After almost two decades’ investing in Indian companies, I have learnt that building long-term relationships with the management teams of quality companies is key to delivering sustainable outcomes for our investors. This article outlines some of the reasons why now, more than ever, India is an attractive market for global investors seeking diversification and growth.
Small is beautiful
India is one of the oldest stock markets in the world, and has about 6,000 listed companies. Even if you apply basic governance and growth filters, there are more companies in India to choose from than in many other emerging markets.
In India, only around 10 per cent of listed companies have a market capitalisation above US$200 million. This compares to China, where firms of that size and above account for 80 per cent of the market.
Many of the companies in India are still relatively small, meaning there is a lot of scope for growth. It’s an untapped market in many ways: with a population of 1.4 billion people increasing their consumption of various goods and services, there is amazing potential for these companies to become a lot bigger in years to come.
Alignment of interests
In India, there are many family-owned companies, where the managers think of their business in a multigenerational way.
When you meet these owners and managers, you can have discussions ranging from board composition and independence, to remuneration, succession and ESG matters. These conversations are very long-term and strategic in nature. It helps us find alignment with them, which is a key part of our investment process. We need to see this alignment to have the conviction to buy these companies and hold them for the long-term.
Ability to engage
Our entire investment process is predicated on establishing whether a company meets our standards to invest in it. But there are no perfect businesses, and once we establish that a company is investible, we can start to engage with its management team on ways the business can improve.
The key is to demonstrate to these companies that we are partners for the long-term, and not just here to make a quick dollar. As a long-term shareholder, we see ourselves in the same boat as the people running the company. In our team, we often say that it is better to travel than to arrive, and we see a relationship with these companies as a journey.
All of our engagements, whether it is through meetings with the managers or letters that we write, focus on learning about the business and offering suggestions to improve.
Willingness to improve
Through these engagements, we want to gauge whether the company’s managers are willing to listen to its stakeholders. If they listen to us, a shareholder, it tells us something about the culture of the company. Tomorrow, it might be a vendor, a distributor or an employee who has something to share with management, and we want to know they will be heard.
For example, we raised our concerns with the Mahindra Group about their approach to capital management. We wrote to the chairman, and he acknowledged the issues in his reply, outlining the actions they were taking to improve. Moreover, when we subsequently met the new deputy chief executive, he was brandishing the letter we had written, ready and willing to discuss it.
This episode spoke volumes about the culture there and increased our conviction in the different Mahindra Group companies that we own.
Positioned for the recovery
We are invested in companies that are market leaders, have higher return on capital and have gained market share through the cycles. Last year, during COVID, as businesses were struggling and markets were volatile, we had the opportunity to invest in high-quality businesses that we were watching from the sidelines, and to increase our positions in existing investments.
The FSSA India Equities portfolio is diversified across several sectors where we predict strong growth over the long-term: consumer companies, financials, infrastructure and industrials.
In terms of infrastructure, we don’t invest in asset owners directly, because they tend to be very leveraged, and in many cases, have low corporate governance standards. But we invest in companies that are suppliers to these businesses, which should benefit from rising infrastructure spend or industrial activity.
Positive regulatory settings
India has certainly faced challenges in terms of its economy and regulations over the past decade. Between 2002 and 2012, Indian corporate earnings increased by almost five times, but over the last eight years, it has been almost flat.
There were several reasons behind this slump. In the early 2010s, a lot of corruption and scams came to light and in many cases, these were felt in the Indian financial system – many Indian banks found themselves with broken balance sheets.
There was a freeze in decision-making and a freeze in the economic system, which resulted in a massive slowdown. In 2014, when Narendra Modi became Prime Minister and the Bharatiya Janata Party (BJP) came into power, they implemented a number of positive reforms such as goods and services tax (GST).
While GST initially resulted in chaos and confusion, and a slowdown in the economy, things are now coming together. Those teething issues have been addressed and we’re now seeing an increasing rate of formalisation in the economy because of the reforms. The economy is now set for future success and we have a positive outlook for Indian equities.
Vinay Agarwal, director, FSSA Investment Managers
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