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David Kimberley
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Updated 08 Sep 2023
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Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Ashoka India Equity. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

Next year Indians will head to the polls in an election that will decide whether or not the incumbent prime minister Narendra Modi will stay in power.

Modi, who has been prime minister since 2014, has become a Thatcher-like figure, presiding over substantial changes to his country and gaining a mix of strong admiration and contempt in the process.

Regardless of which side of the opinion divide you fall, it is hard to deny that his time in power has seen substantial change in India, much of it beneficial for domestic and foreign investors. That the majority of Asia-focused investment trusts are overweight to Indian equities today is arguably one crude sign of that.

Some of this is due to steps taken by the government. For example, in the last nine years of Modi’s time as prime minister, his government has scrapped over 2,000 obsolete laws to enhance governance and ease of doing business. Complicated rules, such as land ownership laws and bankruptcy regulations, were altered to make them more efficient.

Other changes pre-date the current government coming to power but have really come into fruition during its tenure. Most notably, the the large-scale roll out of India’s Aadhaar identification system. This was launched in 2010 and, according to data released by the Indian government at the end of 2021, 99.7% of the adult population had the biometric ID – no mean feat in a country of 1.4bn people.

It’s important to note that many of these people were effectively ‘off grid’ for the Indian government previously. Not only did this mean it was hard to target delivery of financial services, subsidies, and other social benefits to them, they also struggled to access the formal banking system.

The roll out of the Aadhaar system was key in changing this but two other factors were vital too. One was the rapid adoption of smartphone technology in India. Today over 70% of Indians now have internet access on their phone compared to less than 1% in 2012 according to Statista.

The other factor was the implementation of a new digital payment system (UPI) in 2016 that allowed individuals and merchants to instantly make payments to one another at low cost.

Combined with a more business-friendly environment, this has all had a huge impact on the lives of ordinary Indians. Over 600m people have opened a bank account using their Aadhaar card according to the International Monetary Fund. Digital payments now dwarf other transfer methods. Corruption in government subsidy programmes has also been reduced drastically, with the government now often able to make direct cash transfers to individual citizens.

Many of these developments shine through in the Ashoka India Equity (AIE) portfolio. As one simple example, the trust’s largest two holdings are in financials – ICICI Bank and Cholamandalam Investment and Finance (Chola), both of which have benefited from the increasing number of Indians that have access to financial services.

The former may be familiar to those familiar with the Indian equity market. However, Chola has seen extremely impressive returns in the last five years, during which time revenues at the lender have risen almost three-fold.

The rapid rollout and success of new digital applications, whether it be Aadhaar, UPI or even the COVID vaccine tracker, is also indicative of the technological prowess India possesses. As AIE Investment Director Ayush Abhijeet noted at a presentation earlier this year, the country continues to produce a world-leading number of STEM graduates. That the current CEOs of Alphabet and Microsoft are both graduates of Indian universities is testament to that fact.

For the AIE managers, the Indian sector continues to offer attractive growth, with companies providing a range of goods and services, whether that be developing their own technology, providing consulting services, or providing outsourcing services to other businesses. This is being supported by a rapid increase in cross-country internet connectivity, with capacity growing at a compounded annual rate of 35%.

There have been some concerns that the sector, much like its US equivalent, is too highly valued. This is plausible but it’s worth noting that the IT Nifty 50, an India tech index, is trading below its 5-year average on a price-to-earnings basis as at 24/08/2023. Perhaps more importantly for AIE investors, companies in the trust’s portfolio continue to justify higher valuations by delivering on growth.

For example, specialist manufacturer Avalon Technologies, currently AIE’s largest tech holding, noted in a recent analyst call that it expects revenue growth for this financial year to be between 15% to 25%, despite its US business remaining almost flat so far. Similarly, technology outsourcing firm Coforge, another major AIE holding, delivered a 21.4% year-on-year increase in sales at the end of last quarter.

Those results and the investments the AIE managers have in those two sectors arguably reflect the strength and nature of their stock picking process. The managers place huge emphasis on corporate governance, as well as taking a valuation-conscious approach to stock picking, where they make use of a proprietary cash flow analysis system.

We see the corporate governance component expressed more in sectoral weightings. The managers like financials and technology, for example, but tend to avoid sectors like utilities and real estate, which are more heavily regulated and often involve state-owned enterprises.

On the cash flow side, the managers like the sort of growth that the firms we have examined display but do not ignore valuations. Instead firms have to demonstrate recurring and sustainable cash flow growth, which can mean paying higher earnings multiples if those cash flows justify doing so.

It’s a process that has worked well so far. Since AIE debuted on the London Stock Exchange just over five years ago, the trust has continued to outperform both its peers and the benchmark.

That’s not guaranteed to continue but for investors looking for fund managers to navigate India’s increasingly attractive economic growth story, AIE may be an option they want to consider.

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