Govt meddling in economy holds India back: Jason Pidcock

Q: You don’t like India from a top-down perspective, but bottom-up what are your big bets there and what kind of themes are you playing?
 
A: We very much like the healthcare sector. Another key thing for us is healthy demand that we have lot more demand for private healthcare in India going forward. A 75% of healthcare expenditure in India is private sector. That marks it out as being quite different from somewhere like China and it is a sector you can invest in companies such as an Apollo Hospitals or Fortis Healthcare.

There will be more domestic demand for healthcare as people live longer, as they have more disposable income and probably as they live longer with diseases, lifestyle diseases in particular, but India is one of the countries that benefits from healthcare tourism as well. Along with Singapore and Thailand it is becoming a regional centre of healthcare tourism.
 
Q: Are you comfortable with the managements of Apollo and Fortis companies?
 
A: Yes.
 
Q: Do you think they are comparable with the kind of profiles you can get in the region or even better?
 
A: As companies they are still relatively young and at the stage where they are growing quite quickly relative to some of their peers. There are one or two more established companies that are at a mature level where it’s clear to see where they are going short-term. Both Apollo and Fortis are in quite an expansion phase, particularly Fortis is via acquisitions.

I think the rewards available to them are bigger and therefore some of the risks that they take will be higher. We have to take that into account. There may be some events that we are not entirely comfortable with, but overall we are happy with that package.
 
Q: You don't see any major stress in their balance sheets as they try and expand?
 
A: They may have periods where they need to raise more equity and we have already seen that but we actually feel that is a relatively safe sector, where they should be able to get access to credit. They both have assets which they could monetise if necessary. Apollo for example has the largest pharmacy chain in India. If the laws changed to allow foreign retailers to come and to take a larger stake, we think that would be very appealing to many international pharmacy companies.

You could see some kind of JV structure which could then expand even more quickly, get international inputs in terms of how to manage it and then Apollo receiving cash as a result. If there was one sector that we probably feel, comfortable funding it is this sector. You are right, the balance sheets could get to a position where they are stretched for a while, but then I think new funding would follow. 
 
Q: You wouldn’t extend your bullishness on healthcare to Indian pharmaceutical companies or the manufacturers?

A: We see pharmaceuticals as more risky. The pharmaceutical sector in India as a group rely a lot more on exports to other parts of the world, there is a lot of generic manufacturing and these companies occasionally leap frog each other, you don’t know necessarily which one to back and that’s subject to demand outside of India. Whereas the hospital operators, there are bigger barriers to entry.

You are essentially playing Indian demand and even with the healthcare tourism element, you can see why it’s going to grow because of the low costs in India compared to elsewhere and there are fewer players. Even the market cap in that sector is lower than the pharmacy. So, I would say it is lower risk with a multi-decade story.Q: Since you like the assets owners in the healthcare space, would you translate that optimism to the other kinds of asset owners in India like the GVK and GMRs who own airports and power companies etc.?

A: Possibly, but not right now. They of course are subject to multiple variables and they have development risk. GMR doesn’t just have airports and even there it’s not just in India, but Maldives elsewhere, not that that’s a negative, but there is more to think about. The inflation, interest rates, it is a more cyclical business. Therefore, we don’t feel that it’s quite as appealing especially in this environment as a less cyclical, but definitely it is a growth story like healthcare.

Q: What about infrastructure? Do you own anything in Indian infrastructure at all?

A: It is an area where we are underweight. We are still comfortable with Larsen & Turbo. We think they are very well managed. They have got a nice portfolio of assets, of skill set and we are very comfortable with them for the longer term. It is cyclical, there are ups and downs.

In the last couple of years share price has struggled as new orders have been hard to come by. But, we think the infrastructure story in India remains, a lot needs to be spend. There are too many bottlenecks. When the government is able to spend more on infrastructure Larsen & Turbo will be a prime beneficiary of that.

Q: What about the Indian consumer companies? You said earlier in the interview that you think some of them are quite pricy? What about the HULs, the ITCs of the world? Do you like any of them?

A: We do like ITC. We think there is a good growth story there. We like the management. We think it doesn’t look too expensive relative to the growth rate. We like Dabur and sometimes it is worth paying up for a good story. So even when they don’t look cheap.

If you find stocks where the PEs are low to mid-20s, it doesn’t sound cheap. But we found in other markets, across Asia, that they earn their way into those valuations. If they are well managed, ideally they will beat consensus estimates and then suddenly the valuation doesn’t look expensive after a year or two.

Q: Staying with the consumption, do you like any of the Indian auto players? Any of the domestic players like M&M or even some of the globally exposed ones like Tata Motors?

A: Tata Motors is doing very well. They have made a various astute acquisition. They have done a good job with Jaguar Land Rover undoubtedly and good luck to them. Hope they grow well globally and they have probably got a good story in China. Personally, I tend to stay clear of the auto sector. It is a bit of a specialist skill set to identify, which will do well.

Over the very long-term there haven’t been many car manufacturers even globally that have been great investments and even the best tend to have periods where they do well. But over a number of decades you would have been better of putting your money somewhere else. It is a bit like football clubs, there is a lot of ego involved in car manufacturing. I guess it’s an area that I would be happy to leave to other people.

Q: You would stay out of aviation for the same reasons?

A: Yes, you should never say never but I never invest in airlines, it’s a very difficult industry. Even when an airline is very well-managed because it will have so many competitors that are badly managed and where is government involvement, it’s difficult to stay profitable for very long.

Because so many governments around the world feel that it is necessary for them to have their own national airline, there simply are too many airlines in the world. Therefore, it is a very difficult sector.

Q: Do you own anything run by the state in India; any state owned enterprise, given that you are a little shaky about Indian politics?

A: No, this is the simple answer. Obviously, the government retains a small stake in L&T, but no management interference in the direct sense, so that’s about as far as it goes.

Q: No state-owned banks either?

A: No.

Q: Do you own any of the banks in India?

A: No, we have HDFC, the mortgage company. We think they are very well-managed and there is a nice long-term story. But, we are quite underweight on banks, normal banks across the whole region, we don’t have many. So, there are many countries where we don’t own any banks. We don’t have any in China for example at the moment.