India is the 6th largest economy in the world and home to vibrant, entrepreneurial companies
India poses an exciting opportunity among emerging markets – we talk much about the world leaders emerging in nations like China or Korea but there is another type of company which is experiencing long-term sustainable growth. These are the local, entrepreneurial companies who display ingenuity and can take advantage of domestic structural change and consumer trends. Many of these companies are found in India and are experiencing strong growth. The market agrees: India’s equity market has outperformed the MSCI Emerging Markets Index by over 30% in the past year1 and the Indian market earnings revisions are one of the strongest in emerging markets, up over 40% in 2021.2
Figure 1: India has one of the highest gross domestic product (GDP) in the world
Source: Statista and IMF. 10 countries with the largest GDP 2020.
Our Global Emerging Markets team continues to be optimistic about the portfolio’s Indian stock holdings which we believe will benefit from structural growth changes. The combination of strong vaccination rates, capex recovery and the redirection of government spending toward investments and infrastructure provide a supportive environment for domestic equities. With this backdrop in mind, the Global Emerging Markets team looks at the broader driving forces in the Indian market and how the portfolio is positioned to take advantage of them.
Benefitting from India's driving forces
India is home to vibrant, entrepreneurial companies which are market leaders in their respective segments. They are positioned to benefit from key driving forces of underpenetration, formalisation and housing.
In the following sections we highlight how some of our portfolio is positioned in order to take advantage of these forces.
The local market is deeply underpenetrated in areas such as passenger vehicles and financial products and services.
Maruti Suzuki is the leading Indian automotive company with roughly 50% market share.3 With only 6% of India’s population owning a car (versus 88% in the US), we believe this a great growth opportunity.4
India is projected to have the largest share of incremental growth of nearly 30% in passenger vehicle sales globally for the next decade.5
Our Global Emerging Markets team continues to be optimistic on the portfolio’s Indian stock holdings which we believe will benefit from structural growth changes.
Retail activity is moving to formal channels with a focus on premium brands. We see this trend across the entire landscape, ranging from broadline retailers to specialty retailers and home building products.
Titan is the leading luxury jewellery and watch retailer in India where 70% of the market is estimated to be unorganised. Revenue growth has been as high as 70% recently, driven by a broad shift to branded jewellery.6
Broadline retailer Reliance benefits from part of the structural shift from unorganised to organised retail markets. Unorganised retail is estimated to be 90% of the Indian market and organised retail the remaining 10%.7 Reliance is a proven market leader -their retail revenue base is 30% higher than the next 10 largest retailers combined.8
Housing and property cycle
Unlike China which is currently experiencing weakness in property market fundamentals, India’s property cycle is improving (following an 8-year period of weakness). Affordability has improved and there is a structural demand-supply gap across all the major property markets of high, medium and low income (figure 2).
Figure 2: Cumulative demand and supply numbers for housing in eight major cities of India 2016-2020
We have two-pronged exposure to housing-driven growth: retail banking and building materials.
Our exposure to retail, private enterprise banks is through HDFC Bank, ICICI Bank and Kotak Mahindra Bank. These companies have the largest market shares in lending with a combined market share of roughly 20% of all lending in India.9
The portfolio holds building material stocks such as Asian Paints and Ultratech Cement. Asian Paints has a 39% market share in the domestic Indian paint market, more than the next three largest combined.10 It is a premium product with the ability to pass through higher raw material costs and recently announced a 10% price increase. Ultratech is India’s largest cement manufacturer with exposure to all product verticals. Cement is a beneficiary of both underpenetration and end-market demand improvement in real estate and infrastructure. For example, ready mix concrete is a very small portion of India’s cement consumption (compared to being the vast majority in developed markets).
Source: Statista and India Brand Equity Foundation; Anarock; Cushman & Wakefield (IBEF real estate 2020, page 9), December 2020. The cities of Delhi NCR, Mumbai MMR, Ahmedabad, Kolkata, Pune, Hyderabad, Bengaluru and Chennai are generally known as the eight major metropolitan areas in India.
In addition to global leaders, emerging markets present a unique opportunity to invest in local market leaders with the potential to benefit strongly from consumption trends and structural reforms in their domestic market. India's vibrant market is home to several of these companies and we have positioned the portfolio for investors to partake of the exciting opportunity it presents.
1Source: MSCI. MSCI India returned 36.5% in the 12 months to 30 Nov 2021, compared to the MSCI Emerging Market Index returns of 4.6% over the same period.; Stakeholder Engagement | Antofagasta PLC.
2Source: FactSet, Martin Currie, December 2021E.
3Maruti Suzuki market share was 47.8% for passenger cars in India for the financial year 2021. Source: Statista and Auto Punditz.
4Source: Statista and Pew Research Center, 2014, and Martin Currie research.
5With global passenger vehicle sales expected to grow around 20% between 2020 and 2030, India is expected to increase its share of sales from 4% in 2020 to almost 6% in 2030. Source: Statista and OICA, Morgan Stanley Research, Martin Currie, 2021.
6Source: Martin Currie, company results.
7Source: Martin Currie.
8Source: Martin Currie.
9Source: FactSet, June 2021.
10Source: Statista and Nirmal Bang, financial year 2020. The next largest paint firms operating in India have market shares of: Berger Paints India 12%; Kansai Nerolac Paint 11%; Akzo Nobel India 6%.