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Published on: Sept. 26, 2022, 9 a.m.
Buy India gains momentum
  • In 32 years, the Sensex has gone up 86x

By Daksesh Parikh. Executive Editor, Business India

There is an unmistakable aura of optimism enveloping India. An overarching sentiment which can neither be quantified nor measured. If India were a company, its shares would definitely be undergoing a rerating. Investors move long ahead of an event and long-term investors would be looking at India’s GDP growth pattern. It became a $1 trillion economy in FY2007, doubled over the next 7 years in FY14, and in 2022-23 is expected to become a $3.5 trillion economy, on its way to becoming a $5 trillion economy by FY2025-26 and a $10 trillion one in another 5-6 years.

We could leave the economists to do the SWOT analysis detailing the strong and weak points of the economy. What is important is that the country’s GDP, which has really started accelerating from 1990, will only be going up. 

The stock market has been growing in phenomenal fashion. In January 1990, the Sensex was 685. Currently it is hovering around 60,000. In 32 years, the Sensex has gone up 86x. With a reformist government in place and political stability at the centre likely for the next few years, investing at this juncture provides a good opportunity to investors with a long term horizon of 5-10-15 years.

Of course, the move will not be unidirectional all the time. Currently there are talks of recession in the US and Europe. Inflation is raging high across the globe. Some temporary aberration may be in store. But the upward bias is clearly unmistakable. From $5 trillion to $10 trillion may require some out-of-the-box thinking by policy makers who will have to make India future-ready after 10, 20, 30 years and not just rely on traditional industries to make the leap forward.

Raamdeo Agrawal, chairman and co-founder of the Motilal Oswal Financial Group, who is an assiduous proponent of the compounding principle says: “Compounding of GDP growth over the years brings in greater and greater income. India is 75 years old and as it grows so will the GDP. “Compounding the past and compounding the future,” is one of his favourite themes. With political stability the government needs to take more steps to step up the pace of compounding in the future.”

When we are looking at banks, we require at least five more large banks to ensure credit dispensation goes up as the economy accelerates. Currently the big banks like SBI, HDFC, ICICI, Axis and one or two nationalised banks account for the bulk of the non-farm credit. What we require is some larger banks to supplement their efforts.

  • The government has to accelerate the pace of compounding the future. It requires to rethink its policy of giving bank licences to enable creation of large banks. The GDP’s growth to $5 trillion and beyond require more credit dispensation by banks

    Raamdeo Agrawal, Chairman and co-founder, Motilal Oswal Financial Grou

Growing bigger and bigger

There is a case to be made for granting licences to large business houses to build and scale up banks. Small banks and payment banks cannot give credit to meet the growing demands of industry. He adds that with companies growing at a compounded growth rate of 12-15 per cent and the blended portfolio of companies growing faster, it is essential to look into the issue of building banks of global size and have more banks rather than making some banks grow to the category of becoming ‘too big to fail’. 

“I am confident of markets growing bigger and bigger. Retail investors have started to invest in markets. That I feel is the biggest evolution of India. From 9 million new investors the investor population will soon become 100 million. Seventy per cent of the money will be in equity. Retail investors will act as a counterforce to FIIs. The other area which the government can look at is using technology more effectively. Have digital systems in courts. Productivity will improve. Individual income has to grow from the current $2,500 to somewhere near $12,500 per person. 

India is indeed in a sweet spot as compared to other countries. Amongst the major markets its year to date returns are 8.2 per cent, a tad below Brazil and a little over Indonesia. At the same time, the major markets, including UK, USA, Russia, Australia and China have given negative returns. With a proper selection of good companies, the bended growth of one’s portfolio can grow even more. Investors with 5-10 years can see their wealth grow manifold times. The key is in selection and longevity. 

“We are not unduly focussed on the events in the US markets, EU or any global markets or even events in India which we believe, are, at best transient in nature,’’ says Rajeev Thakkar, CIO and Director of PPFAS Mutual Fund. “We try and optimise returns across business cycles. Good management and returns of net worth and returns on capital are the two fundamental things we see. We wait for an opportune time and have a long holding period of at least 5 years. Longer holding period protects capital in a downturn.” 

Thakkar, a CA and CFA, ICWA says every downturn is looked as a buying opportunity. Investors in the fund from September 2017-2022 were not bothered about Covid.  Parag Parikh Flexi Cap Fund was launched in 2013 and currently has a corpus of over Rs26,000 crore. It has given a CAGR of 19 per cent since inception and is amongst the best in its class. As a fund manager he is not allowed to give stock-specific recommendations. However a look at his fund gives some good insights.

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    Not unduly focussed on the events in the US market, EU, global markets or even India which we believe are at most transient if you take a longer view of 5/10 years. We try to optimise returns across business cycles

    Rajeev Thakkar, Director, PPFAS Mutual Fund

The fund has around Rs5,300 crore or a little over 21 per cent of the total AUM in foreign securities such as Alphabet, Microsoft, Amazon and Meta Platforms. HDFC, Bajaj Holdings, ITC, ICICI Bank, Axis Bank and Power Grid make up nearly 35 per cent of the AUM. The rest are in equally well managed companies.

In the 1990s getting information about companies was a herculean task and one only had  annual reports to study the company and get affirmation with only one’s broker, friends and relatives. The quarter by quarter reporting for companies became mandatory much later. Now, with the information influx due to the spread of technology and better internet connectivity, smart investors are flocking to the stock exchanges.

Higher coverage in newspaper, magazines and the spread of internet news and TV live coverage assures that the investor population is growing. Besides the total number of investors, it is also important to see the dispersion of investor base across India. From largely a western phenomenon in Gujarat and Maharashtra, investors are now spread across 32 states and Union Territories.

The growth in the number of investors in percentage terms is rising across states. Chhattisgarh has recorded a 60 per cent growth over 1 year till 21 September. MP, with 55 lakh investors, has seen a growth of 73 per cent; Haryana, Nagaland, Jharkhand and Nagaland have seen investor growth of over 50 per cent, albeit on a lower base.

Corporate scaling up

“From a 5-year and more perspective, I feel India will be a differentiating market globally,” says A Balasubramanian, MD and CEO, Aditya Birla Sunlife Mutual Fund. Growth in the economy will only be a matter of time. The policies are aligned to growth  and scaling up in the corporate sector. India is managing the energy crisis much better than other countries. Overseas as also domestic investors  are looking at political stability in the face of uncertainty in other markets.

“The buoyancy seen currently is due to several factors. Continuous reforms will see better results in the coming days. We will see higher traction in the manufacturing sector; we are already seeing higher and higher GST and direct tax collection. Government focus in building digital platforms like ONDC will see MSMEs benefitting and scaling up.”

The government is also taking the right initiatives on the agri front to ensure farmers get a good income. The Gini index, which is nothing but a representation of inequality, may also improve quite significantly due to efficient transfer of social benefit by the Government, leading to rural India driving consumption. 

“I will look at the banking and finance sector. Over the last two years, banks have significantly mitigated the NPA policies and stable deposits. The auto sector could see a good revival as might consumer durables as well as the capital goods sector. The commodity sector could see volatility but prices are expected to remain at elevated levels in relation to earlier years,” says Balasubramanian.

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    A developed world recession will reduce some problems that India faces due to high oil prices, concerns around current account deficits. Inflationary pressures will also reduce

    Nimesh Shah, MD & CEO, ICICI MF

Nimesh Shah, MD and CEO, ICICI Mutual Fund says: “While there are concerns around a recession in developed economies, we are of the view that India will not go through a recession.” He adds: “A developed world recession will reduce some of the problems that India faces due to high oil prices; concerns around the current account deficit and inflationary pressures too will substantially reduce. While equity markets may correct, we should not be too worried about that as India remains one of the most structural markets in the world. Use this correction as an opportunity to invest for the long term. Currently, in terms of valuations, Indian equity markets are not cheap and if a global recession comes by, it will be a good time for people to move some money from debt to equity.”

 “The market cap of all companies will also move up to over $10 trillion in the coming 13 years,” says Deven Choksey, MD,  KR Choksey Investment Managers. “Some of the shares will grow faster and generate much higher profits than the rest.”

Building scale

Choksey, like some other experts, is also of the view that large caps will grow bigger in the coming years. “Companies like Reliance Industries which will have an EBIDTA of Rs1.40 lakh crore this fiscal may well see a faster growth and EBIDTA could be more than double to Rs3 lakh crore over the next 4 years or so. HDFC Bank post the merger could well become a Rs50 lakh crore company during the same period. Tata group or Adani group may also grow substantially during the next 5 years. The point is that many of the large Indian companies will be building scale to match global giants. They will be able to generate huge profits which will be able to absorb shocks better and execute larger projects to  grow faster.”

Some sectors which will do well: “New material and alternate energy sectors in solar, hydrogen, wind, ethanol could see many a midcap company scaling to become large cap companies. New storage companies for green fuel storage, batteries, hydrogen, etc could also see several companies becoming bigger. As would companies in new materials; production or its ecosystem businesses could see companies scaling up to greater heights,” adds Choksey.

He points out that sugar companies which were rated as commodity companies up till now have now changed the business model to ‘recycle’ companies. Their dependency on sugarcane procurement is well taken care off under the MSP program launched by the government for farmers. The higher yield due to modern agri inputs techniques applied in cultivation are resulting in predicable outputs of sugar or ethanol (as the case may be). India exports about 20 per cent of sugar production and will soon blend about 20 per cent ethanol in petrol for transportation.

The changed DNA of sugar companies from agri commodity products to recycled industrial product will create a value chain comprising of ethanol as alternate energy, co-generation of power, paper from residue waste of bagasse and extract of bio-nutrients which are used in food and pharma manufacturing, etc. Sugar companies are bound to attract green funds for growth. Ethanol production, which is around 520 crore litres, will increase to 1,150 crore litres by 2025-26.

  • Government focus in building digital platforms like ONDC will see MSME benefitting and scaling up. I would look at banking, auto, capital goods and consumer durables

    A Balasubramanian, MD & CEO, Aditya Birla Sunlife MF

The adoption of industry 4.0,  aided by the metaverse and adoption of AI, ML, DL, AR, VR, blockchain further aided by the availability and adoption of 5G technology will result in massive transformation of various businesses and will benefit capital good players like ABB, Honeywell, Siemens, says Choksey. 

 Better connectivity will result in better production planning which would also result in expanding yield of conventional business of the likes of Indian Oil, HPCL, BPCL and redundancies. Better planning and improved productivity will see higher profitability. Businesses which are technology enabled will see a rerating. More than technology, it is technology platform companies and companies operating business models of Software As a Service (SaaS) which will scale up faster and could be valued more. 

 Most experts whom Business India spoke to were optimistic about markets doing well over the next decade and beyond. “I am bullish. The India story has come of age,” says Ajay Garg, Founder and MD, Equirus Capital, a full-fledged financial company. I only wish I was 10 years younger,” says the investment banker with 26 years of experience.  The banker, who has played a key role in taking new issues to the market also runs a successful PMS business managing an AUM of Rs625 crore.

Discovering undiscovered stocks

He says that we should look at companies with good cash flows and high returns on net worth and capital.  Companies with high growth without compromising on margins.  The next 10-15 years will put India in a different league altogether. While Garg does not talk about individual stocks, his PMS gives a good idea of his philosophy of investing in undiscovered stocks with good leadership potential. Seventy seven per cent of his AUM in the Long Horizon Fund is in small caps with around 12 per cent in midcaps. Thangamayil Jewellery contributes to over 10 per cent of his AUM while Vadilal Industries and Pratap Snacks are the latest additions.

 Like in every sector, some experts are more cautious. Dilip Bhat,  Joint Managing Director at Prabhudas Lilladher Pvt Ltd explains that the Indian markets look arguably expensive from the current levels. However, the strong growth of retail investors is providing good support in this turbulent market. They are becoming a parallel pillar to FIIs. As markets the world over are facing volatility due to political and economic upheavals, Indian markets too will echo and feel the heat. It will be difficult to stand out as an island of growth.

On the flip side however, India may become a beneficiary of reallocation of global portfolios away from China. Even if a part of this money comes to the markets, India will see good support from FIIs. “The manufacturing sector can emerge as a major theme and real star as there is global reshuffle in outsourcing. India has proved to be a strong contender in this space. India can outperform major international markets over the next 4-5 years and give handsome returns as everyone will be compelled to keep India on the radar.

  • We like L&T, ITD Cementation in the Build India segment, ICICI, Bank of Baroda in the banking sector, HDFC Life. In apparels, Aditya Birla Fashions looks good. Kaveri Seeds in agri segment.

    S Ranganathan, Chief of Research, LKP Securities

Over the next 4-5 years stocks which look good include ITC, L&T, ICICI, SBI, Mindtree, BEL, Sun Pharma DLF and ABFRL (Aditya Birla Fashion & Retail).

Blossoming of Apparels

Some experts feel that one has to keep track on business cycles if the investment horizon is 5 years. S Ranganathan, head of research at LKP Securities with over 25 years in the field has spent the last 15 years with LKP. He says: “With the NIFTY trading at 20x FY23E earnings it is very important for investors to focus on the business cycle since every business operating in any sector has a life cycle. Hence, for investors looking at a five-year window of opportunity the screening of the usual factors impacting businesses across market capitalisation is of utmost importance. We are constructive on India-centric businesses going forward in a world which has slowed down and is fighting inflation by raising rates.”

Blessed with abundant rainfall and a reformist government aiming to improve ease of doing business we pick stocks like Larsen & Toubro & ITD Cementation in the Build India segment even as we remain optimistic on the prospects for the ESG-compliant PSU-NHPC in the power segment.

“We prefer ICICI Bank, Bank of Baroda & HDFC Life Insurance to participate in the growth of banking, life insurance & general insurance. Apparels as a space is fast blossoming into a very interesting theme which in our view can be co-nurtured through Aditya Birla Fashion & Retail (ABFRL).

The small-cap space has a variety of nuggets and we pick Kaveri Seed Company in the agricultural segment which is witnessing a big transformation on account of food security,” says Ranganathan..

While every expert has his own favourite sectors or companies, what is noteworthy is that most are bullish about the future prospects for the country. While many feel that large companies will become larger and reap larger and larger profits, retail investors should also look at midcap and small caps. Allocation can be as per the stomach to absorb risks. But that is where the real growth in percentage will lie. Index funds which mirror large caps and midcaps or even small caps, could also be looked at.

Recession in India looks remote and even if there is a slowdown, it will not last for long. In recent times the sharp dip in the Sensex was seen post the sub-prime crisis in USA where it lost more than 50 per cent from December 2008 in 10 months or so. But the recovery was equally quick. Negative returns may be present for a few years but as long as optimism remains recovery will be equally swift. Those willing to take risks can expect to see their wealth grow at least in double-digits, on an average. 

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