Selective bets and long-term growth in India

“India is no longer just an ‘emerging’ market; it is now one of the largest economies globally. Its real potential lies in the discount to intrinsic value, not just current price-to-earnings ratios.”

- Vikas Pershad, Portfolio Manager, Asian Equities, M&G Investments

“We see strong growth into auto ancillaries, defence and EMS, particularly in companies focusing on high-value projects like AI data centres. However, being selective is key to finding sustained success.”

- Deepika Mundra, Director, Equity Research India, M&G Investments

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India’s equity market, we would describe as “the cheapest in the world for the next 5, 10, 15 years¹,” remains a standout among global markets. With over 6,000 listed companies and a rapidly emerging economy, India has emerged as a major market and a fully-fledged economic powerhouse. Selective investments in key sectors, such as auto ancillaries, electronic manufacturing services (EMS), and defence hold the potential for sustained growth, with the scope for 15% compound annual growth rate (CAGR) over the next 3-4 years. Additionally, India offers a rich opportunity set for active management, where selective investments can outperform the broader market.

We take a deep dive into why we see long-term value in India’s market, the role of premiumisation, and the role of the Make in India initiative. We will also look at the risks and opportunities in the current IPO market and how we are navigating these challenges through active management.

Question: India’s equity market is often highlighted for its long-term growth potential. What continues to make India such a compelling investment opportunity?

Vikas Pershad (VP): India’s appeal lies in its emergence as a fully-fledged global market. It is not just an “emerging” market anymore; it is now one of the largest economies and equity markets in the world.

After engaging with over 30 companies recently, it is clear that India’s intrinsic market value is significantly higher than what is currently reflected. When evaluating its potential, it is important to look beyond price-to-earnings ratios. Cheapness is not about the current multiple – it is about the discount to intrinsic value. This is where the long-term opportunity lies.

As active managers, this creates a great environment for selective investing, where doing your homework allows you to find companies that will outperform the broader market.

Question: What sectors and opportunities are expected to drive significant earnings growth in India over the next few years?

Deepika Mundra (DM): We see strong growth potential in sectors like auto ancillaries, defence and EMS While these sectors have faced some challenges, particularly in terms of margin pressures in EMS, certain companies within these industries are well-positioned for long-term growth. EMS companies, for instance, are benefitting from global shifts in supply chains and technological advancements, but it is crucial to be selective. We believe companies focusing on high-value projects, such as AI data centres, are poised for sustained success.

Additionally, export-focused industrial names are a significant opportunity. We are seeing a shift in labour to India, and with companies capitalising on that, the growth potential remains robust.

VP: I will add that in the two-wheeler space, companies are gaining market share continue to show promising earnings growth. This growth is sustainable, particularly as Indian companies expand into global markets. Furthermore, industrial companies in regions like Gujarat, which are set to accelerate earnings growth, are ideal examples of where we see value.

Question: With the rise in IPO activity, how do you manage the risks associated with potentially overvalued companies?

DM: We take a cautious approach to IPOs, particularly in avoiding loss-making companies with no clear path to profitability. While some new-age companies have scaled rapidly, without a strong handle on profitability, they present risks of forming bubbles.

Our focus remains on niche companies with strong fundamentals – those that are sustainable and poised for long-term success. This is where we believe real value can be found.

Question: Premiumisation and the Make in India initiative have gained momentum. How are these trends shaping your investment strategy?

DM: Premiumisation is a key trend we have observed across multiple sectors. The demand for higher-end products and services – from airlines to luxury real estate – has been on the rise, with consumers increasingly option for premium offerings. For example, India’s largest airline adding business class seats for the first time in 17 years reflects this shift in consumer behaviour.

Additionally, the Make in India initiative has created real momentum, with companies boosting productivity and export capabilities as part of a global supply chain diversification.

Question: How have Indian companies improved their capital allocation strategies in recent years?

VP: Indian companies have made significant strides in capital allocation, moving away from empire-building and towards more thoughtful, sustainable growth.

A prime example is the recent partnership between Motherson and REE Automotive, where M&G Investments invested alongside Motherson. This collaboration combines Motherson’s manufacturing expertise with REE’s cutting-edge EV technology, a strategic partnership which is driving global production while reflecting a disciplined approach to capital investment and long-term value creation in our view.

Question: What are some of the key risks in the Indian market right now, and how are you positioning your portfolio to mitigate these?

VP: One of major risks we are closely monitoring is the potential for earnings downgrades, especially in light of tight liquidity conditions and the Reserve Bank of India’s focus on unsecured loans. However, rather than investing broadly in the market, we focus on specific companies that are benefiting from earnings upgrades and re-ratings. For instance, we have identified industrial companies in Gujarat that are positioned for significant earnings acceleration, making them strong portfolio candidates.

DM: Another area we are focused on is avoiding overvalued sectors such as consumer staples and PSUs, which are trading at high multiples but aren’t showing the same earnings momentum.

Instead we look for growth in off-benchmark names in sectors like healthcare services and select industrials. In the power sector, for example, we particularly like the transmission space, which is fuel-agnostic, and offers shorter-term execution benefits.

 

¹ Economic Times, 28 September 2024