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This is a financial promotion for The First Sentier India Strategy. This information is for professional clients only in the UK and EEA and elsewhere where lawful. Investing involves certain risks including:

  • The value of investments and any income from them may go down as well as up and are not guaranteed. Investors may get back significantly less than the original amount invested.
  • Currency risk: the strategy invests in assets which are denominated in other currencies; changes in exchange rates will affect the value of the strategy and could create losses. Currency control decisions made by governments could affect the value of the strategy's investments and could cause the strategy to defer or suspend redemptions of its shares. 
  • Indian subcontinent risk: although India has seen rapid economic and structural development, investing there may still involve increased risks of political and governmental intervention, potentially limitations on the allocation of the strategy's capital, and legal, regulatory, economic and other risks including greater liquidity risk, restrictions on investment or transfer of assets, failed/delayed settlement and difficulties valuing securities. 
  • Single country / specific region risk: investing in a single country or specific region may be riskier than investing in a number of different countries or regions. Investing in a larger number of countries or regions helps spread risk.
  • Smaller companies risk: Investments in smaller companies may be riskier and more difficult to buy and sell than investments in larger companies.

For details of the firms issuing this information and any strategies referred to, please see Terms and Conditions and Important Information.

For a full description of the terms of investment and the risks please see the Prospectus and Key Investor Information Document for each strategy. 

If you are in any doubt as to the suitability of our funds for your investment needs, please seek investment advice.

India - Road to Recovery: 2021 and Beyond

Vinay Agarwal, Director, joined FSSA Investment Managers in 2011, with a focus on the Indian Subcontinent Markets in particular and Asia Pacific equities in general. Vinay is lead fund manager of the FSSA Indian Subcontinent Strategy and the FSSA Asia Focus Strategy.

Sree Agarwal, Investment Analyst, joined FSSA Investment Managers as a graduate in 2014, providing research support to the portfolio managers, with a focus on Australia, India and Southeast Asian markets. Sree is also the co-manager of the FSSA Indian Subcontinent Strategy.

This Q&A was adapted from a live webcast presentation Vinay and Sree did in March.

Having spent almost two decades focusing on this market, what do you like so much about Indian equities?

Vinay: Obviously, I am very biased but there are a number of things. First is the quality of companies that are available in India. In India, there are many privately-owned companies – family ownerships, not state ownerships – which are run in a multi-generational way, which we like.

Second – because capital has been scarce in India, we find that there is a higher consciousness of “return on capital” compared to some other places.

Third is that when you meet these Indian owners and managers, they are open to having discussions on the composition and independence of the board, remuneration, succession or even ESG matters, which are very long term and strategic in nature. These company meetings help us find alignment, which in turn allows us to have the conviction to buy these companies.

Another thing, if you look at the number of listed companies in the universe, India is one of the oldest stock markets in the world, and there are about 6,000 companies listed in India. Even if you apply basic governance and growth filters, there are more companies in India to choose from than other places.

What is even more beautiful is that out of the 6,000 companies listed in India, there are about 700 companies with a market cap of over USD200 million. If you look at China, which has about 5,000 companies, there are 4,000 companies with a market cap of over USD200 million. That is around 80% versus 10% in India, which tells us that Indian companies are still small and that there is a lot of scope for growth in these companies. With 1.4 billion people, there is massive under-penetration across sectors.

Over the last 18 years, I’ve seen hundreds of companies creating enormous wealth for shareholders, and I think over the next decade or two, there will be even more companies that could do that in India.

India certainly seems very attractive in the long term. However, do you feel that we have actually seen the benefit of that growth in recent years?

Vinay: The answer is no. Between 2002 and 2012, Indian corporate earnings increased by almost five times, going from INR70 to almost INR350. But over the last eight years, it has been rather flat and things have not grown.

Earnings growth has been weak in recent years

Source: Edelweiss Securities, Nifty 50 Index EPS over FY02 – FY20, January 2021

There have been multiple headwinds that Indian companies faced over the last seven or eight years. Since the early 2010s, lots of corruptions and scams came to light and in many cases, the excesses of these events were felt in the Indian financial system. Indian banks found themselves in trouble, especially stable ones with broken balance sheets.

India has seen several disruptions over the last decade

Source: FSSA Investment Managers,, Financial Times, Outlook India, December 2020.

There was a freeze in decision-making, there was a freeze in the economic system – and it resulted in a massive slowdown. The slack was then picked up by non-banking finance companies (NBFCs). By the mid-2010s, everyone wanted to go to India to set up a new NBFC and lend indiscriminately, and obviously, the writing was on the wall. By 2018, we had another blow-up, this time a non-banking financial crisis with a number of NBFCs going bust. So, that created another leg of uncertainty and lack of confidence in the system.

If we look at profits, over the last 20 years, corporate profit as a percentage of GDP is at 20-year low. If you look at bank credit growth in India, it is at a 60-year low right now. All this is because of what has been going on over the last 10 years or so.

Growth and profitability have fallen to the lowest levels in decades

Source: IIFL Securities, March 2021

In 2014, the Bharatiya Janata Party (BJP) came into power,and over the next few years, they started implementing a number of reforms and, to my mind, these reforms are very positive for India in the long term. For example, the implementation of Goods and Services Tax (GST) in India is, I think, the single most important reform that India has seen for many, many years. However, that has resulted in chaos and confusion in the short term and resulted, in aggregate, in a slowdown in the economy. Even at a sector level, there have been many reforms. For example, in the real estate sector, the implementation of Real Estate Regulation Act (RERA) created a slowdown in that sector.

So all these things, along with the crisis in the financial system, went against India over the past 10 years.

Do you see light at the end of the tunnel for India? Do you think growth is likely to improve going forward?

Vinay: I think things are starting to come together. Over the last few years, we had teething issues from the implementation of these reforms, but these issues have now gone and we are seeing an increasing rate of formalisation in the economy because of these reforms.

It is often said that India responds when its back is against the wall. When things are desperate politically, it becomes easier to implement reforms. As a matter of fact, some of these reforms were put in place to accelerate growth in recent desperate times, for example, the much needed Labour Law Reform, the corporate tax rate reduction, or the various incentives to increase manufacturing activity. We will have to see how these are being executed, but I believe these reforms are the right things to do for the long term.

Corporate tax rate reduction

Base rate of corporate tax

Source: Bennet & Coleman (October 2020), Kotak Securities (March 2020), Business Standard (November 2020).



As a result of these reforms, we are seeing our company holdings across sectors gaining market share. Whether it is air conditioners (Voltas, Blue Star), biscuits (Britannia), banking (HDFC Bank) or the real estate companies – each of them are gaining market share because of the formalisation happening in the economy. The reforms have made it difficult for non-compliant companies, or businesses that were used to evade tax. These companies are losing market share, while quality companies are gaining share. As things start to improve from here on, these quality companies will be an even greater beneficiary of that.

Market leaders have gained share during the cyclical downturn

Voltas + Blue Star Market Share in Room Air-Conditioners

Britannia Market Share in Biscuits

Source: Morgan Stanley, Company Presentations, FSSA Investment Managers, as of December 2020



HDFC Bank Incremental Market Share of Loans

Share of Top 10 Developers in 7 largest cities

Source: Credit Suisse (January 2021), Edelweiss Securities (September 2019)



In short, I think we are due for a bounce, not from a Covid-low, but from a multi-decade low in a cyclical sense, which falls into the long-term structural growth story.

How is the portfolio positioned and what is your outlook for India?

Vinay: The portfolio is diversified across many sectors where I think there will be lots of growth over the long term – consumer companies, financials companies, infrastructure and industrials. When I say infrastructure, we do not invest in asset owners directly, because they tend to be very leveraged and in many cases, corporate governance levels are very low. We invest in companies, which are suppliers to businesses that will benefit from rising infrastructure spend or industrial activity. These are companies that are market leaders with higher return on capital and have gained market share through the cycle.

Portfolio breakdown

Source: FSSA Investment Managers, as of January 2021, *Does not aggregate to 100% because of inclusion of “Turnarounds & Undiscounted Change” with sector weights.

If you look at the top ten holdings in the portfolio, the names have not changed much. Going a few years back – if you look at the top ten holdings of our portfolio back then, you would still find the same names. The portfolio has evolved over the last few years, becoming more concentrated and it is now a higher conviction portfolio.

Top 10 Holdings

Source: FSSA Investment Managers, as of January 2021



If you look back three years ago, the top 10 holdings were only 42% of the portfolio and top 20 holdings were 63% of the portfolio. The portfolio has become more concentrated since then.

In 2020, the pandemic presented a fantastic opportunity to invest in high quality businesses that we have been watching from the sidelines. Over the last few years, our residual cash position was quite high as our favourite high quality names became more and more expensive; but last year’s sell-off allowed us to buy back these companies and now the portfolio is fully invested again.

If you look at the weighted average return on capital for the portfolio, it is at 38%. It is the highest that we have had for many years, which reflects the quality of the companies in the portfolio.

Portfolio Characteristics

Source: FSSA Investment Managers, January 2021



The earnings potential for these companies in the next two to three years is very strong and it is higher than what it has been in the last few years. Hence, I expect a lot of growth from our portfolio companies. I would also point out that these valuations are in the context of where everything is, or has been in the last few years, which is reasonable for such a high quality and high growth portfolio at 25x price-to-earnings (P/E). These valuations are based on the real earnings of real companies. They are not based on gross merchandise value (GMV) or on renewable energy, electric vehicles or internet companies. There is none of that. They are all real businesses.

Valuations are quite rich at the moment. How much of a bounce back and corporate earnings growth has the market priced in?

Vinay: As mentioned, the portfolio is currently valued at around 25x P/E, which is clearly higher than what it used to be six or seven years ago. I think over the last 12 years, with money printing and the zero cost of money, valuations of everything has gone up.

I do believe some of the earnings bounce back has been priced in, but it would be a mistake to just look at the earnings and say 25x is expensive, because these are companies that will compound earnings over the long term. They are market leaders in their own categories, where the category itself is small. They are companies that are gaining market share and have strong net cash balance sheets and have high return on capital employed compounding over the long term. Whether it is 25x or 20x will not matter. These are real earnings.

Do you see the impact of China-India relations on the portfolio?

Vinay: No, there is no impact on the portfolio. Not just from China-India relations but also the Sino-US trade war. Lots of multinationals corporations (MNCs) have been adopting a China-plus-one strategy for their sourcing requirements and India could be a beneficiary of that. With the reforms that have been put in place to increase manufacturing activity in India, I believe some of our company holdings may benefit from that. That said, we do not change our portfolios on the basis of such short-term noise.

How important is Prime Minister Modi to the continuing equity story and what are your thoughts on the recent social media crackdown?

Vinay: I am quite disappointed by the things that are going on – the increasing intolerance towards minorities or any kind of dissonance. Having said that, whether it affects the equity story or how businesses will evolve in India, I do not think so.

Since the early ’90s when the India market was opened up, we have had a number of things happen. We had a government that lasted for 10 years and a government that lasted for two weeks. We also have had a government that was supported by a very influential left.

If you are investing in the right companies that are in the right industries, with strong balance sheets and high return on capital, it does not matter, because the structural tailwinds of a young population, high aspirations and urbanisation – these are very strong structural tailwinds and I think India grows despite its government not because of it.

Sree: What we noticed over the past decade is that there has been some degree of policy continuity, regardless of which government is in power. It is not like an important law is introduced and then the next government comes and reverses it. To give you an example, in Malaysia, GST was introduced and when the government changed it was reversed. Whereas in India, GST has been in the making for the last 15 years, a period over which there have been different governments in power from different parties and ideologies. Each of those governments took the regulation forward and enacted it. It will continue forward. Nobody wants to take it back irrespective of who comes to power.

Have there been any concerns about liquidity, especially in the event of significant redemptions?

Vinay: Over the last 18 years of my career, I have always been mindful of liquidity. It all boils down to portfolio construction and how big a particular holding is in the portfolio. If it is a consumer business, which is very predictable and growing in an under-penetrated category, I find it very easy to have a big position in it. If it is a property company, for example, where its fortune or its destiny is not entirely in its hands – such as what is happening now in the economy with interest rates, currencies and sentiment – I would be more cautious with that position. Similarly, if it is a very illiquid company, I would not have a very high position in it. As a team, we have our risk parameters that we look at and stick to.

Have you made any adjustments to your portfolio in view of the recent budget? How much attention do you pay towards it?

Vinay: None at all. It is always an unknown event that is quite hyped up. I never make any portfolio changes based on the budget.

However, what was quite different this time was the tolerance towards a higher fiscal deficit, which was quite surprising. In any other year or in any other period of time, if such a high fiscal deficit was expressed, the Indian currency would have been smashed. That probably did not happen this time because governments are running deficits everywhere.

I think what was also different this time is the fact that foreign debt is quite low. India’s forex reserve is quite high at around USD600 billion and at least it is a growth deficit. Historically, it was entirely about subsidies – for fertiliser, food and oil.

If an investor has allocated funds into an Asia or Global Emerging Market (GEM) strategy, how would you build the case for your Indian strategy as a standalone single country allocation?

Vinay: What you would find in most Asia or GEM funds, is that the Indian businesses owned in those funds are usually the big banks, such HDFC Bank, or IT companies, such as Tata Consultancy Services (TCS) or Infosys, and then maybe consumer companies like Hindustan Unilever.

This is an all-cap portfolio. More than 50% of the companies that we hold in the portfolio are small-caps and mid-caps, which you will not find in a regional portfolio that has 20% invested in India. These companies, as I was saying earlier, are market leaders, which are hiding in small-caps, and I believe over the long term will be multiple times bigger than they are today. Hence, I definitely see people who believe in India’s growth story owning this as a standalone allocation.

Any particular reflections on navigating the portfolio during a Covid-19 environment?

Vinay: One of the key lessons was that things that we believed in strongly, as highlighted in our process and our philosophy, were further amplified during Covid. For example, one of the things that we do not like are companies that have leveraged up. When the pandemic hit, there was so much uncertainty with businesses largely shut down; and the first question we asked all our investee companies was, where do they stand from a liquidity perspective and how strong was their balance sheet? We were very happy to note that almost all of our companies had net cash balance sheets and all of them had very strong liquidity positions.

We think of risk as losing money and not underperforming the index; hence, capital preservation is key to us. It was with this mindset and survival instinct that we steered the portfolio towards safe, strong balance sheets, and the more liquid and bigger companies, which we believed would withstand volatility better during those uncertain times.

On the other hand, one of the learnings from last year is that I could have acted quicker and deployed cash faster. Having said that, I also think, from a prudence point of view, it was good to just watch and let things evolve before we invested.

What do you think sets you and the team apart from peers?

Vinay: It would be our philosophy and investment process – it is all that we have – and the discipline to stick to it. As a team, we think a lot about what we will not do, and then we just don’t do it. To us, not everything has a price. If we do not find alignment in a business, or if we do not think the business is being run properly, we just will not buy it, no matter how attractive the valuations or the growth opportunity.

The discipline to stick to that philosophy is something that I think sets us apart. And also, we have a team of around 25 analysts who are very experienced, with many years of experience investing in India.

I think, over the years, our clients have come to understand what we are trying to do and they have been long-term supporters.

Could you explain your investment approach to ESG?

Vinay: Our entire research process is predicated on establishing whether a company is good enough quality in the first place to be investible or not. We do not believe that there are perfect businesses. There are shades of gray in every business and once we establish that a company is investible, we will focus on the darker gray areas and start engaging with the company.

In the Emerging Markets or Asia, we have to remember that these are family-owned companies. When we are engaging with them in meetings or writing letters to them (we are always writing letters to them and I am sure some of them dislike us for that), a very hard stance of an activist manager does not work. We have to take a softly, “nudgenudge” approach – it takes time, over many years. We have to demonstrate to these companies that we are long-term partners and are not just in it for a quick buck. We need to earn the right to engage as long-term shareholders and see ourselves in the same boat as them.

What we are focused on, through these engagements, is not whether the company agrees with our view or not, but rather how they approach it and whether they are open to listening to a stakeholder. That tells us something about the culture of a company. Today, it could be a shareholder, tomorrow it could be a vendor or distributor – their approach tells us about their culture and that is the key thing we take away from these engagements.

In our team, we often say that it is better to travel than to arrive and we see the relationships with these companies as a journey.

Could you share some examples of past company engagements?

Sree: We have always held Mahindra Group in high regard and they have high governance standards. One of the things we like about them is that they have a federal structure, where the chairman, Anand Mahindra, hired very high quality, professional management and gave them the freedom to build big businesses. However, over time, we noticed that because of this federal structure and the different businesses being built – some taking a longer gestation period than others – the capital discipline in the group deteriorated somewhat.

Hence, a year ago, we wrote a letter to the chairman, highlighting some of these issues and our concern about the deterioration in capital discipline. He acknowledged all the issues in his reply and highlighted the changes that they are making, such as making policies more stringent when they are allocating capital. Not only that, but to our surprise when we met with the newly appointed deputy CEO, Dr Renishaw, he had our letter in hand, forwarded to him by the chairman. During our meeting, Dr Renishaw again highlighted all the changes that they were making on their capital allocation policies. Thus, through this engagement, it further increased our conviction in our holdings and towards the Group.

Another example that comes to mind would be Blue Star, which is another company that we have been invested in for many years. A few years ago, they appointed a couple of new board members, and we were concerned over some of the other boards that these independent directors were sitting on. We highlighted this in a letter to the CEO, and in his reply, he explained all the reasons why they were brought on, the capabilities and skills the company was looking for and the years of experience these new directors had.

His view was different from ours, but we really appreciated the time he took to explain to us his perspective. In other words, it was more about that process of engagement and the approach he took towards it, rather than whether or not he agreed with our view.

We also see ourselves as responsible members of a broader ecosystem. We believe we have duties and obligations. For example, when the central bank in India introduced a draft regulation, we had a different view on it and so we collaborated with a like-minded investor to engage on the draft regulation.

Collaborative engagement with other stakeholders

Conclusion: CEO’s of Kotak and HDFC Bank have built their banks into the most successful and best reputed banks across emerging markets. The proposed regulation seeking to put a cap on their tenure risks creating sub-optimal returns for shareholders, as well as having a detrimental impact on the development of India’s banking sector. As long term stakeholders, we must engage with the regulator on this issue.

Source: FSSA Investment Managers



Earlier you mentioned that some of these engagements may take years. Could you share some examples of an engagement that took place over multiple years?

Sree: We have been engaging with Godrej Group on different issues over the years. For example, in December 2012, we wrote a letter to the chairman, highlighting the growing need to source palm oil more responsibly. In his response, he accepted the issues and mentioned all the changes that they were making there.

More recently in 2019, as plastic packaging was becoming a more serious issue, we highlighted this and introduced them to a firm, Polymateria, which came up with a solution for biodegradable packaging. The CEO of Godrej Consumer Products got in touch with the company and began a pilot program. Godrej even helped Polymateria get their certification in India so that they could scale up their solutions.

Were there any examples of companies that, because of your engagement, took two steps forward but later took a step back?

Sree: There was one company, Jyothy Labs, which we owned for a few years. Jyothy Labs is a fast-moving consumer goods (FMCG) business and they became successful with a fabric whitener. They listed in the mid-2000s, and in 2012, they acquired Henkel India’s consumer business, which brought with it a lot of debt.

They hired a professional CEO, Mr Raghunandan, who we have high regards for and have known for many years as he has held senior roles at Dabur India (another company that we have owned for many years). We knew he had the capabilities to turn Jyothy Labs around and so we initiated a position in the company.

Over the next three years, Raghu did exactly what we had expected – the acquisition was integrated, debt was reduced, there were very strong cash flows, margins improved and shareholder returns were very strong over this period.

Our meeting in 2015

Jyothy Labs Revenue Growth

Meeting Note in 2015 – “The new management has done its job by turning around Henkel’s loss-making business. The growth opportunity is significant. It seems very likely that Henkel will exercise its option to take a 26% stake, with them eventually going to a larger shareholding over the years.”



Source: FSSA Investment Management, Company Annual Reports



In 2016, Raghu resigned as the promoter family started to take on larger roles in the business. We wrote to them explaining these issues and the implications it had on the professionals who are part of the company. They were very willing to listen to us and told us that that is why they continue to look for good quality professionals.

Our Engagement Journey with Jyothy Laboratories

Our letter to the management, Management’s response

Meeting Note in 2016 – “The founder and CEO have fallen out here. The family is stepping in temporarily. The talks with Henkel continue. We are engaging with them to introduce Henkel as a partner.”



Source: FSSA Investment Managers


However, in 2019, it became evident that instead of professionalising, the family was taking a step backwards by appointing younger, inexperienced family members to senior roles and giving them large responsibilities in the company. The promoter’s daughters were appointed CEO and CFO, and their husbands given senior roles in the IT and supply chain departments. We had a series of meetings with the newly appointed CEO over the years and we realised that the new management did not have the skills or the experience to run the company, especially in a highly competitive environment where you have world class multi-national corporations like Reckitt Benckiser or established domestic leaders like Godrej Consumer. As a result, we divested shortly after, which is disappointing but it happens.

2019 Conclusion – “It is a shame that a good business will be destroyed because the family is adamant to maintain its control, just so that each of them has something to do. A shocker of a meeting with the next CEO.”

Source: FSSA Investment Managers

The team has been particularly strong on the G (governance) side of things. What about the E (environmental) and S (social)? How do you feel those themes have evolved, as part of the team and from an India equity context?

Vinay: I think when you are investing in companies, if you get the G right, the E and S will come. In these markets, most of the time it is not that these companies do not want to do the right thing. It is often that these companies do not know much about it. When the governance is right, they just need some hand-holding or nudging to work out better E and S practices. I find companies producing the thickest sustainability reports usually run the most unsustainable businesses. Hence, getting the G right is the most important thing and we have focused more on that. As far as E and S is concerned, we are learning and we are trying to get better at it.

Do you have any thoughts on Reliance?

Vinay: Reliance is a company that we have never owned, in the whole of our history over the last 35 years. One of the reasons for this is because we believe the way they gain competitive advantage by influencing policymaking is not sustainable. Having said that, things seems to be improving over the last few years, with the board becoming more independent and appointments of new auditors and partners. Yet, I do not feel comfortable owning them and as things stand today, I do not think we will be adding Reliance to our portfolios.

What are your thoughts on initial public offerings (IPOs) and are there any specific sectors that you would focus on to look for them?

Vinay: We usually do not invest in IPOs and there are a number of reasons for that. One being we like to see the track records of companies; and as we have been talking about, we see it as journey, so we like to know our companies very well before we invest in them. Secondly, when these companies come to a listing, they usually sell at very high valuations, since there is an information arbitrage against you, somewhat of a price arbitrage against you.

That is not to say we have never invested in IPOs. If I look back over the past 10 years, we have participated in around four or five IPOs across sectors. In that sense, there are no sector preferences, but there are certain sectors that tend to have certain characteristics that we like – such as high return on capital employed, high pricing power and economic moats. With that said, it all starts with a reluctance to invest in IPOs in the first instance.

What is your view on the Indian quickservice restaurant (QSR) space, companies like Westlife, Burger King or Dominos? Is it attractive, given the easing of lockdowns and expected pent-up demand?

Vinay: We used to own Jubilant Foodworks, which is the Dominos franchise in India. I think it is a very high quality business with a good management team. It is just that the valuations are very expensive and we sold it when it got too expensive for us. On Westlife, which is the McDonald’s franchise in India, I have reservations on the governance side and also the high royalty rate that Westlife has to pay to McDonald’s.

Jubilant Foodworks has to pay a royalty to Dominos too, but at a much lower rate than Westlife pays to McDonald’s. And the average bill for a pizza at Jubilant is much higher versus a burger at Westlife. That makes the margins easier, in the case of Jubilant versus Westlife. But it will be a challenge to improve their margins in the long term and the valuations are ridiculous in that context.

Burger King was listed recently, but I find myself misaligned because the parent is owned by private equity and this business, which is listed in India, is also owned by private equity. Private equity firms tend to have a short-term time horizon on their businesses, which we do not like. They have quite aggressive targets on store openings, which I do not agree with. So, I would wait and watch to see how things go.

With regards to India REITs, if in the future more of such firms emerge, will you be tempted to invest in them?

Vinay: I feel misaligned as a minority shareholder with the REIT managers. It is a very recent phenomenon and we have met some of them, but I did not feel particularly compelled to own any.

Sree: The fees that the manager gets is based on growing their asset size – the larger the asset size, the higher the fee. That is what they are incentivised to do. Therefore, that does not necessarily always translate into higher earnings per share or dividends per share and at least 90% of the earnings has to be paid out. In so many cases, owners would keep injecting assets owned by them, which are outside of the REITs. We do not get much comfort on owning REITs.

Is your thesis on Indus Motors still intact?

Vinay: Indus Motors is the leading car company in Pakistan. Toyota owns 40% and the Habib family in Pakistan, which is one of the better, more renowned families in Pakistan, has an almost equal ownership. From a governance and management point of view, we have met the CEO a number of times and we feel he is quite capable.

Indus Motors is the leader in terms of market share and the Pakistan market is one of the most under-penetrated car markets in the world. I think that market penetration will increase, which was happening until two or three years ago when Pakistan had some issues. The valuations are incredibly attractive, trading on 10x P/E with 8% or 9% dividend yield. The market cap of the company is about USD500 million, which is almost 50% market share. I think it is still very attractively valued.

What are your thoughts on Asian Paints and the overall outlook for cement companies?

Vinay: Annually, as a team, we run an exercise to list the best companies that we do not own and the worst companies that we do own; and for years, I have written Asian Paints as the best company that we do not own in India.

It is a fantastic business, but I just cannot digest the valuations that it trades on. Very recently, it has corrected a bit, trading on 100x P/E, but I would wait. I believe if oil prices continue to go up, in the near term there could be headwinds for their margins and the market could get frustrated with that. That said, they have so much pricing power that in a couple of quarters, they will be able to pass that along with price hikes. At the moment, it is still very expensive.

On cement, it depends on which region you are looking at. In India when you are looking at the cement industry, you have to look at the North, East, South, West and Central regions separately. I find that the Central region’s demand and supply situation is quite favourable. We own a cement company, Heidelberg Cement, and have done for some time. I think Heidelberg as a parent, in terms of governance and treating minorities in a listed subsidiary, has been fair over time. We find comfort in that. Even in terms of thinking about ESG risks, we find comfort in the way the CEO, Jamshed Cooper, thinks about ESG headwinds.

Sree: They are always setting industry-leading standards. As an example, employee safety in cement plants is really important and a lot of India cement companies have not done too well in that regard. Heidelberg tried to create a cultural change where the plant manager has the final responsibility. All the systems and processes are set up to give responsibilities to the plant manager whose incentivisation is directly linked to the safety of employees.

Not only that, while others optimise their raw materials based on the lowest cost, Jamshed optimises it not only for cost, but also for the sustainability of those raw materials. A few years ago, there was a regulation introduced in India where certain raw materials that were very energy intensive were not allowed to be used anymore. Heidelberg was not affected because they were ahead of the curve and had already stopped using them.

Vinay: From an industry point of view, in the longer term it is quite positive as there will be infrastructure spending and housing demand, which is underpenetrated at the moment. These will increase demand for cement.

What are the biggest risks to your portfolio?

Vinay: I think ESG-related headwinds will become more and more critical for businesses over time and that could be a risk. If 1.4 billion people have to grow at a fast pace for all of this growth to materialise, that will put enormous pressure on resources, and if companies are not thinking about the ESG headwinds that they are going to face in the pursuit of this growth, they will struggle.

Secondly, I think the unemployment situation in India is quite dire. India produces more than 10 million people who join the workforce every year and we are not creating enough jobs for them. A demographics tailwind can become a significant headwind for India if the unemployment situation worsens. It is somewhat a ticking time bomb, so I am worried about that. However, looking at what has been happening recently in terms of pushing manufacturing activity and putting out the right reforms to do that, I’m hopeful – but that is a risk as well.

Related insights

The FSSA team - Vinay Agarwal, Sreevardhan Agarwal and Shivika Srimal – has always found great investment opportunities in the India market, and believe that the pool of investable companies is growing every year. In this note, they share how the investment themes in India have evolved and what excites them as they look ahead to the future.
  • Video
  • 15 mins
We already have (exposure) to India via our Asia and Regional funds. We often hear this comment from prospective clients who are considering an investment in the FSSA Indian Subcontinent strategy, but are not yet convinced that a dedicated allocation would indeed be worth it.
  • Article
  • 3 mins

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