India's unique RoE profile

Overseas Investors: The conviction around the long-term India story remains intact. A lot has changed due to demonetisation, GST implementation and some disruptions. Investors are evaluating as to how long these disruptions will last, which industries are getting impacted positively and which ones negatively. And it is around this that a lot of deliberations are happening.

As regards to earnings recovery, while on the broad base, the earnings recovery has been a bit elusive, it has been fairly decent in segments. If you look at financials, if you take away the public sector enterprises or corporate lenders, where the bulk of the problem is, the growth has been fairly robust. You pick up any other sub-sector of financial; other than this bucket, it has been growing very well. We have also seen automobiles, consumer durables, cement growing very well. Commodities were not doing so well, but they have also come back.

Sector-specific themes: We have been very vocal in highlighting one sector—the financial one. India is going through a big financialisation wave. Financial savings are going up, and as a result of that, this intermediation of savings, the utilization of resources from savers of capital to users of capital will create a huge amount of opportunities for lots of financial services players like us.

Let us not forget that two-three years ago, 30-40% of the Indian population was not plugged into the financial system, which has changed. So, we believe that this is only the beginning of the whole trend.

Second is the unorganised-to-organised theme. In India, due to regulatory changes like demonetisation, GST and also underlying forces like increasing the per capita income and more technology, many industries have started seeing a market shift from unorganised small players to organised large players. This cuts across many industries like building materials, plastics, textiles and many other segments.

Their underlying theme is this—where the inefficient, unorganised players will be less viable, they will move towards organised side. In my mind, this is a decade-long theme. You will see a huge amount of value being created in this space, and we have many companies out here representing that.

Risks India faces: For India, there are more global risks than local risks—you can never predict geopolitical factors. If the risks come, they will be induced by any disruption in the global markets, which could be due to scaling down of the balance sheet of global central banks.

Potential investors comparing India to other Asian players: People say they like the profile that India offers and that there are not as many opportunities in other places. Someone was telling me that Vietnam and Philippines are the only two markets that offer a similar kind of profile, but they are smaller markets. So, if you have to deploy large capital and participate in a very big wealth creation opportunity, then India, which is moving from $2-5 trillion, is the only option.

Overall in terms of valuations, is India still seen as expensive? In isolation, yes. But you have to look at two things—one is the new interest rate regime. You can’t compare with historical valuations without looking at the new interest rate regime. We are in an environment where inflation is fairly contained, trajectory of inflation looks very benign and interest rate trajectory looks very soft. So, you can’t have the same valuation getting traded at when the interest rate was 8-9%.

Second, when we compare with other markets, you have to look at the RoE (return on equity) profile. There is no other market with the RoE profile of India. Third, you have to look at the growth profile. Over the next five-ten years, which market can promise you the growth profile that India can over the next seven-eight years? If you look at all these things, I don’t think it is expensive.