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Fund Manager Diaries – Going Deep in India

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.

THE MULTI-YEAR GROWTH OPPORTUNITY: OFF THE BEATEN PATH TO ALIGARH AND HATHRAS

Whilst face-to-face company meetings at their offices is a key part of our work, it is also vital to view their products or services outside the big cities, where their stated competitive advantage can be assessed for real.

Thus, I journeyed three hours outside Delhi to Aligarh, a city with a population of 872,000 in the state of Uttar Pradesh. Although greatly improved since my first visit here, large parts of the highway still need upgrading and my car had to contend with oil tankers on the wrong side of the road, carts pulled by oxen, and the ubiquitous five people on one scooter. However, it is fascinating to see India literally rising from the fields as new estates and suburbs are built in the greater Delhi area.

My first goal was to investigate the threat from e-commerce and e-banking outside the major cities. This disruptive threat has been much discussed recently, and so I attempted to visit four of the leading “clicks and mortar” exponent’s stated locations in various villages and towns such as Junedpur and Bulandshahr, as well as those in Aligarh. These are meant to act as hubs for parcel deliveries and banking transactions. From what I saw, the reality does not match the hype and, at this stage, we will not be investing in this company. Additionally, the competitive advantage held by Vmart in smaller cities does not face significant risks in the near future from this new channel.

Secondly, I wanted to better understand the physical competitive retail environment for Vmart. In Aligarh, there are two other chain stores, as well as a huge number of independent stores. Vmart was certainly busier than both Vishal Mall and Pantaloon, with Vishal Mall suffering from a terrible retail experience and poor product availability. Pantaloon was more ordered and modern, but this was reflected in substantially higher prices. One key difference with shopping in an equivalent developed city was the open sewer along the side of the street, whilst the contrast with the shopping experience back in Delhi was equally stark.

Moving on to Hathras, a city of 136,000 people a further hour away, Vmart has even less competition. The store is located in the city centre, in an area that looks like an old bazaar. There are a few modern Mom and Pop stores, but they do not have Vmart’s extensive product range. Most competition is from traditional stores, that look unchanged in generations, with the proprietors seated on the floor in open storefronts with merchandise stacked around them. Vmart clearly has a significant opportunity as consumer tastes develop.

Turning to banking penetration, despite Aligarh’s size, there was only one branch for each of the private sector banks that we invest in, namely Indusind, Yes and Kotak Mahindra Bank. In Hathras, HDFC Bank, the largest private sector bank was the only one with a presence. This again vividly illustrates the under penetration story of India, and the multi-year opportunity the banking sector provides.

A FLYING VISIT TO AHMEDABAD

Following Delhi, I embarked on a day trip to Ahmedabad, Prime Minister Modi’s hometown, to visit our holding in Astral Poly Technik. Since we initially invested in March 2016, several sell side brokers have also identified the opportunity here, driving the share price higher.

Driven by urbanisation, an improved rural economy and continued investment in new technology, processes and capacity, we expect 15-20% volume growth and margin improvement building on Astral’s existing 30% market share in pipes. Their entry into the adhesives segment, through earlier acquisitions in India and the UK, provide a second growth driver. As their major capital expenditure investment programme is now complete, Astral should also see a rising ROCE and will become debt free in the next 2 years leading us to conclude that the valuation is still attractive.

I met with an interesting provider of high-end steel piping which will benefit from planned refurbishments of Indian refineries to meet tighter emission regulations. Finally, before flying to Mumbai, I met with Gruh Finance. This is a very well managed company, providing housing loans to lower income customers, with non-performing loans consistently below 1%. We will need to do more due diligence on these prospects over the coming months.