Last week I got a primer on investing in India from a local. I like looking at things that are off the map, and India definitely qualifies. I could only find two academic papers on whether their stock market is efficient! It isn’t. For one thing, there appear to be day-of-the-week effects! Now I am looking for more anomalies.
In terms of valuation, the Indian market has pulled back quite a bit. It’s a two tier market. You have some stocks that have not been affected. Then you have others that have been absolutely hammered.
Apart from SMCG and pharma companies… these are the only two positive sectors for the year. Anything related to interest rates… property developers, infrastructure developers, power companies. A lot of factors are coming forth: interest rates are high, inflation is high, wages are high. You have policy backlogs. It’s almost a perfect storm coming through the typical headline. The view on the street is disgust. So no one wants to buy.
One sophisticated investor I know is taking 75% of his funds out of the US and moving to the Indian market.
The mid-cap segment, just given the growth tailwind that we have here… I think it’s just best to focus on that.
I have looked at all the institution firms who are registered to buy Indian shares. Institutions who wanted to go into Indian are already there. They have been allowed to buy before this new piece of legislation. The question is whether the retail investor is going to buy.
There have been outflows from mutual funds in the US. I think the slow-grinding trend of capital flowing from the developed market to the emerging market is important. The feedback loop will set in. Perception will start taking over reality. Even if things are cheap, people don’t want to invest. But at any moment people might change and say they want in.
India is a shallow market. If you look at the 2008-2009 crash, the index went from 22,000 down to about a third of what it was. Between 2003 and 2008, it did 50% compound. This is just the index. Even if you include the crash of 2008 and 2009, it has done 28% compound. Someone did a study of all the stock markets in the world and concluded that India was the only market that beat gold over the past 15 years.
The growth is just insane. The organic growth… there’s so much pent up demand. The only thing holding it back is infrastructure. You go anywhere here… there’s no recession in India. I don’t see recession. You can go anywhere in India and you will see lines to pay money.
70% of the economy is farmers and agriculture. The other 30% are in the metropolitan areas. These are the ones that have managed to increase their earnings by a huge amount. They have purchasing power. The demand is there. And the other thing is we don’t have much leverage in India. People who buy a house, they buy with cash. Cars. Anyone who’s buying a Beamer or Merc. Rule of thumb. If you have someone here who has a BMW 3 Series for $50,000 US, he’s got to be worth at least $10 million. What happens is he typically discloses 10% of his income. 90% of it is iceberg money and black money. Work it backwards.
Indians are frugal… there’s a really high savings rate. Maybe not as high as China. They love to spend money on education. I’m interested in those plays, but there aren’t too many of those.
Indians are born value investors. If an Indian walks into a Louis Vuitton store and he likes something, he will think that he can get it cheaper if he goes to London or New York. He has this delayed gratification if he thinks he can get it cheaper. There’s always this constant weighing of whether I’m getting enough for my money. Even someone who is worth $5 million will make sure that he gets every drop of petrol at the petrol station. Getting value for your money is deeply ingrained.
That’s why Western companies who come into India with the Western pricing really struggle. It takes them a few years to figure it out and they reprice everything. The flip side is… yes you have lower prices, margins are less, but you get the multiplier effect of the volume. So your asset turnover is much higher. You don’t have inventory sitting there idle. It just rotates so fast.
When you short, it has to be for a day at most. Options have a very short duration… three months.
The market is not as efficient because the market participants are not as sophisticated. There’s no freely available source where you can get information on a company that is accurate. The database is too expensive for your small investor. The big guys have the database, but the small companies are too small for them. So you see interesting dislocations there.
I think the Indian market is a very emotionally driven, momentum market. 22,000 down to less than 8,000. It is a market that goes up and down a lot. So when the index is doing 300% on the way up, you can imagine what some of the stocks are doing inside. Primarily this is due to foreign investor inflows and outflows. In times of panic, the institutions outside of India pull their money out, sucking out the liquidity and the market just collapses. You can play this to your advantage. You wait for times of great dislocation. In times like that, you just go all in. Nothing in the developed market is going to perform like this.
Special situations might be interesting to look at in India. Open offers where a company is buying back shares, debt restructuring, delisting.
If I look at the US vs. Indian markets, there are some strange effects. You have too much money chasing too few assets. If you look at a company like VIP Industries, which makes suitcases, so the equivalent of Samsonite… look at the chart. You get crazy valuations, but then it collapses. India’s Warren Buffett bought into VIP Industries… that could be why the stock went up 10 times. Then you have situations like Jubilant Foodworks, which holds the franchise for Domino’s Pizza. I think the market cap is higher than the market cap of Domino’s Pizza in the US. And we probably have a small fraction of stores vs. what you guys have in the US.
You really need to be more of a GARP investor or momentum investor in India. And if you go after cigar butts, you might not do as well. A lot of cigar butts remain perpetual cigar butts. There’s plenty of stocks like a land bank worth 1,500 crores, stock’s trading at 300. And it just stays there because the market is pricing it right. The guy sitting in between won’t monetize the assets.
The news of an event actually gives you more of a bang than when the event happens. Let’s say there’s an announcement that a company is opening a factory. That will make the share price go high. Come the time that the event actually happens, the shares go down. I think the market tends to get bored very easily here. Long term in India is six months to one year. Long term investors have an advantage because of the timeframe. It does require a different kind of stomach.
You have State Bank of India, which is the bank with the largest franchise in India. It’s down from 3,000 to 1,800. You have to remember banking in India is one of the most conservative and regulated. Limited in what they can invest in. Therefore, it’s quite safe. You still have these kinds of drawdowns.