‘Valuations of Indian stock market are not expensive from a long-term perspective’

The global banking crisis and its impact on India

Doshi: It’s very interesting that whatever is happening globally is just reinforcing our thought process and our belief that India is on the right track. We could never have expected such sort of accidents in our system. While we always think that we have regulatory challenges in India, today, I think it is a very big blessing.

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I think whatever is happening globally, is just start of a cycle where you will see the pain going on for many years. These are all warning signals for us. But India stands out very well.

Jain: The way monetary policy and banking regulation in India has worked over the last few years has been a typical first world style of functioning, which unfortunately did not happen in the first world. It’s quite an irony.

About a decade ago, perhaps post GFC, in India, we saw fairly volatile times, with weak balance sheets at an aggregate level with huge NPAs building up and current account crisis as well. Post that we’ve seen – both at the government and at corporate level – steps taken to strengthen the structural fabric of India. I think we are just seeing the benefits of that come through. It’s a good thing that we did not let the crisis go waste.

I believe that the next decade is ours for the taking.

Mukherjea: I think every 10 years, America blows up. I don’t think that’s the story of the moment.

You will remember 2023-24 as the year in which the world went to war without weapons. What’s happening between America and China is very serious. And it has huge implications for us as a country. Let’s take two developments.

ASML, a company headquartered in the Netherlands, is the only company to produce ‘extreme ultraviolet lithography’ technology to produce integrated circuits, which play a key role in the global chip supply chain.

The Dutch government, basis the pressure from US, stated a few months ago that there will be no exports of ASML machines to China. The western world, in a way, is saying we will send China back to the stone age as quickly as possible by making sure this semiconductor manufacturing comes to a halt.

The other dimension is in the Pharma industry. When we speak to the western pharma major companies, in which we invested in, all of them say there are clear orders from the powers that be in America to buy less API from China and buy more API from India. Fly to Baroda, Surat or Vapi in India, you will see a whole new industry coming up, which is ramping up API production.

Even if China’s 10% of API production moves to India, our API industry will be doubled.

Indian stock market valuations

Doshi: It’s not that our premium has gone up. But it’s just that the valuations of the other countries have gone down. So, our valuations look a bit expensive. But India is charting a growth path of its own.

Could you have imagined that the inflation rate in India would be lower than many parts of the West. I couldn’t have dreamt of it 10 years ago. Further, in the last five years, we are enjoying a corporate tax rate of 25.17%, absolutely undisturbed. Now, isn’t that a very strong promise from our government, to provide consistency and stability?

Shah: Indian stock market valuations are undoubtedly not cheap on a one-year basis. But take a five-year view, and suddenly we are the cheapest among the emerging markets.

Today Maharashtra’s GDP is equal to what whole of India’s GDP was in 2005. The combined GDP of Uttar Pradesh and Uttarakhand is what India’s GDP was in 2001. And three states—Tamil Nadu, Gujarat and Karnataka—combined GDP is where India was in 2000. Can we assume that over the next 15-25 years, these states will produce what India is producing today, if all of us continue to work as hard? I think it is eminently achievable. Now, in which part of the world would you see states becoming as big as the country, with reasonable amount of assurance. People who buy into that story will not find India’s valuation expensive.

Jain: In the calendar year 2022, Nifty 50 gave about a 4%-5% return, which sounds unexciting, of course.

But you should analyse the performance of that 50-stock basket by removing the outliers. And you will find that the difference in returns between the best performing and the worst performing stock is 90%. The best performing stock gave you 50%, the worst performing stock was down 37%.

I think it’s important to be able to identify those companies and take advantage of stock selection in order to create alpha and not overly obsess about aggregate valuations, aggregate growth, etc.

Mukherjea: Do a simple analysis. You look at companies that have a double-digit revenue growth and double-digit ROCE (return on capital employed) in the last 10 years. India has 140 such companies and China has 130. Remember, China’s economy is 4-5 times larger than us and still has fewer companies with the growth I mentioned. And there is no other emerging market in that picture.

The Indian companies filtered would have compounded wealth at 24% over the last 20 years, while the Chinese companies would have compounded at 12%. This is the best that China has to offer .

The decade of manufacturing

Shah: The train which we missed in the 80s, where China became a manufacturer to the world and we became back office to the world, is likely to get reversed, in my opinion. It’s not a 1-3 year journey, it’s probably 10-30 year journey. For China, the manufacturing is about 40% of the GDP. India’s manufacturing should grow from below 25% of the GDP towards first 30%, then 35% and hopefully someday to 40%. That’s the story of manufacturing in India.

Be watchful of:

Mukherjea: We need to push up the ante on corporate governance. We have improved vastly from the days of Satyam and the DHFL debacle etc. But I think given the rate at which our country is going, also the rate at which domestic money is coming into big mutual fund houses, we owe it to the investor community both in India and abroad. To push up the ante on accounting, quality and corporate governance is imperative.

Shah: From the economic point of view, we can’t afford to make a self-goal. In 1947, we were at par with Japan in terms of per capita GDP. In the1960s, we were at par with South Korea. In the 80s, we were at par with China. Today, all these countries are way ahead of us. And that’s because they have done many good things. But we have scored self-goals. The best example of Indian self-goal is when Singur, a state in West Bengal, opposed Tata group’s automobile plant in an essentially backward area. They tried for five years, couldn’t do it and finally moved out. They went to Sanand in Gujarat, which is now growing at a healthy rate. If all of India is going to follow a Singur model, it is time to short India. If all of India is going to follow Sanand model, it’s time to go double long India.

Doshi: India runs one big risk of continuity of reforms. We have had extraordinary leadership at the country level, which need to carry on for another one or two terms, I believe. There are a lot of unfinished reforms in many fields such as agriculture, defence, divestment of PSUs. etc. These are some of these big-ticket items that will actually take India to the next level.

Jain: I like to think that we don’t have control over what is going to be the political climate in India over the medium term and also on how regulations will be shaped. But what we can control is identifying companies that will be able to traverse these differing political scenarios, macro-economic situations, and so on and emerge stronger. So, I would as an investor and as a fund manager, only urge that we need to put effort into identifying companies and winners that can go through variables that we can’t control or which we can’t predict.