Gary Greenberg, Head of Emerging Markets, and Kunjal Gala, Senior Analyst, discuss how an extensive recent trip to India has re-affirmed their conviction that profound long-term change in the region is underway. In the following investment note, they highlight innovative companies that will help to power India’s true emergence as a global force.
India’s presence is being felt in Asia as a strategic counterweight to China and its voice in the G20 is starting to be heard. Although its 8.5% weight in the MSCI Emerging Market Index remains modest, this masks the significance of the many Indian companies that compete globally in reach, quality and management skill.
Meanwhile, Modi’s government has made a good start in its effort to underwrite sustainable long-term growth and modernise the country. Its substantive reforms, aiming to fix structural problems in its economy, contrast with the Chinese government’s recent tactic of short-term fixes to temporarily boost growth.
Innovation driving a new India
The world is now seeing a new India emerging, and the space once held by outdated conglomerates from the time of the red-tape ridden ‘license raj’ and the informal economy is being claimed by businesses willing to compete through innovation and efficiency.
Investing in India during this transitionary phase is challenging, but we believe that well-managed, quality companies with robust financial structures will be able to endure short-term cycles, investing in order to benefit from India’s positive structural trends and reforms.
The following are examples of businesses which we believe will succeed in the medium to long term and reward patient investors as India’s true emergence takes shape.
Motherson Sumi Systems
Motherson Sumi Systems, a holding in our portfolio, is a leader in automobile wiring which is well placed to benefit from the ongoing electrification of cars in the region. Since 2008, the company has grown its European business by acquiring distressed but strategic tier-one vendors to original equipment manufacturers (OEMs) like Volkswagen, Audi and Daimler, usually at their behest in return for attractive long-term contracts.
With the turnaround of acquired companies largely complete, Motherson Sumi has expanded its global footprint by adding 17 factories recently, and it is prepared to address its €12bn order book. Since the company earns 50% of its profits from its Indian operations, road-building and a more comprehensive national 4G mobile network (and, in time, 5G) will steadily improve traffic flow, allowing more cars on the road.
India’s fifth largest IT services company, Tech Mahindra, offers technology solutions for healthcare, police, cyber-security and emergency response systems to governments at the state and central level. The company, a holding in our portfolio, is well-positioned to benefit from the expansion and increased sophistication of digital enterprise and services in India. It helped the nation’s financial-market regulator to digitally transform its processes and end-user experience, and was recently selected by the state government of Jharkhand as a strategic partner to facilitate its digital journey and generate employment through skills development.
Power Grid Corporation of India
We hold Power Grid Corporation of India, a company tasked with the expansion and strengthening of India’s inter-state transmission networks, in our portfolio. Its work is essential in connecting states with power surpluses or deficits. The company has an order backlog of $20bn, which it will act on over the next four-to-five years. Interestingly, the creation of what Power Grid describes as ‘renewable energy corridors’ in north-west and south India aim to ensure that standalone projects can transmit electricity without a thermal power plant to providing baseload energy.
Container Corporation (Concor), one of our holdings, is a prime beneficiary of the Western Dedicated Freight Corridor, a freight route to connect Delhi and Mumbai, currently under construction. Concor is setting up multi-modal logistic parks (MMLPs) along the length of the corridor to serve as hubs for customer storage, customs clearance, cargo aggregation and disaggregation, and intermodal transfers. The MMLPs will also provide value-added services such as packing, re-packing and supply-chain services, with the ability to handle specialised cargos such as liquids, automobiles and cement.
Concor is also likely to benefit from the GST, which is due to be implemented in 2017. This will eliminate the cascading duty payments of the current indirect tax regime and thereby increase the attractiveness of a third-party logistics business model. Concor customers have shown interest in scalable logistic facilities and are considering outsourcing some of their supply chain functions to the business.