“The Elephant is Moving” — notes on Amitabh Singhi’s India-listed Investment Ideas

by Travis Johnson, Stock Gumshoe | May 6, 2013 6:07 pm

Amitabh Singhi has spoken at Value Investing Congresses in the past, and he typically talks about India-listed stocks that, frankly, we probably can’t easily buy — but he talks about the state of the economy, and the growth we should expect to continue, so though I probably won’t buy his stock I like learning about what he thinks the catalysts are for movement in different sectors.

Agriculture is a huge sector of the economy, with massive commodity exports, land trades very actively in India and may be in a bubble, and India is the world’s leading gold market (though he says they need to spend the next decade making gold less appealing — they need to move savings into equities instead, and make savings banks more appealing and accessible). There are several commodities exchanges, including for power, coal, gold and currencies. India also has the second largest number of publicly traded companies, with 3,000 that actively trade on the Indian exchanges.

The Foreign investment money is what he calls the “smart money” in India, and the opportunity is in the small companies that don’t attract foreign investment money or get a research analyst covering them. India has thousands of brokers and analysts covering equities, but the bottom of the market — between $10-250 million — is where the opportunity is. That’s 900 companies. And probably none of them are easy for us to buy if we don’t trade on the Indian exchanges, but we’ll bear with him.

India will add a trillion dollars in GDP over the next four years, and the rate of growth is accelerating. Overall, GDP is 63% services, 20% manufacturing and 17% Agriculture. Agriculture is his focus — 60% of the Indian population depends directly or indirectly on agriculture, the rural population needs to be taken care of.

For the last several years in India, rural India has seen onion prices spike, which benefits farmers, rising land values have also skyrocketed as land has been developed, everyone is going to be given a retina scan/fingerprint scanner and a unique ID (300 million people are done so far, another ten years it’s all done), and technology has crept into rural India (mobile phones, bank branches).

99% of land is fragmented into small lots — two hectares or so. People buy tiny tools, mini tillers and water pumps are in great demand. VST Tillers has returned 21X in 12 years but is still tiny, market cap of only $90 million.

He looks for choke points and inflection points — like the tillers, which are targeted just for this odd world where they need small farm mechanization, and the force of growth and increasing population and emerging rural India, and it should grow regardless of the world financial situation.

And then the rural Indians, when they get a little money, want to move to bigger villages and cities. Migration into cities in India is the fastest in the world, and that’s a choke point that the politicians can’t handle. They start in slums and awful housing, then move up and buy a home and paint it, and they paint often for festivals. Paint is a place where brand matters, the cost is not that much higher, distribution is excellent, and people want to trust the paint and will pay a little more for it — it’s still a small cost compared to the price of the house.

Asianpaints is a phenomenal business, but it’s too expensive. Investors love it, but it’s 30-40 times earnings.

So what can go wrong with Indian companies? He says there’s a 90% correlation of GNP with monsoons — rainfall is extremely important for agriculture, which drives rural economy, which drives the wealth effect, which drives paint and tillers and everything else.

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And India is also known for its very poor infrastructure — a third of food is wasted. This is changing because some businesses and sectors are getting much more organized, and there will be profits from developing infrastructure.

THe company he wants to focus on is Greenply, which he’s holding but it has gone up. This is another one that’s not so great for individual US investors who don’t trade directly in India (I don’t, either), but it’s something to look for in the kinds of companies that do very well in emerging markets where people make enough money to buy or improve homes.

They make plywood, laminate, veneers and MDFs — “interior infrastructure”. Very boring, but it’s a $4 billion market and they have strong market share in all the main segments and have worked hard to build a brand — furniture makers and carpenters will focus on making sure they get the best branded stuff. Huge distribution network in 13,000 hardware stores, market cap still only $170 million and they’re going to do extremely well as the MDF market grows like it did in China in years past.

So … I take away from this simple optimism about “eventual” Indian growth as infrastructure buildout happens and more money makes it to the rural areas, which will benefit everyone, but other than the expansion of banking (there are two big, easily traded Indian banks), I don’t have an idea to play off of for Indian growth. I’ll probably look into this a bit more when I can.

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