October 2008 - After years of services-led growth, India is now seeing investment and consumption as growth drivers.  Vinay Gairola, fund adviser to the Atlantis India Opportunities Fund, comments: “The global slowdown is affecting India at the margins, but the long term scenario is still hugely positive. Gairola says, “India is still in the golden phase of its growth trajectory. After a strong performance over the past four years, the real economy of production, consumption and wages, has shown signs of slowing down in the last few quarters. However, there is no indication of their reversal, with strong earnings per share growth of 18%, returns on equity of 21% and corporate gearing less then 11% for India as a whole. The average GDP growth in the last four years has been 8.8% and the Indian Government has already begun to introduce fiscal measures to tackle the inflation issue.

“Recent Government initiatives designed to boost disposable income and make the growth rate more resilient will help the economy. These initiatives include salary increases for nearly 5.5m central Government employees and recommendations for soft loans for cars and housing. The Government has also provided a waiver of some farm loans, a move which could remove the burden of loan repayment for a large number of small farmers, improving credit flow to the rural economy, in turn boosting consumer demand.”

More realistic valuations are apparent since the Sensex came off its 2007 high, when the index was trading at a peak of 21x one year forward earnings. The multiple is now 15-16x, which is comparable to the 15 year average trading band of 17.5x. Gairola says “in the short term, we believe the markets will continue to face headwinds in the form of inflation, interest rates and higher oil prices, along with a slowdown in manufacturing growth on account of supply constraints. The current fund strategy is to buy into the core positions given that we continue to remain bullish on the long term prospects of the economy and the markets.  

“The general themes driving our portfolio at the moment are:

Job Creators - Companies that are benefiting from better management of the key cost components of staffing and real estate by moving to b and c grade cities. These companies are benefiting from the demography of the country, which ensures the availability of an educated workforce across the length and breadth of India. Specific companies we like are Infosys, Tata Consultancy, Glenmark, Ranbaxy.

Demographics - Companies like Reliance Capital, ICICI Bank and others which are involved in insurance, asset management and retail lending. We also like companies such as Educomp and Everonn, which are involved in the education space.

Climbing the demographic pyramid - Companies in FMCG/housing/telecom spaces like Bharti, HDFC, ITC. These are companies benefiting from the movement of the consumers up the demographic pyramid.

Globalisation - Resources companies like Sterlite, Sesa Goa, Tata Chemicals, Companies that have set global footprints like Bharat Forge and United Phosphorous.

Suppliers and Facilitators to the above - companies like Welspun, ICSA, Godavari power & Ispat, Monnet Ispat.

Improved infrastructure is clearly the essential ingredient for a successful emergence by India. At more than three million kilometres, India’s road network is among the largest in the world. However, national highways acoount for just 2% of the network. At a mere 2,000 km, India’s expressways are a fraction of China’s 40,000km network. The nettle seems finally to have been grasped, though and various major projects are about to come to fruition. India’s massive but decrepit rail network is being boosted by the addition of 2,700 km of new freight routes. Similarly for airports - two million passengers flew in India in 1971. The figure was 20 million in 2005, but there had been no corresponding increase in infrastructure spend. The government plans to invest $9 billion over the next four years to improve airport infrastructure.

A strong supply side response, both by the government and the private sector, has been the driver for the acceleration in the investment cycle, which has also been well supported by availability of capital. Fund managers predict that the universe of investible infrastructure plays should increase from 150 currently to perhaps 250 names in the next two years.

Gairola says, “We can see from the increased proportion of Gross Capital formation in GDP from 23% in 2003 to 36% in FY07, that investments have gathered momentum. We believe that this capex could easily translate into an opportunity worth $270 billion for the equipment vendors over the period FY07-FY12. The biggest opportunity for the equipment vendors over the next five years will be in industrial segments (metals and hydrocarbon), followed by power generation and transmission.”