Fund Manager Diaries – Delhi, India’s Growth Engine

Mike Sell, Alquity Head of Asia Investments enjoyed an Indian Summer visiting 26 companies to assess how the economic reforms implemented by Prime Minister Modi were impacting our holdings and seeking out new opportunities for the Indian Subcontinent Fund. This trip report, split into three parts, provides a detailed assessment of this multi-year growth opportunity.


Travelling to India is always an experience, even after 20 years. More recently, the dramatic improvements in efficiency and infrastructure are particularly impressive. After touch down in the early hours of the morning, I breezed through the surprisingly busy Delhi airport with its vast duty free store and was kerbside within 20 minutes. Of course, this being India, I was immediately confronted by a stray dog running through the drop-off area and a bus that had beached itself on a speed bump and was blocking the road! Given the strong performance of our portfolio, the objective of my trip was threefold:

    • To review our holdings and ensure that their growth outlook is in line with our expectations.
    • To identify new potential candidates for inclusion in the portfolio.
    • To travel off the beaten track to review the retail environment and potential for disruptive change in the smaller cities and semi-urban areas.



Delhi, or rather the satellite city of Gurgaon, is fast catching up with Mumbai and other Asian mega-cities in terms of ease of doing business. Certainly, the traffic can be awful as the city continues to dig up roads in order to build a metro and the best way to find an address still tends to be to ask a local stallholder. However, in terms of architecture and mindset, this area has more similarity to Canary Wharf than the old Delhi. Many international companies such as Google have set up base here, Uber works efficiently and increasingly companies are beginning to employ professional investor relations staff that are both knowledgeable and shareholder-friendly.


I met a range of companies across the automotive, cement, transportation and retail sectors including our holdings Astral Polytech, Vmart and Heidelberg Cement. The resounding message on Goods and Service Tax (GST) implementation was that it had been relatively straightforward and the benefits, such as a 20% reduction in journey time, as no more queuing is required at state borders, were already being felt. Margins will be further boosted over time as warehouses and supply chains are rationalised. Additionally, after several quarters of disruption from demonetisation and GST, the growth outlook is clearly improving.  Management were consistently more positive and less guarded about their future sales and profitability than has been the case over the previous three years.


It is also clear that India’s growth journey is just beginning. As an example, Vmart, a retailer whose share price is up over 200% this year, estimates there are 5,000 cities large enough to accommodate one of their  stores. Despite being one of the largest organised retailers in India, they are currently in only 150 cities, with a market share of just over 3% in those locations. Given their strong free cash flow generation, which increased substantially in the last financial year, they are now considering accelerating their store opening plans. As we have seen elsewhere in Asia, the ongoing shift from the unorganised “Mom and Pop” stores to organised businesses is a key structural driver across many sectors in India.

Source: Alquity, Bloomberg, Company Data
Source: Alquity, Bloomberg, Company Data


Whilst the potential of India in terms of demographic advantage and the impact of Modi’s reforms have received significant media coverage, the scope of this shift towards the organised sector is not fully appreciated by investors. This factor alone provides an inherent longevity to the Indian investment case. The introduction of GST, acting as an accelerant as all businesses are now required to provide proper documentation and to pay tax, removes the previous cost advantage from smaller and unorganised entities in every sector.


In terms of idea generation from Delhi, two companies justify a deeper analysis as potential investment candidates. Firstly, PNB Housing Finance, which listed in November 2016 and is a major beneficiary of the government’s drive to increase affordable housing through tax breaks for both developers and households. Housing affordability in India is the highest it has been for 20 years. Secondly, Somany Ceramics, which has restructured its business model over the last few years, also provides exposure to the theme of urbanisation, through both their tile and sanitary ware divisions. The company has risen from sixth place in 2011 and is now the second largest in the sector. Over the last three years it has increased margins from 6.7% to 11.5%, and ROCE from 15.5% to 21.3%.  Our preliminary ESG analysis indicates that these companies will meet our behaviour and quality standards, although we require a more detailed investigation.


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