is to back owners and managers with whom we feel strongly aligned. These owners typically have track records of treating all stakeholders fairly, in both good and bad times.

50x P/E!1 70x P/E! 100x P/E! Valuations that were outrageous just a few years ago are commonly bandied about by most of the investment community these days. But, ask any respected business owner and they would shake their head in disbelief.

Every company we speak to these days tells us about the cost pressure that they are facing, emanating from rising global commodity prices. Domestic steel prices have risen by 35% y/y, copper by over 50% y/y and palm oil by over 60% y/y through February 2021.

FSSA India webcast focus on the India Subcontinent Markets and Asia Pacific equities

In our team, mistakes are teachable moments to be shared and learnt from. Thankfully, for us and our clients, in our history of investing in India we have managed to avoid the big ones.

Sree Agarwal and Shivika Srimal, investment analysts at FSSA Investment Managers, believe there are a number of reasons to be positive on India in the long run, and shared their rationale at the FSSA Forum 2023.

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.

Over the last few years, we have been selling many companies which have become expensive. On the other hand, there are still companies that are attractively valued with robust growth ahead.

Last year, we wrote about the bubble we were witnessing in the initial public offerings (IPOs) in India. Now, we see a different type of bubble forming – in these cases, the business is often a proven one, with a strong track record and high return profiles.

After a recent meeting in Mumbai with the top management of Mahindra & Mahindra we came back with a clear message – M&M’s commitment to its purpose does not mean that it will continue to operate loss-making businesses.

Ten years ago last month, I assumed lead management responsibilities for the FSSA Indian Subcontinent strategy. How time has flown!

From our discussions with companies in the FSSA Indian Subcontinent equity strategy, it is clear that they are well-positioned to deal with the impact of the second wave of the virus on their businesses.

There have been many disruptions in India over the past decade, with frequent regulatory reforms and a costly Covid-19 experience. However, the positive effects of the reforms are now being seen, with market leaders across sectors gaining rapidly from the formalisation of the economy.

That would perhaps be an accurate description of what drove some of my portfolio decisions as a young fund manager, roughly 15 years ago during the global financial crisis (GFC) meltdown.

Corporate India’s resilience has been severely tested over the past decade. Since 2010, there has been a long, drawn-out downturn, caused by a series of corruption and scams, a banking and financial crisis, and now a devastating health pandemic.

Learn more about investing in Indian equities with FSSAIM today. Our India investment fund strategies aim to achieve sustainable, long term growth.

As disposable incomes have grown, we find that Indian consumers are now moving up the ladder to buy more premium products, or buying discretionary products they could not previously afford.

As the saying goes, those who stand for nothing, fall for everything. And so it is that we believe there isn’t a price for every business. Most are better left alone in the interests of sleeping better at night. Staying disciplined to our process means erring on the side of caution and avoiding companies where we have lingering suspicions about the governance practices.

FSSA Investment Managers has been investing in Asia and global emerging markets for three decades. We are conservative investors, and resilience during market sell-offs has underpinned our long-term performance.

Fund Manager Q&A

In response to recent questions from our clients, we had a conversation with Martin Lau, managing partner and lead portfolio manager for the FSSA Asian Equity Plus and FSSA China Growth strategies.