The economy is steaming ahead, against the odds
The Indian market was strong in May, and recovered all its April losses and some. If we were to just rely on news reporting from CNN and Swedish media channels over the past month, it would be easy to believe that the whole country was about to perish in the pandemic.
Yes, India has been hit very hard by a second wave of Covid-19, with over 25 million cases, but in recent weeks the number of new cases has decreased to around 150,000 per day (from a peak of 400,000), which is still a high figure. India did not introduce a national lockdown this time, but large parts of the country have opted for closures as needed. What the media chooses not to report is that the economy is steaming ahead against the odds. We will need to revise down our expectations somewhat for GDP growth this year, and corporate earnings for the first quarter will be weaker, but most investors choose a longer time horizon and see this phase as transient.
Most of the companies in the fund’s portfolio have reported their full-year results, and in the midst of all the misery it is amazing to see how well their businesses are performing.
Here are some examples of India’s best in class: HDFC Corp, which is the market leader in mortgages, increased its lending by 26 percent during the past quarter. Its profits increased by as much as 40 percent thanks to lower bad-debt losses. The housing market has been at a record high since October 2020. Ultratech Cement increased its sales volume by 30 percent. Cement prices rose by 20 percent, which meant that profit before tax rose by 55 percent. Asian Paint also showed a very strong sales increase of 48 percent, driven by higher demand from the housing market.
In automotive, several sub-suppliers showed good results. Balikrishna Industries, which sells specialty tyres, increased its sales by 29 percent. Bharat Forge, which sells cast metal parts for trucks, is benefitting from super-strong demand for heavy trucks in the United States. Increased e-commerce and a growing need for logistics and shipping is leading to higher freight prices.
Motherson Sumi Systems is also benefitting from a strong recovery in the global market for passenger cars, not least EVs. The company develops new lighter materials for electric vehicles (necessary to compensate for heavy batteries). It is also developing new environmentally friendly plastics that can be recycled. Since its customers include all the German premium brands (Mercedes, BMW, Audi, Volkswagen and Porsche), it requires a high level of quality and innovation. Electric cars account for 20 percent of the order book.
These are just some of our favourite companies that we have followed and owned in the portfolio for a long time.