India’s greatest strength lies in its domestic consumption. Urbanisation and a booming middle class mean disposable incomes are growing.
More than half the population is under 30, which should drive structural growth for decades. India is also the world’s biggest democracy. This suggests its equity market is less likely to suffer from state interference than its counterparts in other emerging markets.
Furthermore, following reforms and investment in infrastructure, a number of bottlenecks that used to hinder large-scale manufacturing have been addressed. India is thus set to benefit from the West’s desire to move supply chains away from China.
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While the opportunities for growth and investment are ample at present, we particularly like banking names as well as consumer-discretionary companies such as auto ancillaries and consumer electronics.
A brand you can bank on
Despite the turmoil in Europe and the US, we remain optimistic about the Indian banking sector as the domestic industry has gone through an intense cleanup with a series of regulatory changes.
Indian banks currently boast clean balance sheets and are well capitalised, while their profitability is improving. Federal Bank (Mumbai: FEDERALBNK), the largest holding in our portfolio, is a medium-sized private-sector bank whose $19bn asset book is well balanced between corporates (45%) and retail (55%).
Over the past five years, the bank has transformed itself into a leading bank with a strong board and a team of professionals hired from leading multinational and other private-sector banks.
Furthermore, the group has built up a strong asset book, with one of the lowest levels of gross nonperforming assets (NPAs) in the industry: about 3%.
The bank has been among the most innovative on digitisation – it has 50 partnerships with fintechs, for example. Its long-term prospects are bright, as its strong balance sheet should support the rise in credit demand from both the corporate and retail sectors.
Sona BLW Precision Forgings (Mumbai: SONACOMS) manufactures systems and components for car companies around the world and stands to gain from growing orders and demand for electric vehicles.
Its strength lies in its research and development (R&D) capabilities, with 15% of the workforce dedicated to creating innovative technologies. Early entry into the market for advanced differential gears – a system that helps transmit power from the engine to the wheels – for electric vehicles has enabled the firm to secure large orders globally.
Throw in new products being commercialised from the pool of R&D projects, and there is high revenue visibility over the next three to five years.
Making India a manufacturing base
Dixon Technologies (Mumbai: DIXON) designs and manufactures electronic products for leading Indian and global brands, including Samsung, Panasonic and Philips.
It is a direct play on India’s drive to become a manufacturing base for consumer electronics as brands shift supply chains out of China.
Importantly, Dixon has a dominant market share in each of the product segments it operates in: more than 30% in LED TVs, 45% in domestic LED lighting, 28% in washing machines and roughly 30% in security systems.
The market opportunity is large for catering to the domestic as well as the global market. Dixon is well placed to capture this growth opportunity, with its strong management team, execution capabilities and a capital-efficient business model.
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