Travelling, rather than arriving, with companies in India

Sree Agarwal and Shivika Srimal, investment analysts at FSSA Investment Managers, believe there are a number of reasons to be positive on India in the long run, and shared their rationale at the FSSA Forum 2023. First, as one of the oldest equity markets globally, India offers an attractive long-term opportunity for investors. There is a large universe of high-quality listed companies, including many large businesses of the future currently hiding in small market capitalisations. Second, owners and management teams are engaged and accessible, and focused on returns. Finally, governance standards and minority shareholder protections have consistently improved over the years – a reassuring point for long-term investors like FSSA.

Why now?

Over the past decade or so, India has navigated a series of events that affected domestic demand, including several corruption scandals in 2011; the demonetisation program in 2016, ostensibly aimed at tackling money laundering and counterfeiting; the Goods & Services Tax (GST), which aimed to simplify India’s tax system; the collapse of several Non-Bank Finance Companies (NBFCs) in 2018, which sparked a credit liquidity squeeze in the entire financial system; and then, in 2020 the world went headlong into Covid-induced lockdowns.

While reforms like GST, the adoption of Aadhaar (India’s Unique Identity Number, used to simplify access to services such as banking and healthcare) and the launch of a digital payments ecosystem were all designed to make India a more effective and efficient place to do business, it was during Covid that the benefit of these reforms came to the fore. And, though there were short-term teething issues at the start, these are now largely in the past and the structural benefits are beginning to be realised.

There are other positives as well – speaking at the FSSA Forum 2023, Sree and Shivika highlighted market leaders such as HDFC Bank, which gained market share during the cyclical downturn, as have the top 10 developers in India’s largest cities. Despite even the worst macroeconomic backdrop, great management teams with dominant franchises usually find ways to improve their competitive advantages and come through the market weakness even stronger than before.

A core part of FSSA’s investment approach is their engagement with management teams. On average, the team conducts around 300 meetings a year with Indian companies, of which almost 90% are with the founders or C-suite executives. Due to the team’s long history of investing in India and the relationships they have built over years, they are often viewed as the shareholder of choice. This gives them the benefit of being able to engage with management on a variety of topics, including succession planning, environmental impact, safety issues and board independence.

Due to the FSSA's long history of investing in India and the relationships they have built over years, they are often viewed as the shareholder of choice.

A core part of FSSA’s investment approach is their engagement with management teams. On average, the team conducts around 300 meetings a year with Indian companies, of which almost 90% are with the founders or C-suite executives. Due to the team’s long history of investing in India and the relationships they have built over years, they are often viewed as the shareholder of choice. This gives them the benefit of being able to engage with management on a variety of topics, including succession planning, environmental impact, safety issues and board independence.

While the FSSA team are bottom-up investors, there are a few common threads amongst the FSSA Indian Subcontinent strategy’s holdings, which includes top private banks and finance companies, dominant consumer staples brands, consumer discretionary market leaders, leading exporters of technology services and healthcare, and infrastructure companies. It is a relatively concentrated portfolio, with high returns on capital employed (31% based on the weighted average), attractive earnings per share (EPS) growth (24.7% based on the weighted average 2-year EPS compounded annual growth rate) and a weighted average forward price-to-earnings ratio of 22.7x (all figures as at 31 August 2023).

FSSA are also disciplined about what they will not do, companies they will not invest in, and people they will not back. For example, weapons manufacturers and tobacco are completely excluded from FSSA’s investment universe, while coal and gambling, as well as governance issues like bribery, are covered in FSSA’s exclusion policy. The outcome of this inherently conservative investment style is that the FSSA Indian Subcontinent strategy tends to perform better in down-markets compared to up-markets, and in the long run has provided better returns than the index in the majority of periods (based on the last 10 years of monthly data to 31 August 2023).