Reading the headlines of late you would be quite fair in surmising that Covid, and the handling of the pandemic, has been an unmitigated disaster for India. The draconian lock down imposed in March resulted in a 23.9% decline in GDP for the quarter to June, according to the National Statistical Office. What is more galling is that it did not appear to work. Five months later on India is rapidly closing in on the USA for top global spot, at least in terms of recorded Covid cases, with no sign of a peak in sight. Arguably it may have slowed things down a bit, but at what cost?
In our March 2020 report, The darkest hour is just before the dawn, we suggested India’s more rural population and tropical climate might help it do better than most, despite its highly under developed hospital sector. The relative youth of the population was also a positive. But part of this more positive view was immediately torpedoed by the lock down, which compelled the now unemployed migrant workforce to evacuate the major cities and disburse home to every village and town across the land.
However, despite all of that, India’s death rate is so far coming in much lower than many other parts of the world. This is not to belittle the seriousness of these deaths, but merely to provide some context. According to the John Hopkins University of Medicine website, India’s death rate is running at about 1.6% of observed cases versus around 3% in the USA and 5% in Spain. Detractors will say there are bound to be many cases of Covid deaths going unrecorded in India, which is inevitable in a country where approximately 5% of all deaths are of unknown causes. By way of further context, even on its current unpleasant trajectory, measured Covid deaths will likely account for somewhere between 1% and 2% of the total deaths in India this year.
One final, more optimistic, thought on the ever debateable Covid statistics came from recent blood serum surveys in India. Relevant Covid antibodies were detected in 41% of samples collected in Mumbai, India’s worst affected city, and 57% of samples taken from its slums. In nearby Pune over half the samples had the antibodies. This suggests two things. Firstly, the recorded case number is woefully undercooked, and as a result of this the ultimate death rate will be far lower than today’s number, even accounting for unrecorded Covid deaths. And secondly, the prospect of herd immunity must be getting closer than most believe.
In our December 2019 piece on India, Keeping up with the Wangs, we lamented the impossibility of reconciling the economic commentary at the time (gloomy) with the stock market (buoyant). This year has made this task no easier. The fall in economic activity was certainly precipitous, but researchers from Jefferies have compiled a broad based recovery tracker which suggests activity is back to around 90% of pre-Covid levels. The rural economy has been far more resilient throughout, helped by good monsoons and boosted by the influx of migrant workers from the cities looking for a living, but by all accounts this is starting to even out, with urban activity fast recovering too.
Perhaps more instructive would be to examine the outcomes for the three companies we highlighted in that report, Apollo Hospitals, Varun Beverages and PVR Cinemas, which we had hoped would grow nicely, no matter what the headline GDP number would do.
We have spoken to the management of Apollo Hospitals several times over the past few months and priorities have changed as the situation evolved. In March the message was concerned with preparing for Covid cases and getting testing stations up and running, while remaining open for emergency in-patients only, which meant about 30% occupancy. By July this was back to 45%, and they were by no means inundated with Covid cases. Throughout the period, the pharmacy business was going from strength to strength, remaining open and benefitting from improved basket size as shoppers bought not just drugs but sanitisation and other FMCG products as well. They pushed into online pharmacy sales with an app which completed over 12 million Covid risk scans over the period. Needless to say, despite the success in pharmacy, and the impressive control of costs, the negative operating leverage of the hospital business resulted in a loss for the latest quarter. We expect this to be temporary, and in terms of the longer term valuation of the business, immaterial. The stock price is around 20% ahead so far this year.
Management of Varun Beverages, the Pepsi bottler, have also been in regular contact and the situation appeared dire in March when the whole business shut down, just as they were entering the peak summer season for soft drinks, when they normally make the bulk of the year’s earnings. But by May they were back to operating at about 50% and by our July call it was 85-90%. Despite a herculean effort to control costs, profits for the quarter fell 65%, better than many feared, but still a big dent in this year’s numbers. Although they have some debt on the balance sheet after buying several additional bottling assets last year, the balance sheet was never troubled. Once again, the longer term impact on the valuation of the business, or indeed the investment thesis is negligible. The stock price is little changed from the start of the year.
PVR Cinemas is the one of the three which was more problematic. No doubt Indians are returning to shopping malls as life slowly returns to normal. But we felt cinema going would take a considerably longer time to return to normal. There is a voluntary element to sitting in a large room filled with strangers which, after all, can be by-passed by modern alternative viewership options, and we felt this was a longer term change to the business. PVR was the one Indian investment we sold during the period.
It is hard to describe our large exposure to India as a significant positive to performance so far this year. As regular followers will know, we focus our efforts on areas of consumption in a country which we believe to be in the sweet spot of growth. In India, this tends to be at the more basic end of consumption: convenience food and beverages (Varun), organised retail (Titan), financial inclusion (HDFC Bank) to name a few. At this end of the spectrum, the kind of disruption brought on by lock down is painful, at least temporarily. So unlike China, where our investments are much more service orientated and often online, and hence have proved resilient, our Indian portfolio was hit hard along with the broader market.
More importantly, however, and unlike our fellow Foreign Institutional Investors (FIIs) who sold US$8bn worth of Indian shares in March, we viewed this as more of an opportunity to buy a select few very high quality Indian companies which had hitherto appeared overly expensive to us.
Two such examples were Jubilant Foodworks and Trent Retail. Jubilant is the master franchise holder for Domino’s Pizza in India, as well as operating Dunkin Donuts and two home grown brands, Hong’s Kitchen and Biryani. Speaking to CEO Pratik Pota in March it was already apparent that this business would emerge as a beneficiary of the pandemic. An advertising offensive promoting trust, food safety and hygiene worked well, and while dine-in sales were hit, delivery sales strengthened. There is huge scope for roll out across the country for both the Domino’s brand as well as the nascent own brands.
Trent is the retail arm of the Tata Group in India and houses aspirational fashion outlet, as well as the rapidly growing affordable fashion, under the Zudio brand. Other assets of the business include a joint venture with Inditex (Zara and Massimo Dutti) and a collaboration with Tesco in grocery retail. Organised retail is entering that sweet spot of growth in India and Trent is one of its best proponents. Historically the stock has been illiquid and expensive, but liquidity has improved in recent years and Covid (temporarily in our view) solved those valuation concerns.
Both stock prices are over 40% higher than our entry points, despite being a little early into Jubilant. Interestingly, having largely sat on the side lines since March, FII’s bought back $6bn worth of Indian stock during August, at what must be considerably higher prices than they sold them in March.
Both India’s economy and stock market were hard hit by Covid in the first half of 2020. While painful at the time, we see no significant long term damage to the investment cases of the majority of our holdings in India. In fact, some may have been strengthened. In all cases, whether organised retail, packaged food and beverage, healthcare or financial services, from where India is now, the opportunity remains enormous and will run for many years. To us, this is far more important than what the next GDP print will be, or indeed how long this terrible pandemic takes to burn itself out.
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