Ashburton’s Schiessl sees great opportunities in India

India’s economic prospects may seem decidedly gloomy but Jonathan Schiessl, Ashburton’s Asian Equities specialist, argues that there are great opportunities for investors prepared to dig deeper and look beyond the headlines.

Anyone travelling in India only a few short years ago couldn’t help but notice signs saying: “Now it’s our turn”. At the time the country seemed destined to finally realise its potential and take its rightful place among the world’s economic and political giants.

Today India feels like it has gone from hero to zero but whilst the headline economic data and political system has undoubtedly seen a downward trend, many parts of corporate India have been quietly going from strength to strength. It’s important to highlight that amongst the general doom and gloom are plenty of Indian companies run by top quality management, offering fantastic growth opportunities, even in this environment.

Growing strength of domestic demand

Growth and wealth in India is predominantly created by individuals and the corporate sector, and not government. We have tended to focus on domestic businesses that are subject to minimal interference by government. This reduces the influence of rent seekers and increases our confidence in sustainable management quality and business longevity.

It would, of course, be all too easy to focus on the titans of corporate India. We could highlight companies such as Tata Motors with its resurgent Jaguar Land Rover division, or the technology outsourcing giant TCS. But two predominantly domestic companies we think are worth noting are Eicher Motors and Godrej Industries, businesses that most will never have heard of but are emerging giants in their respective industries.

Emerging giants

Both companies are largely consumer-facing and follow a relatively simple approach: identify a market segment or opportunity and dominate through a variety of strategies.

Eicher Motors: a domestic commercial vehicle manufacturer doing rather well in the premium motorcycle sector. Eicher Motors began selling imported tractors in 1948. Over the last five decades the company has grown, diversified, acquired, consolidated and expanded into the group it is today. It has two main divisions – Royal Enfield (a premium motorcycle business) and a commercial vehicle business joint-ventured (JV) with Sweden’s Volvo Group. Despite the recent economic slowdown in India, Eicher has been increasing its market share. We expect this trend to continue as the JV focuses on product quality and improving reliability, expanding its after-sales network and diversifying its product range.

Godrej Industries: the holding company of one of India’s oldest and most respected family dynasties that operates predominantly in India, but increasingly in other emerging economies. Godrej Industries (GI) can trace its heritage back to 1897. One of India’s most trusted brands; Godrej enjoys the patronage of around 500 million Indians every day. The Godrej group has interests in real estate, consumer goods, appliances, and agricultural applications as well as chemicals.

Since 2001 the company has grown its market capitalisation by 45% compound annual growth rate (CAGR), driven by a 30% CAGR in consolidated earnings. In 2010-11 management forecast a further 10x growth by 2020 which on the current trajectory, growth of 27% from 2011-2013, appears to be on track. The company is a holding company with its biggest single stake being 22% of the separately listed Godrej Consumer Products (GCPL).

What really excites us is Godrej Agrovet, GI’s 64% owned agricultural business. Agrovet is India’s leading agricultural player in animal feed and palm oil plantations. This is a low capital intensity business with high barriers to entry. It also has a 49% stake in a JV with US multinational Tyson Foods selling chicken and frozen foods. This trend is changing fast as retail in India becomes more organised. The company has stated that this business will ultimately seek a separate listing, and could be worth as much as US$1bn (Godrej Industries market capitalisation is currently US$1.5bn).

India’s political and economic status may have deteriorated but in the hunt for enhanced returns, a great many opportunities can be found by looking beyond the headlines.

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