India has struggled with coronavirus but is it still worth backing? As Diwali celebrations arrive, we look at the case for investing
Ocean Dial’s David Cornell said India’s lockdown gave some industries a chance to develop
Festival season in India – a period from September to November peppered with a number of religious festivals, culminating in Diwali on 14 November – is traditionally a time for families and communities to come together for celebrations.
As India, along with the rest of the world, continues to navigate a pandemic, celebrations for this year have unsurprisingly been impacted.
The country is emerging from the stringent lockdown implemented in March this year, and daily new cases are decreasing, but with much of the developed world now tackling second waves, India must proceed with caution.
A relatively low fatality rate of around 1.5 per cent of all confirmed cases is reassuring but high population density in India’s cities and poorer hygiene standards contribute to high transmission rates.
The government’s decision to prioritise the health of the population over the health of the economy when cases were still relatively low saw GDP contract 24 per cent in the April to June quarter of this year.
However, as many industries were forced to shut down, others were given a platform to develop.
Time to develop
Technology is one such area, with the acceleration of digitalisation forcing change across the whole economy.
Office and school closures saw business and education move online, tele-consultations and availability of medicine online have improved healthcare efficiency.
Organisations are spending more on cloud technology, allocating funds to platform as a service and software as a service to boost operational agility.
I am excited about Persistent Systems and Tech Mahindra, two IT service companies that are winning business from global corporations looking to transition to the cloud.
With 654 million mobile internet users and data costs amongst the lowest globally – at $0.10/GB – the opportunity for businesses and sectors embracing technology is huge.
These changing patterns in consumer behaviour have piqued investor attention and leaders in e-commerce, online education and fintech are announcing IPO plans for 2021 to 2022 as they look to fund future growth.
Flipkart, Byjus, Paytm and Zomato are just a few tech names expected to go public in the next couple of years.
Consumer spending still high
The lead up to Diwali traditionally welcomes a surge in consumer demand, with shopping and gift giving very much a part of the celebration.
This year appears to be no different with macro indicators showing a steady recovery; India’s PMI for services entered expansionary territory for the first time in eight months in October, while its PMI for manufacturing continued to exhibit strong performance.
As Covid-conscious shoppers shy away from bricks-and-mortar retail, e-commerce appears to be a big driving force here – although still a relatively small fraction of total retail at 3 per cent in 2019 compared with China’s 27 per cent – and is growing rapidly.
Global tech companies are competing over the Indian consumer with Amazon and Flipkart upping their investments in Indian operations. Both companies have raced to acquire stakes in Indian retail firms to expand operations and leverage strategic partnerships.
Well-capitalised private sector banks are another area of the economy emerging strongly from the crisis.
Having steadily gained market share over the past five years, this seems set to accelerate in a post-Covid world as state-owned banks continue to suffer from non-performing loans.
Investments in fintech are helping private sector lenders to build strong digital infrastructures and improve customer journeys for loan approval, identity verification and so on.
The annual Hindu festival of lights, Diwali, takes place on 14 November this year
An under-penetrated industry
Insurance companies are similarly benefitting from increased investment in their digital platforms. ICICI Lombard General Insurance, India’s largest private sector general insurance company, with a market cap of £6billion, is gaining market share with the development of its online claims process; 98 per cent of the insurer’s policies are now issued electronically.
Still a relatively under-penetrated industry, India’s 230 million vehicles and around 1,200 daily accidents provide substantial scope for growth. The removal of paperwork and time spent queuing are helping to build customer loyalty amongst progressive financial institutions.
There is a possibility of retail stress in private sector lending books but the major clean-up in the banking sector following the IL&FS default in September 2018 has already removed a lot of this risk – something which valuations are not yet reflecting.
A decrease in unemployment will help here with recent labour reforms significantly simplifying labour laws in order to be more effective for employees and incentivise organisations to add jobs.
This is particularly pertinent as India rolls out its China+1 strategy, encouraging global manufacturers to consider it as a viable alternative; corporate tax rate cuts, the Production Linked Incentive scheme, and an improvement in the World Bank’s Ease of Doing Business ranking – now 63rd compared with 142nd five years ago – should all fuel India’s case.
Competition for China
On top of this, India’s labour costs are around one-third of China’s, it holds the benefit of conducting business in English and boasts a steady, political reform-driven government.
The macro-economic environment remains stable in spite of Covid disruption with low inflation, forex reserves at all-time highs and a more resilient Rupee.
An attractive investment destination, companies such as Neuland Laboratories, a producer of Active Pharmaceuticals, are benefitting from changing global trade dynamics as clients seek more collaborative, transparent relationships.
With US FDA approved facilities, Neuland Labs is well prepared to compete in the global market. Other niche sub-sectors such as Contract Research and Manufacturing Services, speciality chemicals and consumer electronics are seeing similar gains.
In the latter, Dixon Technologies has moved from strength to strength, manufacturing products for the likes of Samsung, Philips and Godrej.
With a huge domestic market opportunity and the PLI scheme supporting mobile phone production, the company is well-positioned to benefit.
Whilst a full recovery from the crisis may take some time, the outlook for India is encouraging.
Economic activity is starting to exceed pre-Covid levels, the government are once again focused on growth and enacting reform, and necessary diversification away from China is opening up exciting opportunities for Indian manufacturers.
While accessing individual stocks can be a complicated process, long-term investors should look to single country funds in order to capture the full upside potential.
India fund picks
India Capital Growth investment trust
The £82million trust managed by Ocean Dial aims to provide long term capital appreciation by investing in small-cap Indian companies. It is currently trading on a discount of 19.29 per cent and has returned 76.30 per cent over the past six months.
Ashoka India Equity investment trust
The £79million Ashoka India Equity follows a largely bottom-up approach with no strong views on the market in the short-term. However the team said many indicators point to a strong rebound in economic activity as malls, bars and restaurants have reopened with social distancing norms in place. Its discount has bounced back around 20 per cent in the midst of the pandemic to 7.4 per cent today.
JPM India fund
One of JPMorgan’s many single-country funds, the $524million JPM India, managed by Rajendra Nair and Ayaz Ebrahim, has returned an incredible 252 per cent since it was launched 15 years ago. Top holdings include Infosys and Tata Consultancy Services out of a portfolio of 41 companies.
Jupiter India fund
Avinash Vazirani’s £463million Jupiter India fund has an annual management charge of 0.75 per cent and is benchmarked against the MSCI India. Almost a quarter of the fund is invested in the consumer goods sector while telecoms remains low at 2.9 per cent of the portfolio. Over six months it is up 17.44 per cent.