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Episode 23 - Exploring India: Insights from a recent CG research trip – Part 2
Natalya Zeman
Equity Investment Director
Anirudha Dutta
India Macro Analyst
Himanshu Sharma
Equity Investment Analyst

In the second of two episodes, Investment director Natalya Zeman speaks to India specialist Anirudha Dutta and equity analyst Himanshu Sharma. Recently returned from a research trip to India the trio provide notes from the fields and discuss how Capital Group's boots on the ground approach informs our investment decision making.

Natalya Zeman is an equity investment director with eight years of investment industry experience (as of 12/31/2023). She holds a bachelor's degree from the University of Oxford.

Anirudha Dutta is an India macro analyst with 28 years of investment industry experience (as of 12/31/2023). He holds a postgraduate diploma in business management from the Xavier School of Management and a bachelor’s degree with honors in metallurgical engineering from the Indian Institute of Technology, Kharagpur.

Himanshu Sharma is an equity investment analyst at Capital Group with research responsibility as a generalist for India. He has 11 years of investment industry experience and has been with Capital Group for four years. Prior to joining Capital, Himanshu worked as a senior analyst at Pzena Investment Management. He holds an MBA from The Wharton School, as well as a master's and a bachelor's degree in technology from the Indian Institute of Technology. Himanshu is based in London.

Catherine Craig: In the second of two podcasts on India investment director Natalya Zeman, India specialist Anirudha Dutta and equity investment analyst Himanshu Sharma unpacks some of the current risks and opportunities in the region and how the recent research trip has shaped this thinking.

Natalya Zeman: Anirudha, Himanshu, thank you both very much for joining me for part two of our India discussion. Last time we spoke about our recent research trip to India and the centrality of these research trips to making investment decisions, understanding the long-term strategy of companies. Today, I want to unpack some of the risks and opportunities that we are focused on in India right now.

When we were in India, it was very clear to me that, you know, there was infrastructure building everywhere. Today there are now twice as many civil airports as there were ten years ago. We saw, you know, roads being built all over the place, taxi drivers telling us that that travel time had been halved in the last few years. We saw a lot of coordination between the government and the private sector, everything seemed very positive. Now Anirudha you live in Mumbai, and you know India incredibly well. What are your personal reflections currently? Are you really as positive as this trip left us feeling?

Anirudha Dutta: You know, over a period of time, India goes through, you know, waxes and wanes, in optimism and pessimism, and we have seen that over the last three decades, at least. I have observed that it would last three decades. One of the most, you know, apt quotes on India that I love to mention is India always loves to disappoint both the optimists and the pessimists. We have to bear that in mind when we speak about India, that there could be risks lurking around the corner. Having said that, I don't think I've been this positive in a long, long time and the same stands for the corporate sector as well. Whether small, medium listed, unlisted, large. You meet them and the number of good reasons for that.

You mentioned about the infrastructure build out, which clearly you can see for the first time. I mean, it's not China. So first I must tell our audience and anyone who's listening on to this, that India is not the next China in the same way as China has grown in 30 years. Having said that, the bids that India is coming from, it's really rapid development of infrastructure that is taking place. You mentioned about airports and airlines. You know, there are about 20 plus cities where today metro subway train facilities are being constructed, this is unprecedented in India. There are other reasons to be positive. One of the big factors we have to remember is the banking sector probably has not been in as good a health in a long, long time again. We have come through a decade on nearly a decade of clean-up process where the bank nonperforming loans are at the lowest level. And Himanshu, I'm sure, can speak more about it with the corporate sector balance sheets, which are largely very healthy. And that's why we see that when we today have a new investment cycle kick starting in a small way. It's all being funded with cash flows of corporate sector, the corporate sectors, capital allocation, the founders of the companies, the management controlling shareholders are lesser focused on that. The infrastructure development, the banking sector, health, you have the corporate sector health and balance sheet. Lastly a lot of you know, in the first two decades after liberalisation, I would say probably the first decade of this century, a lot of, the positivity around India was around the IT services. That continues to be an engine of growth even today, although currently we are seeing a slowdown out there. Even as that is slowing down, the global captive centres of emergencies are growing as rapidly and therefore the multiple engines or levers of growth today which are firing, which probably makes me more positive than I've ever been, in a long, long time. At the same point of time, as I said, there are always certain risks lurking somewhere around the corner that we have to be mindful about.

Natalya Zeman: Thank you. You paint a pretty positive picture. Valuations in India also reflect this positive picture. Himanshu, turning to you. How do you tackle the challenge of valuations in India today? Where are you finding opportunities?

Himanshu Sharma: I think first of all, you know, when we look at market valuation, there are always pockets of opportunities in specific companies. As a team, one of the things that I mentioned, was that a couple of years back when no one was looking at state owned enterprises, you know, as Capital Group, we did look at them, with a fresh, you know, perspective, me and bunch of our colleagues ended up investing, in the sector. And I think now the rest of, you know, the market has caught up in a way, but, you know, there are always, pockets of opportunity. The other thing is also, you know, like a part of the valuation premium that India's getting is because if you look at the risks, you know, first, let's tackle the financial risk, right? From a corporate balance sheet perspective, from people's personal balance sheet perspective, and from the country's balance sheet perspective, all those three balance sheets are very healthy. At the same time, there are very few countries in the world where we can say that the central bank, and the Finance Ministry have been, you know, handled Covid really well in the sense that there was targeted help that was provided to the people but, there wasn't any excess, liquidity in terms of freebies that was injected to the system that created a problem of, you know, intolerable inflation. I don't want to minimise the impact that inflation has had on the people because it's been true worldwide, but relatively speaking, to, you know, versus the rest of the world, India. And to be honest, Asia in general, has handled, that aspect really well. The other is that, as Arnold mentioned, the bank's balance sheets are really good, so they're happy to lend. Consumer in India is, you know, aspirational at a very interesting, you know, age. The demographics in India are really interesting. You know that aspiration combined with, combined with the, you know, triple balance sheet, which is very healthy right now that that has made people very optimistic. I think you know, when valuations are high in the market, we obviously have to be choosy among where we're investing. There are times when the entire market looks very attractive and there are times when we have to be pickier, so I think that discipline is super important.

Nataly Zeman: And that's really where our advantage comes in in terms of being able to go out on these research trips to choose companies to not have to invest in the in the whole market.

Himanshu Sharma: Absolutely. And I think, like if someone came to me and said that there are all companies in India especially, and you can invest for a really long time, I think, you know, then the definition of special gets diluted. But there will obviously be 5 or 6 companies that have such a long runway for growth that they might be, you know, good investments, even if the valuations look optically, very expensive.

Natalya Zeman: Anirudha, returning to you. One of the most memorable meetings we had when we were in India was with one of India's largest loan distributors. And the reason this was interesting was it gave us a pretty broad view across the whole economy. This distributor was connecting loans with consumers, wanting loans of various different types across the whole country. The meeting seemed pretty positive in terms of demand and growth. But were you concerned or are you concerned about any vulnerabilities?

Anirudha Dutta: You know, most senior bankers in India will tell you, and Himanshu and I keep hearing about it all the time, is that the bad loans are made during good times, and these are good times, but I still think it's too early to start worrying about it. There might be some pockets of vulnerabilities, but you see, for example, our regulator, the reserve Bank of India, has been right at the forefront and ahead of regulation trying to control these vulnerabilities. And this is just not true today. So as an institution, if I go back the last 20 years, so I mean I heard of the GFC, for example, it, you know, took risk rates up on, mortgages when I don't think it was happening in any other country. And we weathered that storm pretty well. And I think even now we are seeing that with the reserve Bank taking out risk, taking up risk rates on certain kind of personal loans, and so on.

What we need to appreciate when we see this growth. And the positivity is the kind of digital infrastructure that has been put in place, and the credit scoring and the credit bureaus that are set in place, the amount of data that is there today with the banks and the financial institutions to evaluate when they give loans is, really, not only state of the art, but probably ahead of many other countries in the world, particularly the digital public infrastructure that's happening, what this is doing. It has made credit accessible to a large section of the population, which used to be and, smaller companies, which used to be dependent on informal money lending, moneylenders. And that's kind of ending. That's why we are seeing this growth, this demand was always there in the system, but it was not being catered to. Access to credit is a big part of the growth story of India now, and that will remain for quite some time.

Natalya Zeman: Great. And staying on financials for a moment. So, Capital Group across a number of different funds is the largest institutional investor in India. We manage around 34 billion USD in Indian equities, and around half of that is invested in the financial services sector. So, Himanshu, turning to you, on a recent trip to India, we met with seven financials companies privately run banks, asset managers, insurance companies, state owned banks. What are the key drivers of opportunity that you see and that you like in this sector today? And how do you determine which companies to invest in and which not to invest in?

Himanshu Sharma: I think you're right that, you know, the vast majority of our investment in India have historically been in the financial services sector. But I think it's also a function of, where we've found opportunities historically. That does not mean, you know, going forward. That's the area where we will continue to find opportunities. Things that have stood out for the financial sector is that, you know, one of the one of the topics that we were discussing a bit earlier is valuations. In the financial sector, the valuations do seem to be, you know, much more palatable, less as, history was as the returns that these, companies make and the growth opportunity that lies ahead. Coming to an earlier point that you'd also mentioned was about the long term, nature at Capital Group versus some of our competitors.

I have tried to talk about this internally that I think if I look at the bare bear thesis on a lot of financials, it is about a lot of near-term content in terms, whether the margins are going to compress for another quarter or two versus, like me thinking about, what the loan growth in the system can be long term. What has been the historical relationship of growth to nominal GDP? What is the Capex opportunity in India? If you if you add all of those things up, I think financials are a very, very interesting area to invest in India right now where many of our competitors are worried about near-term margin pressures. And that has created a valuation opportunity in some of the best banks in India, which is much better than what it has been historically, so I'm very excited about that. Having said that, I think, in all the financials, as I said, the most important thing is the risk management. I think good loans, are made in bad times, and bad loans are made in good times. Right now, across the board most of the banks are reporting very low credit costs. There is a narrative that all banks are doing extremely well. I think the truth is, somewhere in the middle, banks are being run better than what they were in the past but there is still a huge quality difference. I think this gives us an opportunity to invest with the best banks when the valuation differences between the best and the worst isn't that much.

Natalya Zeman: Thank you. Pivoting and staying with you, Himanshu, for a moment to some of the consumer opportunities, if we look at, for example, you know, discretionary spending as a percentage of household consumption, it has risen substantially. It's pretty much doubled since 2000. And discretionary spending is expected to reach more than a third of household consumption by 2030. We met with a number of consumers facing companies, travel companies, beauty companies, food and beverage companies, restaurants, etc. during our recent trip to India. What sort of companies do you think will benefit from this rising demand of the Indian consumer?

Himanshu Sharma: Yes, I think for that we have to think about. Keep an open mind about the fact that the companies that have worked well in the past may not be the companies that will keep continue growing in the future. It's coming from semi-rural, rural, areas. It's coming from tier three, tier four, five, towns. So, companies who are fulfilling the aspirations of the consumer in those geographies with a good distribution network, with a product that is priced appropriately for that consumer, which are with a product which has been designed specifically for that consumer, those are probably going to do better than the other consumer companies.

The second thing is also, I think if you look at, penetration of products in India versus, let's say in China, things which were growing extremely fast in the decade 2000 to 2010, whether it was the toothpastes and the two wheelers, etc., you know, now, as the per capita income continues to grow, these spending might growth might come more in the discretionary part of consumer spending, which is why we need to keep an open mind.

The third thing is also, I think with the advent of digitisation in India, which has happened at a at a very strong pace, we are seeing a lot of digital first brands, which a lot of consumers are very happy to try. Some of them have not scaled well and hit, you know, plateau if you will but many of them are challenging the existing companies. It's very important to keep an eye on the disruptors and to make sure we know the disruptors well. I don't think all the disruptors will disrupt the big companies. A lot of big companies will continue to be very important but if you get 1 or 2 of the disruptors, right, it can be very powerful for our shareholders.

Natalya Zeman: So, a lot of drivers and a lot of different sorts of opportunities. On the digitisation across India, I mean, we could do a whole podcast on that topic, couldn't we?

Let me turn to any region and slightly change tack to another investment theme that was very present during our trip. One of the interesting meetings that we did was to a factory outside one of the big cities. The theme here that was very apparent were the opportunities for India as companies start to de-risk their supply chains out of China. The factory that we visited makes components for air conditioners. You've done a huge amount of work on roots, so does it have legs? Is it all right? What are your thoughts?

Anirudha Dutta: You know, just to answer it very briefly to start with, yes, it has legs, right. This is a theme which is an enduring theme. Given the geopolitical developments around the world, this probably lasts for a long time. At the same time, it's also true that India right now is not the biggest beneficiary of this theme. We have had, for example, Mexico, Vietnam, Cambodia or Bangladesh, depending on which product and which category we are talking about have been beneficiaries of this. Again, it was generally seen that India has lost the manufacturing race, which it has in many ways, right, compared to China, because China is the only country in scale that we can compare ourselves to. Now we have got another opportunity to wedge, sales into the global supply chain and it's happening, and there are multiple reasons. It's just for China plus one and the global geopolitics that surely a large part of it.

What's also happening is this government over the last ten years has refocused in a way on manufacturing, realising that manufacturing is for two reasons. One, if you take the example of the kind of company that we visited, the electronic supply chain, for example, India was becoming a very large importer of electronics, both components and finished products for the reasons which Himanshu spoke about earlier, about consumerism, for example, there was a genuine risk that electronic goods became another oil for India in terms of import dependence. This government refocused saying that we need a domestic supply chain, we need domestic production. For this, they extended certain kind of policy support right from some import tariffs to incentive schemes to overcome the disadvantages that India has in manufacturing. This has started yielding results when, for example, Apple comes and says that we want to have 25%, or a quarter of our iPhones being assembled out of India. Now that's a big statement. In the next 3 to 5 years, it may not reach a quarter, of the production, I hope it does, but even if it did reach 15%, it was 0% three years back. Zero. That’s a big deal for India. This has multiple ramifications around that. What we have to realise apart from China plus one, the government's effort, what's also changed is India has moved from, say, something like $1,000 per capita income to now about $2,500. We are going from $2,500 to $4,000. The next five years, it could be seven years, whatever, but certainly not more than that today. India, with this growth, economic growth, with the rising prosperity, we are already among the top 3 to 5 consumers in most products in the world. The market is sizeable today. I remember MNC telling me many years back that when the market reaches 5%, you become another huge market for them and see, and I think we have crossed the threshold now and crossing it as we speak. All this kind of makes one positive about the manufacturing sector in India.

Natalya Zeman: Thank you. Himanshu, what sort of companies are you finding that are benefiting from this China plus one reshoring whatever you want to call the theme within India.

Himanshu Sharma: I think India has immense engineering talent, immense engineering talent, and I think the companies that will probably benefit the first from China plus one are areas where we were already doing good, where we have a brand name globally for India and where now it's just very easy to increase market share. If you look at specialty chemical companies in India, they have proved over a very long period of time that they have the capability to scale up to provide the product for the international companies, while also respecting Indian intellectual property laws. It is a super important edge that India has. There is probably no country of India's size in the world, which can make chemicals at the price that Indian companies are able to provide, while also respecting intellectual property. That is going to be a huge advantage for India. Similarly, I think electronic manufacturing, it has just started the different differentiated duty structure that the government has. When this boom really started, I thought it will just be about assembling phones, but it keeps going up the value chain. Should we be a little bit careful about how the pace of that development will be? You know, it's an experiment that is not always flawless. There will be lessons that will be learnt along the way. India is a democracy, and it will also be important to make sure that any decision making involves all the stakeholders and it cannot be rammed through, like it might be possible in some other countries. Having said all that, I think the basic ingredients are there for a success in these two sectors, and I'm very excited about that.

Natalya Zeman: Thank you so much. Thank you both so much for joining me for this India podcast.

In part one, we delved into the sort of research that we do here at capital and how different parts of the research team work together. During part two of the podcast, we spoke about the investment opportunities, the financials, the manufacturing companies, the consumer companies, the infrastructure opportunities, some of the specialty chemicals, chemical companies, as well as covering some of the risks that we are focused on today given those valuations in India. Thank you both very much.

Closing disclosure

We're always trying to get better, so if you have any feedback, including topics you'd like to see addressed in future episodes, send us an email at And if you like what you heard today, please follow us on your favourite podcast platform.

For Capital Ideas, this is Matt Reynolds reminding you that the most valuable asset is a long-term perspective.

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