India could benefit from double-digit growth
The past decade has been challenging for India’s manufacturing, construction and infrastructure sectors as the investment cycle slowed. This phenomenon hampered the growth of gross domestic product, which reached 4.2%, the lowest value of the decade, in 2019. Consumer demand, driven by favorable financial conditions; the uncontrolled growth of credit, requested by a population with aspirations; and public spending have been key supports for economic growth. So that,
What are the outlook for the Indian market and economy?
In the manager’s opinion, the pronounced reduction in costs in the industrial sector in recent years has laid the foundations for change. Companies have cut capital expenditures and lowered leverage. The Indian government has launched badly needed labor reforms. At the same time, bank balance sheets show better results and interest rates are at low levels. Against this backdrop, the Indian manufacturing industry is likely to be on the verge of a multi-year growth period that will enable recovery of margins, earnings and return on assets (ROCE). This should favor the start of a new investment cycle.
Furthermore, the distribution of COVID-19 vaccines is restoring consumer confidence. India has managed to cope well with the pandemic, despite dire prognoses. After what has been described as “the strictest lockdown in the world”, the economy has recovered faster than expected.
In the many conversations of the manager with various companies, we sense a certain optimism in the corporate sphere, something that has not been observed in recent years. Several economic sectors have begun to regain normalcy. Manufacturing activity, exports and sales of vehicles and other goods have shown improvement.
Also, the government’s approach appears to be changing. Rather than trying to clean up the system, as it has done with great success for the past 6 years, it now appears to focus on growth and aspires to collaborate with the private sector to stimulate the economy. A representative example: the Indian government recently unveiled a production-related incentive program to encourage foreign manufacturers of mobile phones, pharmaceuticals and medical devices to establish themselves in the country, and for domestic producers to expand. In addition, the recently released central government budget for fiscal year 2022, focused on infrastructure spending and growth, has strengthened confidence.
The incipient recovery, coupled with low interest rates, could trigger a favorable cycle for the Indian economy. We believe that GDP could achieve double-digit growth in fiscal 2022 and stabilize in the 6-8% range in subsequent years.
It will be essential to pay attention to certain key sectors for signs of progress – and investment opportunities – as the Indian economy continues to recover.
E-commerce: a fierce battlefield
India’s digital transformation is advancing rapidly, pitting national tech companies against multinationals trying to attract consumers among the many young people who are part of the country’s population. Reliance Industries is at the heart of the fray.
His mobile service, Jio, launched in 2016 and recently surpassed 400 million subscribers. Reliance, which started out as India’s largest oil and gas company, has grown to become a national technology powerhouse. However, instead of facing its journey alone, the company has partnered with global multinationals in search of a gateway to the Indian market. Its large-scale vision is to connect manufacturers, retailers and consumers on the Jio platform. This motivated its strategic alliance with Facebook. Jio is also collaborating with Google to develop an Android smartphone at an affordable price.
The banking system of India
The growth potential of banks in India is strong thanks to relatively low market penetration and the rapid growth of mobile banking. However, there is a strong divide between public and private banks. The former have some of the highest delinquency rates in the world, a problem that is likely to be made worse by the pandemic. While the new bankruptcy law forced banks to recognize bad loans more diligently, more reforms will be needed to get more credit to flow, to stimulate growth and innovation. To that end, the government recently announced plans to create a “bad bank” to handle distressed loans.
The other side of the coin is the largest private banks, which have been increasing their profits and gaining market share. They are well positioned to attract some of the weakest lenders in the country.
Residential real estate sector: less fragmentation
In recent years, new laws have been enacted that have structured and legitimized the industry; a process that some large regional home builders such as Godrej Properties, Sobha Ltd. and Brigade Enterprises have survived. A rapid economic recovery in India could fuel new demand for housing in urban areas. In addition to what this represents for home builders, opportunities could arise for companies that supply cement, paint, tile, or appliances.
Consumer market: the hegemony of multinationals.
The Indian consumer market has been dominated by subsidiaries of multinationals such as Hindustan Lever, a unit of Unilever. Pepsi, Nestlé, Mondelez and Coca-Cola aim to expand their market share through a series of innovative strategies geared towards hypermarkets. This high-growth sector is likely to witness the emergence of new national players and the entry of a broader group of multinationals.
Coming reforms are the key
If India is to reach its full potential and keep markets running, it will have to implement deep structural reforms. Since taking power in 2014, Prime Minister Narendra Modi has launched a series of reforms aimed at modernizing the economy, facilitating business, rooting out corruption and improving living standards. His government has conceived the pandemic as an opportunity to push for pending measures regarding agriculture, labor and manufacturing at the national level. However, far-reaching reforms can be challenging, as we have seen recently with widespread protests by farmers over new farm laws.
In the opinion of Capital Group, the quality of management of private companies in India is on par with the best in the world. If structural reforms lead to a higher national growth rate, many of these companies would be well positioned to grow, both in revenue and results, at a faster rate than many of their peers in global and emerging markets. With a market capitalization of around USD 872 billion, according to the MSCI India Investible Market Index (IMI) as of December 31, 2020, the Indian equity market is still relatively small compared to the size of the economy and its potential growth.
This could represent a expanding opportunity in India for years to come.