India has not generated outsized returns for foreign investors, says Ambit’s Nitin Bhasin

• India is a favoured investment destination for foreign investors, but it has not generated returns the way the US has.
• India’s public markets are dominated by mid and small cap companies as scale is a problem.
• Reliance and Adani (including newly acquired cement companies) now have the first and the third most highest weights in NIFTY100 at 9.7% and 4.3% respectively. Adani Group’s recent high increase in weightage is yet to be adapted by investors in their portfolios.

India is a much loved market when it comes to foreign portfolio investors. And this is evident from the inflows into equities after every crisis. This coupled with concentrated ownership of foreign investors have prevented any sharp fall in the benchmark indices over the years since the Global Financial Crisis. This does not mean that India is delivering outsized returns to investors, which perhaps explains the massive selling by FPIs since the end of last year, says Nitin Bhasin, co-head institutional equities and head of research at Ambit Capital. Edited Excerpts:

The Nifty50 is truly resilient in the face of headwinds but is it reflecting what is happening in India?
As investors, we have missed the point that India is not outperforming the US in the last 10 years. We may have done well in the last six months but if you look at a decade then India has delivered an 11% CAGR over ten years. If you look at dollar returns, then India has not given more than 6.5-7%. This is less than the US market's returns. India has not generated outsized returns for foreign investors. India is a much loved market but it has not generated returns the way the US has!

Why is this so?
In India we look at the changes in the Nifty, we only look at the increase in market capitalisation but have these companies become large businesses in the last ten years? Now compare this with American companies which have gone out and built much larger global businesses. If you look at Google, Apple or Facebook, these companies have become world leaders.

In India, companies have clocked profits but revenues have not grown at the same pace. Returns from Indian companies have come because these companies have become very expensive. If you look at smaller companies in the Nifty50, their multiples will be 2-2.5 times that of Nifty’s multiple. If you look at the benchmark index, it is dominated by financials at 35% and another 15% is accounted for by IT services. Auto, Oil & Gas (largely Reliance) will together account for nearly 72%.

You have lopsided earnings trading at a lower multiple and a small number of companies trading at very high multiples. Unless the mindset of the world changes its view and multiples of asset heavy companies increase, you have a challenge and why should Nifty’s returns be any different from the last 10 years?

Finally, now a lot of Indian money is finally coming to Indian equities. But do we have the depth in the market? We see a lot of small companies coming to the public markets and there are very few large businesses coming to the market on a global scale.

Our country’s listed space is dominated by mid and small caps which have a scalability challenge. You have a challenge of the past showing you that India has not beaten the US market and the Nifty is very lopsided.

Are the foreign portfolio investors done selling in India?
The month of June saw massive selling by foreign investors. If you look at foreign portfolio investors 85% of their holding would be in the top 100 stocks. I cannot hazard a guess if they are done selling. We don’t know what has happened that they have come back; perhaps a change of outlook or valuations in pockets becoming attractive. Or, reduced newsflow around challenges of crude or interest rates in India.

However, we do not expect a similar intensity of selling seen in the preceding six months. But, we are still not out of a situation where one can bet that the markets have only one way to go– which is upwards. Both micro (earnings) and macro (global and Indian factors) situations look uncertain and tough in many pockets. We are not decisively moving towards a situation where the index will move only upwards in the near-term. India has neither become oversold nor is the market inexpensive.

Given that China has its own issues, do you feel India’s capital markets could be a beneficiary of these developments?
I don’t think India can benefit from what is happening in China. I doubt that large institutions that dedicatedly invest in China will move out and come to India. You are talking about two different sizes of markets as companies in China are very large which is not the case in India.

China is a hotbed for internet consumption and electronics manufacturing. China has 35-40% weightage in a Global Emerging Market fund, while India’s is 10-12%. If an investor wants to buy stock in an electronics company for $100-200 million, do we have such opportunities in India?

If you look at FPI ownership is it still concentrated in the top 10 stocks on the Nifty50? Will this polarisation continue?
Polarisation has to increase for the time being. Reliance Industries continues to invest in its businesses – be it retail, O2C or Jio. If you see Adani Group then the promoters have emerged as the richest promoters from India over the last three or four years. They are entering new businesses.

If I were an investor, I would soon note that 20-25% of Nifty100 of market cap is accounted for by Reliance and Adani Group. Then there is a large financial merger happening which could mean that perhaps a few handful of names will account for 40-45% of the index; hence high polarisation.

Where do you see markets going in the near term?
We are operating in a scenario which is a see-saw market. We have positive and negative forces for the Indian economy while we have less positive forces when it comes to external factors. The market will spend a lot of time oscillating between overvalued and under-valued zones, thanks to the risks.

We are not in a situation where the markets can crash 20-30% and neither are we in a situation where we can say the market has reason to go up 20-30%. In this market, we can look at specific stocks on their business models and valuations.

There is no clarity on energy prices and small imbalances can affect prices. In addition, our ability to export will be curtailed, if the US and Europe go into recession, the global consuming market will shrink. If investors have an appetite for risk and recession then money flow into India may continue but may not be with the same amount of buoyancy.

What worries you about the domestic situation?
Borrowing costs in India continues to remain high. We are caught in a 7-7.5% Gsec, which is very high. Inflation remains high too in India. India is still sitting on a large number of underemployed women. Unless we do something about our labour participation rate, things will not improve.

The government is also behaving in a populist way rather than investing in infrastructure; perhaps that’s what is required with a large population. We are making slow progress as a country but we are not creating a massive consumption class beyond the top-20% of the population.

What are the things working for us – formalisation, entrepreneurship and technology businesses (but are these being created for the world?) Unless our GDP growth picks up materially, how can we have good earnings growth? I don’t think we are sitting on the cusp of a definite bull market.

What does a high weightage of Reliance and Adani mean for investors?
Reliance and Adani (including newly acquired cement companies) now have the first and the third most highest weights in NIFTY100 at 9.7% and 4.3% respectively. Other two large group representations are Tatas at 7.7% and Bajaj at 4.2%.

Whilst Reliance’s high weight is well known and adapted by investors, Adani Group’s recent high increase in weightage is yet to be adapted by investors in their portfolios.

Given the experience of infrastructure developers’ poor past performance and concerns around Adani Group’s past capital allocation and high leverage plus the lack of awareness amongst investors would mean that institutional owners could remain underweight Adani names for some time until they understand management’s value creation vision.


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