Interview | For long-term investors, India a compelling story of massive potential: Vistra India head

Vistra Group, among the world’s top three corporate and fiduciary services providers, manages more than $142 billion of investments in India. In an interview with Moneycontrol, Navita Yadav, Country Managing Director of Vistra India and Global Head of Capital Markets, touched upon topics ranging from fund flows into emerging markets, Fed moves and opportunities in REITs and INVITs to the need for corporates to display greater fiduciary responsibility. Yadav, who will be moving to London soon to manage the group's global markets, says India has seen much higher consistency in FPI flows in comparison to other emerging markets.

Edited excerpts:

In recent months Foreign Institutional Investor (FII) flows to India have been very strong. Do you see this sustaining?

In November, we saw record-high FII interest contributed by a meaningful increase of India’s weightage by MSCI in their global Emerging Markets Index to 8.7 percent, and significant flows from both non-India dedicated managers/India-active managers. India has seen much higher consistency in FPI flows in comparison to other emerging markets. This should continue to be the case going forward as businesses chase scale. The ability of the country to absorb large flows is there as are investible assets. These factors make India a very compelling story for any long-term investor (FDI or FII), a story of massive potential.

Besides, the Indian market is gradually being made more available for Indian enterprises, whatever may be the ownership of the asset. ‘Make in India’ and production-linked incentives are now being extended to multiple sectors. The world would recognise this and invest. We are a capital-hungry nation. The propensity to absorb flows is very high and needed to propel growth. Strong secondary market flows from FPIs should set off a chain reaction ultimately propelling consumption and investment.

Coming to the US, when do you see organic growth coming back? Is there a case for the Fed to continue with its easy liquidity, and till when?

The pandemic's uneven economic impact on industries and workers has been stark in the US. This really suggests that the larger entities are recovering and the lower-earning entities are not.

US corporate profits surged 27 percent after 10-12 percent decline in the first and second quarters. While some areas including housing and consumer spending have bounced back well, labour market data shows lasting damage. Industries like technology, retail, and software services have largely recovered and begun rehiring, while travel, entertainment, hospitality, and food services have continued to decline past March levels. We expect moderate easing going forward, with the Fed keeping something in its back-pocket.

How would you rank Indian corporates vis-a-vis their foreign counterparts in terms of complying with their fiduciary responsibilities?

Governance is more than just board processes and procedures. It involves the full set of relationships between a company’s management, its board, its shareholders and its other stakeholders, such as its employees and the community in which it is located. If companies are to attract and retain long-term capital from a large pool of investors, they need credible and recognisable corporate governance arrangements.

Companies, both Indian and foreign, have to respond. Most companies across the globe still need to build a trustee mindset in corporate governance. In some countries, we have seen large financial institutions running vast conglomerates with low external scrutiny. Limited disclosure and audit procedures can prevent early warning of the deteriorating financial conditions of corporations. Even the more advanced economies are discussing, questioning and working towards better practices. In the United States, the separation of the chairman and chief executive is preferred by many investors. European countries face mounting calls for better treatment of minority shareholders and greater transparency in mergers and acquisitions. In Japan, they are working towards improvements in areas of information disclosure and board practices.

Talking about sectors, Q2 earnings of Indian companies were quite encouraging. Do you see this trend sustaining, or was it basically due to the pent-up demand and one-off cost-saving measures?

The financial performance of corporates has picked up in the second quarter of FY 2020-21. Weak consumer demand during pandemic times driven by caution on discretionary consumer spending has weighed on the topline of companies. Low exports with weak demand from global markets amidst pandemic is another factor. The bottomline, however, has improved as companies have undertaken consolidation and cost rationalization measures to curtail expenditure

Excluding banks and finance companies, large companies having net sales greater than Rs. 250 crore dominated corporates’ performance. Industries such as automobile, finance, public sector banks, consumer durables, fertilizers, household and personal care have witnessed improved profitability. On the other hand, real estate, metals, passenger cars, NBFCs, engineering have shown stress.

 Which sectors would you prefer when it comes to looking for a secular growth trend?

I would say parts of the IT sector (digital theme and internet)—pharmaceuticals, exports and the combination of digital and retail plays, are attractive. Consumer behaviours are changing dramatically and providers of these services will look very attractive. We also need to see whether the consumption that is coming up right now is structurally sustainable or not. On the supply side, we have two big drivers. One is the government’s infrastructure spend which is going on, and then we need to see the private sector stepping up on the supply side making fresh investments. Having said that, we still have a couple of more quarters of COVID uncertainty to go through.

What are the emerging challenges of debt and asset resolution in India?

Asset resolution in a dynamic landscape both economic and legal, is a complex affair in India. Policy reforms such as IBC code, RBI’s Prudential Framework for Resolution of Stressed Assets and SEBI action on resolution for debt markets are credible steps in the right direction. Much like lender banks for bank debt, debenture trustees in debt capital markets play an intrinsic role as independent third parties between issuers of capital and investors. There are still challenges around the joint resolution process of defaulting companies including NBFCs across lenders and bond investors. A joint policy framework by SEBI and RBI can show the way for unified action against defaulting issuers and effective resolution of assets in India.

Lastly, How do you see the market for REITS and INVITS in India. And what kind of regulations are required to change for better growth?

India is still a nascent market for REITS/INVITS. With all the good work that has gone in to create appropriate regulatory oversight and improvisation in tax treatments, sponsors and investors both are testing the waters to bring to life listed REIT/INVIT funds. Global investors are chasing simple returns compared to their negative rate investments in global treasuries. Investors need such structures as it gives them long-term stable return opportunities. The falling interest rate market and excess liquidity both work in favour of reducing cost of debt for REITs/ INVITs. Although retail has taken a head-on hit during the ongoing pandemic, a gradual recovery may not be far.

Monetisation through REITs/INVITs competes with bilateral asset deals with asset aggregators who are then expected to monetise through public structures. As market understanding improves, sponsors and promoters should rely on such regulated structures for asset monetisation and availing long term capital raised from a larger pool of diversified investors. Upcoming government INVITs will give a fillip to the market.