India seems to have recovered quickly from Covid, and most citizens have been able to go back to their normal lives free from lockdown restrictions. The country has reported just 12 deaths per 100,000 population, a much lower figure than, for example, the UK’s 189 per 100,000.1 More than 30 million people in India have been vaccinated so far, with the government hoping to cover the most vulnerable 250 million by the end of July. India is especially well-placed for Covid vaccinations, as the country manufactures around 60% of the world’s supply of vaccines.2 We think that India’s world class healthcare and pharmaceutical industry will be a beneficiary of long-term trends for the treatment of and vaccination against Covid.COVID deaths per hundred thousand Source: https://coronavirus.jhu.edu/data/mortality
Confidence high
Our outlook is also positive for India’s economic growth in general. Economic activity has been trending above pre-Covid levels since January, with Goods & Services Tax (GST) takings up 8% in January, on a year-on-year basis, to a record high.3 According to the Federation of Indian Chambers of Commerce & Industry (FICCI) business confidence in March is at a decadal high, with companies not only seeing a recovery in demand, but also the potential for higher investment over the coming quarters.4 The government has a track record of surprising positively on policy, including its introduction of a simplified Goods & Services Tax in 2017, its substantially lowering corporation tax in 2019, and its introduction of production-linked incentives for private sector manufacturers, among other initiatives. We think these types of changes benefit companies in the formal, organised economy, with smaller players in the informal economy likely to lose out on market share.

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.
Rapid progress
We also want to highlight that India is going through a period of very rapid change. The government has done an excellent job on providing basic facilities to its citizens – now over 99% of Indian households have access to a bank account, and more than 95% of the population has electricity (from less than 60% at the turn of the century).7 Electricity generation capacity from renewable, nuclear and hydroelectric sources has already reached 38% of installed capacity8, although not all of this has ramped up to full use, and India looks set to smash its Paris target of reducing carbon emissions by 35% by 2030.9 Not only does this progress have ESG implications, and we see companies in India making steady progress on ESG metrics, but it also offers new investment opportunities. Covid lockdowns have accelerated India’s use of mobile data and the internet. India currently has more than 500 million internet users, but e-commerce and other online opportunities are still nascent. There are more than 100 ‘unicorns’ (start-ups with a market cap above US$1 billion) in India10, and we think that many of them will look to list on the stock market during the next few years.
ESG is integrated through all stages of our investment process

India is a unique market. We focus especially on the following governance issues.

Great companies, at a reasonable price
Our India strategy focuses on investing in ‘best-in-class’ growth companies benefiting from structural trends at reasonable valuations. We conduct detailed analysis of financial data across the entire spectrum of Indian companies in order to build the portfolio. This results in a differentiated portfolio which is broadly diversified across different types and sizes of company, and which is cheaper than the average of the MSCI India index, but with more rapidly growing profits (see table below). We have a truly active approach which involves in-depth analysis of ESG and regular engagement with our investee companies.
The Jupiter India Fund has a portfolio that is cheaper than the market but with higher growth

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

 

Below we present some specific case studies of Indian companies
Company examples are for illustrative purposes only and are not a recommendation to buy or sell.


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: Interglobe Aviation

Market cap: US$9.0 billion

What it does: Interglobe Aviation (Indigo) is a low-cost carrier and India’s largest airline by number of passengers, currently commanding a 54% market share (up from 48% pre-Covid).12

Why we like it: It has emerged from Covid relatively unscathed versus global peers, due to its strong balance sheet, low operating cost structure and focus on the domestic Indian market. After the initial strict lockdown, India has not had to resort to another national lockdown, which means that flights were able to operate between certain areas within India for much of 2020. With the country’s borders closed, many of India’s citizens are opting for ‘staycations’, and Indigo has reported that while business demand is still low, leisure travel has seen a big recovery. The company is still receiving deliveries of the more fuel-efficient Airbus A320neos, which do not negatively impact the balance sheet as Indigo is able to do sale and leaseback of aircraft, and we expect operating costs to come down even more as the company retires leases on older, less efficient aircraft in favour of the new deliveries. The company’s shares trade at an attractive market valuation in relation to its profitability, and while the current financial year will be a washout due to Covid, we think that Indigo will be one of the few airlines to come out of the pandemic in a stronger position than when it went in.

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

 

Risks

The fund invests in a single developing geographic area and there is a greater risk of volatility due to political and economic change, fees and expenses tend to be higher than in western markets. These markets are typically less liquid, with trading and settlement systems that are generally less reliable than in developed markets, which may result in large price movements or losses to the fund. The fund manager may use derivatives, which carries additional risks and may result in large fluctuations in the value of the fund. There is also a risk that counterparties to derivatives may become insolvent, which may cause losses to the fund. This fund invests mainly in shares and it is likely to experience fluctuations in price which are larger than funds that invest only in bonds and/or cash. The Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request.

Important information