The Indian companies dominating emerging market returns
Investors looking for resilient companies could start taking note of the growing number of multinational success stories domiciled in India.
Glen Finegan, Lead Portfolio Manager at Skerryvore Asset Management, is no stranger to the opportunities within the Indian market. Over a quarter of Skerryvore’s portfolio is exposed to Indian-domiciled companies, such as Infosys Limited, healthcare manufacturer Cipla or motorcycle manufacturer Bajaj Auto.
While the exposure may seem large, Finegan notes that the companies held typically have diversified global revenue streams that are not dependent on the performance of the Indian economy.
One example is Tata Consultancy Services.
“Over decades, Tata’s gradually upscaled its offering to the point now it competes head-to-head with the biggest IT businesses anywhere in the world. Any giant contract coming up, a cloud migration project here in Australia or in the US, TCS has as good a chance of winning it as any global player.”
That said, the Skerryvore team has still located opportunities which are more dependent on the domestic Indian market, such as in the highly unique banking industry in India.
In this edition of Expert Insights, Finegan discusses some of the Indian companies held in Skerryvore’s portfolios and the opportunities he sees going forward.
Key take outs - the companies discussed:
- Tata Consultancy Services: offers IT services, business, and digital solutions to clients worldwide.
- Cipla: India's third-largest pharmaceutical company providing over 1500 products in more than 80 countries.
- Bajaj Auto: Indian domiciled manufacturer of motorcycles and three-wheelers.
- HDFC: private Indian bank with a network of 6,342 branches and 18,130 ATMs in 3,188 cities.
Approximately a quarter of the Skerryvore portfolio is invested in Indian companies. Can you discuss the opportunities you see in this market?
Roughly half of our exposure to India is via what we would call successful multinational companies. So, positions in Tata Consulting Services and Infosys, which are global-leading IT services businesses that sell their services all around the world and earn US dollar revenues. That would be about 10% of our exposure to India, coming up on half.
Stock focus: Cipla
We have a very large position in, in our view, the best-governed pharmaceutical manufacturing company in the country, in Cipla. Cipla has two main business lines. It has a domestic-branded, generic business, which sells medicines to the Indian population.
That's a steady-growing, compounding business, but it also sells drugs overseas. It has a particular expertise in respiratory medicines, treating asthma and the like, and they're in the process of launching a number of asthma drugs in the US that increase the US-dollar earnings of the business.
Although the headline exposure to India looks very high, I think if you look at the revenue streams coming into our businesses in India, there's a lot of multinational revenue in there. India has created a number of very successful companies that have succeeded beyond India.
Stock focus: Tata Consulting Services
Let me highlight Tata Consulting Services. TCS, as we call it, is a IT outsourcing provider. It operates out of India, and its origins are as a low-cost... Indian wages being lower than US wages, being able to provide low-cost services. Over decades, Tata has gradually upscaled its offering, to the point now, it competes head to head with the biggest IT services businesses anywhere in the world.
So, any giant contract coming up, a cloud migration project here in Australia, in the US, wherever, TCS has as good a chance of winning it as any global player. That's an example of a business that's moved up the complexity curve, if you like, and now has emerged as a global-leading multinational business, from emerging-market beginnings.
We like businesses that have been able to demonstrate that ability to constantly improve. With that has come pricing power, with that has come great returns. I guess you could add that, obviously, a lot of TCS's costs are in Indian rupee and of course they charge in dollars. That's another nice way of protecting yourself from the potential for the Indian rupee to be weak over time.
Stock focus: Baja Auto
Bajaj is one of the leading motorcycle companies in India. We think it's family-controlled, but in addition to having a large franchise in India, it's one of the biggest motorcycle manufacturers in the whole of emerging markets. I think it's the number one motorcycle manufacturer in Africa, for example.
They've got positions in all sorts of emerging markets, so it generates quite a lot of ex-India revenue over and above its good position in India. We like Bajaj because in addition to having its legacy business, it's transitioning to offering electric versions of two-wheel products that it makes.
I think, in India where it's harder to see the EV infrastructure rolling out, just the nature of Indian cities as such that rolling out the type of infrastructure you need for four-wheel EVs is more challenging, but two-wheel EVs are much easier to charge, lower power, all that stuff. We think EV two-wheel adoption in India, particularly if oil prices are going to stay high, could be a big, new driver for the Bajaj franchise.
Stock focus: HDFC
India is a little unusual in the sense... well, unusual compared to a developed-world country, that round about 70% of the banking system is still controlled by the government. So, you have State Bank of India and lots of other government-controlled banks. Only 30% or thereabouts of banking assets in India actually sit within privately controlled banks, or private non-government banks.
We really like identifying well-run, conservative, privately controlled banks, where they compete with the government. Historically, most of the bad loans tend to end up in the government banks, that's the nature. Sometimes, it's to do with corruption, sometimes to do with the government may want to stimulate certain parts of the economy that maybe private-sector lenders might feel reticent about doing.
There are many, many reasons why well-run private banks are able to prosper by targeting the higher-quality parts of the economy. India has a very large and young population, and growing population. One of our holdings, HDFC, is the leading mortgage provider in the country, and mortgage demand has been strong, continues to be strong, and is likely to remain strong for a long time to come.
It's driven by household formation, young people getting together, wanting to buy their first home. It's nothing to do with people buying their fifth investment property. There's none of that. These are genuine, demographic-driven trends that we think mean the outlook for a well-run private lender in India, it looks strong.
It's a pretty broad exposure we have to India, but that 27%, around half of it would be these US-dollar-earning businesses. So, it's a combination of global and local, our exposures in India.
Far-sighted and fair-minded
Skerryvore Asset Management is a boutique of BennBridge, the UK arm of Bennelong Funds Management. The team are fundamental, bottom-up investors seeking to create high conviction portfolios of reasonably valued, high-quality companies that are exposed to, or operate in, emerging markets. For more insights, visit Skerryvore's website.
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