What makes India an exciting investment destination?

India’s large population, its rapidly developing metropolises and its rich history of commerce, are all contributing to its journey in becoming an economic powerhouse. FSSA has been investing in India since the market first opened to foreign investors (in the early ‘90s); we then launched our dedicated India strategy in 1994. 

In the decades since, we have always found reasons to be excited about India. Below we highlight a few of the structural reasons for our long-term enthusiasm:
 

1. Large universe of high-quality companies

Out of more than 6,000 listed companies in India, the FSSA team has met with and analysed a wide range of businesses. From these, we invest in a relatively small number of companies that meet our standards of quality (in terms of ownership, management, alignment and business franchise). 

These quality Indian companies come from a variety of industries, unlike various commodity-driven emerging markets where certain sectors are simply absent from the stock market. There is also a large home-market to exploit, which means Indian companies are not overly reliant on export demand.
 

2. One of the oldest equity markets globally

India’s Bombay Stock Exchange was established in 1875, making it among the oldest in Asia. The culture of entrepreneurship, and the ability to deal with the opportunities and challenges that come with being a public listed company, has been in place for many decades. 

As a result, there is an abundance of high-quality family-owned business that are listed – it is not uncommon for a public company in India to have more than 50 years of listed history and is now being managed by the third or fourth generation of family members. We like these family-owned firms because they take a long-term view about the future of their business.
 

3. Large businesses hiding in small market capitalisations

The sheer scale of India’s population combined with the still nascent stage of several industries means that the market leaders are quite small in comparison to regional and global peers. This implies there is plenty of room for growth.

For example, China has an estimated 860 million air conditioners installed versus 80 million in India (2023 figures)¹.  The top three listed air conditioner manufacturers in China have a combined market value of USD 144bn, whereas the top listed companies in India are tiny in comparison – Blue Star, for example, a leading player with 13% industry market share, is just USD 5.2bn.²  
 

4. Owners and management teams who are receptive to engagement and focused on returns

India has always been capital starved, with relatively high interest rates in general. Generally, this has meant that the best-managed Indian companies are very aware of the cost of capital and its constraints, and typically operate with high returns on capital employed (ROCE). 

We have found that it is possible to have meaningful conversations with management teams about capital allocation in India. We also discuss issues like board independence and effectiveness, remuneration policies, succession, quality of financials and related-party transactions – all of which tells us a lot about the culture of a company and helps us develop conviction in our holdings. 
 

5. Consistently improved governance standards

Our experience of investing across emerging markets suggests that India is ahead of peers when it comes to protections for minority shareholders. Whether it is the tag-along rights in the case of an acquisition, approvals for related-party transactions, mandatory independence rules for boards, mandatory disclosures of shareholdings and pledges, etc., India’s regulatory system is among the strongest in the region and has consistently improved over the years.
 

Meeting companies is at the core of our investment approach, as we believe we can gain valuable insights from questioning the management about their long-term strategy.  We make five to seven trips to India every year and meet with about 250 Indian companies. ​ When we engage with companies, we are not necessarily looking for them to agree with us. Instead, we want to gauge whether they are open to engagement from a stakeholder, or dismissive of it. Generally, we have found that our portfolio companies are open to our suggestions and take a long-term view on environmental, social, and governance (ESG) issues. They want to do the right thing for their community, as they will be based within these communities for the next 20, 30, 40 years. 

In addition to engaging with management teams we also conduct checks on the people and the business. But rather than building complex spreadsheets to predict a company's future, we consider how they treat minority shareholders and other stakeholders, and whether we are aligned with the company’s goals. We pay attention to what kind of governance structures they have, what the board looks like, whether there is enough independence, and whether the family board members are overly active.  

When we invest in companies, we are also very clear about the types of companies we will not invest in. For example, we have never invested in two of the largest business groups in India, because of the way they were built and managed, and how they influenced policymaking to their advantage.  

We have spent the past decades building relationships with high-quality owners and managers in India and have identified, in our view, some of the best compounding growth opportunities in the world. The companies we own are in our view good businesses run by good people, who are returns conscious. They also exhibit good governance practices and are overseen by regulators who are getting better at doing the right thing for all stakeholders.   

With our portfolio of high-quality Indian companies, we are confident in preserving our clients’ capital during tough periods and growing it steadily over the long term.

Source: Financial metrics and valuations in this article are sourced from FactSet and Bloomberg. As at 30 September 2024 unless noted otherwise.

Footnotes

¹ Source: IEA, Global air conditioner stock, 1990-2050, IEA, Paris https://www.iea.org/data-and-statistics/charts/global-air-conditioner-stock-1990-2050 , IEA. Licence: CC BY 4.0

² Source: Bloomberg, as at 30 September 2024.