investing in indian public equities
Due to 200+ years of British colonization in India, English is widely spoken in India. It is the world’s largest democracy. Elections have been fairly held for 70+ years with outcomes respected by all parties and peaceful transfers of power being the norm. While India’s GDP is $3.2 trillion today, it is expected to more than double to $7 trillion by 2030. This would make it the 3rd largest economy in the world, behind the United States and China. With over 1.4 billion humans, India recently passed China to become the most populous nation on the planet.
The Wealth and Asset Management Industries in India
Financial assets in India today is less than $500 billion. This is equal to about 15% of GDP. In the United States and Europe this number is over 100%. The wealth and asset management industries are embryonic in India. While this 15% will take decades to exceed, 100%, India’s GDP itself is growing rapidly, leading to very strong tailwinds for this sector as far as the eye can see.
In 2020, just 3% of Indians in India had brokerage accounts and owned equities. By comparison, 55% of Americans 33% of Britishers, and 13% of Chinese are invested in their respective stock markets. The average Indian is around 28 years old. Before the pandemic, there were about 40 million retail investment brokerage accounts in India. By August 2022, we saw this number had climbed to over 100 million! Historically wealthy Indians invested excess wealth in real estate, gold, bank deposits and under the mattress. There is a strong secular movement towards publicly traded equities, mutual funds and ETFs. It has been growing a more the twice the rate of GDP growth and that will not change for the rest of the decade and beyond.
Founded in 1875, the Bombay Stock Exchange is one of the oldest stock exchanges in the world. While India has over 6500 listed equities, the real investable universe is around 2500 businesses. This compares favorably to 4000 in the United States and 2000. With a strong regulatory framework and central bank, India is an incredible place to invest.
Alcohol
All over the world, alcohol is a highly taxed good. Most investors are aware that alcohol companies are an excellent retirement stock because they grow with a growing middle class. Companies such as Kweichow Moutai, Diageo, Anheuser Busch, and Heineken trade at high multiples and have decades of sustained growth. India has a unique alcohol tax system. In the majority of Indian states where alcohol is legal, alcoholic drinks are not taxed on the percentage volume of alcohol content, but on the total liquid content in the bottle. Subsequently, beer ends up being relatively expensive compared to hard liquor for the ‘kick’. Indians prefer hard alcohol over beer because it is cheaper and has a higher alcohol content. This is in sharp contrast to the US, Europe, and South America where beer and wine are overwhelmingly favored.
Let’s take a look at one of India’s former liquor barons, Vijay Mallya. Vijay Mallaya is the former Chairman of United Breweries Group and is now a fugitive hiding in the United Kingdom and is the subject of an extradition effort by the Indian Government to face charges of financial crimes in India. His star has fallen, but he was flying high about 15 years ago when he sought out foreign liquor giants to come into India and take a stake in his liquor businesses.
Heineken first started purchasing portions of United Breweries from Vijay Mallaya in 2009. He sold the hard liquor brands under the company of United Spirits to Diageo in 2012. Diageo owns (x%) and has cleaned up the company over the last decade. It has over 50 brands. Diageo and Heineken have continued to buy up shares to build a controlling interest in United Spirits and United Breweries, respectively.
Diageo removed non-core assets, improved the supply chain, and improved operating margins. They focused their efforts on more premium hard liquors and brought their technology and blue-chip management skills. They worked with varying local regulations state by state. This incredible management team tapped into strong tailwinds of one of the world’s fastest-growing alcohol markets. We end up with a business growing at 20+% annually that is being fueled by urbanization and an increase in per capita income and a very young population. Hard liquor premiumization in India is leading to margin expansion in addition to volume growth for United Spirits.
Real Estate
With a rapidly growing economy and a young population, one sector worth looking at is the publicly traded Indian Real Estate businesses. One of my favorite real estate developers is Oberoi Realty with Vikas Oberoi at the helm. Oberoi Realty currently only develops luxury buildings in Mumbai. Mumbai is surrounded by water on 3 sides, it looks pretty similar to Manhattan, with an old Financial District (Nariman Point) a new Midtown (BKC).
Since 2016, India underwent three significant regulatory and legislative changes that wiped out almost 80% of the Real Estate Developers in India. Real Estate Regulatory Authority (RERA), demonetization and Goods and Services Tax (GST) made it virtually impossible smaller players to be viable. The result is a few surviving developers who find themselves in a rational oligopoly with an insatiable demand and need for decent housing.
RERA - The Real Estate Regulatory Authority which was brought into existence by India’s Parliament in 2016 and implemented in 2017. It made the home buying process more transparent and implemented many reforms that affected home buyers and developers. RERA compliance is hard for small developers and most have gone out of business.
Demonetization - The Government of India announced the demonetization of all ₹500 and ₹1,000 banknotes of the Mahatma Gandhi Series. It also announced the issuance of new ₹500 and ₹2,000 banknotes in exchange for the demonetized banknotes.
GST - The Goods and Service Tax in India at 18% dramatically increased the cost of doing business for smaller players who relied on tax evasion to be profitable.
Oberoi Realty is an established branded developer with a laser-focused strategy. It has a 30-year track record in the Mumbai Metropolitan Region which is one of the most attractive real estate markets in India. The company has millions of square footage of premium developments in prime neighborhoods of Mumbai.
Oberoi has benefited in recent years from low lending rates, tax cuts, and consumer preference for projects completed on time and ready to move in. You have essentially a very high-quality company that takes complete care of its customers. For example, in some neighborhoods where they hold a presence, they developed Sports Clubs. They even have an international school. They understand the five most important things high-net-worth and high-earning individuals care about, close to work, close to school, close to restaurants, close to the gym, and close to the airport. Most of their developments are within 30 minutes of Mumbai International Airport.
They only purchase their land parcels from reputed sellers and create aspirational homes for their clients. While most developers in India (and the world) trade at operating margins of 5-10%, Oberoi Realty has operating margins of 40-50% consistently. They have a commercial rental business and are working on hospitality (a hotel with Ritz Carlton). If they build a mall, they’ll build a 5-star hotel on top of it. They do not leave any wasted space and take advantage as much as they can. Mumbai being landlocked, has to be built up not out.
Financial Services
When an economy is set to double in GDP every 7 years, you want to invest in the best possible assets to capture that growth. In March 2023, India crossed the United Kingdom to become the 5th largest economy in the world, with a per capita income of $2000.The U.K. has a population of 67 million while India has 1.4 billion. Given that 40% of Indians work in agriculture and India has roughly a 50% employment rate, roughly 300 million+ are active members in the consumer economy, but almost 600 million contribute to GDP. On average, India is a relatively poor country set to take off with a large and young population.
India has three broad categories of financial services in India, credit or banking regulated by the Reserve Bank of India (RBI), insurance regulated by the Insurance Regulatory Authority of India, and capital markets which is regulated by the Securities and Exchange Board of India (SEBI). Foreign banks make up less than 10% of the banking in India, and most of India’s financial institutions are homegrown.
One of my favorite businesses in India to help understand the financial services sector better is Edelweiss Financial run by Rashesh Shah. He has some of the highest quality chairman’s letters from Asia that I have read. Edelweiss’ business includes credit (retail, corporate), investment and advisory (wealth management, asset management) and insurance (life and general). They have already spun out and plan to spin out portions of their business in the next few years creating incredible shareholder value.
The one issue with financial services is the leverage they take on, however, Rashesh has navigated Edelweiss through the 2018 Non-Banking Finance Companies (NBFCs) collapse and manages the liquid assets to meet all near-term maturities. One of the best times to invest in financial services businesses is after a collapse that really wasn’t that business’ fault. Edelweiss noted a few years ago a push from commercial lending to retail lending and has followed through almost more aggressively than they intended.
Edelweiss is led by an exceptional owner-operator with a great set of managers. It has strong franchises in wealth management, asset management, and asset reconstruction. Edelweiss partnered with Tokio Life with virtually no risk to their balance sheet (Tokio Life was looking for India Insurance exposure) and if things go well, there could be future upside in insurance. Rashesh Shah and his team have high levels of competency in distressed assets and they have excellent control of their liquidity to serve as a good downside protection. The team is focused on the strength of collateral in their lending, and it became clear when they survived the 2018 NBFC collapse.
Edelweiss is cheap across many metrics and the financial services business is working towards building very high ROIC, asset-light, pure-play franchises with very long runways. Some of these sections of the business such as Wealth and Alternatives, are established, but still growing. Others are still in their early days and we will see if they succeed. The upside is significant as all the pieces get to scale.
To summarize the India growth story can be played in many ways, Financial Services, Real Estate and alcohol are just the tip of the iceberg. Happy hunting!
Disclaimer: None of the companies listed are investment pitches, they are simple cases of quality compounders in an emerging market lens. As always it’s best to do your own homework.
