The Backdrop
It will not be news to regular followers of the Aubrey Global Emerging Markets Opportunities Fund that we are, in general, fans of the Modi government, and particularly the reforms they have pushed through, despite the constant resistance of those vested interests who have held India back for far too long. Anyone who has spent time talking to businessmen in India over the past 30 years knows that excessive bureaucracy, and the inevitable and associated corruption, has been the single biggest brake on the country’s growth. The Goods and Services Tax, or GST, is not a panacea for this, but it is a huge step in the right direction, and one whose benefits have been masked, both by early teething problems and, more recently, by Covid-related upheavals. So we are greatly encouraged by recent data showing that August GST collections rose 30% y-o-y, or 14% vs the same month in 2019. We would interpret this as a sign that both the GST system is now working well, and that the economy is in good health.
The implication is also that the fiscal position of the government will be better than expected, and the likelihood that more of the much vaunted infrastructure drive (the US$1.5tn National Infra Pipeline) is likely to happen. We are also wholehearted supporters of the privatisation efforts (the US$80bn National Monetisation Pipeline) in which the government is taking a pragmatic approach, potentially looking at an array of funding models for new projects. This stands more chance of success than trying to sell off old government assets like Air India, which has long ago been out-manoeuvred by its private sector peers.
The other implication is that the fiscal discipline of the Modi government has been retained throughout, while much of the world has seen a period of massive fiscal excess. This has not gone unnoticed by investors, and India’s bond and currency markets have been relatively sanguine throughout the Covid hiatus, despite the inevitable and, in our view, short term pick-up in inflation. The quiet revolution in Indian manufacturing is also starting to be felt positively in the external accounts, and we expect the next quiet revolution to come in Indian agriculture, which will have a similarly beneficial impact. And while we may be a few years ahead of ourselves with that one, it is coming.
The conclusion from this macro ramble is that we believe the Indian economy is in good shape. It has defied the doomsters, and emerged from Covid quicker than many others, as we suspected it would. More importantly than that, we believe it may finally be able to grow consistently faster than recent trends, which is as it should, given its exceptional demographic tailwind, and as it desperately needs to do, in order to provide the jobs and incomes for its youthful population.
A final point on the economy is that India is also at a very favourable stage of the economic cycle. The property market looks to be emerging from a multi-year bear market, as does the corporate sector, whose excesses of the past are well behind us. Most leading companies are in rude financial health. Lending growth has been tepid of late, outside of the nascent consumer financing sector, with most banks flush with liquidity and poised to lend more. We may even get something of a capex cycle, although we suspect it will be narrowly focussed on infrastructure and housing, at least to start with.
Consumer Companies
The Indian consumer story is largely one of rising adoption of a product or service from extremely low levels: bank accounts, mortgages, organised retail, air conditioners, pizzas and soft drinks to name but a few. The direction of travel in this adoption is unarguable, but the speed does depend on the broader economy, and the resultant income growth rate of its consumers. The recent acceleration of the economy is therefore extremely good news for our investments.
This period of behavioural change, when a large proportion of consumers adopt a new practice, service or product, is usually the most rewarding time to invest in an industry. In a recent discussion with Mr. Pratik Pota, CEO of Jubilant Foodworks, purveyor of Dominoes Pizza’s in India, he stated that “several years of behavioural change have been compressed into the last 18 months” as a direct result of Covid. In his case, lockdown in the major cities drove home delivery, use of their app, and contactless payment, while the period of reverse migration took the habit of delivery/takeaway pizza back to the smaller towns across India.
We tend to invest in sector leaders. These leaders usually have the strongest brands, and the ability and cash flow to invest in their growth. In times like this, they are also survivors, when weaker players may fall by the wayside. Jubilant has invested aggressively in technology during the past 18 months, as well as continuing to roll out new venues across the country, while many of their competitors could not.
As discussed above, all of our companies are exposed to sectors which have very long and steady runways of growth, but it is even better if you can grab an ever larger share of that growing pie. Covid has accelerated this process too. Consider Apollo Hospital’s pharmacies or Titan’s jewellery shops, both of which have single digit market shares, where equivalent developed market leaders might have 20% or more. Or India’s leading residential property developer, Godrej Properties, which has a meagre 2% of the market. As the smaller and unorganised players fall by the wayside, we expect these low numbers to rise rapidly.
What we have discussed so far is extremely exciting for our investees top line growth, but what about profits? If there was ever a time to make hard decisions on costs it was during Covid. Jubilant moved their entire store based staff onto variable contracts. They introduced a delivery charge for the first time. A constant refrain among many companies is one of upgrading technology to improve the supply chain, improve user experience and loyalty, and increase efficiency. Even higher input prices, a temporary phenomenon in our view, have largely been passed on to consumers. Add in any operating leverage improvement, and you have a heady brew for consumer company profitability.
Where We Stand Today
Adding several high quality consumer businesses in India to the portfolio early last year proved timely and has been very rewarding. We have continued to add to holdings this year, as India has proved a good counterbalance for some of our more troublesome Chinese positions. Today, India is comfortably our largest country exposure, at slightly more than 40%.
But it is hard to argue that the market is still unaware of these above mentioned rosy prospects, given the re-rating in recent months. As we go through the year, the base of comparison will get higher and harder to beat. It is also quite possible that we may be tempted by opportunities which are now emerging in China or elsewhere, following the recent sharp correction, which we may fund by trimming some of our Indian positions.
That said, on its current path, we believe that India and its 1.4 billion consumers offer an exceptional investment prospect for many years to come. In addition to this, our universe is expanding rapidly as a plethora of highly innovative private companies enter the stock market. The vast majority of these are consumer businesses, and are destined for our watchlist at the very least.
Please click here for a pdf version
This document has been issued by Aubrey Capital Management Limited which is authorised and regulated in the UK by the Financial Conduct Authority and is registered as an Investment Adviser with the US Securities & Exchange Commission. You should be aware that the regulatory regime applicable in the UK may well be different in your home jurisdiction. This document has been prepared solely for the intended recipient for information purposes and is not a solicitation, or an offer to buy or sell any security. The information on which the document is based has been obtained from sources that we believe to be reliable, and in good faith, but we have not independently verified such information and no representation or warranty, express or implied, is made as to their accuracy. All expressions of opinion are subject to change without notice. Any comments expressed in this presentation should not be taken as a recommendation or advice. Please note that the prices of shares and the income from them can fall as well as rise and you may not get back the amount originally invested. This can be as a result of market movements and of variations in the exchange rates between currencies. Past performance is not a guide to future returns and may not be repeated. Aubrey Capital Management Limited accepts no liability or responsibility whatsoever for any consequential loss of any kind arising out of the use of this document or any part of its contents. This document does not in any way constitute investment advice or an offer or invitation to deal in securities. Recipients should always seek the advice of a qualified investment professional before making any investment decisions.
