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Health is Wealth – Why we like the Indian Pharmaceuticals Industry.  Click Here To Download The Research Note

The Government of India announced its Budget for FY19 (March year end in India) on February 1, 2018.  Click Here To Download The Research Note

India has been going through significant change under the Modi Government. Ratings agencies like Moodys view this as a positive medium to long-term to the economy. Investors with matching investment horizons should take note and look to accumulate their exposure to the capital markets of India accordingly. We hope you find value in our short note on Moody’s upgrade.  Click Here To Download The Research Note

The Make in India campaign was launched on 25th September 2014 by the Modi Government as an initiative to encourage both national and multinational companies to manufacture their products in India. The major objective behind the initiative was to focus on job creation and skill enhancement across various sectors in the economy. The Campaign is being led by the Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry, Government of India. The end objective of the program is to promote and foster economic growth in India through increasing utilisation of the countriy’s young talent base and improving perception as a place to do business by eliminating bureaucratic processes and making governance more transparent, responsive and accountable…  Click Here To Download The Research Note

Whilst the world grapples with technological disruption, it seems many investors choose not to “disrupt” conventional investment practices despite several short comings. This is because investment thinking, which is fundamentally sound but unconventional, tends to be considered with greater discomfort, despite potentially being very rewarding. It is only when results have already been rewarding, that herd mentality follows. To take advantage of this, an investor needs to be open-minded and willing to tread off the beaten track to improve their portfolio’s risk-adjusted returns. One major issue facing investor portfolio’s today is the capital growth conundrum given low prospective returns. Whilst emerging markets have commonly been considered a solution to this conundrum, there has been a stark mismatch between expectations and reality. The theoretical prospect of high growth and uncorrelated returns has unfortunately not eventuated and is unlikely to do so going forward in its traditional construct. This paper looks to identify why the current emerging market approach has failed investors and identifies possible solutions to providethe desired growth and diversification one would expect from investing in emerging markets strategies. Click Here To Download The Research Paper

This may come as a surprise, but guess which country was the first to legislate social responsibility for corporations? India! Indian companies are engaged in several projects that are meaningfully impacting the lives of India’s poor and the surrounding environment. Unfortunately, you don’t hear about this in the Australian media. Corporate governance reforms in India have been primarily based on the “Anglo Saxon model” of governance, which adopts principles from the UK’s Cadbury Report, the OECD principles of corporate governance and the US’s Sarbanes Oxley. Corporate social responsibility is a significant part and the key requirements include;   Companies meeting a certain size are required to spend at least 2% of their average net profits during their previous three financial years on socially impactful activities The Board’s annual report to shareholders is required to provide details on the company policy developed on corporate social responsibility activities undertaken during the year The Board shall appoint a Corporate Social Responsibility Committee of three or more directors, with at least one of them being independent A significant holding in our portfolio and prime example of corporate social responsibility is Hindustan Unilever. A merger between the Dutch-British consumer goods giant Unilever and two local players in India in 1933. It is the largest FMCG company in India by sales as it has the widest portfolio of products and the broadest distribution reach, with 8 million outlets. This reach means it is able to provide products for over 700 million Indian consumers who use their products, with over 40% of its sales coming from rural India, among the highest proportion for FMCG companies operating in India. The tailwinds for the India consumption story, particularly within the rural segment is substantial given inflation has receded from over 10% in 2012 to below 3% currently, a favourable monsoon environment last year and what is forecast for 2017 has also provided much impetus to the rural sector. Additionally, there are several government schemes which are aiding the consumption growth outlook as a greater sense of equality is sought across the nation. Furthermore the 2019 election is likely to see several pro-consumption, pro-rural policies, particularly in the FY18 budget given 70% of the Indian population are part of the rural economy.   Source: Hindustan Unilever Company Reports The confluence of positive factors and significant reach to most of India, uniquely positions Hindustan Unilever to make a meaningful difference to society. The company has undertaken several sustainable initiatives which have long-term benefits for the economy and its population rather than focus purely on the wealthier segment of India. Several of these initiatives cover significant environmental and social matters and are described below.   Empowerment of Women Women empowerment is a strong drive in India. (For example, the corporation act legislates that there must be at least one woman director on the board) Hindustan Unilever have commissioned a project called project Shakti (strength) which works towards changing lives of women in rural India. They have trained thousands of women across villages in a bid to develop an entrepreneurial mindset and make them financially independent and more empowered.   Source: Hindustan Unilever Company Reports Sustainable living Hindustan Unilever has also created an urban water, hygiene and sanitation community centre in one of the largest slum areas in Mumbai. This includes toilets, clean showers and safe drinking water. Fresh water is used for brushing, bathing, handwashing and laundry while the waste water from these activities are used as input for flushing toilets. This is expected to save around 10 million litres of water per annum. Another example, is the development of a new process of manufacturing soap based on ‘Plough Share Mixer’ technology. This eliminates the need for steam in soap making and cuts carbon emissions by 15,000 tons per year.   Clean India Furthermore, in partnership with the Bill & Melinda Gates Foundation, the company has used their leading toilet cleaning brand, Domex (which we know as Domestos here and globally) to help build over 70,000 toilets in rural households across India. They have also launched the Swachh Aadat, Swachh Bharat (Clean Habits, Clean India) programme in line with the Government of India’s Swachh Bharat Abhiyan (Clean India Mission) to promote health and good hygiene practices. In India, over 130 million people were reached by December 2016 through programmes on handwashing, safe drinking water and sanitation. Companies like Hindustan Unilever are very much part of the better livelihood for the broader population across India. Investing in businesses like this one are likely to provide India’s youthful and aspiring population an opportunity for inclusiveness in the transition and transformation of India. To find out more on Hindustan Unilever’s sustainable living plan visit https://www.hul.co.in/sustainable-living/ Click here to read this article on Live Wire.

Last week, Apple CEO Tim Cook told analysts that “India is moving fast. They are moving at a speed that I have not seen in any other country in the world.” Despite this and many other positive endorsements, investors often procrastinate and identify reasons not to invest in India’s growth. In this wire, we seek to dispel those reasons.   1: “INDIA IS A CORRUPT COUNTRY” “Not one single country, anywhere in the world, is corruption free”. This is the title of the first chapter in the Corruption Perception Index Report of 2015. India is not an exception, however, what is changing is the focus on reducing corruption. This is evident by the monumental support of Prime Minister Modi’s pledge against corruption. India’s focus has now moved on from pure enforcement of anti-corruption laws to prevention at the source, which is more effective at sustainably fighting corruption. One such successful strategy has been through the adoption of technology. We list some of the other initiatives and developments below: Over one billion Indian citizens have been issued unique identification numbers known as Aadhaar. This is not simply a tax file number, but it enables authentication of an individual using biometric and iris eye scanning technology! In fact, it has been used successfully in enabling the direct transfer of social benefits and thus eliminating the scope for corruption from middle men. Over 4 billion transactions have been completed using this platform. Physical inspections by enforcement agencies like customs are now being replaced by digital scanners and camera’s saving time and reducing the potential for corruption. Higher transparency through e-tendering is expected to reduce the scope for corruption in awarding of government contracts. The Reserve Bank of India (RBI) is pushing a move towards a cashless society by focusing on development of new electronic payment systems and issuing licenses for new payment banks. Payments through non-cash electronic channels have increased from AU$400 billion in 2011-12 to AU$1.3 trillion in 2014-15 The emergence of organised retail through Departmental stores, Hypermarkets and Online Retailing is helping reduce cash transactions, a source for “black money”(unaccounted for money) in the economy 2: “I MAY NOT GET MY MONEY BACK” The regulatory framework in India’s financial markets is in compliance with the OECD Principles, an international benchmark for securities markets regulation. The World Bank in its report titled “Doing Business 2015 Going Beyond Efficiency” has ranked India 8th in respect of minority investor protection ahead of countries like the US and Australia. Furthermore, the International Organisation of Securities Commissions (IOSCO) and the Bank for International Settlements (BIS) has rated India’s regulatory framework for financial market infrastructure at the highest score of ‘4’ for all eight parameters assessed on a scale of one to four along with only five other countries globally including Australia, Brazil, Hong Kong, Japan and Singapore. India has over 6000 companies, making the equity market the largest in the world in terms of number of listed companies. In fact, it has a settlement cycle of T+2 with average daily traded volumes of AU$4.5bn and a market cap larger than Australia at over AU$2tn. To put the size into perspective, we have compared the Indian stock market to the Australian Stock market below.   India vs. Australia: Average Market Cap 3) “I HEARD THERE IS LACK OF REFORMS AND THE PACE OF DEVELOPMENT IS SLOW” India’s progress is quite often assessed by its “perceived” pace of reform execution. Note the word perceived, as the media is quite negative in its assessment of the pace of reform. Unfortunately, investors’ view on Modi can be tainted by this. However, given India is the world’s largest democracy, this is probably a hasty assessment. In fact, there is an interesting website, which tracks the progress on India’s reforms: (view link). The website tracks 30 of India’s reforms as either complete, in progress or incomplete. This transparency is unprecedented, even in developed markets. So is development in India really slow? Whilst the pace has certainly picked up, change needs to be considered long-term as the process of reforming such a large and heterogeneous economy is nuanced, involving a diverse set of states and industries. However, Modi’s Government is putting the right bricks in place, which should pave the way for handsome dividends over the next decade. One example is the implementation of GST, the country’s single biggest tax reform. Once rolled out, it will be driven by the principle of one nation, one tax doing away with multiple indirect taxes and economically unifying India by transforming it into a single market and a free trade economic zone for producers based inside the country. This is likely to add percentage points to GDP growth over the next few years.   4) “INDIAN MARKETS ARE TOO RISKY” During the global financial crisis, corporate earnings in India were resilient, even though price-earnings multiples fluctuated wildly due to global events. However, if we take a longer-term perspective, equity returns from India have rewarded investors who have ignored short-term volatility and not made irrational, myopic investment decisions. Those that choose to ignore short-term sentiment and focus on correctly identifying companies or markets that are experiencing strong and sustainable earnings growth can create significant wealth. Despite India’s higher price volatility, the US has experienced substantially higher volatility in its earnings (nearly 3x as much as India). Ignoring short-term price volatility, In Australian dollar terms, India has delivered returns of 12.7% p.a. compared to the S&P500’s 5.3% p.a. over the last 15 years which equates to 385% difference over the period. India is a prime example where companies have generated substantial and sustainable earnings growth over the long term. Indian corporates have consistently managed to maintain a high return on equity (RoE). In fact, the RoE of Indian companies was above 14% even during the crisis period as companies were able to capitalise on resilient local consumer demand to offset much of the weak global sentiment. Indian companies exhibit a very favourable combination of strong RoE and low earnings volatility compared with other markets