The India pivot

I spent one week in India, meeting corporate leaders in Mumbai and Pune. After a weaker period during the third quarter, Indias economy is recovering, growth is back on track with GDP growing at 6,2%.

Indias central bank, RBI, put its foot on the brake in March last year, being concerned about fast increasing debt levels and signs of increasing credit cost in the financial system. I’m not sure that they were prepared for how fast investments and consumption would slow as a consequence.

Now RBI has made a full pivot towards more accommodating monetary policy. In February we got a 25 bps rate cut, two more are expected this year. They have also injected more liquidity into the economy through the bond market. Finally RBI recently normalized the elevated risk weighted capital requirement, that was imposed a year ago, for banks funding the finance companies and the microfinance market.

The stock market peaked in September last year, with an elevated valuation. Strong domestic retail flows had pushed the valuation into unsustainable bubble levels. Domestic flows rose from USD 2,4 bln to 8 bln a month in less than a year.

Now the market is five month into a correction. Further consolidation at these levels might be necessary short term. In a longer perspective the market now looks attractive again. Valuation for the Nifty 50 index is back at 18 x earnings, which is the long term average. Indian equities are now available at a lower valuation than US stocks, for the first time in five years.

The other factor to consider is China. The Chinese government have also appeared to make a pivot regarding economic stimulus. Since September last year a number of initiatives has been announced to put a floor under the property market. At the recent NPC meeting, more support for domestic consumption was introduced along with incentives for increased childbirth. The Chinese market was oversold. As a result of a more supportive economic policy, we saw a powerful bounce for Chinese equities. In the reallocation of capital to China we also experienced a significant withdrawal of investments from India.

In my view the market has gone from one extreme to another extreme position.

The Indian economy was not as strong last year as the bull market was discounting. This year the economy is in better shape than the market is willing to recognize. The market overreacts in both bull and bear market.

Talking to companies on the ground, the take away is very much that it is business as usual, although they are now giving a slightly more conservative guidance on future growth.

Both HDFC Bank and Kotak Mahindra Bank tell me that lending this year will grow faster, credit quality is under control and margins are stable. Weak deposit growth was a concern last year, but has improved much this year.

Reliance Industries are seeing improved operation for its retail division with sales growing at 9%. Last years challenge from the quick commerce players, (Zomato, Swiggy and Zepto), has less impact now. Reliance’s comment regarding quick commerce was that they keep burning cash from the VC funds, which is unsustainable. Also the model with homedelivery in 8 minutes is an urban story. Does not work in the rural area. The fact is that the competition with new players in quick commerce is forcing them into a race for landgrab to new location with lower sales growth, which in effect drives them into further losses.

Mahindra&Mahindra see strong sales for its new models recently launched. They booked 30000 unit bookings for the new EV model, EV9 and EV6 that were launched in February.

In the cable&wire industry we see increased competition and disruption of existing market dynamics, after both Ultratech Cement and Adani Enterprise has announced plans to build capacity for production of construction cables.

Persistent Systems gave a very positive view on future growth, driven by the healthcare sector and also cloud service and AI applications.

Tech Mahindra are in a restructuring phase and gave more muted growth outlook with margins to recover from 6% to 12%. Telecom is still a drag on profitability.

New companies we saw was KPIT, Bellrise and JB Chemical, all with high growth potential and interesting business plans.

Gunnar Påhlson
Bombay
25-03-22