A View from the Ground in India: Key Takeaways from Our Latest Research Trip

by Team of Wasatch Global Investors, 7/18/23

Among emerging-market countries, the Wasatch investment team remains most constructive on India. We’ve shared our views on the country in prior communications, exploring how trends such as digitalization, financialization, formalization, and industrialization continue to push its economy forward. A recent visit to India allowed us to see how those trends are evolving. It also provided a chance for us to meet with some of our portfolio-holding companies and explore new opportunities within India’s fast-changing economy. Below are a few takeaways from our trip.

UNLIKE MUCH OF THE WORLD, INDIA’S ECONOMY IS STILL STRONG

The management teams we spoke with—even teams that have historically been more conservative—were positive about the economic outlook for the country. Consumers, hotel operators, and cab drivers were equally optimistic. Capital spending and housing appear to be in an upcycle, and banks are reporting non-performing loans near all-time lows. Massive construction projects within cities and capital-spending plans among businesses point to a coordinated effort to spring India’s economy forward. We saw highways, overpasses, bridges, and infrastructure being built everywhere. The sense of optimism and excitement among businesses and consumers was quite different from what we read and hear about in many other parts of the world, where recessions have arrived or recession fears are mounting. Economic forecasts confirm our views on the ground, with the International Monetary Fund forecasting real GDP growth of around 6% for India in 2023, one of the highest rates in emerging and developed markets.

INDIA IS CAPITALIZING ON ITS NEW MANUFACTURING OPPORTUNITY

In prior market commentaries, we’ve discussed industrialization as an important theme for India’s development. We’ve all seen the recent headlines about Apple and other companies moving production to India. On our latest trip, the growth of the country’s manufacturing sector was palpable. Management teams from industrial companies reported an upsurge in demand as global companies develop China Plus One strategies for their supply chains. In another telling sign, finance companies told us loan demand from manufacturing enterprises is surging as a direct result of China Plus One. Additionally, executives from several firms told us that after years of scant progress and initiatives going through fits and starts, the government’s newest Production-Linked Incentive (PLI) initiative, a broad collection of incentives to spur companies to manufacture goods in the country, is finally producing tangible results. From its launch in 2020 to the end of 2022, more than 650 applications have been approved for new manufacturing facilities under the PLI.

SPECIALTY CHEMICALS ARE ONE OF THE MOST PROMISING INDUSTRIES BENEFITING FROM CHINA PLUS ONE

We met with a number of specialty-chemical companies on our trip, and we think a few trends are converging to support the industry. First, companies are relocating some of their specialty chemicals manufacturing capacity away from China. Second, the Indian workforce’s expertise in chemistry and mechanical engineering continues to make it an attractive relocation destination. We think this is the same type of expertise that allowed India’s pharmaceutical manufacturing industry to flourish in the mid-2000s. Finally, we believe a gradual and ongoing shift in preferences from petroleum-based specialty chemicals to plant-based specialty chemicals is also a tailwind. We’re excited about this relatively new area of investment for us in India.

INDIA’S CONSUMERS ARE EXERCISING THEIR SPENDING POWER IN THE WAKE OF THE PANDEMIC

Demand for travel and hospitality services may be the highest we’ve seen in two decades of visiting India. The trend was most evident in the price of domestic flights. Historically, in-country flights have cost around $70 to $80, but fares were often in the $200 range on our most recent trip. Hotel occupancy rates were also much higher than in years past. After getting hit hard by the Covid-19 pandemic, it was surprising to us how fast the population has put it in the rearview mirror. Gathering places were crowded, most people were unmasked, and the population generally seemed undeterred by the new Arcturus variant that emerged in the spring.

INDIA’S INFRASTRUCTURE INVESTMENTS ARE BOOMING

The government’s current fiscal-year budget increased infrastructure spending by over 33%, now totaling 3.3% of GDP. Mumbai serves as a prime example of the infrastructure development we saw underway. The city is undertaking four simultaneous mega-projects that could remove significant bottlenecks and increase connectivity within the city. They include a new coastal highway; a new airport on the eastern side of the city’s bay; an underground subway; and an overhead metro train. To get a sense of the scale of development, we equate it to four of Boston’s “big dig” projects all taking place at once. As India improves its infrastructure, information technology (IT) service companies are also helping in the government’s efforts to create “smart cities” that include better 5G infrastructure and cameras to monitor traffic.