Progress India Bets on Sectors Driven by Consumer Spending: Q&A


(Bloomberg) -- The Progress India Opportunities Fund is focusing on India’s health-care, financial services and transportation sectors -- as those will benefit from increased consumer spending, according to Vikas Gattani, chief executive officer and founder of Singapore-based fund manager Progress Asia Capital and Advisors.

The long-short equity fund, which started trading in December 2014, gained 31 percent last year, according to an investor letter seen by Bloomberg News.

Klaus Wille spoke to Gattani last month. Comments have been edited and condensed.

Tell me about the Progress India Opportunities Fund.

It is an India-dedicated long-short equity fund. The fund focuses on the most secular part of India’s story, the young demographics and rising consumer affluence and the spending associated with those demographics. We invest in large cap and liquid stocks. The fund has now completed three years, with an annualized return of 14.5 percent and annualized volatility of 11.6 percent.

What sectors are you looking at?

We are looking at sectors that will benefit from the increased spending by consumers -- like health care, financial services and transportation. Per-capita consumption and per-capita income is rising in India, with 60 percent of the population below 29 years of age, coming into the working age and increasing spending.

Any particular stocks you like?

We look at well-managed large-cap liquid names which are of institutional quality.

One of the names we like and have had in our portfolio for a long time is Eicher Motors. The company is uniquely positioned in the two-wheeler sector. It produces motorcycles in the range of 250 cc to 750 cc, which is a very different segment compared to the other two wheelers. We find this company trading at around 23 times forward earnings, with a return on capital of about 32 percent and earnings growth of at least 20 percent over the next two to three years. It has a lot of potential going forward. It sells at the premium end, meaning margins are high, and has very little competition in its segment.

Another company we like is Pidilite Industries, a manufacturer of adhesives under the brand name Fevicol. It has a deep pan-India distribution network, an amazing brand for more than 40 years and a unique system of reaching out to customers through carpenters and artisans. The return on capital is about 23 percent and earnings growth is more than 20 percent. The company is uniquely positioned and the business is difficult to replicate. It benefits from increasing housing and construction, but also has gone into segments like waterproofing -- an area for which there’s huge demand given the quality of construction and harsh weather conditions in India.

What’s your outlook for India’s stock market?

India has delivered a strong performance over the last year. The market is currently pricing in the best of earnings expectations, given the current macroeconomic scenario. Low interest rates are keeping the market propped up and stocks are trading on the expensive side of valuations.

The imposition of the long-term capital gains tax is definitely a negative, but more from a domestic investor point of view. Thus this is providing the market a reason to correct and bring valuations more in sync with reality. We think markets will correct and consolidate for a while, lasting a few months before the next up move. However, nothing has changed fundamentally on the macroeconomic front.

What about for India’s banking stocks?

We think there is too much optimism regarding the capability of Indian banks to generate earnings growth going forward, despite the resolution of the stressed assets situation. As such, their valuations look stretched to us, especially given the increased competition from private banks, non-banking financial companies and the growing disintermediation and increased role of fintech firms.

What’s your view on the state of reforms in India?

One should not look at reforms in silos; you have to look at the reforms in aggregate for a period of 10 to 15 years or even longer. The measures taken over the past three years have three major effects: the widening of the tax base, formalization of the economy and the financialization of savings.

The economy is going to steadily reap the benefits of these major policy measures over the next five to 10 years. The process is going to be slow, but the major teething problems of the implementation are over. And that will help the capital markets and lower the cost of capital for the corporates.

On the flip side, I am skeptical that private investment will pick up soon as many non-performing loans are sold to the National Company Law Tribunal at discounted prices, meaning bank lending won’t revive soon since these under-utilized assets can be picked up by investors and promoters at discounted prices.

How is fundraising going?

There is increasing interest in investing in emerging markets, especially China and India. Institutional investors understand the major part of the policy measures has already been implemented. Also, we are seeing more interest in long-short funds in the region, as most markets are trading on the slightly expensive side of the valuation. So people would like to protect against the downside, but still get the upside.

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