Opportunity India: Myth or Magic? (Amitabh Singhi)

By xiexgp@gmail.com, September 8, 2014

These are my notes and instant reactions from a presentation at the Value Investing Congress, the notes below might contain errors, paraphrases, incorrect quotes, or misinterpretations.

Singhi’s objective is to get value investors to embrace India.

Large, frustratingly slow — but when it moves, it really moves. India is like an elephant.

People are worried about what India can do in the short run, but when you look at the long run it is magical.

At independence in 1951 India had GDP 21 billion. 91% of Women illiterate.
1970 GDP 57 billion, women 78% illiterate — the green revollution avoided disaster, but did not spark capitalism.
1990 — 342 million women, population doubled since independence, illiteracy 61%, GDP 293 billion. This is the low point, this is when they prepared for capitalism. The absolute poorest of the poor were getting aspirational.
2010 — 503 million women, 35% illiteracy, GDP 1,289 billion.
2014 — GDP 2 trillion, but people are completely frustrated with bureaucracy.

553 million people vote in the 2014 election. New PM got absolute majority, which no one has had since 1984 — no need for coalition government. Very cerebral country, but have a very hard time getting anything done — so what will happen?

New PM is fanatical about tracking and execution. First 100 days he has made tangible changes in all the nightmarish ministries that stopped development. Very exciting times as India gets less socialistic decade by decade. The money in India will be made where there are maximum problems.

Current shortage is at least 30 million homes, increasing by 4 million homes per year. Need to build 2 billion square feet of residential space each year. They want to live in new residential apartment developments, high rises with common green space.

Example: Ashiana — debt free housing company, run by a family, pretty clean, targeted projects in several areas.

Half idea — private company he seeded to do affordable housing, called Shubhashray. 400 homes done so far, sell a 300 sq ft house for $9,000. He’s learning the business, but you’d have to buy into his private company.

First real idea: Aro Granite, #1 granite processing company in India. Like for flooring in big projects, or kitchen counters.

10-year average ROE was 20% before US bust (70% exported to US, certain colors are only available in India), then 10% for last seven years because they expanded too much for the US boom. They should be able to expand ROE to 15% by getting more of local market and doing more finishing of kitchen counters.

Negative: the working capital sucks up a lot of money, expensive warehouses of granite. But trades at half of book value. Trades at 4 times last twelve months earnings, has a market cap of only $13 million.

Next, a stock related to Tata Motors (TTM). Indian companies are starting to figure out that owning brands is a great business, why Tata bought Land Rover and Jaguar. Tata Motors has differential voting rights shares in 2009 to raise equity — they’ve been selling them, but they are at a discount. Each DVR has equal financial right but 1/10 voting right, and gets a slightly better dividend — kind of like a Korean preferred. Only four such stocks in India.

He thinks you should go long the discounted voting right shares, and go short the Tata common to capture the 20% discount that should narrow.

Indian services business is growing, too — not just exported service (like offshored tech support), there’s big demand for financial services. The big banks are stressed for lots of reasons, but there is big demand for financial services. There are a bunch of non-banking finance companies (NBFCs), and some have done very well, and they’re very small and aggressive.

Third investment idea: For the person who wants to get into India but doesn’t want to do any work. The Tata Group is everywhere, and Tata Investment Corp, the parent corporation for the Tatas, they have balance sheets only once a year but trade at a discount of about 40% to the liquidation value. Fairly high dividend, might see the discount shrink in a bull market.

India has been a PR disaster, but he thinks the action on the ground and the ten-year data show continuing phenomenal progress. “India is working again” and aggressively trying to get things moving. He thinks the next decade will bring them to 620 million women, illiteracy down to 17%, and a GDP of $6 trillion that he thinks will be fired by domestic consumption and will be unstoppable. And India is built on relationships, he urges you to go to India and build some relationships so you’re ready for the amazing opportunities ahead.

Bonus idea for those who want something big: Sun Pharma — rollup of pharma companies, moving up the value chain — now a $30 billion company.

He says that “India always disappoints in the short run, but we always surprise in the long run” — and since it’s still fairly hard even for institutions to register to invest directly in India (not unlike Korea), he thinks that it will fairly soon (next few years, perhaps) be possible for foreign investors to invest directly in India.

In the interim, he suggested looking for the many India-focused funds — he says the US ADRs are probably sold too aggressively, and he doesn’t like buying something that someone is trying to sell to him. I owned some of the US-listed India stocks several years ago, in the early 2000s when India was in a nice boom, but haven’t looked at any of them very closely of late (and I was skeptical of Tata Motors (TTM) as it was near the bottom several years ago, which was a mistake). So nothing really exciting and actionable for us little guys from this presentation, but I loved the enthusiasm and I’m glad to be reminded of the real human potential of India. I’m almost ready to drink up some Indian Kool-Ade.

We’ll see if I find some way to turn that enthusiasm into money (the stocks are a bit expensive on the election enthusiasm, and if India “always disappoints” in the short run we might get a broad buying opportunity in the next year or two.

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