Since Rob Brewis (Investment Manager at Aubrey Capital Management Ltd) first visited India over 25 years ago, the state of its infrastructure, with its inadequate road network and dilapidated railway system, seems as deplorable as ever and quite the opposite of what is seen in China. Nevertheless, following his trip in January 2018, he has put together an assessment and highlights real potential for investors.
What has been the average return on the Indian Stock Exchange?
Investment in Indian shares has increased by a factor of 8 since the end of 1992, when the Indian MSCI index in dollars was introduced. While there may be nothing particularly spectacular about an annual compound return of 9.2%, to give it an order of magnitude, an identical investment in the Chinese index would have yielded barely 2% during the same period. Since 2000, annualised returns in India are 9.9%, compared to 8.4% in China.
Let’s talk about the notorious problem of the infrastructure in India - what is the origin of this?
Going back to China, the country has two advantages when it comes to construction. On the one hand, there is the power of the Chinese Communist Party, which immediately quashes all land ownership issues and, on the other, the fact that state builders were not necessarily demanding a return on investment. In India, the latest major initiative has been a project led by the private sector, and financed primarily by debt. Consequently many participants have gone into bankruptcy, not due to a lack of demand but rather to overoptimistic forecasts, resulting in an over-valuation of the balance sheets, and accompanied by territorial conflicts and political blockages.
And what is the role of Indian political power in all this?
There have been numerous criticisms directed at Prime Minister Modi, but very unjustly in our eyes. There is no doubt today that technology, anti-corruption measures, the introduction of the GST and the drop in oil prices have contributed to an improvement in the country’s financial situation. In the face of a paralysed state banking sector (despite recent recapitalisation efforts) and an inadequate investment cycle, the government has intervened. The progress is considerable.
Another reason for optimism - housing. You notably walked through Navi Mumbai, the famous twin city of Mumbai.
Yes, this new city is very reminiscent of the Pudong district of Shanghai in around 1992 - pockets of large-scale real estate development, interspersed with vast areas of brush, farmland and a few modest hills (in the case of Navi Mumbai). Like Pudong, a huge new airport is being built, the elevated railway is progressing rapidly, but above all vast areas of new housing are beginning to appear - some affordable, others less so.
Prime Minister Modi has built a large part of his popularity on the policy of Pradhan Mantri Awas Yojana, “housing for all”. That said, there is no guarantee of housing for everyone as the Chinese government managed to do in the late 1990s. This is firstly because it has not yet been built. And secondly because, unlike the Chinese state at that time, it does not own it. Nevertheless, where it can act directly is by making prices very affordable through subsidies and tax incentives.
For example, I saw the construction site of a 5-storey building erected by one of Mumbai's small developers, located at the end of a long dirt road full of ruts. So I asked: “Aren’t you worried about a problem with road access?” To which the reply was that the government would have to quickly build a proper road.
But for many major projects (motorways, bridges, etc.), on the other hand, the cooperation of the private sector is required. However, it won’t get involved again unless it can be sure of decent returns on investment.
Building housing is all well and good, but you still need to be able to get to it...
Close to Navi Mumbai is Palava City, a huge real estate project covering an area of 4,500 hectares, built by the private group Lodha. It already has 100,000 residents, and aims to welcome a total of 1 million. These are nice properties aimed at the middle classes, but access to Mumbai is still difficult. But that said, come back in five years and I forecast that the promise of a travel time of one hour to the city centre from Navi Mumbai will have been met. With this type of large-scale development, let’s once again remember China.
What did you make of your train journey from Jaipur to Delhi?
That there is some way to go before India can boast a high-speed network comparable to that of its neighbour. But I am optimistic: the Jaipur elevated urban railway is already fully operational. Throughout the journey to Delhi, there is clear evidence of track improvement work taking place. The Delhi metro is continually being improved and new airports are springing up all over the country. Add to that the fact that air transport is already cheap and easy. A lot of progress has been made with the road network in recent years. And the GST has removed logistical obstacles and the main source of corruption - the former inter-state border control.
You compare India with China, but you stress that India is not the China of yesterday. What does that mean?
India cannot be China. It is a democracy and the private sector needs return on investment. But we are at the start of a powerful cycle of investment, firstly in housing and subsequently in renovation of the infrastructure. Indian companies in the private sector will continue to chase elevated returns for their shareholders, and this is expected to underpin India’s over-performance.
Comments recorded by Cédric Godart on 07 May 2018, with Rob Brewis, based on his account of his journey made in January 2018. It is possible that the opinions and comments recorded in this document will no longer be valid at a future date. Market behaviour observed in the past is never indicative of future behaviour.
Rob Brewis is Investment Manager with Aubrey Capital Management Ltd, a focused global growth equity manager located in Edinburgh which works closely with TreeTop Asset Management.