Has India emerged as a force to reckon with or have doubts about the government’s efforts clouding the country’s near term prospects? A motley crowd of fund managers including Akash Prakash, N Jayakumar, Rama Bijapurkar and Shankar Sharma discuss this at the Morningstar Investment Conference 2015 moderated by Ramesh Damani, Member, Bombay Stock Exchange Ltd.
Although emerging market has fallen out of Foreign Institutional Investors (FII) favour, India has emerged as the most “consensus buy trade right now,” N Jayakumar, President, Prime Securities tells CNBC-TV18. However, Akash Prakash, Director and CEO, Amansa Capital, is not so hopeful. He feels the general optimistic mood is seeing a shift with respect to reforms. On the government’s performance, he says the decision making by Prime Minister Office has been slow as there are a lot of things that the government could have done which do not require legislative change.On the automobile sector, Rama Bijapurkar, Management and Market Research Consultant, says auto companies have not yet explored the scope of the Indian market and finds it “ridiculous” to hear the companies’ board saying there is no consumer demand left. She is of the view that the auto companies need to have the resilience to understand the kind of demand they are unable to fulfill.Backing Bijapurkar’s view, Shankar Sharma, Vice Chairman & Joint Managing Director , First Global says if companies can find ways to leverage small transactions, India remains a large market. “If people are willing to pay, companies need to respond with products,” he adds.Meanwhile, on the much awaited Bihar election results, Sharma says market always reflects the fact that BJP controls most of the states. Below is the verbatim transcript of the discussion..
Sharma: There is a big upside story coming from. So, that is the whole point. On a diversified basket I don't think you are going to make much returns.
Damani: Markets are always right, some tell us. Markets are always wrong, somebody tell us, that is why they are so volatile. Why are emerging markets suddenly hemlines and hairstyles out of favour?
Prakash: I gave Shankar the sense and we both know who he is talking about, a good friend of both of us who has done a lot of work explaining that emerging markets really is an incongruous construct. It is a whole bunch of very different types of countries from Korea to India to South Africa to Brazil. So, to bunch it all together first of all is incorrect.
Secondly the reality is emerging markets (EM) when you look at the last four or five years post the crisis when the under movements have been quite stark there clearly has been a sea of disappointment both on growth Return on Equities (RoE) are now below developed world averages, growth is slower than the developed world averages. The macro vulnerability from being less vulnerable post the crisis to now EM is where it looks like the next stress points are.
Damani: Why, is that, because of high debt?
Prakash: Two or three things. One is that partly EMs have taken the advantage of the last five years to lever up very significantly. Number two, the reality is that a lot of these countries have not done the hard reforms which are required to sustain and accelerate their growth rate. So, some EMs are caught in the middle income trap. The Brazil class example or other places. And the window of high commodity prices, very low interest rates, easy liquidity, most countries have not used that window to fundamentally get their house in order and now you are paying the price because commodity prices have come down, you have no growth, you have high debt level, your currencies are vulnerable, your current accounts are vulnerable. So, that is one issue.
Second also Shankar may make this point later but also the reality that we have to understand in the next three to four years if you look at the EM construct 40 percent of the index would be China, this is a shocking stat. Already the ADRs are coming into the indices and in two tranches and March and September, after that once you start including Asia EM will be basically at China and greater China index because 50 percent of index which include Hong Kong and Taiwan will be China. So, when you are buying EM what are you really buying. In three years time you will be basically buying China.
Damani: China has problems?
Prakash: China clearly has problems but as I wrote last week in an article China is clearly slowing but the construct that people use to analyse China which you look at par demand growth or railway freight or metrics like that are horrible but those are not the right metrics to look at China going forward. You have to balance it by looking at the service metrics as well. So, China is clearly slowing. It is not going to grow at 8-9 percent. Probably grow somewhere between 5-6 percent. But that is still reasonable, it is not collapsing, it is not a huge recession, it is not going down the toilet. Sometimes we in India gloat a lot, oh, China is collapsing. The reality is China is five times our economy size, it is at least 10-15 years ahead of us on almost any metrics and it is not going away.
Damani: Isn't India though this time, the Cinderella at the emerging markets ball?
Jayakumar: I was in Atlanta recently. Atlanta probably has a population of under a million. Georgia, it is kind of deep down south in the US and we had a day free, so we went to the Atlanta zoo, believe it or not the zookeeper said, hey, where you guys from? And we said India. India, that is where all the money is going these days. So, pardon my saying so, but this is Atlanta, this is not a fund manager whom I am speaking to. I am kind of oversimplifying and romanticising this.
Sharma: I have a story to say once you have finished on this fund manager and the money coming to India.
Jayakumar: But essentially India is the most - however terrible that sounds - "the most consensus by trade right now". So, there are periods in history where consensus can be right. But if every fund manager who comes give or take a few words, not as eloquent as Shankar, but talks about long term is great, because long term nobody is around to tell a story but India is great long term. Even medium term we are great but short term there could be problems. So, give or take a few words everybody has the same thing to say about India. So, actually before coming here the only thing I have been worrying about is where is it that let us assume for a moment, the consensus. Clearly consensus is not going to make money in India which means that just buying the Indian index you are not going to make money money. So, there has to be much more in trying to seek alpha if you will to sort of put this in context of today but somewhere along the line we can keep saying Cinderella because everybody is saying it.
Damani: Let me challenge you a statement. You are saying that everyone is bullish, consensus, India trade. So, the foreigners are selling. The numbers say that the foreigners are selling. Domestics are buying, locals know their country best.
Jayakumar: That is not essentially true. Four weeks ago that was the scenario for three weeks in a row. Last week or week and half it has been reversed. But at the margin this is what you are seeing really is marginal trades which means if USD 1 billion gets bought and USD 1 billion gets sold, that offsets each other big deal or vice versa big deal. We have not had a week where USD 2 billion foreigners want to sell, Indians want to sell USD 2 billion and let us see how the liquidity of the market holds up then the great Indian public (GIP) will they get GIP or not we will figure out at that point in time.
We have not had a disruptive element in India. The only thing we can say about India is the world, whether Russia, China, every part of the world including US has had disruptions to existing thesis. The only disruption to our thesis which we are polite enough to say because the government takes time etc is that the government is taking time. Other than that the story is intact. Let there be one disruption to our carefully handcrafted picture - I am saying handcrafted in a positive sense - and then let us see where the disruption takes us.
Damani: Yesterday the conference that you were in Arun Shorey the former minister said congress with a cow.
Prakash: They just scaled up congress with a cow.
Damani: So, do you agree there is no disruption going on in India? Political disruption has happened.
Prakash: I would tend to agree with Jayakumar in the sense that the mood is clearly shifting on this government in the sense that the patience is starting to wear thin - I mean Shorey's basic point yesterday was that there are lots of things that this government could have done which do not require legislative change and his view is that they are not doing any of it and his argument for why they are not doing it is one because the government is way too centralised, it is his point and we have a huge Prime Minister's Office (PMO) which everything goes to but the PMO can't take decision, everything has to go to the Prime Minister, therefore things are very slow in decision making, number one.
His second point was that he felt the team was weak around the Prime Minister. The Prime Minister may have good intentions but the team is not strong enough to deliver. And that seems to strike accord - of course India international centre is the centre of anti Modi wave also. So, you have got to be careful of that also but there is some disillusionment - let me put it this way - the sense of disillusionment with India reduces the further away you are from India. So, if you are in India we were getting very disillusioned, there is lot of nervousness, skittishness. You go to London or New York people still say, what is the big deal, great crowd, you are growing at 6-7 percent, Brazil is minus three, Russia is minus four, China is 5-6 percent. Looking great, don't worry about it. But in India I clearly sense maybe the expectation was probably too high, but there is a clear sense in India at leapt that the government is starting, it has not delivered what the people expected.Damani: The consumers are doing well but corporates don't get it, is that a fair statement?Bijapurkar: I think that is a completely fair statement. Actually I would say there are two Diwali's, the one that where you sit in your drawing room and watch CNBC-TV18 and the other is people who shop on Crawford Market pavements. I think the latter are quite happy, the former are not.Corporates are actually serving a very small proportion of India. The middle class in India firstly is the upper class. The top 20 percent is the upper class. The top 20 percent is disproportionately a higher earner and a higher buyer than anybody else. The thing about India is that there are a whole lot of people who are earning and spending a little bit each that adds up to a lot. If corporate want to look at USD 1.5 trillion of disposable income and then they want to do strategies and pricing for the top 20 percent and then wonder why the numbers don't come in. Obviously the numbers can't come in any kind of way. Neither do the large corporate want the mass of the Indian market nor do the multinationals want the mass of the Indian market because they are really saying we want to exploit whatever we already have in other markets.Damani: You made a great point about the automobile industry in India, can you share that with us?Bijapurkar: I was saying that the automobile industry in India is always complaining about how there is not enough demand and so on. Firstly India is not as rich as you think it is. The two wheeler guys have got it absolutely right. If you look at penetration even in poor India, even in the lowest quintal or 20 percent of income about 16 percent of them already have two wheelers. Two wheeler and car overlap is also very high. However as far as cars are concerned, till not very long ago before Uber came there were no taxi services in Ahmadabad, Bangalore, Hyderabad, Coimbatore, was there no money in any of these places? There was lots of money in all these places. Nobody wants to take an auto and rattle around but then there was no taxi service. Question is whose job is it to actually invest in getting these taxi services going? Until Uber came actually we did not even have an option. Now you have some Cool Cabs, some Uber services but guess what we don't have enough drivers because it is nobody's problem to get driving schools going. Then suddenly the auto industry says that my sales have been bad for two months and so the government has to reduce duties.My point is government of India is not the marketing director for the auto industry. I think they should just stop winging and looking at what possibilities there really are. If you say there is no consumer demand, everybody wants suit, boot, car, bungalow, that is everybody's desire. The rich in India has money. In 2008-09 people were spooked, they weren't buying and then again it came back like a pressure cooker letting of steam. Again that is what we are going to have going forward now. So, you have to have the resilience to be able to understand that there is demand you are not fulfilling and secondly to be able to ride out your cycle.Damani: You think the rise of the shared economy and rise of the rental economy, digitisation presents a plethora of opportunities to corporate?Bijapurkar: Opportunities as well as a source of disruption to corporates. If we are Uber and we are not getting drivers, I don't know if we are going to buy the second car. Having said that today you can actually lend and so the other point I was making on cars is that if you are wanting to drive from Coorg to Bangalore or if you want to take your family from here to Alibaug, there are just no taxi cars available. There are 2-3 guys and you don't get them. So, digitisation, the shared economy will hopefully enable people to be able to get that demand better and therefore people should be able to lend to them a lot more easily.India has always been a lot of people, little bit each. Earlier you couldn’t figure out where the demand was and which fraction would go to whom and how to do it but now it is possible to do it. My daughter rented a dress, I was a bit horrified, I said why are you renting a dress. She said I want to wear it once Rs 700, Rs 7000 is what it costs and it comes in neat little box, you wear it one day and you give it back. I was thinking that, it completely changes the idea of cheap and good quality. So, I think the consumer is getting it. However companies are not getting it. They have been spoilt by too much valuation without enough value to the consumer.Damani: You had a story to finish.Sharma: Jayakumar was mentioning about going to Atlanta and finding the guy in the zoo saying that all the money is coming to India. I remember in the early parts of the FII boom in 1996-97 where hundreds of Indian companies went out and raised GDRs and some of those names are scandalous. You had Sanghi Polyester, Garden Silk Mills and god know what kind of companies. One day I asked my analyst, let's get the data together. We had no idea what the GDR market itself was. We thought it was like some giant market in which we are going there and getting some money. I said let us find out in the last three years which countries have raised the most money and what is the pie chart. I thought India is going to be some 2 percent but India was 97 percent of that market. 97 percent in that period of two years, we were the only guys out there looking for money and getting the money. So, money is always coming to us and we are always looking for money. So, if you had gone to Atlanta zoo even in 1997 he would have told you the same story. The second point, just building on what Rama said, there is a company that I have been engaged with which has made a phenomenal product which is a self sustaining toilet. It creates its own water, requires no power, requires no sewage. We put up two units in two points in Delhi, we got the municipal approvals to do that. At one point our target use was about 100 users a day and we said we will charge Rs 5 per use. So, that is Rs 500, Rs 15000 a month and couple of lakhs a year. We had thousand users a day in Noida. Now you do the math, it cost me Rs 3 lakh to build this toilet, it costs me Rs 12500 to maintain it. 1000 people is Rs 5000 a day, one and a half lakh rupees a month, Rs 20 lakh every year from a single Rs 3 lakh investment.Bijapurkar: I can also tell you that Coke and Pepsi sales will go up. The reason we don't have drinks outside the house is because there aren’t enough loo's. It is not per capita income, it is per capita toilet.Sharma: I have actually invested in it. I thought it was a great idea. The point I am making is that here is the pain that the consumer has, it is a terrific way to solve that pain and people are willing to pay. Allied to that we put it up in the export centre where it was 1000 users a day, we also put it out in a market place. 1200 shops in a crowded market place in Faridabad. I went there just last week, I went and asked a few shopkeepers where do you go for toilet. They said there is nothing here, we go 2 kilometers from here for gents, ladies you don't even want to discuss. We take an auto to go to the Fortis Hospital, we sneak in so that the guard doesn't see us and we go and use the toilets there. So, I said ok, here is something how much you want to pay for a month, the guy who was selling tea at a stall he said I am 80 years old I can't afford too much, I can give you Rs 100-150 per month. Each shopkeeper said I will pay Rs 200-400 per month. Do the math, there are 1000 shops, Rs 200, that is Rs 2 lakh a month, Rs 24 lakh a year for something that cost me Rs 4 lakh to make. Point is, if you can find ways to solve pain and use small transactions India is a huge market.Bijapurkar: Would you have someone who would invest in 100 lakh toilets?Sharma: Yes. I am trying to find people and there are people who are coming in.Damani: You have always said it is a supply side problem we have not a demand side in India.Bijapurkar: Yes it is a supply side problem because everything you look at there are enough people but are there enough guys who will put 100 lakh toilets together. Damani: As an investment professional we want to generate alpha. How do you generate alpha out of market like India, where do you look at to figure out these opportunities? Do you look at the established businesses which Rama says are not getting it or do you look for microfinance, tell us about some of the things you are looking at?Prakash: Our philosophy always has been you have got to try to find investments where there is big gap in perception and reality. We should not find businesses where the earnings power of business is vastly under estimated by the market, it could be because the management has changed, it could be because some secular industrial change, it could be because of government policy or whatever. India is actually a very ripe market for stock picking and always has been. India always used to be considered stock pickers market, bad macro but great micro and you can pick stocks. There are many cases of situations like that where you have company where the family has changed, new generation comes in with very different approach, far more shareholder focused and the game changes or government policy changes. So, our philosophy remains that you try to understand what expectations are embedded in the stock, do you agree with that, if you agree with that? Our view is you can't make money with having consensus expectations as your expectations.More to follow..
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