June 1, 2023

The global banking crisis and its impact on India

Doshas: It is very interesting that everything that happens in the world only strengthens our thought process and our belief that India is on the right track. We could never expect this kind of crash in our system. While we always think we have regulatory issues in India, today I think that is a very big blessing.

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I think that everything that is happening in the world is only the beginning of a cycle in which you will see pain that continues for many years. All of these are warning signs for us. But India stands out very well.

Jane: The way in which monetary policy and banking regulation in India has worked over the past few years has been a typical first-world style of operation, which unfortunately was not the case in the first world. It’s quite ironic.

About a decade ago, perhaps after the global financial crisis, we saw some pretty volatile times in India with weak balance sheets at the aggregate level, huge NPA accumulation and a current account crisis. Publish what we have seen – both at the governmental and corporate level – the steps taken to strengthen India’s structural fabric. I think we’re just seeing the benefits of it. It is good that the crisis was not in vain.

I believe the next decade belongs to us.

Mukherja: I think every 10 years America explodes. I don’t think this is history at the moment.

You will remember 2023-24 as the year the world went to war without weapons. What is happening between America and China is very serious. And this is of great importance for us as a country. Let’s take two developments.

ASML, a company headquartered in the Netherlands, is the only company using “extreme ultraviolet lithography” technology to manufacture integrated circuits, which play a key role in the global chip supply chain.

The Dutch government, under pressure from the United States, announced several months ago that there would be no export of ASML machines to China. The Western world is kind of saying that we will bring China back to the Stone Age as quickly as possible, making sure that this semiconductor production is stopped.

Another dimension is found in the pharmaceutical industry. When we talk to the big Western pharmaceutical companies we have invested in, they all say there are clear orders from the powerful in America to buy less APIs from China and more APIs from India. Head to Baroda, Surat or Vapi in India and you will see an entirely new industry emerging that is ramping up API production.

Even if 10% of China’s API production moves to India, our API industry will double.

Indian Stock Market Reviews

Doshas: It’s not that our premium has grown. But the values ​​of other countries have simply fallen. So, our reviews look a little expensive. But India is forging its own growth path.

Could you imagine that the inflation rate in India would be lower than in many parts of the West? 10 years ago, I could not have dreamed of such a thing. In addition, for the past five years we have enjoyed a corporate tax rate of 25.17%, absolutely unchanged. So, isn’t that a very strong promise from our government to ensure consistency and stability?

Shah: Indian stock market valuations are undoubtedly not cheap on an annualized basis. But look at the five-year period, and suddenly we are the cheapest among emerging markets.

Today, Maharashtra’s GDP is equal to India’s total GDP in 2005. The combined GDP of Uttar Pradesh and Uttarakhand is equal to that of India in 2001. And the combined GDP of the three states – Tamil Nadu, Gujarat and Karnataka – corresponds to the level of India in 2000. Can we assume that over the next 15 to 25 years these states will produce what India produces today if we all continue to work as hard? I think this is highly achievable. Now, in what part of the world would you see states getting as big as a country, with a reasonable degree of certainty? People who believe in this story will not find the valuation of India expensive.

Jane: In calendar year 2022, the Nifty 50 generated a return of around 4%-5%, which, of course, sounds uninteresting.

But you must analyze the performance of this basket of 50 stocks by removing outliers. And you will find that the difference in earnings between the best and worst stocks is 90%. The best performing stocks gave you 50%, the worst performing stocks fell 37%.

I think it’s important to be able to identify these companies and use stock selection to create alpha and not get too hung up on aggregate values, aggregate growth, etc.

Mukherja: Do a simple analysis. You look at companies that have posted double-digit revenue growth and double-digit ROCE (Return on Capital Employed) over the past 10 years. There are 140 such companies in India, and 130 in China. Remember that China’s economy is 4-5 times larger than ours, and there are still fewer companies with the growth I was talking about. And there is no other emerging market in this picture.

Filtered Indian companies over the past 20 years would have earned capital by 24% and Chinese companies by 12%. This is the best that China has to offer.

A decade of production

Shah: The train we missed in the 80s when China became the world’s manufacturer and we became the world’s back office is likely to be reversed in my opinion. This journey is not for 1-3 years, but for 10-30 years. For China, manufacturing is about 40% of GDP. Manufacturing in India should rise from less than 25% of GDP to the first 30%, then 35% and hopefully someday up to 40%. This is the history of manufacturing in India.

Be carefull:

Mukherja: We need to up the ante on corporate governance. We have improved a lot since Satyam, the DHFL debacle, etc. But I think that given the speed at which our country is developing, and the speed at which domestic money is flowing into large mutual funds, we are indebted to the investor community as in India and abroad. It is critical to up the ante on accountability, quality and corporate governance.

Shah: From an economic point of view, we cannot afford to set goals for ourselves. In 1947, we were on par with Japan in terms of GDP per capita. In the 1960s, we were on the same level as South Korea. In the 80s we were on the same level with China. Today, all these countries are far ahead of us. And that’s because they did a lot of good things. But we scored own goals. The best example of India’s end in itself is when Singur, a state in West Bengal, opposed the Tata group’s car plant in an essentially backward area. They tried for five years, couldn’t make it, and finally moved out. They went to Sanand in the state of Gujarat, which is now growing rapidly. If all of India is going to follow the Singur model, it’s time to sell India. If all of India is going to follow the Sananda model, it’s time to make a double long India.

Doshas: India runs one big risk of continuity of reforms. We have had extraordinary leadership at the country level, which I believe should continue for one or two more terms. There are many reforms in progress in many areas such as agriculture, defense, PSU diversification. etc. Here are some of the high priced items that will really take India to the next level.

Jane: I like to think that we cannot control the political climate in India in the medium term, nor how the rules will be shaped. But what we can control is identifying companies that can overcome these different political scenarios, macroeconomic situations, etc. and become stronger. So, I would like, as an investor and as a fund manager, only to insist that we need to make an effort to identify companies and winners that can go through variables that we cannot control or that we cannot predict.

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