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- [00:01]
A
Welcome to Thoughts on the Market. I'm Riddham Desai, Morgan Stanley's Head of India Research and chief India Equity Strategist. Today, the once in a generation investment opportunities Morgan Stanley sees in India. Joining me in the studio, Arjun Saigal, co head of Morgan Stanley Investment Management India Private Equity and Chaitanya Khandari, Morgan Stanley Investment Management Head of Macros and thematic research for EM Public Equity. It's Tuesday, September 23rd at 4pm in.
- [00:32]
B
Mumbai and 6:30am in New York.
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A
Right now India is already the world's fourth largest economy and we believe it's on track to becoming the third largest by the end of this decade. If you've been following our coverage, you know Mongul Stanley has been optimistic about India's future for quite some time. It's really a perfect storm in a good way. India's got a growing young workforce, steady inflation and is benefiting from some big shifts in the global landscape. When you put all of that together, you get a country that's set up for long term growth. Of course, India is also facing pressure from escalating tariffs with the US which makes this conversation even more timely. Chaitanya Arjun, what are the biggest public and private investment opportunities in India you'd highlight?
- [01:29]
B
I'd say in public equities. There are five broad thematic opportunities in India. Financialization of savings and structurally low credit costs, consumption with an aspirational consumer and a growing middle class, localization and supply chain benefits as a China plus one destination digitization with the India stack that is helping to revolutionize digital services across industries and capex revivals in real estate and industrials, especially defense and electrification.
- [02:04]
C
I'll just break down the private markets into three segments, the first being the venture capital segment here. It's generally been a bit of hit or miss, some great success stories but but there have also been a lot of challenges with scale and liquidity coming to the large cap segment. This is the $100 million plus ticket size which attracts the large US buyout funds and sovereign wealth funds here. Target companies tend to be market leaders with scale, deep management strength and can be pretty easily IPO'd and we have seen a host of successful PE backed IPOs in the space. However, it has become extremely crowded and given the number of new entrants into the space and the fact that regional Asia funds are allocating more of their dollars towards India as they shift away from China. The third space which is the mid market segment, the 50 to $100 million ticket size is where we believe lies the best risk reward. Here you're able to find mid size assets that are profitable and have achieved market leadership in a region or product. These companies have obvious growth drivers, so it's pretty clear that your capital is able to help accelerate a company's growth path. In addition, the sourcing for these deals tends to be less process driven, creating the ability to have extended engagement periods and not having to compete only on price. In general, it's not overly competitive, especially when it comes to control transactions. Overall valuations are more reasonable versus the public markets and the large cap segment. There are multiple exit routes available through IPO or sale to large cap funds. We're obviously a bit biased given our mid market strategy, but this is where we feel you find the best risk reward.
- [03:49]
A
Jitanya, how do these India specific opportunities compare to other emerging markets and the developed world?
- [03:56]
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I'll answer this question from two perspectives, the macro and the markets. From a macro perspective, India, as you said, has better demographics, low GDP per capita with catch up potential, low external vulnerability and relatively better fiscal dynamics than many other parts of the world. It is a domestic driven story with a domestic liquidity cycle to support that growth story. India has less export dependency compared to many other parts of the emerging and developed world and is a net oil importer which has been under pressure actually positively impacting commodity importers. Reforms beginning in 2017 from demonetization, GST, RERA and other measures to formalize the economy is another big difference. From a market standpoint it is a sectorally diversified market. The top three sectors constitute 50% in India versus around 90% in Taiwan, 66% in Brazil and 57% overall in EM, aided by a long tail of sectors. India screens as a less concentrated market when compared to many emerging and developed markets.
- [05:20]
A
And how do tariffs play into all this?
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B
About 50% of exports to the US are under the 50% tariff rate net net. This could impact 30 to 80 basis points of GDP growth. Most impacted are labor intensive sectors like apparel, leather, gems and jewelry and through tax cuts like GST and monetary policy, government is going to be able to counter the first order impacts. But having said that, India and US are natural partners and hence this could drag on and have second order impact. So can't see how this really eases in the short term because neither party is too impacted by the first order impacts. US can easily replace Indian imports and India can take that 30 basis point to 50 basis point GDP impact. So this is very unlike other trade deals where one party would have been severely impacted and thus parts were created for reversals.
- [06:18]
A
What other global themes are resonating strongly for India? And conversely, are there themes that are not relevant for investing in India?
- [06:27]
B
I think broadly three themes globally are resonating in India. One is demographics, with the growing cohort of Millennials and Gen Z leading to their aspirations and consumption patterns. India is a large young urbanizing population with a large share in these demographic cohorts. Supply chain diversification, friends shoring, especially in areas like electronics, technology, defense. India is an integral part of that ecosystem and industrials globally are seeing a revival, especially in areas like electrification with the increased usage of renewables. And India is also part of that story given its own energy demands. One of the themes not relevant for investing in India is the aging population, which is one of the key themes in markets like North Asia and Eastern Europe where a lot of the aging population drivers are leading to investment in consumption patterns. And with the AI tech revolution, India has not really been part of the AI picks and shovels theme like other markets in North Asia like Korea, Taiwan and even the Chinese hardware and Internet names globally. In selected markets utilities are doing well, especially those that are linked to the AI data center energy demand, whereas in India the sector is is over regulated and under indexed to growth.
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A
Arjun, how does India's macro backdrop impact the private equity market in particular?
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C
So today India has scale growth, attractive return on capital and robust capital markets and frankly all of these are required for a conducive investment environment. I also note that from a risk lens, given India being a large stable democracy with a reform oriented government, this provides extra comfort of the country being an attractive place to invest. You know we have about $3 billion of domestic money coming into the stock market each month through systematic investment plans. This tends to be very stable money versus previously where we relied on foreign flows which were a lot more volatile in nature. This in turn makes for some very attractive PE exits into the public markets.
- [09:04]
A
Are there some significant intersections between the public and private equity markets?
- [09:08]
C
It tends to be quite limited, but we do see two areas, the first being pre IPO rounds which have been taking place recently in India where we do see listed public funds coming into these pre IPO rounds in order to ensure a certain minimum allocation in a company. And secondly we do see that in certain cases PE investors have been selectively making pipe investments in sectors like financial services which have multiple decade tailwinds and require regular capital for growth. Unlike developed markets, we've not seen too many take private deals being executed in India due to the complex regulatory framework this is perhaps an area which can open up more in the future if the process is simplified.
- [09:52]
A
Finally, as a wrap up, what do you both think are the key development and catalyst in India that investors should watch closely?
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C
We believe there are a couple of factors, one being rupee depreciation. Historically this has been at 2.5 to 3% and unfortunately it's been quite expensive to hedge the rupee, so the best way to address this is to sort of price it in. The second is full valuations. India has never been a cheap market, but in certain pockets valuations of listed players are becoming quite concerning and those valuations in turn immediately push up prices in the large ticket private market space. And lastly, I would just mention tariffs, which is an evolving situation.
- [10:36]
B
I would add a couple more things. Macro equilibrium in India should be sustained as India has been in one of the best positions from a macroeconomic standpoint. Private sector capex is key to drive the next leg of growth. Higher opportunities for the youth to get productively employed is critical in development of an economy and India has always been in a geopolitical sweet spot in the last few years and with the tariff situation that needs some resolution and close monitoring. All of this is important for nominal growth, which ultimately drives nominal earnings growth in India that are needed to justify the high valuations.
- [11:22]
A
Arjun Jitania thank you both for your insights.
- [11:26]
C
Great speaking with you. Ridham.
- [11:27]
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Thank you for having us on the.
- [11:29]
A
Show and thanks for listening. If you enjoy thoughts on the market, please give us a review wherever you listen and share the podcast with a friend or colleague today.
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D
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