The country’s economic revival is expected to be boosted by the government’s supportive approach to spending. In the February budget, the Finance Minister announced that there would be increased public spending on infrastructure and healthcare. While we think revival of capital expenditure investment from companies may take a few more quarters, it is not just the public sector that is expected to benefit from elevated government spending. For instance, private sector engineering company L&T has reported a 76% increase in order inflows for the quarter ended 31 December 2020.5 Public spending is not the only opportunity here – Covid seems to have kick-started India’s drive for reform, with ongoing reforms in agriculture, land and labour laws expected to have long-term benefits for the country. In a speech in February 2021, Prime Minister Modi reiterated that the government has “no business to be in business”, and indeed there are several large public sector companies that are in the process of being privatised, such as Bharat Petroleum and Air India.
In the meantime, Indian households have been keeping their hard-earned cash in reserve. Household savings are close to an all-time high, with a net addition of more than US$200 billion to financial assets during the pandemic. As a percentage of gross domestic product, household savings are near the level seen after the global financial crisis.6 We think of household savings as deferred consumption, and we believe that improving consumer confidence should lead to households moving from saving to spending, providing an additional boost to the economy. Household debt has also come down over the last few years, which we think means that there is scope for growth in lending to also revive. We think that companies producing food and daily household goods, selected companies producing more expensive, non-essential items, and banks, all stand to benefit from this trend.
Source: FactSet, 31.12.20. **Source: Bloomberg, 14.01.21.
Weighted harmonic average for P/E, P/B and P/CF, weighted average for dividend yield and EPS growth is shown. Excludes cash.
P/E = price earnings ratio, a measure of how relatively expensive (high) or cheap (low) the stock market price is compared to the company’s profits
P/B = price to book ratio, a measure of how relatively expensive (high) or cheap (low) the stock market price is compared to the company’s book equity (total assets minus total liabilities) per share
P/CF = price to cash flow ratio, a measure of how relatively expensive (high) or cheap (low) the stock market price is compared to the cash (per share) generated by its activities
EPS = earnings per share, the company’s profit divided by the number of its shares
Company: Olectra Greentech
Market cap: US$250 million
What it does: India’s largest manufacturer of electric buses through its joint venture with BYD, a Chinese company that specialises in electric vehicles.
Why we like it: India has a serious issue with air pollution. 22 of the world’s 30 most polluted cities are in India. The Indian government has ambitious plans to overhaul the country’s energy mix.11 Olectra has done extensive testing on its products, which are based on technology already commonplace in China, and is well-placed to benefit from government plans to roll out in excess of 5,000 electric buses in the next two years. The company’s e-buses division is on the cusp of profitability (it also has a small insulators business, which is already profitable), and we expect rapid growth from here. The company’s shares have been trading in the market at an attractive value in relation to the net assets on its balance sheet, and the stock is considerably cheaper than most (non-electric) Indian auto companies, despite having better long-term prospects.
Company: Fortis Healthcare
Market cap: US$1.9 billion
What it does: One of India’s largest hospital companies.
Why we like it: In May 2018 we were part of a group of shareholders that voted to remove the company’s board of directors and instate a new board, after there were concerns that the company was being sold without a proper process. Since then, IHH, Asia’s largest private healthcare group, has taken a large stake in the company. Over the past few years, the new board and management have been hard at work revamping the company’s strategy and implementing operational efficiencies – this has paid off, with EBITDA (earnings before deducting interest, tax, depreciation and amortisation) margins recovering from single digits to mid-teens in 2020, and hitting a recent high of 16% last quarter despite the negative impacts of Covid. The company is on some measures valued marginally ahead of its hospital peers, but with further improvement in margin expected. We also note that the company owns a majority stake in Fortis SRL, one of India’s largest diagnostics companies. We believe there is the potential for value unlocking there, as Indian listed diagnostics companies trade at at higher valuations than Fortis Healthcare does, due to the high growth rates in the industry.
Company: State Bank of India (SBI)
Market cap: US$47.2 billion
What it does: SBI is India’s largest bank, and a public sector bank.
Why we like it: It has been a long-term holding of ours, and its shares have performed especially well in recent months, gaining 37.4% year-to-date. Despite its stellar performance recently, we still think it may have further potential upside. The bank has two listed subsidiaries (credit cards and life insurance) in which the bank’s stake is worth US$15.6 billion at current market valuations, which implies that the core banking business is trading at a market price lower than its net assets are valued at on its balance sheet – a significant discount to private sector peers despite SBI having the lowest cost of funds and best distribution reach in the country. The bank also has two large unlisted subsidiaries (general insurance and asset management) which we think could be listed in the near future, precipitating value discovery. Despite public sector banks having a reputation for being old and staid, SBI has bucked the trend by investing in technology, and its app, YONO, has almost 33 million users. A recent report from Goldman Sachs indicated that as a standalone company YONO alone could be worth US$20-50 billion.13
All data as at 17.03.2021, from Bloomberg
4. FICCI’s Business Confidence Survey, March 2021. http://www.ficci.in/ficci-in-news-page.asp?nid=29210
6. UBS report, Household savings: The US$200bn surge and after, January 2021
10. Credit Suisse report – 100 Unicorns: India’s changing corporate landscape, March 2021
13. Goldman Sachs report on State Bank of India, 12.01.2021