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Stewart McAndie: My name is Stewart McAndie, and I'm a member of the Ashmore UK Intermediary client team. We hope you're all well, and thank you very much for joining today's Ashmore webinar, 'How to Find Stock Ideas in the Indian Equity Market Right Now’.

Today's speakers are Rashi Talwar Bhatia, who is the Lead Portfolio Manager of Ashmore's Emerging Market (EM) Equity Strategy, and Gustavo Medeiros, Ashmore’s Global Head of Research. Okay, over to you, Rashi and Gus.

Gustavo Medeiros: Well, thanks Stewart. It is a pleasure to have Rashi here with us in London. And it's a pleasure to have the opportunity of hosting another webinar roughly nine months after the first one. So, welcome to London, and thanks for having, thanks for being here with us.

Rashi Talwar Bhatia: Thank you.

Gustavo Medeiros: Perhaps we'll start with a question we get all the time from clients when we’re on the road: Where are we in India versus China? A lot of our existing clients will know that in our global funds in Q1 this year, on a tactical basis we moved to a small overweight China, and we moved to a more organically small underweight India over the course of 2023 as we took profits on quite a lot of small and medium-cap plays that we had in our global funds. We also added some large-cap names that were less valued. So, can you walk us through the opportunity set in terms of the different small-cap, large-cap, mid-cap in India, and why i it still makes sense for long-term investors that are thinking in terms of asset allocation to have a dedicated exposure to India.

Rashi Talwar Bhatia: Yes, thank you, Gus. So, a relevant question today, and clearly given how India has performed over the last couple of years, we really are at a point where the large-cap indices are trading at 20 times one year forward earnings. That's about a 10% premium to the historical average. But in the mid-cap space, that's at 29 times one year forward earnings, and it's about a 35 or 37% premium to its historical average. And I think in the small-cap space, it's at 20 times, again, one year forward earnings. And the small-cap space has traditionally traded at a discount to the large caps. 

The Indian markets, as a standard beta play or a standard market investment may not exactly be the most market-ready to give you the maximum re-rating per se. I think a lot of that rerating may be done right now unless we see a healthy correction that comes in.

So from a tactical point of view, I think our Global EM fund is looking at the returns that China gives you as a market index versus India, and while India is already there, therefore given the valuation for where China is, obviously it looks attractive. But that's really not how we manage money in India, and how we run the India-only mandates for Ashmore. 

We look to take advantage of the inefficiencies and the mispricing that the Indian market creates over a period of time, and the alpha opportunities that the Indian market provides.

It may sound a little counterintuitive that India is such a large market, but that it is still inefficient. Yes, it has a market cap of $4.4 trillion, and there are 525 billion-dollar companies in India. A lot of our stocks have over 50 analysts, but it is still a market which is inefficient in some ways. And there are enough mispricing opportunities in the large-cap space as well as the small and the mid-cap space – maybe more in the large-cap space today than the small and the mid, given where those valuations are. 

Therefore, that's what we try to do. We try to find good stocks or companies which are either going through a difficult time or going through something either external or internal which is creating some kind of disruption, where the market is probably overreacting in some way and mispricing the stock. And therefore it is trading at a significant discount to its intrinsic value. That's the opportunity we're trying to get.

So, stable markets work for us. If there's a healthy correction, I'm not that much against it, and hopefully we can continue to do what we do and create alpha in the market that way.

Gustavo Medeiros: Absolutely. I think that India is the clearest case for a long-term allocation within EM on a standalone basis. We discussed in the previous webinar and at length with clients that all the structural drivers for healthy market returns are there. You have political stability and well-implemented policy. You have infrastructure investment and capital expenditure (capex), and you have a very elevated GDP. So you have all the right signs. I think that's a lot of value in the case of India, which is one of the broadest and deepest equity markets in the world, and the second broadest and deepest after China, and when you're looking to some measures, it's very comparable to China.

I'm really interested in the sectors and themes that you are playing at the moment. I remember in the previous webinar, you said you were focusing on the two-wheeler segment as a mean of capturing rebounding consumption on the rural economy, which was relatively cheap, and not a lot of people were paying attention to that. How did that work since then, and is that something that's still your focus? And if not, what are you looking at? What are the opportunities?

Rashi Talwar Bhatia: You're right, and you remember well. The position we took out in two-wheelers that we talked about nine months ago played out pretty well for us. The two-wheeler companies we owned, have returned about 96%, from the points where we bought them, beating the index, their peers, even the automobile sector. So they did outperform. 

It doesn't happen every time, but when it does, we can take the wins. 

But again, right now, I think there are more opportunities in the large-cap names – such as the large private sector banks – than in the small and mid-cap names.  I think that's just a function of where valuations are, and where you find more mispricing versus the small and mid-cap names. 

The large-cap private banks are a place where I truly believe there is opportunity right now. The other sector, which we invested in not very long ago and again is a place where there is a lot of alpha to be made, is the larger names within the life insurance sector. Each one for its own specific reason in terms of a company as well as the sector as a whole. 

In some cases, there are gains to be made because of more branch expansions, for example, that are happening because of parent-specific issues. In other cases, there is a change in terms of the management, which is leading to some change in the mix of the products, which is getting more growth along the way. But those are benefits as well. 

An area we're really interested in and surprisingly enough is currently at a low instead of a high in these markets, is speciality chemicals. This is a sector which is currently benefiting from the China Plus One supply chain move to India. 

Because of the chemical cycle, where there is currently inventory destocking, earnings for these companies are actually subdued, or they're hurting currently. So, it's a great time to buy them because over a four or five-year period, I do believe the demand-supply dynamics are going to shift significantly in their favour. So that's another one we've brought into the portfolio. 

I've given you three sectors, and the fourth is the pharmaceutical sector and especially on US generic pharma. There are Indian companies that were exporting to US generic pharma, and for four or five years have been seeing price action and price cuts all over the place. Somewhere last year, we started to take a call that valuations seemed to have bottomed out and were starting to improve. We took a few positions in companies that were specifically exposed to US generic pharma, and that seems to be playing out right now. 

If you're asking me where India is currently probably at in this market, in terms of premium valuations, not only to its own history, but even definitely to other Emerging Markets, are we finding opportunities where we think we will generate alpha? Absolutely. I’ve just named four sectors which we own in our portfolios, that we're actually very bullish on, and I think that's how we choose to do it.

Gustavo Medeiros: Makes sense. Typically when everybody's very bullish, and everyone is waiting for a correction, this correction takes a long, long time to come. So, if you are bullish on the structural story, you have to have exposure and just manage it smartly.

You mentioned China Plus One in the chemical sector, which is an important and interesting theme. It is also definitely a secular theme that is going to keep on developing in favour of India. Politically, no matter who is going to win elections in the US in November and who is going to be in office there in 2025, we know that China Plus One is going to be playing out. Very few countries have the scale or the capacity and the relatively low cost of production that India has. Historically, a little bit of India’s problem has been the lack of infrastructure, right? Companies were always complaining about infrastructure. A lot of the improvements from the Modi administration have been to make more room in the budget to spend more on infrastructure. 

Tell us a little bit of your view on the ground on how this is evolving. We get quite a lot of high-profile headlines of multinational companies investing in India. But give us a little bit of flavour on the ground and how that's going to be unfolding in the next couple of years?

Rashi Talwar Bhatia: Gus, India is always a mixed bag, right? We will disappoint the optimists, and we will surprise the pessimists. So, that always continues. 

Let me start with the wins that we have in the tech space. 14% of iPhones are now assembled in India. That is a win. We are seeing a lot of activity in the EMS space. Auto components has always been a big story and continues to grow from strength to strength in that space. 

One of the spaces where India hasn’t managed to really do much, is within the really labour-intensive areas, and that's a surprise given the number of people we have in India. 

Take textiles, for example. We've not managed to make the same inroads into the textile space as we have with tech, auto components, or heavy equipment machinery. We're still importing a lot of that, and it's a significant part of India’s import bill.

But from the government's perspective, I think they've done the right things. The Production Linked Incentives (PLI) scheme has been extremely controversial, and questions have been asked on how it works given the margin companies are getting from the government. But let’s not forget how the auto component network in India mushroomed, which was Suzuki and the government of India setting up Maruti Suzuki. At the time, the government of India was incentivising auto component companies to set up factories, and they did this over a period of time. We’re talking about a period of 40-45 years, and today we have an auto component network in the country, which is remarkable, and supplies globally practically every auto component, to every car there is, including Tesla, Mercedes-Benz, BMW, you name it.

I think the PLI scheme will achieve the same success, but you have to view these changes over decades... They're not going to happen in three or five years. You'll start to see that in three or five years, the requirement for the subsidy might go away.

As of right now, those are sweeteners the government is trying to provide so multinationals coming in or even the Indian corporates trying to set up these factories for exporting, get that incentive or do not get penalised or pushed down by frictional factors. I think to some degree we were seeing that work, but is it working across all sectors and in every space? No.

But I think that's fine, you don't have to win everywhere. 

Gustavo Medeiros: Absolutely. Very good. Well, that ties in with some of the top-down analysis I've been doing and some of the reports I've been reading. I think in December or January this year, the Bank of International Settlements posted a report talking about the evolution of global supply chains, and their conclusion was the global supply chain has elongated, right? And then you overlay that with the analysis of Raghuram Rajan, former Governor of the Reserve Bank of India, who has been criticised the PLI scheme, for example.

It is exactly the picture that you painted, but I think in terms of the first stage you start assembling something in India with components imported from China, Vietnam, South Korea, Taiwan, etc. But over time, you're going to build this ecosystem, like in the car industry, in which you have thousands of companies today as part of a deep ecosystem. That's historically how most countries have evolved their manufacturing sector. 

But I think what is interesting is that the manufacturing sector is expanding, with more capex that is both infrastructure-led to support the manufacturing sector, but from the private sector in the manufacturing sector. In our analysis, and in long-term studies, this has a much bigger impact on the long-term growth profile in terms of GDP, than the same investment in the service sector or in other industries. So I think it's important to see that taking place and evolving. 

In our last webinar, we also talked a little bit about roads. It was interesting to hear that India’s government is actually getting heavy infrastructure out of the way with quite a lot of efficiency. Tell us about that.

Rashi Talwar Bhatia: I'm laughing because I think as far as India is concerned, we've just been building. You go to any city, and there's construction happening. We're building the metros, flyovers. We're building everywhere, Delhi, Mumbai. We're just building roads. 

I recently used the Atal Setu, which is the largest highway over water built in India, to go from Mumbai to Pune. It cuts down travel time by 25-30 minutes for a two or two-and-a-half-hour journey. That’s a lot of time saved, right? We've got the coastal road in Bombay, and anybody who knows going from say, midtown Worli to South Bombay is a 45-minute drive – it's now seven minutes.

Gustavo Medeiros: Wow.

Rashi Talwar Bhatia: It is spectacular. For those of us who've grown up living in Bombay, we never anticipated we would see this journey get compressed to seven minutes. And we've only opened part of the road as yet. And these are efficiency gains, productivity gains that you're seeing in various spots. And I think as we see the metro open in Mumbai, that's going to be another significant improvement in productivity and efficiency for the people over there. We're seeing that happen all over the country.

So yes, you're absolutely right. I think the government's doing a lot, even in terms of ports and building roads from ports, and railroads, which are evacuating material faster. And we can see the impact of that on India’s Air Quality Index levels, which has created a lot of noise over the last few months as well, not only for Delhi, but Mumbai as well. But we're getting there.

And I think you're absolutely right. The multiplier effect that it has on growth and then GDP in terms of capex is much larger. And as you know, we are going in for an election. It seems like we're going to get the third term of the incumbent government. I have never in my life seen India vote the incumbent government in for a third term. 

It’s not done but it seems pretty likely at this point of time. And the consistency this brings to economic policy, for things like PLI, Make in India, continuing the pace of infrastructure and getting things done, well the benefits of this will be visible in the third term.

Gus, I’m sure you understand as much as I do, coming from another Emerging Market, that we always have a one-term strong government, the second term it’s a weak government, and by the third term, we have the opposition in, and all policies are then being rehashed and undone. I think a third term of an incumbent government gives the kind of policy continuity India has not seen before. And I think that is something to look forward to.

Gustavo Medeiros: Particularly encouraging, a third term of a government that we know has an established track record in economic policy. Most likely, these economic policies will remain in place. I think that's the key.

It’s very interesting that you mentioned the multiplier to GDP because London is all the time under construction as well, but it's not really under construction. It's getting repaired, so there's no multipliers here. 

Looking at China, infrastructure investment is very high, but the multiplier to GDP is much, much lower. So India is in that phase where the more infrastructure there is, the higher the multiplier will be. The effect will be very strong. And that encourages me that policy continuity is going to lead India to become, most likely within the next decade, the most important contributor to global GDP growth, not only EM.

Rashi Talwar Bhatia: While you were saying this, it just hit me that it is because we are still dealing with so many bottlenecks that this capex is unlocking or unbottling, for the lack of a better word. Whereas China doesn’t have the need for that many roads because it has already done a lot. So the multiplier effect is smaller, as they are not unlocking something that's stuck. In India’s case, it is still creating productivity and efficiency gains because of the time saved or quicker access. I think that's where we get that multiplier effect.

Gustavo Medeiros: Yes, very good. Now you touched on elections. We are very close to starting the election process if we haven't already started, but it's going to be concluded very soon. What should we expect? Is it a multi-stage process with different states voting at different times, so when should we start getting results? When are we going to have an idea of the overall composition of parliament, and what are people expecting? And does it matter at all? Because I have no doubt that Narendra Modi's BJP is going to get a majority. Does it matter how many seats does he get, etc? Give us some impression. 

Rashi Talwar Bhatia: In the current polls, various agencies are between the NDA, which is BJP plus its allies, in the region of, say, 370 seats. Some are saying 400 seats. And these are large numbers. If the December 2023 elections were anything to go by, where BJP came in and swept, I think that's why these numbers have become stronger. I wonder whether that predicted outcome has become a little too optimistic at this point of time, because between 370 to 400 is expecting NDA to literally win everywhere. But there are states including the southern states, where they do not have as much of a presence. I think Punjab will also be a challenge. Does the NDA have this election? I think so. I'm not really debating that. Could we see a number that would slightly disappoint the current consensus Probably. Does it really matter? No, because I think NDA will still form the government, but it might be a bit of a sentiment or a mood killer, a mood killer at that point in time. Let's see. Maybe that's the opportunity for a correction. A healthy correction is always good, and I think specifically a correction more in the small and mid-cap space at this point might be healthy.

Gustavo Medeiros: Very good. Excellent. Well, Stewart, do we have any questions from the audience?

Stewart McAndie: Yes, thank you both. We've had a couple of questions which were already answered, but you did just allude, at the end there, Rashi, to small and mid-cap. You mentioned some sectors at a higher level that you find attractive, and obviously markets have done pretty well. How are you positioned in terms of market cap, and where does that fit in the context of your portfolio allocation historically?

Rashi Talwar Bhatia: Yes, a great question. Historically, we have had 40 to 45% of small and mid-caps in the portfolio. And until about 18 months ago, that's where we were. But currently we are at 25% and we'd be closer to 20% depending on what mid-cap classification you look at. Like I said, that’s a function of the fact there is lesser opportunity in the small and mid-cap space right now, given the level of valuations and, to some degree, the speculative activity that we've seen in that space. 

Over the last 18 months, a lot of our small and mid-cap stocks have rallied, and prices have gone up significantly above their intrinsic value. At this point, when we continued to re-evaluate those prices, we sold and naturally, given we're bottom-up stock pickers, we found more value and opportunities in the large-cap space, where stock prices were trading at a discount to their intrinsic value. 

Whether it be large private sector banks, some of the large US generic pharma spaces, etc, that's where we redeployed. Right now, we are a lot more weighted towards the large-cap than we otherwise have been historically. I think if we see the kind of potential correction that we've been talking about, we will use that opportunity to move back into some of the names that we are monitoring, where we are waiting for the right time.

Gustavo Medeiros: Very good. Fantastic.

Stewart McAndie: I think that frames the discussion quite well. Thank you both, Rashi and Gustavo, for your time today. And to all attending, thank you for joining today's webinar, 'How to Find Stock Ideas in the Indian Equity Market Right Now'. If you have any questions or would like any follow-up information, please contact your Ashmore representative, and we'll be sending out a replay of the webinar post the event. So, thank you very much for your time. That concludes today's webinar.

Rashi Talwar Bhatia: Thank you, guys.

Gustavo Medeiros: Thank you.