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Portfolio Commentary

Sep 21, 2022

Structurally speaking – Is India turning a corner?
After the unabated selling in the year’s first half, August was another month of relief for the markets. The enviable resilience in the Indian markets has surprised many pundits, feeding the narrative that India is decoupled from the world. The last time the decoupling story made its way to the economic dailies was in 2007, right before the global financial crisis unfolded.

Now that’s not a good precedent to make anyone believe the narrative. However, despite the fall of more than 70% from the top post the global financial crisis, India still outperformed almost all major markets from the high levels of 2007 (table below).

Source: Bloomberg, Sanctum Wealth
Above returns are local currency returns

Although India currently seems well placed on several macro parameters, some risks can spoil the party. Sticky inflation, a deep recession in the US, and further escalation of the Russia-Ukraine war are some top-of-mind risks in the global markets.

However, most of these issues are short-term, and we won’t remember these a few years from now like we hardly talk about Brexit and the fiddly averted Greek debt default.

That’s the nature of the markets. The short-term scares and joys don’t last too long. The long-term changes matter, and India has plenty of them to turbocharge the economic growth. Here, we are trying to showcase how these seeds of change provide a launch pad for robust economic growth and corporate profitability.

India is almost fully electrified
India’s electricity penetration has made a quantum leap in the last 20 years as 99% of households are now connected to grid power, compared to 55% in 2001 and 76% in 2010.

The power supply situation has also improved significantly, with the daily average power supply jumping a whopping 83% from an average of 12 hours per day in 2015-16 to 22 hours in rural areas and over 23.5 hours in urban areas.

As per a study conducted by the World Bank, household access to electricity has substantial socio-economic benefits. It increases household per capita income by nearly 38.6%, a cumulative effect of electricity over time. Household per capita food expenditure rises by 14%, non-food expenditure by 30%, and total expenditure by more than 18%.

India has made serious inroads in electrification in the last ten years, and the benefits of most of this progress are likely to flow through in the coming years.

India is more connected
As of April 2022, India had 76.1 crore active internet users, which is ~54% internet penetration across the country. The number of internet users in India has grown ~4x, and internet penetration has jumped 35 percentage points in the last seven years, from 18% to 54%. The huge leap has come while maintaining internet accessibility highly affordable, with data costs being one of the lowest in the world.

By some estimates, a 10% increase in high-speed internet penetration yields a 1.5% increase in GDP over the long term. As a result of internet proliferation, India is much more deeply digitized than many of the advanced economies of the world. Most of the benefit of India’s digitization is yet to come through in growth, making the internet a major driver of India’s economic acceleration.

India is more connected
• The introduction of GST has led to better tax compliance and an increase in indirect tax collections, which have risen 20% in 2021-2022 from 2017-2018 levels. The collections are further rising each passing month.
• Implementation of technology in direct taxation has led to improved compliance and a 50% growth in direct tax collection in 2021-2022 from 2017-2018
• Plugged gaps in the subsidy program through direct benefit transfer (DBT) that has led to cumulative savings of Rs. 2.2 lakh crore
• Foreign exchange reserves are at $490 billion, enough to cover 8.5 months of imports
• India is the only country in major economies to have improved its overall debt ratio since 2008 (table below)

Source: Kotak MF, BIS, IMF

India is reforming at a brisk pace
India has covered a fair distance from its policy paralytic past just a few years ago to being on the top of policy matters.

Despite the healthy growth in India’s services sector in the past, the employment growth has been modest because only a small portion of the population has seen direct benefits from the sector. The manufacturing sector, which is much more employment-heavy, did not participate as much in the growth as the services sector over the last three decades.

Policy reforms are now focused on increasing the share of manufacturing in the economy to correct this anomaly. With the global customers looking for credible alternatives to China, which has a manufacturing sector 10x the size of India’s, the reforms should help accelerate India’s manufacturing growth in years to come, creating jobs and corporate profits on their way.

Here are a few recently acted reforms that should help ignite the growth engine for India:
• Labour reforms are leading to the easy setting up of bigger manufacturing units
• Reduction in corporate tax rate from 30% to 22% for all companies and from 25% to 15% for new manufacturing units has incentivized new investments
• Renewed focus on manufacturing through start-up sops and production-linked-incentives (PLIs) has attracted many new manufacturing units
• High growth in capex by Central Government has led to the creation of productive assets, including an expanded highway network and dedicated freight corridors
• Paced-up land acquisition and a significant reduction in time taken for environmental clearance have considerably reduced the set-up period of infrastructure and capital projects
• Focused divestment and privatization are reducing the government’s involvement in business
• The introduction of RERA has cleaned up the real estate sector, reinstated confidence in the sector leading to robust demand for housing

The reforms push has already started bearing fruits with early shoots of a pick-up in private sector capex after a COVID-induced lull. The cocktail of healthy corporate balance sheets, lower stress in bank books, and high liquidity in the banking system shall also ensure a smooth flow of funds to deserving projects.

Corporates are also sounding positive with strong order books/inquiry pipelines in some manufacturing industries, including Autos, Chemicals, Electronic Goods, Engineering Goods, Packaging, and Construction. Capacity utilization in sectors like Cement and Steel has reached above 80%, triggering the need for additional capex.

What does it mean for Indian Equities?
At Sanctum, we have been seeing and pointing out signs of a pick-up in manufacturing and capex-related sectors for many months. The trends we have discussed don’t generally die in a year or two. They instead keep the growth engine humming for many years. Should that happen this time, the growth in the GDP will percolate to robust equity returns as well.

Remembering the legendary perma-bull Rakesh Jhunjhunwala, who said in a conclave months before his sad demise, “we have raised our growth rate in every decade since independence, I think India is sitting on what is going to be the highest level of growth it has ever seen from 2020 to 2030,”

We also share Mr Jhunjhunwala’s optimism and remain optimistic about India and Indian equities. Even with average economic growth, there will be enough opportunities to build quality portfolios with the right themes.

As highlighted earlier, there are risks too that can act as speed bumps to equity returns in the short run. The most immediate risk seems to be emanating on the forex front as RBI wouldn’t be able to cushion the rupee further if the global macros continue to worsen, which would mean some trouble on the balance of payments front and higher market volatility.

However, it has been proved time and again that investors do well when they treat volatility as an opportunity. Historically, markets have spent much more time going up than they have spent going down. Should that continue, down days will always be limited, and so would be the window of opportunity to top up quality equity investments.

At Sanctum, we have positioned our portfolios accordingly with a focus on a few broad themes, including housing, manufacturing, and financial services, and we continue to be on the lookout for emerging themes that will benefit from the economic acceleration. Our focus on these themes has already returned some early winners, and we believe many more will come.

Here is how the Sanctum PMS portfolios have done over time.

Portfolio Performance

Performance is calculated using Time Weighted Returns, net of fees and expenses. Returns over one year are compounded annually; returns for less than one year are absolute. Please note that SEBI does not verify the performance information provided above. Please note that past performance is not a guarantee of future performance.

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