India: Interestingly poised
Avinash Vazirani and Colin Croft provide a comprehensive account of the prospects for various sectors after a recent visit to India.
India remains a bright spot, the International Monetary Fund said in a recent report, adding it will account for half of global growth this year together with China. We found a lot of anecdotal evidence of that optimism. A rapid digitalisation of the economy is taking hold, with consumers in remote towns now able to pay street vendors with 5G enabled phones. Physical infrastructure is also getting a fillip, with the road network expanding at a rapid pace. Such improvements underpin strong demand for goods and services. While we find opportunities across many sectors, we particularly favour domestically focused businesses in sectors such as healthcare staples, consumer discretionary and industrials, which are poised to benefit from the current environment.
The biggest surprise in the budget for financial markets was the change in taxation of life insurance savings policies. Favourable tax treatment of these policies had made them increasingly attractive to affluent customers. However, we believe that insurers will be able to mitigate the roughly 10-12% impact on revenue growth via changes to the product mix. Our view is that the market has overreacted to the tax hikes, particularly with regard to SBI Life (our largest insurance holding).
Consequently, the earnings dynamic seems likely to be better further up the value chain, or in cement companies that have a company-specific cost optimisation story, such as Ambuja Cement (held in the strategy).
While banks in the Western world are facing stress due a rapid tightening of monetary policy, interest rates in India, initially high relative to developed nations, have inched up slightly. Of course, India is not an island and global problems will have repercussions on India too, but we need to wait and watch how the situation unfolds.
Market participants have been keenly awaiting the start of a new capex cycle in the private sector, and we are seeing some early signs of this in accelerating loan growth to companies; ICICI bank, for example, reported corporate loan growth at 18% y-o-y with SME loans growing even faster at 25%. Balance sheets are strong, with corporate debt as percentage of GDP at a 15-year low of around 50%, significantly below the level seen in most other large economies. Households are likewise underleveraged, and loans are growing double digits, undeterred by interest rate hikes that have simply brought rates back to where they were pre-Covid.
Banks in India are significantly more conservative and risk-averse than their developed market peers. With no shortage of deposits, they focus on the basics of banking: traditional, vanilla lending and credit analysis, with exposure to the riskier end of finance avoided entirely.
* Holding examples are for illustrative purposes only and are not a recommendation to buy or sell.
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