Episode 2: The public and private side of investing in India

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India liberalized its economy in the early 1990s and is attracting interest from large Canadian pension funds. This episode examines India’s investment landscape from both a private and public equity standpoint, as well as its dominant risks and opportunities. We’re joined by Sanjeev Krishan, leader of deals and private equity at PwC India and Jinesh Gopani, head of equities at Axis AMC, a Schroders joint venture in India.

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(Run time: 17:42 min, size: 15.6 MB)

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Jinesh Gopani

Jinesh Gopani

Head of equity, Axis AMC (Schroders joint venture in India)

Jinesh Gopani is the head of equity at Axis AMC. Axis AMC is the Schroders joint venture in India. It manages domestic funds under the Axis Mutual Fund range and advises Schroders on its global India product range. He has joined Axis AMC in 2009 as equity fund manager and worked his way to head of equity in 2016. He currently manages the flagship Axis Long Term Equity Fund amongst other funds, advises and oversees the unconstrained Schroder International Selection Fund Indian Opportunities Fund. Gopani played the leading role in growing Axis Long Term Equity Fund seeing it’s asset size burgeon from a less than $1 million at launch to almost $3 billion now. Prior to Axis AMC, Gopani was associated with Birla Sunlife AMC as Portfolio Manager, where he was responsible for alternative assets across growth, value and dividend baskets. He was associated with this company from June 2008 to October 2009. He was also associated with Voyager India Capital as a senior research analyst responsible for the banking, financial services and insurance and infrastructure sectors and held a sectorial portfolio manager role for investments. He was with Voyager India Capital from February 2006 to May 2008. He holds an M.M.S. in Finance from the University of Mumbai with a total experience of 18 years in the capital markets of which 10 years are in equity fund management.

Sanjeev Krishan

Sanjeev Krishan

Leader – deals and private equity, PwC India

Sanjeev Krishan leads the Financial Advisory Services practice at PwC India with over 20 years of professional experience in carrying out due diligence reviews, share and business valuations, business plan and working capital reviews for multi-national clients as well as domestic clients, both in the private and public sectors. Krishan worked with PwC Stockholm for a period of 20 months between 1998 and 2000 where he gained exposure in working with financial investors and also worked with numerous strategic investors. Apart from India and the Scandinavian countries, he has worked on deals in United States, United Kingdom, Continental Europe, Indonesia, Bangladesh, Japan, Thailand and Middle East. He is the Private Equity leader of PwC India and does a lot of work for private equity clients in India, and also co-ordinates and leads efforts regarding outbound transactions. Krishan works with clients from a cross-section of industry segments. On a functional basis, Krishan works across the deal continuum, with a focus on due diligence, valuation and post deal services, specifically including review of sale and purchase agreements, negotiation support, transaction structuring and post closing and integration advisory.

Text transcript

[Yaelle]: Hello, my name is Yaelle Gang and I’m the editor of Canadian Investment Review.

[Martha]: And I’m Martha Porado, associate editor of Canadian Investment Review and Benefits Canada.

[Yaelle]: Thanks for joining us for Pension Passport, where we’ll connect with investment experts from around the world to zero in on different countries and explore their economies, investment opportunities and risks for pensions plans.

[Martha]: In this episode, we’ll take a trip to India, which is one of the fastest growing and one of the largest economies in the world. India is classified by MSCI as an emerging market.

[Yaelle]: We’ll dig deep into the public and private sides of the market and hear from Sanjeev Krishan, who is a deals and private equity expert at PriceWaterHouse Coopers India and from Jinesh Gopani, who is a head of equities at Axis AMC a Schroders joint venture in India.

[Martha]: We’ll start out with Sanjeev, who joins us on the phone from Mumbai. Welcome Sanjeev.

[Sanjeev]: It’s a pleasure to be with you and hello everyone.

[Yaelle]: Great thank you. Hello. So the liberalization of India’s economy started in 1991. Can you tell us about what was driving that and when did you first start seeing foreign institutional investors get interested in India’s economy?

[Sanjeev]: Well if I go back in time, the Indian economy was facing inevitable predicaments in the 1980s with the common finances becoming progressively unsustainable and increasing fear of escalating inflation. And you know at that point in time, [crude oil] prices were going through the roof as well, and which effectively meant that India had to do something significant to sort of get its finances back in place. It was in that construct that the liberalization of the 1991 came into being, which effectively led to relaxation of foreign direct investment norms across a bunch of industry sectors and a bunch of sectoral and tax reforms, which really created opportunities for overseas trade.

But possibly the most important element of the liberalization that India saw during those times was freeing India from the clutches of Licence Raj, which effectively meant that you did not need a government approval to set up factories and it really opened India up to competition from rest of the world and made Indian industries more competitive because they had to now be competitive globally, not just locally.

In some ways it did help foreign investors starting to look at India more definitively but over ‘91 . . . I would say between the period ‘91 to ‘97, ‘98 there was some foreign direct investment that started flowing into India but not any big investment dollars from the institutional side.

I would think that the first really noticeable investment from foreign investors in India was in 1999 when Warburg Pincus invested in Bharti Airtel. It was about a $92 million deal at that point in time – was a large deal. And in some ways, got the financial investors interest in India.

Having said that, the first real wave of private equity investors in India was between the period of 2002 to 2007. And since then, you know, we have completed I would think two full cycles of private equity investments in the country and we’re currently going through the third one.

I would just like to highlight that last year, we recorded $47 billion in transactions in investments. And in the first half of this year we are at $21 billion. So I’m expecting that 2019, it might actually surpass 2018 foreign investments in the country.

[Yaelle]: Perfect. And then just to clarify are you talking about private equity only or across asset classes?

[Sanjeev]: This is across asset classes.

[Yaelle]: Wonderful, thank you.

[Martha]: Perfect. And to zero in a little more on private equity, what are the risks and, on the other hand, opportunities that pension funds and other institutional investors need to be aware of for India?

[Sanjeev]: So, from a private equity standpoint, I think they’ve had, as I was, mentioning they have had a very robust 2018 and 2019 also we are doing very, very well. I think that there are significant investment opportunities especially for the pension funds.

These are assets in the infrastructure and renewables space, at times real estate space and a bunch of other cross sectors in India. And, you know, there is significant opportunity at this point in time to buy assets at I would say a significant discount and to turn them around. I think that’s one big opportunity.

Another area really has been to set up platforms across financial services, renewables, infrastructure verticals and I think that quite a few funds have been quite active in that space in recent times. And then, you know, just in terms of during the growth in India because we have a situation where the capital cycle needs to revive. The banks, which have been laden with non-performing assets at this point in time are possibly it will take a while to be able to open up the purse strings, but the economy for the growth needs capital and that is another area for investors to sort of basically be a provider of capital for funding the growth of India across sectors, across the infrastructure sector, which is a much-needed investment from India from an India standpoint.

And I would say finally – if you look at some of the characteristics continue to show that India is a large consumer and a services market. There are businesses which continue to change hands from early stage investors to late growth investors, which are also now coming into a stage where they can be large enough for some of the pension funds to invest in. So those are the big opportunities at this point in time for private equity investors, particularly, I would say, for pension funds in particular. I would say also that the new government in India is playing in the favour of some of the pension funds and sovereign wealth funds until some time back, so there’s been some significant investments in that area as well.

In terms of risks I would say, you know, populational sectors, the traditional consumer technology sector, even healthcare, the valuations have been pretty healthy and investors are actually focused, particularly the pension funds are focused on sectors which may actually be supporting these sectors rather than investing in these sectors directly.

So maybe for example they may be investing in e-commerce logistics than investing in e-commerce itself. A couple of other factors that show that normally risk areas come up one is the delay in the revolution of stress assets. And as I mentioned the stress asset opportunity is a big one. But there have been some legal and regulatory roadblocks in sort of the revolution of these assets, which has made the pension funds a little pensive about their whole focus on the stress atmosphere in recent times.

And then finally I would just say the global environment at times would dissuade the global investors from investing in emerging markets in general and of course in specific. And those, I would say are the factors that could sort of challenge pension fund investments in India.

[Martha]: Wonderful, thank you so much for joining us and giving us that insight Sanjeev. Yaelle it’s quiz time again.

[Yaelle]: Alright I’m prepared.

[Martha]: So how many languages, and this isn’t like official languages or anything but how many languages total are spoken in India?

[Yaelle]: So if I recall correctly there are around somewhere just about over 20 official languages, so total languages spoken I’m going to go for 75?

[Martha]: Way off.

[Yaelle]: Lower or higher?

[Martha]: It’s higher.

[Yaelle]: Okay, what about 1,075?

[Martha]: You can actually almost split the difference there. There’s been a pretty big drop off it looks like in terms of how many languages are still spoken in India, but in 2010 the people’s linguistic survey of India counted 780 languages, but that’s actually a huge drop-off from 1961 where the census found 1652 distinct dialects.

[Yaelle]: That’s a lot of languages and there’s also a big chance I never would have guessed that. So, now moving onto our next guest and also moving from private to public I’d like to introduce Jinesh Gopani, who is a head of equities at Axis AMC, a Schroders joint venture in India. Like Sanjeev, he’s also calling in from Mumbai to talk about the risks and opportunities in India from an institutional investors’ perspective. Welcome Jinesh.

[Jinesh]: Hi, hi. Good morning good evening.

[Yaelle]: What internal and external factors are driving growth in India?

[Jinesh]: So India is like U.S., we are a largest domestic consumption-driven economy. We are not heavy on exports. We have 1.3 billion population to feed. If you take the opportunity and the per capita income of Indian citizens it is close to $1,900 to $2,000, which is one third or one fourth of what China’s per capita income would be. So hence once India starts growing at seven or eight per cent of GDP for a sustainable period of time, the GDP can grow from 2.3 trillion dollars to as high as five to six trillion dollars over a period of six to ten years. And that is as the per capita improves the consumption boom might just explode at a certain level and that is where the biggest opportunity lies. So India is more of a domestic consumption-driven economy like U.S. and not like China, which is more of an export-driven economy.

[Martha]: And within equities, can you give us an overview of the stock markets in India and what market access is like. Are there any challenges for foreign investors?

[Jinesh]: Yeah, so interestingly Indian market cap is close to two trillion dollars- total Indian market cap, which is 0.8 0.9 of GDP, with top hundred stocks accounting for around 80 to 85 per cent of the market cap. And as the market cap to GDP grows in line with the GDP growth I think there will be more and more potential to participate in India.

I would say from the challenges point of view, barring a liquidity factor which sometimes crops up in the names below top 100 names, I think we don’t see any reason why foreigners can’t invest in India. It’s a very, very open market. There are regulations which are in favour of foreign institutional investors and we are seeing over the last many years, in the last ten years we have $170 billion of FII investment in India. So apart from liquidity challenges below top 100 names we don’t see any reason why India shouldn’t be a focused destination for an FII.

[Yaelle]: So, you spoke a little bit about liquidity challenges. Aside from liquidity, what are the biggest risks for foreign investors looking to access the Indian economy and how can those be mitigated?

[Jinesh]: One fundamental risk or maybe a challenge for foreign investors when they’re looking to India is we should not replicate India like China. China is more a top-down approach whereas India is more bottom-up approach. What I mean to say is, in China it’s the government who runs the business and decides the course of business. Whereas India is like land of entrepreneurs of close to 20 or 30 million entrepreneurs running the country. Government has no role in running the business. They are more acting as a regulator. So anyone who is putting money in India should look at India as a bottom-up destination and look for good companies in the sectors rather than taking a very top-down approach of macro and putting money, because we are seeing, and there is a history with this, that if your goal is top-down in India the chances of making money is less as compared to what you would have made by investing in a few select stock-specific names who have been growing irrespective of the market conditions and irrespective of the economic conditions.

[Yaelle]: And so with that in mind, what are some of the biggest opportunities whether by sectors, themes or part of the cap spectrum. Is anything particularly attractive to investors right now?

[Jinesh]: Yes, so as I said, India is like U.S. So anything which touches the lives of an Indian citizen is a classic story to play in India. So be it financial services, here I am talking about banks, insurance companies, asset managers and so on and so forth. We then have a consumption theme, they are fast-moving consumer goods, consumer staples, consumer discretionary are a great theme to play into India. Auto as a sector is another theme which has clear GDP market players story. Again, the penetration levels are very, very low as compared to the other Asian markets. So these are some of the sectors where investors can really look to invest into Indian stocks.

Basically, the theme of India is more B to C than B to B.

[Martha]: Okay and if we could jump over just to geopolitics for a minute, when it comes to something like the trade war between the U.S. and China do you think that that could have an impact on India and how would that impact India potentially?

[Jinesh]: So the good part is since we are not an export destination we are not directly impacted so much. But indirect the impact could be let’s say this trade war continues and China starts to devalue its currency than it will have an impact on the other emerging market currency and hence India might also have to face some music of the devaluation of the currency. Barring that, we don’t see any significant impact apart from flow slowing down because of the currency devaluation and some of the reasons are we don’t see any reason why India gets disproportionately hit by this trade war. In fact, it will be more of a positive for the FIIs to looks for the destinations, which is less impacted and will recover from this event.

[Yaelle]: And so with all this in mind, what would be your main piece of advice for a pension fund looking to invest in India?

[Jinesh]: So as I said, India’s a great consumption story. India’s a bottom-up story. There are beautiful companies who have been growing at 15, 20 per cent for the last 10, 15, 20 years. So my advice would be also when you are looking into India look at it with a bottom-up approach. Look at it with a view to hold onto the stocks for five or ten years. There are many stocks which would be looking like a mid-cap market cap stock at this point in time given the size of the funds that they are. But then the size of opportunity to scale in some of the sectors is very, very high and that is where one should put their money.

So look for good-governed companies, strong management, a strong pedigree, strong business models, which are trialed also in our scheme of things and really continues to do well over longer periods of time.

[Yaelle]: Thanks so much Jinesh for sharing your insights and joining us.

[Martha]: Before signing off, here’s a quick investment spotlight of what a Canadian plan is doing on the ground in India. This February, OMERS announced it acquired a 22.4 per cent interest in IndInfravit Trust, which holds a portfolio of operational toll road concessions.

[Yaelle]: This is actually the first infrastructure allocation OMERS has ever made in India.

[Martha]: Well, we’ve come to the end of our road today. Thank you so much listeners for tuning into Pension Passport.

[Yaelle]: Yes, thanks to everyone for listening. And don’t forget to tune into our next episode, which is available on www.investmentreview.com/podcasts. Thank you.

[Martha]: That’s all for now. And as they say in Hindi, one of India’s 22 official languages, phir milenge.

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