India poses a unique opportunity for foreign investors, says Ajay Tyagi, manager of the UTI India Dynamic Equity Fund
HOW HAS INDIA’S STOCK MARKET EVOLVED?
In 1991, we opened up our economy to private capital, both foreign and domestic. The stock market has followed this progression and
the market capitalization of India has been approximately 90-95% of GDP during the last 10 years. India’s secret sauce is a combination of an entrepreneurial spirit and a massive consumer base. This secret sauce has provided a framework for wealth creation and made India the fifth largest economy in the world after the US, China, Japan and Germany, and the second fastest-growing emerging market after China. Presently there are three mega-trends at play – Indian businesses are acquiring scale, more companies are being listed, an increasing number of young people are buying stocks online. These trends are likely to accelerate thereby creating a vibrant culture of equity ownership in the country.
WHAT IS THE CASE FOR INVESTING IN INDIA?
Economic growth is driven by three things: increase in labour, increase in capital and increase in productivity. India’s working age population, aged between 19 and 60 years, is about 60% of our overall population. Over the next 30 years, this population is only going to grow and this is what separates India from most other emerging markets – at least the bigger ones like China, Brazil, Russia and South Africa – where working-age population is going to massively decline over the next three decades. India is in the top quadrant as a recipient of capital – people respect our democratic framework. We are an open market and have not reversed any of the policies of the last 30 years. In terms of productivity, we are a lot less efficient than many other emerging economies and structural reforms being implemented by prime minister Modi will be a key driver for future growth. Productivity gains will unlock India’s promise and a reform like the Goods and Service Tax is expected to add 1% to 1.5% to GDP.
WHAT DOES AN ALLOCATION TO INDIA BRING TO AN INVESTOR’S PORTFOLIO?
It brings consistent and predictable growth: we will remain a high-growth economy for a long time. Within an allocation to emerging markets, it also provides strong diversification. Many of the larger emerging markets are dependent on exports for growth; in India, the key driver is domestic consumption.
India is likely to surpass China’s working age population within this decade and therefore is expected to grow faster than China for decades as Chinese growth stabilises.
WHAT ARE THE MAIN ATTRACTIONS OF YOUR INVESTMENT APPROACH?
The most important pillar of our philosophy is to never compromise on quality. Quality has many definitions, but for me, it’s about investing in businesses that can deliver returns on capital substantially and sustainability higher than the cost of capital. We are buy-and-hold investors, investing in businesses, not stocks. We are only interested in the outcomes businesses can churn out – their ability to solve a particular customer need and maintain high margins.
HOW HAVE YOU NAVIGATED THE COVID-19 CRISIS?
Our portfolio hasn’t changed much in the past 12 or 14 months. Our annual portfolio turnover ratio is low anyway – 10-15% over the past 10 years and has been in that range in the past year. The reason is simple: we are buying resilience businesses – the leaders, the champions, the stronger players. Most of them have net cash on their balance sheets and can acquire weaker players at attractive valuations. This was not something we saw coming, but we were very comfortably positioned. Unsettling events happen every other decade. The reasons are always different, but quality businesses become stronger at the other side of such events.
CAN YOU TELL ME ABOUT ONE OF YOUR HIGHEST CONVICTION HOLDINGS AND A RELATIVELY NEW PURCHASE?
Bajaj Finance has been in our portfolio for more than four years and our largest holding for about three. Its core business
is lending for low-ticket items – washing machines, refrigerators and LED TVs. It has been using technology for analytics on its borrowers for many years, which gives it a very strong lending framework. It continues to grow at more than 30%, find new ways
to reach customers and understand their behaviour. One of our more recent additions stands to benefit from the government’s production-linked incentive scheme. Ever since Covid hit the world there has been a lot of emphasis on having medical infrastructure in place. India still imports a lot of medical consumables and we picked up a company that is still very small but a leader in medical consumables production – Poly Medicure.
It is very high quality with no debt on its balance sheet. It has been growing in the mid to high teens over the last 10 years but could now be looking at even higher growth rates.
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