Artemis: How India went from sleeping giant to superpower in 10 years

Natasha Ebtehadj, global equities fund manager, says that by investing billions of dollars in infrastructure, digitalising its finance system and reducing bureaucracy, India has overtaken China as investors’ favourite emerging market. But with valuations looking stretched, what is the best way to approach it?

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India’s stock market capitalisation has just overtaken Hong Kong’s as global investors become increasingly excited by what is happening to the economy¹. I have just returned from my first visit to the country in five years, and even in that time the differences I noticed are immense.

Infrastructure transformation

A huge investment in infrastructure is powering economic growth. New roads are being built in key locations. An embattled goods delivery driver used to take 36 hours to drive from Delhi to Mumbai. The journey now takes 24 hours, and soon will only take 12 hours with the completion of the Delhi-Mumbai Expressway².

Manufacturing companies around Delhi will also soon have an alternative route to send their goods to Mumbai. The completion of the Western Dedicated Freight Corridor³, part of a new railway network dedicated exclusively to freight, is speeding up the transport of goods and will free up existing railway lines for passengers.

India has the fourth-largest railway network in the world – more than 42,000 miles, of which more than 90%⁴ is now electrified (compared with less than 38% in the UK)⁵. The process began before prime minister Narendra Modi came to power 10 years ago but has continued apace since, with more than half of the network electrified⁶ in the past decade.

The renewable revolution

There is still a challenge to ensure that the electricity powering trains and other new engines of economic growth comes from renewable sources. Nearly half of India’s power capacity still comes from coal⁷.

But work is steaming ahead on that front, too. India is committed to generating 500GW of installed renewable capacity by 2030 – greater than India’s total electricity capacity today⁸. This includes 280GW from solar and 140GW of wind power⁹. In parallel, it is developing its grid infrastructure and battery storage¹⁰.

As the country grows, demand for electricity will rise – and renewable energy supply is more variable, so capacity needs to grow even faster. Coal will be a part of the mix for some years yet, but its role will continue to decrease.

Hopefully, the rapid growth in renewable energy production will help reduce pollution levels, which are terrible – the flip-side of an emerging market going through an economic boom.

Another area where there has been astonishing development is India’s digital infrastructure. The adoption of digital IDs, a fee-free instant payment system and low-cost bank accounts have dramatically improved financial inclusion, enabling smoother social benefit and bill payments and faster, easier loan applications.

Low-cost banking is widely available – more than 460 million low-cost bank accounts have been opened since 2009, more than half of them by women¹¹. All this is good for growth.

Geopolitical tailwinds

Modi has faced criticism for his Hindu nationalist tendencies, but a decade of relatively stable government – and a government focused on action – have helped India. The feedback loop between top ministries and companies is astonishing – unlike in China, where little seems to get through to the top. Government’s willingness to at least listen is helping to inform public policy and cut red tape.

Picture the goods delivery drivers on that new Expressway connecting Delhi with Mumbai – a road that crosses six states. Previously they would have had to stop at each state border to pay taxes.

Thanks to the simplified ‘One Nation, One Tax’ regime (GST) introduced in 2017, that is no longer necessary. Life is being made easier for business. India has risen up the World Bank’s Ease of Doing Business rankings to 63rd place from 142nd since 2014.

‘Friendshoring’

India also looks set to benefit from external factors, not least the geopolitical tensions between many developed countries and China. As companies look to reduce their reliance on China for manufacturing, production is moving to India – particularly for low-end electronics. On this trip I saw people putting parts together to make light bulbs – a low-value-add but still labour-intensive process.

This sort of work is likely to go to India, given the country’s natural advantage of surplus labour and companies’ desires to have a ‘China +1’ manufacturing strategy. But India has ambitions to move further up the value chain.

Indian multinational IT business Infosys says it has just hired 50,000 people to work on Nvidia’s new Generative AI products¹². It is hard to name anywhere else in the world you could hire so many skilled IT people so quickly.

Strengthening domestic economy

As the economy grows, the population becomes wealthier. As recent inflation has eased, lower-income households have recovered and increased their spending. Wealthier consumers seemed relatively unaffected by inflation. Premium-end Hindustan Unilever brands are still seeing more than twice the growth of the rest of the portfolio.

Another company I met with, Sula Vineyards, is seeing consistent double-digit volume growth, driven by demand for its premium wine portfolio. Meanwhile, I was told that waiting lists for premium car models from Toyota and Mahindra are 24 to 62 weeks.

Credit is abundant, and the regulator has created the environment for non-bank financial institutions and life insurance companies to thrive. Niche lenders in products such as microfinance and in rural areas look likely to continue doing well, lending amounts too small and in places too hard to reach for the big banks.

Investing smartly

I believe the Indian economy is at the start of a potential multi-year boom. However, it is not all good news. Stocks in India tend to be expensive. This has been the case for the decade I have been monitoring this market, and there are several reasons why. Growing wealth and capital controls have channelled India’s financially literate and technologically connected consumers to invest domestically in equities, which has driven up prices. Strong growth has a premium attached to it, too.

On this visit I met 21 companies. I see this as a happy hunting ground for the growth investor prepared to be patient and do their research. For now we are playing this economic boom via our holding in HDFC Bank – a simple way to tap into the growing prosperity of businesses and consumers. This is a stock that looks attractively priced – the bank trades on consensus 2.2x price/book and 15x price/earnings for the 2024/25 financial year.

But we are digging further into other companies. I suspect we will add more to our India exposure the Artemis Global Select Fund in the coming months – and that I will be back again in the not-too-distant future.

¹https://www.bloomberg.com/news/articles/2024-01-23/india-overtakes-hong-kong-as-world-s-fourth-largest-stock-market
²Delhi-Mumbai Expressway status: Where you can drive as new 244 km stretch opens - Times of India (indiatimes.com)
³95 per cent of Dedicated Freight Corridor to be ready by March 2024 - The Hindu BusinessLine
⁴https://indianrailways.gov.in/railwayboard/uploads/directorate/ele_engg/RE/2024/Railway%20Electrification%20as%20on%2001-01-2024.pdf
⁵https://www.infrastructure-ni.gov.uk/sites/default/files/consultations/infrastructure/all-island-strategic-rail-review-draft-report-revised-8aug2023.pdf
⁶https://www.thehindu.com/news/national/parliament-proceedings-indian-railways-has-set-target-to-become-net-zero-carbon-emitter-by-2030-says-aishnaw/article67658464.ece
⁷https://www.reuters.com/business/energy/indias-power-output-grows-fastest-pace-33-years-fuelled-by-coal-2023-04-05/
⁸https://cea.nic.in/dashboard/?lang=en Government of India Ministry of Power Central Electricity Authority
⁹https://timesofindia.indiatimes.com/blogs/voices/india-gets-closer-to-meeting-2030-renewable-energy-targets-with-new-transmission-plan/
¹⁰https://timesofindia.indiatimes.com/blogs/voices/india-gets-closer-to-meeting-2030-renewable-energy-targets-with-new-transmission-plan/
¹¹https://www.omfif.org/2023/11/indias-digital-leap-in-financial-inclusion/
¹²Infosys and NVIDIA Team to Help World’s Enterprises Boost Productivity With Generative AI | NVIDIA Newsroom

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