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Hottest Indian equity plays

Hottest Indian equity plays

By Tim Love, investment director for emerging market equities, GAM

Indian equity markets have been one of the top performers in emerging markets this year, soaring over 20% year to date. And we believe there is more to come as the country rides the wave of growth led by recent policy overhaul and a young, cash-laden middle class keen to spend money.

Although India has lagged China’s growth for the past five years, we believe it will follow a similar trajectory, replicating some of its key economic achievements.

According to recent IMF statements, the new Goods and Services Tax (GST) will bring India’s GDP growth rate to over 8% a year in the medium term (versus 6.5% at present).

The implication of this comparison is that the aggregate India consumer spend market is vast, and five years behind the exponential take-off that we have witnessed in China. Time to buy India.

New ways to play India

On the global stage, India has always been recognised as a strong player in generics, consultancy services and auto parts. However, post-Prime Minister Modi’s reform programme, broader areas of consumer growth are now becoming attractive. In our opinion, these include exposure to the wedding industry, confectionary, Bollywood, luxury travel and scooters, to name a few.

Citing Conde Nast India’s head, Alex Kuruvilla, the average Indian spends about a fifth of his lifelong accumulated wealth on their son or daughter’s wedding. This astonishing statement lends credibility to the industry’s confident growth projection of 25-30% year on year, predicted to hit around $50 billion by 2019.

Naturally, this creates several investor opportunities, but the most enticing one is the gold industry.

It is a tradition to offer gold gifts during wedding ceremonies. The industry alone transacts over 400 tonnes of gold a year, and if the estimated growth of weddings continues, gold market transactions will reach exceptional values.

The wedding industry is not the only one to reach dizzying new heights. A supportive factor for Indian equities is the country’s vast youthful, cash-laden middle class, who are keen to indulge in luxury items.

Sweet like chocolate

Confectionary is no longer an annual luxury and instead is enjoyed on a regular basis by sweet-toothed Indians. Today the average Indian shopper buys around 0.15 kilograms of chocolate a year, compared with a generous six kilograms bought by the average UK shopper.

This potential, combined with year-on-year consumption growth of 13%, presents an incredible opportunity.

Although these sugary treats may come with a bitter aftertaste as rising consumption potentially results in more cases of diabetes and obesity, this will in turn boost the healthcare sector. Unsurprisingly, chocolate is in the highest tax bracket of the GST with VAT of around 28% to try to dampen this demand, but consumption for now is showing few signs of slowing.

Meanwhile, the Indian travel and tourism industry is worth $112 billion (about 7.5% of Indian GDP) and is expected to double in value by 2024. Indian travel companies are capitalising on the rise in the number of middle-class Indians travelling abroad, many of whom have developed a liking for luxury destinations such as Mauritius, Dubai and the Maldives. Many of these resorts can also cater for the Indian palette, for example by offering strict vegetarian diets.

Bollywood idols

India’s film industry, Bollywood, is also set to explode. Bollywood produces more than double the number of movies of its US counterpart (about 800 a year) with some 2 billion avid cinema viewers.

As of today, 1.4% of the Indian population goes to the cinema daily and spends the equivalent of a day’s wages. Combined with predicted growth of around 30% until 2020 and a rise in the disposable income of the middle class, exceptional revenue
growth is to be expected.

The country is also home to the largest number of scooters, with around 16.5  million in 2016. They offer easy mobility within dense city centres and are also rapidly becoming popular with commuters from rural villages. With the urban
population expected to rise to 41% of the total population by 2030 (presently 1.3 billion and growing at over 1.2% a year), this will ensure high demand for scooters.

The fundamental strength of the Indian economy and attractive valuations make India an attractive place to invest in.

But for India to remain an attractive long-term destination for foreign corporations to set up shop, further reforms of corporate governance and fair treatment of foreign corporates on historic tax issues will be key.

As an asset class, Indian equities are not without challenges, but careful stock selection will continue to yield attractive returns.

 

This article was published in the October issue of the Citywire Private Wealth magazine.

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