Elections And EMs Entry: The Impact Of India | Talking Point | NDTV Profit
-India's growing weight in EMs to garner higher flows?
-Further run-up ahead of 2024 polls?
Macquarie's Aditya Suresh in conversation with Niraj Shah on Talking Point.
-Further run-up ahead of 2024 polls?
Macquarie's Aditya Suresh in conversation with Niraj Shah on Talking Point.
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00:00 [MUSIC PLAYING]
00:03 Thanks for tuning into Talking Point.
00:12 I'm your host, Neeraj Shah.
00:14 The case for a chat today-- well, it can't be anything
00:18 else, or one of the points has to be around India's weightage
00:24 in the EMs, and the second point has
00:25 to be around elections, because both of those things
00:28 are front and center.
00:30 So we obviously talk about that.
00:32 We also talk about a very specific subset
00:34 within the markets, which is the recency of the announcement
00:37 prompts us to do that, which is the new EV policy
00:40 and the impact that it has on a very large sector, which
00:43 is autos.
00:44 Joining us to talk about all of these and more
00:47 is Aditya Suresh, head of research and strategy
00:50 India at Macquarie Capital.
00:52 Aditya, it's been a while.
00:53 Thanks so much for taking the time out and being with us.
00:55 Let's start off with the global backdrop within which India
01:00 operates as well, because FI flows haven't quite
01:05 been that great.
01:05 People anticipated with the election verdict
01:08 post the state election decision in December,
01:11 if the June election verdict seemed
01:13 to be a shoo-in that flows would start from Jan.
01:16 That hasn't quite happened.
01:19 While India's weightage in EMs has gone up,
01:21 while the bond indices inclusion is all coming in.
01:23 So explain to us from your perspective,
01:26 how are your global clients thinking
01:28 about investing into India?
01:31 Yeah, no, really, Sushil, thank you again.
01:33 I think the backdrop is still fairly constructive.
01:37 When you think about India's growth outlook,
01:40 thematics which are at play, India's still
01:43 one of the larger emerging markets, which can actually
01:45 grow labor capital factor productivity.
01:47 And it's something which you can get behind as a team
01:50 over, let's say, a decade.
01:52 And there's a bunch of work which
01:53 we've done around this with our big book of friends.
01:55 So I think the thematic backdrop and the growth
01:57 kind of backdrop is clearly something
01:59 which attracts investors.
02:02 I mean, is this price change, is I guess the second part
02:06 of that piece.
02:07 And that's kind of where we kind of have more challenges
02:10 answering that question, in particular in that, say,
02:12 six-month, 12-month kind of window in the short term.
02:16 So that's one side of the equation, Neeraj.
02:18 But then even when I think about,
02:21 as you're putting up on the chart here, which
02:23 is India within emerging markets,
02:25 our share can just kind of increase.
02:26 Today, we're about 18% of emerging markets,
02:30 while China's come down from 40% down to 25%.
02:34 If you kind of push and ask, where
02:37 do you think India's weightage could expand to over the next,
02:40 say, couple of years, we're more in the camp
02:42 that it further expands, even with the rich valuation
02:47 backdrop.
02:48 So I think it's a systematic undertone, though,
02:51 which is really a key support factor for India's market.
02:56 You're not seeing that in the flows in Jan and Feb,
02:58 but you did see that through last year,
03:00 where we saw about $20 billion worth of inflow,
03:03 even with these high valuations.
03:05 OK.
03:09 Do we see the advent of flows, just to get this clarity,
03:14 if they are to come in, because under this constructive
03:16 backdrop, post the formal verdict of the election,
03:20 or does the election have not much to do with it this time?
03:25 I think that there is an element of that,
03:27 when you're kind of getting into these investment committee
03:30 kind of meetings type.
03:31 There's probably like, let's get this kind of hurdle
03:37 kind of formally crossed out before kind of allocating
03:40 incremental dollars to India.
03:41 Maybe that's at play here as well.
03:45 That would be a consideration, Neeraj.
03:47 OK, thanks, thanks.
03:48 I mean, because otherwise, all of us thought that, hey,
03:51 now that it's a done deal, what is stopping?
03:53 But maybe the point that you mentioned about there
03:55 need to be a cross done out there formally
03:58 is an interesting point.
03:59 The other aspect, Aditya, is the combined impact
04:03 of foreign investor interest into India as a result of, one,
04:07 the uptick that has happened in India's weightage in the EM
04:11 pack, or the overall pack, Asia pack, if you will,
04:15 and the fact that there is both the JP Morgan bond index
04:19 inclusion and now the Bloomberg bond index inclusion, albeit
04:22 the larger one from Bloomberg is still to happen.
04:24 But be that as it may, that has also happened.
04:26 I'm just trying to understand, what are client conversations
04:29 like when it comes to a couple of these technical factors
04:33 when you talk to your clients?
04:36 I think it's just an ongoing recognition of the theme
04:39 that India's weightage in all these industries
04:43 is set to further rise.
04:45 And therefore, how do we get a position?
04:47 Where do we position?
04:48 It's more the conversation rather than anything else.
04:53 So I think it's more about, what do we
04:54 do with this increasing allocation?
04:57 Then with valuations and what's baked in across earnings
05:01 estimates, et cetera, that becomes where
05:03 the conversations tend to flow.
05:05 But I think all these are clearly very big positive support
05:08 factors here.
05:10 It also clearly impacts from a rupee perspective.
05:13 And therefore, in terms of dollar returns,
05:15 all these kind of index inclusions
05:16 and these natural dollars coming in,
05:18 it helps overall dollar returns as well.
05:21 OK, Aditya, what is to your mind now,
05:27 therefore, what is the roadway from here
05:29 till the end of December for Indian markets?
05:32 I know a clutch of global elections,
05:34 there is this whole set of policy decisions
05:38 from the central banks which will have an impact too.
05:41 But since you are the strategy head,
05:43 and you have to bake all of this in and give a year-end target,
05:47 what is it that your note would highlight
05:49 when you're sending it out, if you had to send out the note
05:52 today to your global clients?
05:53 We did do that a couple of weeks back.
05:58 But the main message was that in terms of the top down,
06:02 we actually struggle a lot to defend empirically
06:06 and kind of fundamentally why India is trading where it's
06:08 trading.
06:09 So when you think about fundamental,
06:11 if you break down India's multiple as three parts
06:14 in simplistic terms, EPS growth, ROE, cost of capital.
06:20 Whilst it is true that, say, maybe 12 months back, 24 months
06:23 back, we had a very large EPS growth premium
06:26 compared to emerging markets.
06:28 What you'll notice in the broader backdrop
06:29 is that after fairly sharp cuts in terms of emerging market
06:33 expectations, whether it be Korea, China,
06:35 all these markets, we put EPS growth
06:38 to the expectations of emerging markets about 15%,
06:42 India about 15%.
06:43 So that relative growth premium in itself
06:46 is not really a support factor.
06:47 What is a support factor?
06:48 Simply that India's currency estimates
06:50 being revised upward, and there's
06:53 more visibility and quality of those earnings.
06:55 But growth premium in itself is merely in line.
07:00 So that actually is going to work against multiple
07:02 if it is purely on that factor.
07:04 Similarly, return on equity as a factor is merely in line.
07:07 So our 300 base points premium to emerging markets
07:11 is not really explaining why our premium multiple is now,
07:16 say, close about 3% deviations above normal.
07:19 So I think the crux of the story remains about liquidity
07:22 dynamics.
07:23 And we started off with foreign liquidity.
07:26 And that, so far this year, has been a mild negative factor.
07:31 But then domestic liquidity continues
07:32 to be surprisingly positive.
07:35 And so to that extent, for us, where we are
07:38 is really a function of the liquidity conditions
07:41 here in the marketplace.
07:42 And where we end up in, say, 12 months, 18 months, for me,
07:47 more is going to be a function of what's
07:50 happening to domestic liquidity.
07:52 If domestic liquidity can sustain
07:54 at these $2.2 to $2.3 billion of natural inflow,
07:58 which we're seeing, clearly that's
08:01 supportive here for markets.
08:02 But whether it be the SEBI actions or RBI, et cetera,
08:05 if there is really--
08:06 if that leads to a tightening of liquidity conditions,
08:10 that then would point to downside, to markets.
08:14 Because as I say, purely on fundamentals,
08:17 EPS growth, return on equity, et cetera,
08:19 we are stretched as a market.
08:21 And that stretched kind of comment
08:22 is coming on expectations which are already
08:24 elevated across all the different sectors which
08:27 are looking at.
08:29 Earnings growth in itself is--
08:32 the relative growth is really in line.
08:34 It's not a support factor for the multiple.
08:39 OK.
08:40 And viewers, in some sense, if you look at the NIFTY
08:42 and if you look at the three-month, six-month,
08:45 nine-month, or 12-month return profile of the index,
08:50 it kind of exemplifies that.
08:51 India had a great move, let's say, for example,
08:53 in calendar year '23.
08:55 But by no stretch of imagination was India the best performing
08:58 index, if you will.
08:59 There were other indices which far outstripped the gains,
09:02 and which is, I think, kind of exemplifies
09:04 the point that Aditya is making, that India is a good market.
09:06 The fundamentals are great, but the valuations at the margin
09:09 are stretched.
09:11 And that is an issue.
09:12 So if top-down, Aditya, is an issue,
09:16 how to play the bottom-up story?
09:18 What is it that is standing out as the key--
09:24 how do I say?
09:25 What are the firsts amongst the equals?
09:29 Yeah, no, again, so this is also a hard question,
09:32 because 12 months back, 24 months back,
09:36 when we had these discussions, Neeraj,
09:38 we might have made a comment along the lines of,
09:40 if earnings is kind of where we're
09:43 going to allocate so on and so forth, that financials
09:45 is a sector where you see earnings upgrade risk, right?
09:50 Industrial, similar comment, where
09:52 there's upside to earnings estimates
09:54 is what we had kind of argued for.
09:57 Similarly with autos as well.
10:00 But now when you kind of look at where earnings estimates are
10:03 at, I don't have a comment for you.
10:06 So when you kind of look at financials as a sector
10:08 and kind of what's baked into consensus expectations,
10:11 there's a very sharp kind of uplift
10:13 in that kind of--
10:14 in earnings expectations for fiscal '25, fiscal '26.
10:18 At the margin, when you kind of speak to our financials team,
10:21 they would speak about whether it be kind of growth
10:24 normalization, credit costs being as good as it gets,
10:28 margin compression.
10:29 So even with financials, we've been seeing
10:31 kind of decent numbers, but we're still seeing cut sale.
10:35 Industrials, again, a lot of the kind of large auto backlogs
10:38 is only in estimates.
10:40 So the broader point about that was that,
10:41 whilst 12, 18 months back, it was easier
10:44 to give you a comment about earnings upside
10:47 in certain sectors, and that being a proxy for where
10:49 to allocate, when I could have zoomed out
10:52 and look at what's already baked into estimates nearage
10:55 across all the different sectors,
10:57 I'm not seeing clearly which areas you're going
10:59 to see upside to numbers.
11:03 So then the layer below this is then what we do, therefore.
11:06 We've got to kind of allocate 100 rupees across India.
11:09 It then kind of comes down to the bottom up
11:11 and very selective ideas.
11:13 So I don't have that generic sector level comment
11:16 to give you here today.
11:18 It was easier to do this maybe, yeah, as I say, two years back.
11:23 But as we sit here today, I think
11:24 it's very, very selective, focused,
11:27 looking at kind of incremental earnings,
11:29 where you have confidence there.
11:32 Those are some of the considerations.
11:34 Aditya, do you guys track auto closely?
11:37 And any thoughts here on how to best play the auto space going
11:45 ahead, because there are a clux of sub-segments out there
11:49 which people can pick and choose.
11:53 Yeah, no, just to kind of add to the previous comment
11:56 as well on this kind of EV policy
11:58 and potential implications, et cetera.
12:00 So when you kind of look at autos as a sector,
12:02 and India's share of global trade for within automobiles,
12:08 up until 2015, we were making kind of steady gains.
12:10 And then over the past, say, seven, eight years,
12:12 we've basically flatlined.
12:14 So we really lost out in terms of further market share gains.
12:18 So any of these type of policies--
12:20 and a lot of it has to be tied back to the fact
12:23 that we've not made much progress in that EV space.
12:26 So to the extent that we are going to be looking
12:28 to kind of address that, then maybe we
12:30 can be back again on this path of capturing global market
12:33 share.
12:34 But it has been a bit of an area of kind of underperformance
12:38 for me in terms of India's capture of global market share
12:42 because we don't develop that ecosystem.
12:44 So all these policies and kind of measures
12:46 which we're kind of pushing to kind of encourage
12:50 this local ecosystem, I think we are fairly constructive on this.
12:52 We're constructive on manufacturing in general
12:54 as a theme.
12:55 And within that, areas within these existing ecosystems,
12:59 whether it be pharma, autos, et cetera, stand out.
13:01 But I would just call out that these sectors have really
13:05 not captured incremental share in the past, say, a few years.
13:08 Yeah, autos--
13:09 But yeah, auto banks, I think, would be really interesting.
13:11 OK, so auto ancillaries, maybe.
13:13 But it's an interesting point you made that, yeah,
13:16 on the global scale, Indian autos haven't--
13:18 Indian pharma, I thought, save for the ones which
13:21 were facing the brunt of the US pricing pressure,
13:24 pharma has done reasonably OK on the global stage,
13:26 you would think, Aditya, or no?
13:28 And part two of my question, therefore,
13:30 is that while the generic makers have had a bit of a rally
13:32 already in calendar year '23, is there more in store there?
13:37 Or do you prefer the CDMO slash--
13:41 I mean, the other aspects of health care,
13:43 which is either hospital diagnostics, what have you?
13:48 Yeah, just on the first point, on the pharma--
13:51 in the share of global pharma trade,
13:52 we're actually flat-lined.
13:53 In fact, in the most recent year,
13:55 we've gone down a bit, despite the expectation,
13:58 let's say, two, three years back, that because of what's
14:01 happening in China, we see India pharma continue
14:04 to gain global market share, in particular in API.
14:09 Frankly, that's not yet happened.
14:12 So within our coverage, Neeraj, we actually
14:15 do like some of the larger traditional pharma companies,
14:20 which are now expanding their specialty chemicals portfolio.
14:26 That's kind of where our preference is.
14:29 I think CDMOs is an interesting opportunity.
14:31 It ties back to what I was trying to get at,
14:33 that when you think about global pharma trade,
14:37 China is well above India, or China is above India.
14:41 And if you were to close that gap,
14:42 it would be in that CDMO space.
14:43 And that could be interesting, but it's not yet
14:46 kind of playing out in estimates.
14:49 Within the hospitals and diagnostics space,
14:51 our analyst is less optimistic.
14:54 I think thematically, it's a really interesting space
14:57 to be positioned in.
14:57 But when you tie the thematic back to numbers and supply
15:01 demand pricing, we are less constructive there.
15:06 Some of the pockets, Aditya, which are coming up--
15:09 you mentioned CDMO.
15:11 I mean, these are pockets wherein companies
15:13 have to invest for a number of years
15:15 before maybe a really juicy return comes in.
15:19 And I think we're seeing that in some of the other sectors,
15:22 too-- green energy.
15:24 Maybe to an extent, defense was such a thing,
15:26 but now the order of flows have started coming in.
15:29 Do you think public markets are ready for some things
15:31 like this?
15:31 And what else, therefore, to your mind,
15:35 looks attractive enough from a sector which
15:37 has made investments or continues to make investments
15:41 and will arguably see stronger returns in the years to come?
15:44 For us, thematically, I think that the main point is
15:50 about scaling local manufacturing.
15:52 So local manufacturing to GDP is about 15%.
15:55 The aspiration is for that to be at 25%.
15:58 When you look at investment intentions in areas
16:01 like electronics and machinery, and when you scale this
16:04 compared to intentions over the past, say, 10 years,
16:07 we are--
16:08 the material we operate-- so when
16:10 you think about electronics and machinery,
16:12 investment intentions in those spaces
16:14 is almost like tenfold what has been announced in those sectors
16:17 in the past 10 years.
16:18 So I think that's kind of where we're
16:20 seeing a lot of incremental investment intentions that
16:23 then translates to CapEx and then potentially
16:26 into return-aggregative growth over time.
16:31 Other areas, we're not seeing that as clearly in New Realm.
16:35 So as I say, even within, say, areas like autos, et cetera,
16:39 it's not at a sector level we're seeing that trend specifically
16:44 kind of play out.
16:45 Renewables is an area where we are seeing investments
16:48 being made.
16:50 Intentions are high.
16:52 There's a strong kind of thematic backdrop.
16:54 There's a strong government push towards incentivizing
16:57 that sector as well.
16:58 But we still have question marks around the unit economics
17:02 and kind of does this work at scale
17:04 in a return-secretive manner.
17:06 So I think that needs to be de-risked.
17:08 We don't have a strong conviction view
17:11 that this is going to generate strong returns,
17:14 despite the kind of high CapEx kind of going into that space.
17:18 But yeah, those are some of the thoughts here around this.
17:21 But I think electronics and machinery is really leading
17:23 in terms of where investment intentions are at.
17:27 - Okay, just the last question there, Aditya, therefore.
17:30 Manufacturing, everything that has got great potential,
17:34 I mean, say for maybe chemicals and pharma,
17:35 which are going through a cyclical lull, if you will,
17:38 or were going through a cyclical lull,
17:40 almost everything which has got great potential
17:42 is being priced very heavily, right?
17:44 I mean, EMS companies, for example, very steep valuations.
17:49 And so does the strong growth make up for that?
17:52 Is that predictable in such long cycles?
17:56 And therefore, are global clients buying that story
18:01 at these valuations?
18:03 Sure, they could have bought it two years ago.
18:05 At these valuations for some of those expensive pockets,
18:08 are people buying those stories?
18:09 - I think it's really, really selective.
18:15 And you're correct that these spot multiples
18:18 look like really punchy.
18:20 And I think where you are seeing kind of buying
18:24 coming in incrementally,
18:26 as you kind of started the call as well,
18:28 so India is a market you're seeing,
18:30 at least in the past couple of months,
18:31 foreigners have been reducing their kind of exposure here,
18:34 right, at a market level.
18:36 Within that, when you think about, say, small mid-caps,
18:38 where a lot of these manufacturing companies are,
18:40 valuations are further kind of elevated, so on and so forth.
18:43 And some of this is more on the narrative and the thematic
18:46 rather than being on the tie back
18:49 to fundamentals and numbers.
18:50 So where the tie back is not there,
18:52 I think that's kind of largely kind of a no-go zone,
18:55 at least today.
18:57 But I think it's about getting confidence
18:59 in that 10-year kind of growth story.
19:01 And therefore, like even if my current multiples
19:04 again, say 60, 70 times,
19:05 if I'm fairly comfortable that this kind of,
19:07 this multiple can kind of collapse to whatever,
19:09 15 times, 20 times in that medium term time period,
19:13 that's still potentially interesting, right?
19:15 But it's a very selective comment,
19:17 you know, it's not an in-mass buy manufacturing
19:20 because it's a strong team.
19:22 - Got it.
19:26 Aditya, lovely talking to you as always.
19:28 Thanks for making some very nice points.
19:30 Really appreciate your time,
19:31 but look forward to have you more often, frankly.
19:33 - Thanks, Suresh.
19:36 Thank you so much for having me.
19:36 And yeah, it's a tough market.
19:39 We are trying to navigate this space
19:41 and would love to kind of engage more.
19:43 - Thank you, thank you.
19:44 That's Aditya Suresh
19:46 and some very interesting points, viewers.
19:47 Hope you find it as interesting
19:49 as much as I enjoyed doing it.
19:51 Thanks for tuning into yet another episode
19:53 of The Talking Point.
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