India: The new global growth engine – Part 2

Why you should consider investing in Indian equities

If you look solely at price-to-earnings or price-to-book ratios, India’s equities appear expensive relative to those in other emerging markets. However, this valuation premium is arguably more than justified when you consider their relatively strong earnings growth, high levels of profitability and low levels of debt.

Source: Bloomberg. 28 April 2006 to 31 December 2023. You cannot invest directly in an index. Past performance is not an indicator of future performance.

Below are a few examples of quality, highly profitable Indian companies:

ICICI Bank – A leading Indian bank with much higher profitability than global banking peers

ICICI Bank, India’s second largest private lender, reported higher than expected earnings on 27 July 2024, on continued strong structural demand for loans. Indian households remain very much underbanked, but private sector credit has grown at 11%pa of the last 5 years in India¹. ICICI Bank reported a Net Interest Margin (or NIM, the difference between interest earned by a bank on loans versus paid on deposits) of 4.36%. Australia’s big 4 banks typically earn NIM between 1-2% and European banks often have a NIM of less than 1%².

ICICI bank has been a leader in the roll out of digitalised banking services to both retail and corporate customers and has fast growing capital market businesses.

Infosys – global leader in IT consulting and outsourcing services

As global businesses continue to digitise and automate their processes, the demand for IT consulting services has never been greater. Infosys is a global leader in technology business consulting and global outsourcing services. Infosys is able to leverage a deep pool of relatively low cost, IT graduates and professionals.

While global IT enterprise spending slowed in 2023 in the face of higher interest rate and inflation, Infosys has continued to add customers and in the long term should benefit from an eventual Fed pivot and easier economic environment. One of the customers it signed this year was Telstra, with a Telstra spokesperson saying, “As we approach the tipping point of genAI and an avalanche of digital adoption, strategic partnerships with global leaders such as Infosys are critical to support our shared ambitions for digital leadership.”

Varun Beverages – Riding domestic consumption tailwinds and expanding internationally.

The dominant cola in India is Pepsi. Varun Beverages has been a strategic franchisee partner of PepsiCo for the past 32 years, bottling 90% of PepsiCo beverages in India.

Soft drink consumption in India is growing off a low base, still only 12 litres per capita per annum, in comparison to 79 litres in China and 359 litres in the USA.

Varun Beverages also has franchise rights for various PepsiCo products in Nepal, Sri Lanka, Morocco, Zambia, and Zimbabwe. The company has ventured into new products with lower calories, zero sugar soft drinks, and non-seasonal products like juices and sports drinks.

Varun’s earnings have grown by an enviable 48%pa (FY19-FY24) and it had a return on equity of 40% as at Dec 2023³.

How can Indian equities fit in Australia portfolios?

The Indian economy is humming, which is powering its equity market at the same time.

Australia’s equity market is often viewed as a China proxy, with our large materials sector, and the outlook for earnings growth appears muted. The Indian equity market exhibits low correlation to Australian, Chinese and US equities, offering Australian investors something different.

The same factors fuelling India’s economy are boosting its corporations. The growing consumer market is driving profitability while market reforms and infrastructure improvements are fostering productivity gains.

As India’s share of the all-important MSCI Emerging Market index rises (now up to 20%) and China’s falls (now 25%, down from 40% in 2020). Any professional investors benchmarking themselves against an emerging market or All-Country global equity index who have ignored or remained underweight India increasingly do so at their own peril.

Source: Bloomberg. March 2020 to August 2024. You cannot invest directly in an index. Past performance is not an indicator of future performance.

But India is simply getting too big to ignore, and investing in high quality Indian companies provide an avenue for adding growth equities outside of US big tech.

For investors agreeing with this view, Betashares offers Betashares IIND India Quality ETF . IIND’s Index selects the 30 highest quality Indian companies based on a combined ranking of the following key factors – high profitability, low financial leverage and high earnings stability.

The index has returned 13.3%pa over the five years to 30 June 2024, and has experienced lower volatility and drawdowns than India’s often quoted Nifty 50 index⁴. Relative to the Nifty 50 index, IIND’s index provides better diversification, with smaller single stock concentration and more balance across sectors like information technology, consumer staples and consumer discretionary sectors that are benefiting from India’s rise.

Read India: The new global growth engine – Part 1

Footnotes:

1. Source: Morgan Stanley, July 2024. ↑

2. Source: Bloomberg, July 2024. ↑

3. Source: Morgan Stanley, July 2024. ↑

4. Past performance is not indicative of future performance. Index performance does not take into account IIND fees, taxes and costs. You cannot invest directly in an index. ↑