Aubrey Podcast: Andrew Dalrymple’s Post-Trip Insights From India

Transcript

Mark Martyrossian: Good morning, everybody. I’m Mark Martyrossian, a director of Aubry Capital Management, and I’m joined today by Andrew Dalrymple, one of my partners. Many of you will know Andrew of old, but for those who don’t, he founded Aubry Capital Management in 2006 and is one of the PMs on our emerging market growth strategy. Andrew has been an investor in India for over 20 years, and I asked him along today as he’s just back from a trip to Delhi where he saw a large number of Indian companies. So, Andrew, in general terms, what were your impressions.

Andrew Dalrymple: Yeah, well, thank you, Mark. I mean, the amazing thing about going to India is always that it’s a sort of assault on your senses. And I suppose it begins really even when the airplane from London arrives at about midnight, give or take. You’re immediately assaulted by the heat, and the noise, and the intensity of the place. You know, it’s quite noticeable. If you were to get off an airplane at Heathrow at one o’clock in the morning, although the airport would probably be closed by then, the roads would be deserted. But even a short 10-mile journey to the hotel near the airport in Delhi is just an absolute battle, with six lanes of traffic all going in one direction, motorcycles, cars, vans, lorries. The impression is really of a country that is just going for broke in a real hurry, and that was the first impression and in a way was reinforced very strongly by the meeting with companies over the course of my week in Delhi.

Mark Martyrossian: Okay, Andrew, I know you’re keen to get on to some of the bottom-up opportunities and the energised companies that you saw there. But before you do that, could you give us an impression of how you felt about the macro condition of the country?

Andrew Dalrymple: Yeah, I mean, I’m not breaking any new ground here by saying that India is growing extremely strongly. People are forecasting GDP growth of around 7% this year. What is a notable achievement of this growth is that inflation is very much under control. For most of the first 20 years of my career of looking at India through to pretty much the mid 2010s, Indian inflation was always running at about 9 to 11%. Currently, it’s running at about 4.5%, which has made a notable difference to business conditions in the country. That has mainly come about because of we’ve had 10 years of Prime Minister Narendra Modi running the country extremely well. He’s instituted material changes to the tax regime, massively improving the infrastructure, massively improving things like electrification, peoples access to finance and bank accounts, and indeed the digital economy, which I’ll talk about later when I talk about companies.

Now, much was made in May when the election results came out and the BJP under Modi didn’t achieve an overall majority. But he’s in a coalition with about five or six smaller parties who are very much like-minded. The growth game, the very business-friendly environment looks set to endure for at least the next five years, if not longer than that.

I did I ask quite a number of companies during my meetings whether they thought the politics had really changed, because India did suffer badly during the 1960s through 1980s by a Congress government closely aligned to Russia, very socialistic, very very business-unfriendly, held India back massively through that 30 or 40 year period. And I said to them to a number of business leaders, do you think it is properly changed now that India is now on a completely different path and they were absolutely unanimous in their view that it was. Which is very encouraging, I mean, of course, in a democracy, these things can always change, these things don’t endure forever, but for now, at least the macro conditions look excellent, the politics look stable, and the business conditions look exceptionally good for Indian corporates.

Mark Martyrossian: Obviously India, Andrew, has been a great performer for many months now. One of the most frequently asked questions, concerns if you like, that I hear from investors is about the valuations of the market – is it all in the price?

Andrew Dalrymple: Well, it’s always a question that everyone asks, I mean the market P/E is about 21-22 at the moment, which is at the top end of its range and it still continues to make very good progress, what we have seen in the last year is that Indian earnings have actually exceeded the market growth, so the P/E of that has come down a little bit since this time last year. It’s still at the top end of its range, I’ll concede that. What I thought was very interesting was, I was at a conference with about 250 odd other investors in India, and almost universally they were of the same view: “We’re underweight India. We can’t quite handle the valuations. What do we do, we’re regretting where we are.” It troubles everyone really, It has troubled us less because we’re more experienced investors, and we know that Indian valuations are traditionally very high. I think what a lot of people don’t get their hands round is the domestic nature of Indian businesses, it is a very complicated, very disorganised place. If you want to be a retailer in India, a successful one, you probably got to get your product into anything between 4 and 6 million outputs around the country. You’ve got to put a distribution change together, a cull chain together, whatever it might be, it’s exceptionally difficult, to a very large extent, those sort of businesses are dominated by incumbents who have been there for generations in some cases, and are really not going to shift. The other thing to say is that India is also very much domestically focused, they don’t allow e-commerce businesses to be set up in their control by foreign entities. And so, Amazon, for example, who is operating in India can only operate it as a marketplace, it can’t sell directly to customers. And so the business conditions from that respect very much favour the Indian incumbents and startups. And the other thing, finally to say is that actually it’s the long term nature of the Indian growth opportunity, and I don’t think people price that in. People look too short term, it sounds like a rather trite thing to say, but quite often you can look ahead and think the P/E is incredibly high but the reality, one, two, three, four years down the track will look so different. And the growth of some of these companies is astonishing, the opportunity is really amazingly good, and we just think it is worth paying up for those valuations. And the final thing to say about valuations which I think is a good justification for the higher valuations in India is that I honestly think that the Indian managements are the best in Asia, there’s no question about it in my mind. They are incredibly well-educated, they’re very articulate, many of them have been to business schools in America and elsewhere, which isn’t necessarily a huge endorsement, but most of them have been committed to their companies that they work for or in control of for really substantial periods of time. There’s a great deal of corporate loyalty I would say in the senior managements of Indian companies. So really it’s a combination of all those things that make India an astonishingly good growth opportunity, and a very good long-term one at the moment.

Mark Martyrossian: You obviously returned energised, Andrew. Tell us about a couple of the companies that stood out.

Andrew Dalrymple: There were so many good companies, sorry to butt in, I can’t wait to tell you really, but the fact of the matter is, if I had to pick two or three good ones, I’d start with Bharti Airtel. They have a 42% share of the Indian telemobile market. There are 800 million mobile telephones in India now, five years ago there were 200 million five years ago. It’s not something that only the rich people have. Everybody in India now regards having a mobile telephone as a necessity. Data is extremely cheap, a mobile subscription only costs $1.80 per month at a basic level. And actually what Bharti have seen is just an enormous take-up, they are trying to get people on what they call post-pay packages, so instead of pre-paying your package which is what they used to do to make sure they didn’t hurdle on some bad debts, they’re now seeing people paying for a subscription package and once they’ve done that they end up subscribing to a great amount of add-ons. They are generating five billion US dollars worth of operating cashflow a year, they have a lot of debt because they had to buy a spectrum of the Indian government and they’ve had to invest a huge amount into broadband, fibre, data centres and so forth. But the cash generation coming through the company now is just astonishingly strong, we’ve had it in the portfolio now for about a year and a half and we’ve doubled our money. So Bharti was an incredibly good story and it’s just going to go on and on. Broadband to home and broadband to businesses is the next huge opportunity for them.

Another one too that really excited me and I know airlines are always unpopular with investors, I never understand why because there’s some very good businesses out there. There’s a company called Indigo, well, that’s what it’s known as and it’s kind of a cross between Easy Jet and British Airways, actually, because they do have premium end service, but It’s just an enormous operation. They have 300 airplanes. They carried a hundred million passengers last year. They’re operating at a load factor of 87%, and the break even load factor is about 60%. And they are flying to 88 destinations in India and another 34 offshore. I mean, 10 years ago there were 4 international airports in India, and by the end of next year there will be 18, and it’s now becoming not only a much easier destination, for inbound tourists, but a lot easier for Indians to get out as well. And also their fare structure is very appealing. I mean, it costs 70 US dollars to fly from Delhi to Bombay. If you were to do the same train journey, a 1st class train journey, it’d be the same price. And 7 billion people travelled on the Indian railways last year, and I’m not suggesting that all 7 billion are eligible to fly on indigo. But the train journey takes 16 hours, he airplane takes 2 hours, plus obviously a bit of airport time, and it’s a bit of a no brainer. So you know, the opportunity ahead of them is just again amazing. And it’s and it’s got the market to itself. There are no real competitors to to indigo.

I mean, then the final one, too, just the last last one just to pick 3 that particularly stood out, another one is Indian hotels. Indian hotels have just over 300 hotels. We’ve got another 114 in the pipeline. India has become just an incredibly popular and much easier tourist destination. This is again partly attributable to Modi’s reforms, making the infrastructure more palatable, more agreeable, making the roads better, and so forth. And they’re also starting a mid-range Hotel, brand, which they’re going to call Ginger, which is like a sort of Hampton by Hilton, a sort of mid range sort of business sort of lower end tourist hotel. And and again, I mean, the occupancy levels are running at over 70%. They’re doing an awful lot of management agreements. I mean, they made the point that theirs is a hospitality business, not a property business, and that if you start a new hotel from ground 0, 60% of the cost can be in the property, and that’s therefore taking on lots of lots of management contracts with joint venture partners who supply the buildings and the land in the first place. And so again, I mean, the opportunity ahead of them is extremely good, and the demand supply dynamics look extremely favourable as well, because tourist growth into India is running at about 8, 9% per annum growth, and increasingly, Indians themselves are getting to a position where they can afford to travel themselves within the country. So I mean again, another very, very strong, long term long term prospect, we think, for the fund, and we would be very surprised if we weren’t still holding it this time next year and have made additional returns. And again, Indian hotels has got no debt at all. Actually, it’s again generating lots of cash, which is recycling back into their new hotels. There’s three, but I mean I saw 30 odd companies in India that weekend. As I said, earlier, extremely impressed by the opportunities available to them, and indeed the managements that are taking these companies forward.

Mark Martyrossian: Well glad to see you so Bullish, Andrew. So those who would be interested in a brief snapshot on the other 27 companies that Andrew saw. Please get in touch with your sales contact, and we’ll we’ll send you along his notes.

Thank you, everybody. Thanks, Andrew.

Andrew Dalrymple: Thanks, Mark.

Disclaimer

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