Nilesh Shah on India's growth potential and speed breakers

Mar 23, 2023

Nilesh Shah, Managing Director and CEO at Kotak Mahindra Asset Management, shares his views at a recent webinar hosted by Morningstar.

On the journey that got him into the stock market…

I was doing my articleship in Fort Chambers, which is behind the BSE. I saw people becoming rich very quickly and I thought I'll be one of them. I jumped into the market in the 1991-92 era, and lost everything. However painful it was, I'm thankful to God that he gave me that experience at a very, very low cost, early in my career.

The journey continued over three decades. Today, I'm student of the market. There are few principles which haven't changed over the last three decades and there are things which keep changing every day. So, it's an exciting journey. But clearly, one has to be student of the market rather than a guru of the market.

On speed breakers to India’s growth trajectory…

Global events will continue to impact our economy. If those events turn out positive, then there will be positive effect, and if not, then a negative effect. But in the deteriorating global backdrop, the Indian economy has done well. Cities are doing well. States will become as big as the country is today in terms of GDP. Companies will become global leaders. .

In CY22, Hyderabad, Bangalore, Delhi, Chennai, Kolkata and Mumbai were amongst the fastest growing cities of the world.

Maharashtra produces as much GDP as the whole of India was producing in 2005. Over the next two decades, UP, Uttarakhand, Tamil Nadu, Karnataka and Gujarat can reach where India is today. These five states alone can end up creating five Indias in terms of GDP over the next two decades.

Our companies are now trying to be globally competitive. Even cooperatives are aiming higher. Amul is India's largest FMCG company with a turnover of Rs 61,000 crore. Their target is that by 2047, they will be world's largest FMCG company with Rs 18,00,000 crore turnover. In 1970, India was producing milk which was equivalent to 16% of Europe's milk production. Today it is 150%. If Amul can lift India from 16% to 150% of Europe's milk production, if it can make India the world's largest milk producer, why can't it become the largest FMCG company of the world?

Speed breakers?

Events such as the Russia-Ukraine war, U.S. Fed pivot, energy prices, global flows, RBI’s management of the monetary policy, monsoons in India - which is likely to be impacted by El Niño this year. But in the long term, India will undoubtedly continue to grow and become the third largest economy of the world over next decade or so.

On China Plus One…

China Plus One is a penalty goal given to us. In the past we were not good at converting the penalty goal to the goal. This time, God has ensured that the goal post is wider, the goalkeeper has been put to sleep and the ground has been tilted. So, even if we push, the goal will be scored. But I still have to go and kick the ball in right direction.

An encouraging start is that 14% of companies which are moving out of China are coming to India. But our end destination should be 50%, not 14%. Samsung now operates the world's largest single location mobile handset manufacturing plant in Noida. In mobile phones, from an importer we have now become an exporter. But what we have done with mobile phones and electronic components, we need to replicate in many, many, many other sectors. A promising start, but a long-term journey.

Samsung came to India many, many years before they discovered Vietnam. It's an unlisted company, but they are India's largest consumer durable company. Their turnover will be in the region of $12 billion to $13 billion. In Vietnam, their turnover is $65 billion. Vietnam is 110th the size of India or lower. And yet, Samsung has five times more turnover in Vietnam.

In 1980, India and China were at similar per capita GDP, NGDP. Today, they are six times ahead of us. That's the kind of distance we have to cover capturing this China Plus One opportunity.

On being a growth at a reasonable price investor in such a market...

At Kotak Mutual Fund, our job is very simple; we operate within our boundaries.

  • Corporate Governance.

In the past, we have made many mistakes and learnt that there's no point in investing with people who are going to take you for a ride. Fortunately, the regulator has also empowered us to protect our minority rights. We are by and large invested into good governance companies and ensure that they remain on the path of good governance.

  • Valuation.

Price is what you pay, value is what you get. There are periods where certain stocks continue to run higher and higher. You underperform your peers or benchmark indices because you took a different call from them. Now, you have to stick to your guns. You have to absorb those periods of underperformance. Over a long period of time, markets are like weighing machine where fundamentals will play out. We are not a momentum player. We are not a flow player. That game you can play on few thousand crores not on few lakh crores.

Today, I can proudly say that the entire mutual fund industry has come out with flying colors on avoiding expensive stocks. Even when they were part of benchmark indices, even when the whole world was populating the myth that fund managers are not generating alpha, all the mutual fund managers stayed away from the temptation of investing into expensive stocks, and that has been proven right now.

  • Behavioural.

It is all about balancing your greed and fear. It's all about maintaining your sanity when the market becomes irrational. It's never easy to make money. If you have discipline, you will eventually be successful.

On return expectations…

We are trading somewhere around historical average valuation. But please remember that in those historic average valuation interest rates were a little lower than what it is today. Right now, the market believes that interest rates will start coming down somewhere in 2024 and probably still believes that equity market is at historical average valuation. But it is not our historical average valuation, but relative valuation to peers where there is a challenge. We are trading at our historical average valuation, but all others have fallen behind and that's why gap between us and them have increased significantly.

Now this gap means investors have more expectations out of India. They expect our earnings growth to be better than our peers. They expect our governance standards to be better than our peers. And they expect our green commitment, our commitment to environmental and social, to be better than peers. If India delivers on this 3G (growth, governance and green), then we will continue to deliver returns to investors. If we fail to meet these expectations, then certainly, our market will get de-rated.

Fortunately, there are many companies within our universe which are capable of delivering on 3G and hence we believe India will be an outperformer to other emerging markets. It will reward investors albeit with bouts of volatility in between. Please remember that economy and markets can behave differently in the short term. Markets will be driven by flows and sentiment apart from fundamentals and hence there will be more volatility in markets than in economy.

On global rating agencies giving India the shorter end of the stick...

Don’t expect rating agencies to treat everyone equally. There is a financial apartheid in the world. If we were doing money laundering for white men, we will be called a terrorist nation. But when the "white countries" do money laundering for emerging market crooks, they are considered havens. No one is going to treat us fairly. Other than your mother and father, no one is going to treat you fairly.

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