In this week’s Emerging Markets Equities podcast we focus on India. Kristy Fong from our Asian Equities team joins Nick Robinson to discuss everything from the effects of the pandemic to how the Indian government’s reforms might affect the country’s growth. Kristy also talks about the challenges facing India, and how it might balance a greener agenda for carbon emissions with economic development.
Nick Robinson: Hello everybody and welcome to the Aberdeen Standard Investments Emerging Markets Equity podcast. I'm Nick Robinson from the EM equity team.
In this podcast series, we explore the factors that underpin our thinking on Emerging markets. From key individuals to evolving trends, we seek to answer the five w's - Who, What, Where, When and Why - that are shaping investment opportunities in the region.
Today we're going to discuss India. Now there's a lot going on in India at the moment as the country recovers from its coveted slump and enacts reforms to boost growth, whilst at the same time, several new economy companies are coming to market to broaden the investment opportunity set.
So, to help me approach this subject I’m very happy to be joined by my colleague Kristy Fong. Kristy is based in Singapore on the Asian Equities team and she's been with the firm for 16 years and she co-manages our Indian Equity products - Kristy welcome to the podcast how are you.
Kristy Fong: Great - I'm very pleased to be here thanks for having me.
Nick: You're welcome, it's a great pleasure to have you on. So I hear you're planning a trip to see Indian corporates face to face next year, I think we're all pretty excited about getting out there and visiting company management teams again. How's it been communicating with management teams during this pandemic?
Kristy: Yeah you know ,I like to hope for the best, but you know communications with Indian corporates have been very smooth actually thanks to technology. You know many companies are now a phone call or a video call away so, it's been, it's been very good. Obviously, it's nothing like seeing them face to face, so we really can't wait to be there in person - crossing fingers.
Nick: Yeah well, certainly cross fingers for that trip. So, Kristy, perhaps a good place to start on India is - could you talk us through the last year for the country and how badly was it hit by the pandemic and how do you think the recovery is going at the moment?
Kristy: Well, so unfortunately India was one of the worst hit globally and it was the third most infected behind America, the U.S and Brazil last year and this is despite a very swift nationwide lockdown so obviously if you look at social distancing efforts it's not, you know it's proved futile. The lockdown has been a huge economic cost, we've had GDP contracting 7.7% for the financial year so India really looked, you know, the situation was very, very, dire for India for most of 2020. But if you look as we have seen elsewhere, the situation was improving - caseloads have been declining since mid-October and you have economic activity picking up and obviously the vaccine rollout is progressing slowly but surely and many companies we talked to are you know are guiding for the worse being over and recovery being underway. But again, to stress here that, you know, not all companies have that same optimism. The companies we focus on are the better managed ones with strong business models and balance sheets, so even as you've had macro-economic growth being severely impacted, these companies have been able to gain market share, so they have been able to grow faster than peers.
Right now, as you see, India is again going through fears of a resurgence in cases - Mumbai being a hot spot - so this could hinder the pace of growth recovery, but we were not expecting a straight line or V-shaped recovery in any case. As long as India doesn't go back to the nationwide lockdown - which to us is a very unlikely scenario - we do not expect a repeat of the dark days of 2020 and obviously we look at India with a long-term lens and continue to be very optimistic about the opportunity set in India.
Nick: Great, and pre-pandemic India was very much a reform story as Modi enacted several significant reforms during his first term. You'd probably say that the pandemic has been the overarching theme of his second term so far, but do you think we're likely to see that reform story return and also do you think there's a risk that Modi's performance in the pandemic has undermined that somewhat?
Kristy: If you look at how we think about India, you know one key thesis is that there is potential from the structural reform and that's something that hasn't changed. We recognize that there are challenges in execution but unlike the previous governments the Modi led BJP is saying the right things about reform and they have the political mandate to pass rather controversial bills. So if you think about reform progress, I would say that prime minister Modi has done well in his first term to pass the goods and services tax bill. You know he's also made several policy moves with the intention of removing or eradicating corruption and making potential defaulters accountable - you know whether it's through demonetization or the bankruptcy code. In reality they were disruptive to business and I would say one of the factors along with the non-bank financial crisis for the slowing growth that India experienced even prior to the pandemic.
And if you look at the second term since 2019, the prime minister’s, you know, seemed to have prioritized nationalistic policies and disappointingly you know, taken his eye off the economy. So, to your question about whether it undermines his reform efforts, actually I would say that the crisis probably has been a wake-up call. There's little choice that the government has given that there is little means to announce big stimulus plans, so little choice but to strongly reaffirm their reform commitment. And you've seen that happen in the past few months, whether it's the passing of the agriculture and labour reform bills or even in the most recent budget in February making strong commitments to infrastructure spending, you know, several initiatives – ‘make in India’ initiatives to encourage more foreign investments in areas like handset manufacturing so hopefully more pro-growth this time.
But on policy reform, you know the devil is in execution and we are well aware of implementation challenges. There are ongoing protests by farmers against the agricultural bill, they're fearful that big companies might benefit at their expense. But really what's more interesting to us is what is actually happening with companies, and one of the key beneficiaries of reform has been in real estate. It's been four to five years since the passing of the real estate regulation act and since then we have seen a massive clean-up of the real estate sector and an exit of many operators who you know who have been very unreliable. But you still have demand from home buyers and they just want to - they're only interested in - buying properties sold by reputable and professional companies. So what we've seen even during the pandemic is that many of the market leaders, just a very small handful, they have seen very strong property sales.
Nick: And continuing on the theme of policy, I mean with the announcement of China's carbon neutrality plan and the election of Biden in the U.S, we're really seeing this trend globally towards decarbonisation. What's been India's stance on the issue and what's been their approach so far?
Kristy: India has not actually said anything official but you do have the press reporting about how top government officials are debating a net zero target for 2050 - maybe even 2047 that puts them ahead of China - which looks very ambitious. But even before this you've seen the country already announcing pro-green policies such as increasing the share of natural gas usage you know from 6% to 15% by 2030; ramping up renewable power capacity to 450 gigawatts by 2030 - so there is the intent.
And this is important you know, you have India being the third largest carbon emitter and actually speaking about this it brings back memories of how I had already started my mask wearing habits when I last visited Delhi in 2019 and you might have read in the papers about the really bad smog problem. The challenge obviously for the country is finding a way to balance the green agenda and economic development.
Nick: Yes, I mean the smog problem sounds pretty grim. You would hope that such a bad problem would be something that would catalyse real change in policy. Are there ways to invest in the green opportunity in the local Indian stock market or is it the case that investment opportunities may themselves be outside of India.
Kristy: Well not to the extent of China's renewable opportunities but we have identified some companies that could benefit from a step up in investments in clean energy. One example is Gujarat Gas which is India's largest city gas distribution company in the state of Gujarat. This is a company that we are very familiar with, we've held it even before British Gas sold their stake to the Gujarat state-owned utility. And we like that even with the change towards state ownership, it has maintained its professionalism and profit focus.
One of the key positive changes that has happened to the company in the last couple of years is that the banning of coal gasifiers in the region which is the largest textile manufacturing zones in India has benefited the company massively because of this forced shift to cleaner gas and we see this as just the beginning as India gets more serious about reducing carbon emissions. The other example is Power Grid that is a national transmission utility and one that is likely to grow as India increases its capital expenditure in renewable energy.
Nick: And how would you say Indian companies are doing in terms of embracing environmental social and governance issues? In your discussions with them, do you get the impression that they're taking the issue seriously?
Kristy: India is a big market that's hard to generalize, but if we focus on the companies that we take an interest in which typically would be those with a strong governance track record there has certainly also been a greater awareness of environmental and social factors. In fact we think that a company with strong governance is more likely to think holistically about these sustainability issues affecting all stakeholders and if you think about India environmental and social issues are actually not new, many of these companies have had to deal with unpredictable weather conditions or labour issues, so it's almost an operational matter that has to be addressed. But all being said you know, our companies are definitely getting better versed in discussing these issues and understanding the expectations of investors. Many are starting to improve disclosures through sustainability reports and are able to discuss how the board of directors are looking at risk metrics. So companies are certainly not surprised when we raise ESG issues and it has also been two-way in that they do come to us to get our opinions on certain matters and what's important to remember is that for many of these emerging market companies, they may not yet be at the finishing line but as we want to keep them moving closer to it, it's important that we remain engaged.
And if I may share an example of an engagement journey with one of our companies, Ultratech Cement. It's one of our core holdings, yet it is in a sector that is, you know, one of the highest emitters - so how do we reconcile the two? I mean, we think about cement companies in developing countries, they are part and parcel of infrastructure development. Banning cement to us is not the solution, instead we find it more constructive to encourage companies to adopt processes for cleaner cement production.
So if you think about our very first engagement back in 2017 when we started talking to them about climate change, their approach towards energy efficiency. Back then, it was more educational, and I recall our team setting milestones such as reducing clinker, improving kiln efficiencies, using alternative fuels etc.
Two years on when I met Ultratech during my last trip to India, I was very impressed by how they spoke about factoring a hypothetical carbon tax of $10 into their project capex calculation and that really is a way for them to shift mindsets internally and to get project teams to be more accountable for the emissions impact.
And when we spoke to them last year you know they made more progress they shared the adoption of science-based targets to analyse their carbon trajectory and their aim is really to align themselves with global efforts to keep global warming under 2 degrees Celsius. This year we have observed how the company has improved its disclosure to the investment community, you know it recently issued a sustainability linked USD bond where the coupons will increase if they do not achieve their green targets. So we've been very encouraged to see our engagement efforts bearing fruit and this is why we continue to see Ultratech being one of the best in class in the sector.
Nick: Thanks Kristy for sharing that, that’s really interesting to hear how the engagement has evolved over the years and actually you know the company themselves creating a structure to financially disadvantage themselves for not meeting sustainability targets gives a lot of confidence they're taking the issue seriously I think.
We’ve seen the huge transformation of the Chinese stock market in the last decade in terms of the much wider investment opportunity set in new economy companies. In comparison, the Indian opportunity set looks quite narrow still with the largest tech companies being the big global IT outsourcing companies. How has this been evolving and could you tell us about some of the new companies that are listing?
Kristy: Yeah, I mean it's true, if you look at the Indian listed space there are not many names in new economy. You do have the IT services firms and just a small handful of digital proxies, if you consider Reliance through their Jio platforms or Info Edge which is an online recruitment company with a portfolio of start-up assets. And there is also another small cap undercover name called Affle that we like as an e-commerce beneficiary given that it's got Amazon as a key client. So not many listed digital companies that we can consider and many of them have been confined to the private space, but you know it's now changing. We are expecting more IPOs of these companies in the coming year and one factor we think could be that Covid has truly fast-forwarded digitalization trends by a few years. Yeah and we expect these new listings to enhance India's attractiveness as a place for us to invest in, some of the more interesting names include an e-sports company called Nazara, it just listed yesterday actually, you’ve got names in the fintech space whether it's the well-known company called PayTM that may list in a couple of years or Mobiqkwik that's in mobile payments and in the buy-now-pay-later space.
And as I've mentioned Info Edge, you know some of the companies are coming to the market as well, whether it's Z umato that's in food delivery, Policy Bazaar in online insurance and a few other names like a logistics solutions provider called Delhivery in Delhi and a similar name to Autohome in China called Car Trade - it's an auto classified business. So yeah India is looking ever more interesting with these new listings.
Nick: Yeah that really does sound interesting I mean it's, it's really good to see the market broaden out now in the way that it is and I certainly look forward to hearing more about these new listings in the future as you continue doing the due diligence on them.
So that's the end of today's podcast, so with that the only thing left for me to do now is to thank my guest Kristy.
Kristy: thank you.
Nick: and also thank everyone who took the time today to listen in. If you enjoyed today then please download our other podcasts from our website or wherever you normally get your podcast watch out for our next episode and tune in.