Passage to India

Mumbai, India

In an environment where growth sectors are becoming more difficult to find for investors, Mugunthan Siva points out certain thematics make giving India some consideration prudent.

Investing has become increasingly difficult given the fact most asset classes, be it property, bonds or shares, appear to be overvalued relative to their long-term averages. Additionally, in a low inflation and corresponding low interest rate environment, accessing opportunities to true growth assets appears to be a conundrum investors are faced with, particularly given longevity cannot be solved with high-yield-type assets only.

Usually, shares are the asset class assigned the role of producing growth of capital in a portfolio. Ideally we invest in companies growing their earnings, which leads to increasing dividends and a rising share price over medium to long-term horizons. However, for skilled investment professionals, to whom we typically assign the task of finding companies that are truly growing their revenue and profit from strong fundamentals, the job at hand is becoming harder. Typically, most investment professionals tend to focus on companies domiciled in developed economies that grow their earnings from changes in market conditions, technology, industry structure or intellectual property.

However, it’s important, given the current environment of lower growth, to invest in areas where fundamentals are benefiting from investment themes such as a significant youthful or growing population. Companies in these regions benefit from the following fundamentals:

  • strong economic growth coming from a rising and youthful population,
  • an increase in gross domestic product (GDP) per capita due to the needs and wants of a population aspiring for more and better-quality infrastructure, improving corporate governance and productivity, and
  • lower-cost delivery of developed economy goods and services.

One of these regions to consider from an investment perspective is India. While many global, emerging market or Asia-focused funds often dabble by investing in a few well-known companies in India, they miss out on a significant number of companies benefiting from the thematics outlined above.

Let’s consider why India is so attractive to an investor seeking capital growth in their investment portfolio. Table 1 indicates the growth rate predicted by the International Monetary Fund, World Bank and Harvard Business School.

India’s growth is expected to be superior to all developed or developing countries over the next two decades. This will be largely driven by the youth and significance of its population, infrastructure requirements and the potential to export more of its competitive advantages to the rest of the world. Perhaps much in the same way China commenced doing in the 1980s.

The reason behind India’s strong predicted growth stems from its significantly large and youthful population. The World Bank records India’s population at 1.3 billion, and it is expected to surpass China as the world’s most populous country by 2022.

When studying India’s population pyramid (Figure 1), the following statistics are impossible to ignore:

  • 46 per cent of the 1.3 billion people are below the age of 25 (30 per cent in China), and
  • 64 per cent of the population are working age, that is, 15 to 64 (refer to the orange dotted box).

It provides a significant runway for India to benefit from a strong middle-class effect over the next two to three decades. This relates to GDP per capita rising from $6600, where it is now (ranked 160 out of 230 nations). This is well south of China’s $15,400, Russia’s $26,500, Japan’s $41,300, the United Kingdom’s $42,500, Australia’s $48,900 and the United States’ $57,400. Oxford School of Economics predicts India’s GDP per capita will increase fourfold from a very low base over the next 20 years.

Figure 1: India’s population pyramid

Table 1: Forecast growth – India v regions/world

*April 2017 forecasts, ** January 2017 forecasts

This has significant implications for India’s companies, which are well positioned to benefit from its rising middle class. The National Council of Applied Economic Research estimated there were 267 million people as at 2016 in this class, defined by income earned. By 2025/2026 this is forecast to rise to 547 million people.

India’s consumption expenditure therefore has grown significantly to US$1.4 trillion as at 2016, according to India’s consumption is expected to grow at over 10 per cent yearly to become the world’s third largest consumer economy in the world over the next 10 years. A Boston Consulting Group article, “The Rise of India’s Neo Middle Class”, written in 2016, also highlighted the changing face of Indian consumers (see Table 2).

Table 2: The changing face of Indian consumers

*Households with spending above $19,500, **Cities with populations between 50,000 and 1 million

The key takeaways from this assessment of India’s consumers is the rise of not only India’s middle class, but also its affluent class, which can be compared equivalently with the global middle-class consumer. The affluent consumer will account for 40 per cent of India’s consumption. Both India’s middle class and affluent consumers are increasing their spending habits from a focus on basic needs towards increasing spending on education, leisure, communications and healthcare. Additionally, in categories such as food, preferences are moving towards higher-priced and better-quality items.

Apart from shifting consumption preferences, growth is being driven by the rapid pace of urbanisation. The shift from an existing workforce that is primarily employed in farming/agriculture towards larger cities will see 40 per cent of the population living in urban areas by 2025 and accounting for 60 per cent of consumption. However, this won’t be aggregated in just the tier 1 cities of over 1 million people, but also cities with a population of 50,000 to 1 million. This requires significant infrastructure such as electricity, power generation, roads, trains, schools and wi-fi enablement.

Another change is the nucleus of the modern Indian family. Typically, India’s past was characterised by a family structure where children live with their parents, pre and post-marriage. However, today there is change afoot with nearly 70 per cent of households having a nuclear structure. For the same income level, these ‘nuclear’ families can consume 20 per cent to 30 per cent more than joint families.

Internet access is also currently available to over 300 million people and is expected to rise to 730 million by the end of the decade. Increasingly, accessibility is now spreading to rural areas, the aged, women and children, transforming the lives of citizens and driving economic growth.

India has a national identification card called Aadhar, which was established in 2009. This card has over 1.17 billion on-boarded and uses a biometric system to identify citizens. All subsidies and benefits are paid to the bank account linked to this card. The card allows increasing digitisation through its linkage with a bank account and allows for increasing financial inclusiveness across rural India. Over the long term, it will serve the purpose of reducing cash transactions and increasing digital use as a means of reducing corruption, increasing efficiency and lifting taxation for the government.

Digital empowerment is changing the way Indians invest and transact, buy and sell, educate and socialise, read and select. In fact, this, compounded with India’s youthful demographics, social, political and cultural change, as well as a high level of saving with the potential for credit off-take (household debt to GDP is 9 per cent relative to Australia’s 122 per cent), leads us to consider the significant opportunity for several companies thriving from the consumption of goods, services and infrastructure.

India’s stock market is one of the best ways to gain exposure to the growth story. The markets are well regulated by India’s capital market regulator, the Securities Exchange Board of India.

India’s dominant sectors include banking, healthcare, information technology and consumption. Largely the opportunity for companies can be explained by the youthful and significant population. Let’s examine these more closely.

Banking: Large parts of India remain unbanked and credit penetration has been low and slow given the cultural emphasis on savings in the past. In fact, as of November 2016, India’s unbanked sat at 167 million (the size making it the eighth largest country in the world). The Modi government’s reform of demonetisation, passed in November 2016, forced people to deposit funds into bank accounts to avoid losing their savings. This leaves banks flush with cash and an opportunity to cross-sell product across a broader and aspiring population.

Healthcare: As more fall under the umbrella of the middle class, not only do they eat more and eat better, but also seek greater levels of medical attention. India has added 450 million people over the past 25 years, a period during which the proportion of people living in poverty fell by half. The healthcare industry is set to increase to over US$200 billion by 2020 from just over US$100 billion in 2016. In fact, the infrastructure requirement to fulfil healthcare needs cannot keep pace.

Information technology: This industry has provided IT services and business process outsourcing to the rest of the world, with US$147 billion of revenue generated from the industry (US$99 million in exports), equating to close to 8 per cent of GDP. It provides a significant opportunity for India’s youth to gain employment, particularly as companies such as Apple, Amazon, Microsoft and IBM consider where they are going to grow their manufacturing base from. It also provides a substantial growth platform for India’s IT firms to leverage off their expanding skill set and lower-cost advantage.

Consumption: Several sectors drive consumption, including automobiles, food, retailing and consumer goods. All these sectors are benefiting significantly from India’s large and youthful population, aspirational culture and increasing appetite for credit. Car ownership, for example, is going from 2 per cent penetration to 18 per cent over the next 20 years, according to a study by the International Energy Agency. That’s a growth rate of 775 per cent over that time. This provides significant opportunities for Modi’s Smart City project, which will see 65 cities of over 1 million people across India, as well as transitioning to electric vehicles by India’s car manufacturers.

Additionally, food patterns are changing. India has a significant component of vegetarians (40 per cent), however, their eating patterns are changing towards greater consumption of edible oils, milk, vegetables and fruits, as well as chicken, fish and eggs. This again presents substantial opportunities for food manufacturers, as well as household equipment sales benefiting from more nuclear families, greater spend on lifestyle and a transition to products such as microwaves, televisions and washing machines.

In summary, investing to harness the growth of India will be beneficial to Australian clients. Companies listed in India have been generating significant earnings growth over the past two decades and are poised to do so over the next two decades as demographics take hold. The growth being achieved by companies in India is more likely to be generated organically rather than through cost-cutting or squeezing the last drop from productivity. It makes sense to consider allocating some of your investment portfolio to secular thematics like this one.

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