This post was written by Diana Cawfield for Morningstar Canada, where it initially appeared.
Under new pro-business leadership over the past two years and with the world's second largest population, India is a growing consumer market in its own right.
Currently, 60% of India's GDP is related to consumption, says Christine Tan, chief investment officer of Excel Investment Counsel Inc., which is based in Mississauga, Ontario, Canada, and specialises in emerging markets.
The emphasis on domestic consumption makes India quite different from some other emerging-market countries that are much more export-driven, says Tan. She adds that India is forecast to comprise about 40% of global middle-class consumption by 2050. "India is basically where China was 10 years ago," says Tan, who recently visited Mumbai, where she met with portfolio managers of Birla Sun Life Asset Management, which sub-advises Excel India. "There's a lot of room for this consumption to grow," she says. "Look at Tim Cook, the chief executive officer of Apple. He just made his first visit to India because he realizes that Apple's penetration in China is pretty much done."
India's demographics, with rising urbanization and a mostly young population totalling 1.2 billion, are spurring consumption. Positioned to capitalize on this growth, the portfolio of Excel India has an approximate combined weight of 60% in the financial, consumer and technology sectors.
Yes Bank
Among the fund's top 10 holdings is Yes Bank Ltd., "a great example of our team's active management and index-agnostic approach," says Tan. Held in the fund since 2011, the stock has tripled over that period. "The relatively small bank, predominantly in retail lending," says Tan, "is growing very quickly but their market share of the overall loan market is only 1%. So you can clearly see the growth potential." From a risk perspective, Yes Bank has very little exposure to the corporate-loan sector, where there are issues in India with non-performing loans.
Maruti Suzuki
Another top-10 holding is Maruti Suzuki India Ltd., a partnership with Japan-based Suzuki Motor Corp. "Maruti really focuses on entry-level cars, cars that are under US$5,000" says Tan. In India, 30% of car sales are in that segment. Tan describes Maruti as a "pure Indian story" that illustrates the Excel team's preference in the consumer space for companies that offer greater potential market opportunities. "We expect them to grow their vehicle sales by about 15% every year over the next few years."
Infosys
Infosys, a technology-outsourcing company, is currently the second largest holding in the fund. "They're very much benefiting from this whole trend in Europe, the U.S. and Canada," says Tan, "of companies outsourcing a lot of their IT services." Well known for its quality customer service, Infosys has almost a 70% renewal rate on its business contracts. As well, year-over-year revenue growth is expected to reach the high teens over the next few years, adds Tan.
India's potential
Since the May 2014 election of the government led by Narendra Modi, India's central bank has played a key role in stimulating economic growth, Tan says. Only a few months after the election, the program Jan-Dhan Yoyana, Hindi for "People, Money, Scheme," was launched. Modi convinced the banks to open bank accounts for everyone, not just people who could deposit funds, with the government absorbing the cost. About 135 million new bank accounts were opened within months, many in rural areas.
Electrification is another economic stimulus, says Tan. In the 2016 fiscal year ended in March, the Indian government spent $11 billion to provide electricity to 7,000 villages. Part of Modi's goal is to electrify all the villages by 2018, with another 10,500 villages still to be connected. Tan says economic studies clearly show that the productivity of a village, a city or a region increases dramatically after electrification.
Implementing changes to strengthen India's economy, "you might hear that Modi is running into stumbling blocks," says Tan, "but I would say that some of these big reforms are taking time. I try to remind investors that India is a democracy and it takes time to get big, big changes through. India is 40 times the size of Canada in terms of population."
Tan says one of India's competitive advantages is that it is more integrated with the rest of the world than most emerging-market countries. Technology and global outsourcing has been a big contributor to employment in India, thanks to the educated labour pool of young, English-speaking Indians.
The most powerful positive change affecting India, says Tan, is the growing perception that it has become a good place to do business. "What's really helping India today is that we are in a world of extremely cheap capital and very low global growth," she says. "There's literally trillions of dollars looking for long-term investment opportunities."
Since the May 2014 change of government, India has attracted a lot of investor attention and "very sticky, direct investment dollars," says Tan. These cash inflows, she adds, are critical to meet India's infrastructure spending goals of about US$1 trillion over the next several years.
