India Has Produced Some Of The World's Best Performing Stocks In The Last Two Decades, Goldman Sachs
On today's episode, financial journalist Govindraj Ethiraj talks to Anil Agrawal former IPS official and former...29 Jun 2023 5:30 PM IST
- <00:46> India has produced some of the world's best performing stocks in the last two decades, Goldman Sachs.
- <08:15> Air conditioners are mostly made with imported parts, that's changing with Anil Agrawal
- <18:53> Why are companies sitting on so much cash? Should they give it out? with Hetal Dalal
- <29:38> And Hmm..airlines have been asked to self-monitor air fares, what does that even mean?
TRANSCRIPT
NOTE: This transcript contains only the host's monologue and does not include any interviews or discussions that might be within the podcast. Please refer to the episode audio if you wish to quote the people interviewed. Email [email protected] for any queries.
Good morning, it's Tuesdsay morning, the 6th of June and I'm Govindraj Ethiraj with The Core Report, coming to you from Mumbai, India's financial capital.
India has produced some of the world's best-performing stocks in the last two decades, Goldman Sachs.
Air conditioners are mostly made with imported parts, but that's changing.
Why are companies sitting on so much cash? Should they give it out?
And Hmm... airlines have been asked to self-monitor airfares, what does that even mean?
Goldman Sachs
After investment bank Morgan Stanley put out a glowing report on a 10 steps + 10 outcomes report that was entirely future focussed, another Wall Street giant Goldman Sachs has put out, within a few days as it happens, an equally or more glowing report on the India opportunity. The only difference is Goldman looks at the definite past versus Morgan's likely future.
Goldman has said in a detailed report titled Investing in India's medium-term growth story: Identifying potential multibaggers that more than half or 54% of the NSE 500 stocks or 269 stocks generated 10-bagger returns or 10X returns within a rolling 5 -year period over the past 20 years.
Goldman studied 6,700 stocks to arrive at this conclusion and significantly, India had the largest proportion of multi baggers among 10 major emerging and developing markets.
Goldman says India offers compelling long-term beta and outsized alpha opportunities. Within EM India's economy has grown 7-fold in the past two decades, delivering a nominal GDP CAGR of 10%.
Equity returns have matched this strong economic performance, with BSE 200 offering 16%/13% annualized returns in local currency/USD terms, almost double the 7% offered by the MSCI EM index. MSCI by the way stands for Morgan Stanley Capital International.
Some more numbers, yes I know there are many.
It took 54 months for Indian multi-baggers to reach their peak, achieving a median performance of 24X dring their 5-year period.
60% of multi-baggers saw 20% revenue growth and 30% profit growth.
Very very important.
Half of them had an initial market cap of less than $50 million - if that tells you what or how to pick going forward and maybe what not to...like overpriced IPOs.
The 269 multi-bagger stocks all share a number of the following traits:
1) high realized growth rates;
2) high capital return ratios;
3) mid/small-cap bias;
4) inexpensive starting valuations;
5) domestic sector orientation; and
6) high promoter holding.
As a comparison, China (MSCI China) and Taiwan (TWSE) markets had only 18% while US (SPX) and Japan (Topix) had 16% stocks generating 10-bagger returns, one-third of the proportion of the stocks in India, said Morgan Stanley.
Interestingly, Goldman says the six EM markets in its study (India, Korea, Brazil, South Africa, China and Taiwan) on average had 30% of their local benchmark stocks generating 10-bagger returns.
The 4 developed markets (US, Japan, Europe and Australia) on average had only 20% of the stocks delivering multi-bagger returns.
So if you had the stomach, or perhaps still do, India is a pretty sound bet to invest in.
So what is the strategy going forward…Goldman says crises like the 2001 dot com bubble or big dips were good points to enter the markets. Perhaps Covid19 in April 2020 was a good point too, though I didn't notice a mention possibly because of recency and obviousness.
Goldman has identified several industries and sectors.
It points out that sectorally, domestic cyclical sectors (investment and consumer cyclical) have produced the largest number of multi-baggers (54%).
Specifically, cement, chemicals, capital goods and consumer durables and retail have seen the largest number of multi-baggers. While some multi-baggers also belonged to non-domestic sectors (IT/exporters, commodity cyclical), the majority of the multi-baggers were from domestic cyclical sectors in 70% of the years over the past two decades.
This suggests a strong tilt towards domestic cyclicals, across multiple periods historically.
Going forward, it says a stable macro and improving microenvironment creates a runway for strong, medium-term growth in the country and thus themes with explicit policy support, energy transition and import substitution including through the productivity linked incentive or PLI scheme to which I will come back to after this report.
Goldman highlights overarching themes like Energy security/self-sufficiency; import substitution and supply chain security (under the broader Make-in-India initiatives); pick up in manufacturing and capex cycle;
still large growth headroom in select consumption sectors like QSR (supported by drivers such as rising disposable incomes, urbanization and favourable demographics) and high-income consumption; digitalization of consumption and services (across digital payments, food delivery and online travel), formalization of credit, financialization of household savings and healthcare services.
And some specific areas are broadline retail, tires & Rubber Construction & Engg. Construction Machinery Automotive Parts & Equipment Textiles Construction Materials Hotels, Resorts Div. Real Estate Activities Internet/Media & Entertainment, Apparel Retail, Household Appliances Real Estate Dev
In all these sectors the 3-year (CY23-25) Earnings CAGR above 15%
So which are these stocks that made Indian markets shine in the the last 20 years.
I made a list of the the top 10 multi baggers…
Westlife Foodworld, MMTC, Praj Industries, JM Financial, Patanjali Foods, Phoenix Mills, Capri Global Capital, KEI Industries, Delta Corporation and Balkrishna Industries.
Followed by another 10, and here is where it gets interesting..Lupin Laboratories, Godrej Industries, NCC, Ratnamani Metals and Tubes and Symphony, Kalpataru Power, Caplin POint Labs, Avanti Feeds, manappuram Finance and Vedanta. See some older brands ?
Obviously in many cases, you ought to have got in and out, maybe between Sep 08 and Sep 13 for Westlife Foodworld and June 02 and May 07 for Phoenix.
But timing the market is a different story for another time though Goldman says the median drawdown is around 31% so most of these stocks have not crashed through the floor.
By the way, another investment bank Nomura too has said India is set to acquire the fastest growing economy in this decade, alongside south east countries.
Nomura expects India to register a CAGR of 6.6% in the next seven years until 2030, the strongest growth phase since 2010.
India is set to replace China as the flying geese, thus unlocking its full potential, Nomura said.
The 'flying geese' paradigm was originally coined by Japanese economist, Kaname Akamatsu in the 1930s which predicted the rise of Asian economies in the time to come.
The paradigm refers to the catching up process of industrialisation of latecomer economies from the point of view of intra-industry, inter industry and international competition.
India's air conditioner makers import a big chunk of their raw materials, that is changing
The Goldman Sachs report referred to explicit policy support as industries that will do well.
Given our general focus on industrials, I looked at one category, air conditioning.
India manufactures around 7 million air conditioners annually and going by the temperatures outside and the way they are rising, this number is going to rocket in coming years.
What I didn't know though others may have is that almost 75% of all the materials used in air conditioners manufactured in India could be imported. Or put another way, local value addition may be only 25% in many cases. This figure may not apply to all kinds of air conditioners but surely some. In terms of value, the value addition is considered around 50% by industry.
Be that as it may air conditioner components was one of the areas chosen by the Indian Government as part of its PLI scheme efforts to build domestic component capability and bridge the gap.
The key components include of course the compressor, tubing and printed circuit boards or the electronics of it.
Some 36 companies including the big names like Daikin, Johnsons Controls, Hitachi, Havells, Voltas and Lucas TVS were cleared to go in November 2021 with committed investments upto Rs 4,000 crore.
In March this year, the first of the investments began paying off when LG in launched locally made dual inverter compressors from its Greater Noida facility, making it the first brand to make its own compressors in India. Earlier, it imported mostly from Thailand. Other manuacturers are also gearing up to launch in coming months.
I caught up with the former Government official who architected the air conditioner and LED part of the PLI scheme. He is an IPS official, now superannuated and his name is Anil Agarwal and he was earlier Additional Secretary, Department of Promotion of Industry and Internal Trade or DPIIT under the ministry of commerc. I began by asking him how his part of the scheme had fared ?
Why Are Companies Sitting On So Much Cash ?
Earlier, we spoke of how India has produced record multi bagger stocks, thus returning strong returns to investors who obviously invested at the right time and either got out in time or maybe in some cases still holding on.
Indian companies are also sitting on huge amounts of cash, as is somewhat the trend international as well.
The reasons could range from lack of sufficient investment or expansion opportunities which make it somewhat deep rooted or simpler, like an unprecedented profit run in recent years.
Either way, investors could demand a slice of this cake.
A study by proxy advisory firm Institutional Investor Advisory Services (IIAS) in their IiAS Dividend and Buyback Study 2023 says that based on 2021-22 financials and adjusted for announced acquisitions and capital expenditure in 2022-23, some 45 BSE 500 companies can return almost Rs 69,000 crore or more to their shareholders, or almost 41% of their balance sheet cash for the fiscal year end.
The report says that while companies have been returning more cash to shareholders (through dividends and buybacks) in FY22, cash balances continue to build up for corporate India.
During the COVID years, companies conserved cash by lowering dividend pay-outs. In this study, IiAS identified 294 companies out of the S&P BSE 500 companies, with excess cash (but not necessarily sufficiently in excess to distribute).
I caught up with Hetal Delal, President and Chief Operating Officer of IIAS to understand why so much cash was sloshing around in balance sheets and what companies could do and more importantly investors could expect.
By the way, five companies that could distribute almost Rs 38,000 crore are Tata Consultancy, Siemens, ITC, Hero Motorcorp and Sun TV Network.
So you know where you can start knocking.
And Hmmm
The Government and the civil aviation ministry has asked airlines to self-monitor airfares on routes that have been seen massive jumps in fares in the last month, notably those served by the presently grounded Go First airline, which stopped flying on May 3.
It is not clear to me what self-monitor means because self-monitoring is what led to everyone jacking up fares the moment Go First stopped flying. And Mumbai Delhi fares were or are the same as Mumbai to Dubai.
But more Mumbai people have houses in Dubai so they may not even go to Delhi I think.
Anyway, the problem is fundamental and conceptual.
India's airline sector is deregulated which means prices cannot be established or regulated by the Govermment. Prices are also set in multiple buckets, meaning you could have got a cheap ticket had you bought a month earlier but will have to pay a fortune if you try and buy a few days before.
Nevertheless, the civil aviation ministry, thanks to all the pressure being heaped upon it by various quarters including people within the Government is compelled to call everyone and give them a gentle sounding if one can call it that..
That's it from me, have a great day ahead.
