Whilst it is debatable how much investment will materialise, we believe it goes some way to show the intent of policymakers – other emerging markets are not approaching foreign companies with this scale and coordination. However, lack of reform on labour laws is still one area of disappointment.
2. What will it take for earnings to rebound?
The RBI’s focus on disinflation and the commodity price collapse has taken its toll on top-line trends for companies. However, there is hope that in 2017, average earnings per share (EPS) growth of 18% can be achieved.
It is interesting to note that commodity price reflation would be positive for the market now – metals account for 6% of banks’ loans, 12% of non-performing assets, 25% of corporate capital expenditure, 20% of MSCI India Index earnings and 50% of government assets.
Whilst public sector growth continues, private investment is largely absent. Green shoots are emerging within the economy, but there is frustration that these economic developments are seemingly not translating to corporate earnings.
Indeed, 2016 earnings were downgraded by 12%. The framework of a corporate earnings and free cash-flow recovery in India is based around demand, capacity utilisation and capital expenditure growth. These catalysts for an earnings recovery remain in place, given the operating leverage in the system, but India has been affected by collapsing trade and global growth trends.”
3. Winners and losers, disruptors and disrupted
India is a market that many companies consider ripe for disruption.
We believe drivers include: public policy support for innovation through the ‘Digital India’ and ‘Start Up India’ initiatives; limited sunk investments in obsolete technology, so resources can be directed to the new economy; and the fast pace of change as sectors skip intermediary steps – for example, skipping from 2G to 4G data networks without widespread introduction of 3G.
In a public sector example of disruption, just 5 years after its launch, nearly a billion people are covered by the Unique ID system card, which transforms the way in which subsidies are issued.
Clearly there will be winners and losers as this disruption takes hold. In particular, we have identified a number of mid-cap companies that have embraced change and continue to be far more nimble than their baggage-burdened large-cap peers.
According to Flipkart, an Indian e-Commerce firm, 70% of Indian electronics purchases are made through mobile, representing the highest proportion of any country in the world. The banks we met were clear that branchless, digital banking was the future in India, with significant cost-to-income benefits.
Apollo Hospitals spoke of how telemedicine, electronic medical records and genomics in oncology will drive their future growth.
The Neptune India Fund remains focused on mid-cap opportunities, given our aforementioned belief that these companies will be the drivers of future economic growth through their disruptive business models.
We believe the catalysts for an earnings recovery remain in place and a subsidence of global market volatility, which has had a particularly profound effect on emerging markets, will allow a return to the strong growth rates seen in recent years.