Long-term, India still an attractive market: StanChart Bk

In an interview on CNBC-TV18, V Shankar, Group ED & CEO of Europe-Middle East, Africa and the America (EMEAA) for Standard Chartered Bank, says it is a three speed world - Asia is still on a growth track, America is recovering and Europe is still struggling.

He says it a given that when the US recovers, interest rates will go up and dollar may strengthen and money will come back home in the chase of higher yields and better performance. So what is imperative is that a country positions itself as an attractive investment destination for the future in the long-term through the cyclical basis. So it is about creating the right environment for foreign investors, he says.
According to him, the India growth story is still intact as this is a large domestic economy. Besides, India is rather competitive in a lot of areas, especially, when it comes to exports. He says India's demographics, industrialization, urbanization and the huge potential that this country offers, makes India attractive in the long term. Also Read: Sebi move on rupee harsh, but bodes well for eco: StanChart
"If an investor were to take a medium to long-term view, then the Indian consumer doesn’t look like it has been fully played yet, it is playing out. The manufacturing sector is another good story overall. IT the usual suspects still remain intact. Infrastructure is going to be a big story because India can add several percentage points to its GDP by getting the infrastructure right. That again provides huge opportunities for foreign investors," he told CNBC-TV18.
Shankar says Africa is the market to watch out for as there is no one Africa, it is 54 countries. And by 2035, Africa will have more people of a working age than either India or China. He says there is huge opportunity in Africa in the infrastructure space. It is estimated that Africa is currently spending about USD 30 billion a year on infrastructure and that needs to go to USD 100 billion a year.
He says the StanChart business in Africa has grown top-line at 15 percent and bottom-line at 21 percent CAGR over the last five years. Below is the verbatim transcript of V Shankar's interview on CNBC-TV18 Q: Let me begin by asking you the current macroeconomic context that we are operating in continues to be as far as the economy is concerned continuously in turmoil. India hasn’t managed to escape whatever else is happening in the world, give us a sense of the economic recovery if at all in the world?
A: I think it is a three speed world, clearly, Asia is still on a growth track, America is recovering and Europe is still struggling. To your point about India being caught up in this turmoil, no country is immune to it today. We are very much a part of a globalised world and a globalised economy. So that is the positive and the negative of that. Q: As a global banker with extensive experience of what is happening all over inflows/outflows the key concern in India is the American recovery that you mentioned and while it is good news for the world economy, for India it may not be that good news, the fact that there is a sense although that is debatable that ultimately the huge amount of easing that we saw in the United States will be rolled back and that is playing out on stock market sentiment in India. What would you say to that debate?
A: When quantitative easing started, more of the emerging markets were complaining about that. They were complaining about the creation of an asset bubble, which was true and now that the quantitative easing is being rolled back, there is complaint about a withdrawal of money. I think it is a given. With America recovering, interest rates will go up and dollar may strengthen and money will come back home in the chase of higher yields and better performance. This is what happens when you have true open capital markets. Q: As far as foreign institutional investors (FIIs) investment is concerned, we have seen some efforts by the Indian government to boost FII investment, but we have also seen that despite whatever you do at home, factors like the one that you just mentioned drives sentiment. How would you position FII sentiment, going forward, what are the key triggers that you see coming forth in their investment decisions?
A: I think you cannot drive a car by just looking in front of your bonnet, you need to look 200-300 yards in front of you and not just look in front of the bonnet. I think your approach to attracting the foreign investor is exactly the same. One is to get concerned about short-term volatilities, which are a given today. Q: Short-term volatilities are a given and what you are saying is that they will continue to be so?
A: They will continue to be so. You need to position yourself as an attractive investment destination for the future in the long-term through the cycle basis. So it is about creating the right environment for foreign investors in terms of protection, rights, return, overall attractiveness, your ability to come in and ability to exit. That is what will drive in the long run for an investment in any country. Q: What is your sense of the efforts that have been made, the last budget in some ways was a watershed one for the Indian economy and we have now seen the new administration, the new finance minister in some ways trying to clean up the slate, what is your sense of all the efforts that have been made so far?
A: I think the last several months has been very good in terms of the finance minister’s push precisely exactly what you are talking about and when you do vigour and enthusiasm in terms of making India attractive again, the results of these things take years before you start seeing the benefits. So you have to give it time. Q: While the finance minister has been working hard and more of that is expected on the foreign direct investment (FDI) reform front and several other measures, let us pick up one thing of immediate worry as far as the Indian economy is concerned and it is of course a big global issue. This is the currency volatility that we are seeing, the rupee diving south of 60/USD, making a marginal recovery, the currency markets, the way they are playing seem to be both driven by sentiment and are not perhaps picking up the cues that the Indian government would want them to pick up, do you agree with the play that is happening as far as the currency markets are concerned?
A: I think currency markets are driven by sentiment, partially by economics, but also largely by flows what we talked about with interest rates going up in America, money coming back home that has got a significant impact in exchange rates. So it is multiple factors, which play into the exchange rate equation, I do not think anybody in the world can claim to know every in and out of that.
_PAGEBREAK_ Q: When you talk about inflows and that is where the key hopes of the government lie that a slue of FDI reforms, removal of caps will lead to inflows. Just to generally get your sense on expectations if I were to ask you about India easing FDI caps because that is long-term investment, good investment for an economy like India, do you think there would be a positive response worldwide? Do you hear from companies that they are keen on India or is the India story still a recovery that is yet to take place?
A: The Indian story is intact. Q: You are perhaps the only one who is saying that.
A: I am not the only one. Just look at the demographics of India, the youth, the consumer, the sheer demand that is going to generate. This is a large domestic economy and on top of that India is also quite competitive in a lot of areas when it comes to exports as well. So if you just look at the demographics, industrialization, urbanization and the huge potential this country offers, longer term you got to believe in the attractiveness of India. Q: When you say long-term potential, are there sectors that you think are worth investing in that overseas investors who want to look at closely in the coming months?
A: I won't say coming months, but if you just take a medium, long-term view, the Indian consumer story is a big story which has not yet been fully played, it is playing out. The manufacturing sector is another good story overall. IT the usual suspects still remain intact. Infrastructure is going to be a big story because as you know very well India can add several percentage points to its GDP if we get our infrastructure right. That again provides huge opportunities for foreign investors. So I won't say this is just this sector or that sector, the opportunities are quite wide and enormous, retail, hospitality. Q: But when it comes to inbound investments, we are looking at a longer term horizon but let us talk about outbound investment. You are in India in Delhi for your first ever Africa Chairman’s conference being held here and we know as a banker, as a deal maker in the past you have worked on some very large deals where Indian companies were going overseas. We have seen people in the government and people in corporate India talking about the fact that Indian companies investing overseas perhaps also because of lack of opportunity in the domestic market. How does that play out? On one hand you expect overseas companies to come into India yet we have seen this trend of Indian companies leaving India in that sense. What is your sense about that?
A: It is not a binary equation. Indian companies investing in India and investing outside these are not necessarily in conflict. Some of this is about acquiring scale, some of this is about acquiring skill, some of this is about acquiring access to new markets, it is about exporting talent, the product, skills, and services. So it is a combined picture, sometimes it is access to resources which you don't have at all. There are lots of good stories of Indian companies going outside and making a huge success. Take Jaguar Land Rover that is a stellar example. Q: Infact that portfolio is holding up Tata Motors performance currently.
A: What Tata’s have done with JLR is simply astonishing. We all as Indians should be very proud of that. Q: What has Bharti Airtel done with Zain?
A: They have done a good job, Africa is a tough market. It was never going to be easy, there are strong competitors and they knew that, but I feel very happy when I go to Africa and see Airtel signs all over the place. They have done a terrific job with launching new products and services and essentially establishing Airtel as a well-known brand in Africa. Q: One of the key points that we have been speaking about and this is Africa. We see enhanced competition in Africa, you have the traditional dominant players there which are the Chinese, now you have Brazil heading in and of course the United States, how is the African play as far as valuations are concerned for the Indian companies? Is it the same as a few years back or are they headed for greater challenges as the African economy grows?
A: As the African economy grows you should expect more competition. You have just seen President Obama make a trip to Africa this week, but if you were to just step away from current valuations and think a little more about what is the opportunity in Africa I would say it is in four sectors broadly.
One is consumer. The African consumer across 54 countries last year spent almost USD 1 trillion. That is more than the consumer economy in India. Take a company like MTN, it virtually didn’t exist 15 years ago but today it has got a market capitalisation north of USD 35 billion all on the back of an African consumer spending.
The second area I would highlight is infrastructure. Take a country like Nigeria, it has got 30 times more population than Singapore admittedly a larger country but has lesser installed power capacity. It is faster and cheaper to ship a car from Paris to Lagos than from Accra Ghana to Lagos. So, infrastructure is a big need in Africa and it is estimated that currently in Africa they are spending about USD 30 billion a year on infrastructure and that needs to go to USD 100 billion a year, therein lies opportunity.
The third area I would highlight are resources. Africa, depending on which mineral or what you talk about, is a major source of resources. India itself imports a lot of oil from Nigeria and Angola.
The fourth area I would highlight is food and agriculture. If you just consider the fact that global food consumption has to increase by 75 percent over the next 20-25 years Africa will have to play a big role in meeting that food demand because 60 percent of the world's uncultivated arable land is in Africa.
So, it is consumer, agriculture, infrastructure and resources, but the biggest thing that we in India will get very quickly is the demographics of Africa. By 2035, Africa will have more people of a working age than either India or China. It has a very young population just like India and therein lies both opportunity and challenge because if we can't train them, educate them, provide them the requisite skills and get them the jobs you can have a version of Arab spring, the African spring. Q: If you were to sort of look at the entry strategy that companies adopted fives years back I am guessing the entry strategy was different, Bharti's case at that time, the logic and the rationale for entering that market was different
A: Bharti is actually good because what Indian companies excel in is a cost effective delivery mechanism, the minute-factory model and that is what Africa needs. This is not a place where you go in with gold plated stuff. This is a place where frugal innovation works. We have all heard of M-Pesa, the mobile payment transfer system out of Kenya, Safaricom launched it. That is the sort of stuff which actually sells in Africa and that is where Indian companies have an advantage over their western counterparts.
_PAGEBREAK_ Q: In terms of the entry strategy what would you advice Indian companies broadly who are looking at an African play, what are the key points that they need to keep in mind before they decide to go to Africa?
A: First of all there is no one Africa. It is 54 countries, 54 different politics and 54 different licensing regimes and in many cases a lot of friction in terms of movement of cross border goods and services. That is being addressed now through the formation of regional blocks and so on, but it is not a common tax market either, which is why it is interesting to note that in Africa less than 15 percent of Africa's trade is intra-Africa trade. If you take the same number for Asia it is more than 50 percent. So, understanding that, it is 54 different markets, 54 different regimes, cultures, ways of doing business – that is very important to realise.
Second, having a very clear strategy in terms of how are you going to compete and what is it you are going to do, what is it you are not going to do, it is very important. In some cases you may need to choose a partner so the choice of partner is important. Also don’t under estimate local competition. Today, you are seeing in Africa the emergence of a terrific domestic home grown entrepreneurial class.
Take a company like Dangote Cement. Today they produce close to about 30 million tonne of cement, it has got a market capitalisation of USD 23-24 billion and here is a company which could well be producing 50 million tonne of cement in three or four years time out of Nigeria but operations in more than 10-13 African countries. So, you have got a huge Indian diaspora there. There are 2 millions Africans in Africa today, many of them occupying prime positions in commerce, industry and business across Africa. So, don’t underestimate and finally get a good advisor. Q: How is it for you as far as your African business is concerned?
A: Phenomenal. It is a jewel in the crown. This is a business which has grown top-line at 15 percent and bottom-line at 21 percent Compound Annual Growth Rate (CAGR) over the last five years. Broadly speaking, it is a business which generates top-line in excess of USD 1.6 billion, bottom-line close to USD 600 million profit before tax (PBT). We have 8,000 people in the continent. In 14 of the 16 countries we operate in Africa we have local African Chief Executive Officers (CEO) and that is a big advantage. 80 percent of our senior management across wholesale and consumer banking in Africa are local home-grown Africans. It is a great business. Our board just went to Africa. We took the Standard Chartered board to Ghana just a couple of weeks ago. We were there in Kenya two years ago and frankly we are all excited about the potential of Africa. Q: You are roughly represented in one third of Africa, I heard you say 16 countries. Are there any expansion plans in terms of moving into other geographies within that region?
A: We are looking at going into Mozambique. It may happen in the next 12 months. We are also upgrading our presence in Angola from a rep office to a locally incorporated subsidiary which should be launching later this year. Yes, our Africa plans are alive and kicking. We are going to invest in 100 new branches over the next three years. We have committed a USD 100 million. Although I said we operate in 16, that is the ground presence, we do business in many more African countries without local presence. Q: In terms of the regulatory environment for new bank licences and new branches how is the African system, rather how is it in most of these countries?
A: I would say it varies from country to country. The banking system in Africa is quite sound, on a firm footing, well established and quite welcoming of foreign investment. Q: Since you spoke about welcoming of foreign investment let me once again drag you back to India and this is in the context of almost 26 new companies lining up for bank licences in this country. How do you take that? Is India perhaps the only major economy in the world at this point of time which is toying with the idea of new bank licences?
A: I do not think we are the only one. I know of many others. Clearly the fact that 26 smart companies, people are applying for licence would suggest that there is a market waiting to be tapped. India's banking sector ultimately is going to be a leverage play on India's economic growth as it is anywhere in the world, so if you were to believe that India's economy is going to motor along nicely, there will be demand for banking services. There may also be demand not just at the top of the pyramid, but at the middle of the pyramid and the bottom of the pyramid, so there is an overall market. But the broader point I would make is sooner or later we need to establish a champion if not several more Indian banking champions of international size and scale. If I look at the market capitalisation of all Indian private sector banks put together, their market capitalisation is less than that of just one of the top four Chinese banks. Q: Let me come back to one of your key roles and this is what you are best known as far as Indian journalists are concerned and this is your deal making. Are you working on any more deals at this point of time?
A: I cannot tell you. Q: I am going to still try my luck with the telecom space. We have been hearing some sort of buzz about one more play in Africa and Indian company. Any truth to that?
A: I would like to chat with you. Tell me more about it. Q: How has the road been at Standard Chartered so far and what is it likely to be in the years ahead?
A: It is fantastic. I joined Standard Chartered in late 2001 to start the corporate finance business and our principal finance business. It has been fantastic. We have had a good run as a company and as a business. It has been great. It has given me exposure to the fast growing markets of Asia, Africa and the Middle East, but also remember that our business in Europe and America is also growing very fast. Both of them have recorded double digit income growth over the last few years. The reason why is simply because if you are a European company or an American company where are you going to pursue growth, it is in Asia, Africa, Middle East. Secondly, there are not that many European and American banks left to service your needs in those markets. So it plays to Standard Chartered's advantage.