India Fund

Why You Don’t Invest in India

Last week, Apple CEO Tim Cook told analysts that “India is moving fast. They are moving at a speed that I have not seen in any other country in the world.” Despite this and many other positive endorsements, investors often procrastinate and identify reasons not to invest in India’s growth. In this wire, we seek to dispel those reasons.


“Not one single country, anywhere in the world, is corruption free”. This is the title of the first chapter in the Corruption Perception Index Report of 2015. India is not an exception, however, what is changing is the focus on reducing corruption. This is evident by the monumental support of Prime Minister Modi’s pledge against corruption. India’s focus has now moved on from pure enforcement of anti-corruption laws to prevention at the source, which is more effective at sustainably fighting corruption. One such successful strategy has been through the adoption of technology.

We list some of the other initiatives and developments below:

    • Over one billion Indian citizens have been issued unique identification numbers known as Aadhaar. This is not simply a tax file number, but it enables authentication of an individual using biometric and iris eye scanning technology! In fact, it has been used successfully in enabling the direct transfer of social benefits and thus eliminating the scope for corruption from middle men. Over 4 billion transactions have been completed using this platform.
    • Physical inspections by enforcement agencies like customs are now being replaced by digital scanners and camera’s saving time and reducing the potential for corruption.
    • Higher transparency through e-tendering is expected to reduce the scope for corruption in awarding of government contracts. The Reserve Bank of India (RBI) is pushing a move towards a cashless society by focusing on development of new electronic payment systems and issuing licenses for new payment banks. Payments through non-cash electronic channels have increased from AU$400 billion in 2011-12 to AU$1.3 trillion in 2014-15
    • The emergence of organised retail through Departmental stores, Hypermarkets and Online Retailing is helping reduce cash transactions, a source for “black money”(unaccounted for money) in the economy


The regulatory framework in India’s financial markets is in compliance with the OECD Principles, an international benchmark for securities markets regulation. The World Bank in its report titled “Doing Business 2015 Going Beyond Efficiency” has ranked India 8th in respect of minority investor protection ahead of countries like the US and Australia.

Furthermore, the International Organisation of Securities Commissions (IOSCO) and the Bank for International Settlements (BIS) has rated India’s regulatory framework for financial market infrastructure at the highest score of ‘4’ for all eight parameters assessed on a scale of one to four along with only five other countries globally including Australia, Brazil, Hong Kong, Japan and Singapore.

India has over 6000 companies, making the equity market the largest in the world in terms of number of listed companies. In fact, it has a settlement cycle of T+2 with average daily traded volumes of AU$4.5bn and a market cap larger than Australia at over AU$2tn.

To put the size into perspective, we have compared the Indian stock market to the Australian Stock market below.

India vs. Australia: Average Market Cap


India’s progress is quite often assessed by its “perceived” pace of reform execution. Note the word perceived, as the media is quite negative in its assessment of the pace of reform. Unfortunately, investors’ view on Modi can be tainted by this. However, given India is the world’s largest democracy, this is probably a hasty assessment. In fact, there is an interesting website, which tracks the progress on India’s reforms: (view link). The website tracks 30 of India’s reforms as either complete, in progress or incomplete. This transparency is unprecedented, even in developed markets.

So is development in India really slow? Whilst the pace has certainly picked up, change needs to be considered long-term as the process of reforming such a large and heterogeneous economy is nuanced, involving a diverse set of states and industries. However, Modi’s Government is putting the right bricks in place, which should pave the way for handsome dividends over the next decade.

One example is the implementation of GST, the country’s single biggest tax reform. Once rolled out, it will be driven by the principle of one nation, one tax doing away with multiple indirect taxes and economically unifying India by transforming it into a single market and a free trade economic zone for producers based inside the country. This is likely to add percentage points to GDP growth over the next few years.


During the global financial crisis, corporate earnings in India were resilient, even though price-earnings multiples fluctuated wildly due to global events. However, if we take a longer-term perspective, equity returns from India have rewarded investors who have ignored short-term volatility and not made irrational, myopic investment decisions.

Those that choose to ignore short-term sentiment and focus on correctly identifying companies or markets that are experiencing strong and sustainable earnings growth can create significant wealth. Despite India’s higher price volatility, the US has experienced substantially higher volatility in its earnings (nearly 3x as much as India). Ignoring short-term price volatility, In Australian dollar terms, India has delivered returns of 12.7% p.a. compared to the S&P500’s 5.3% p.a. over the last 15 years which equates to 385% difference over the period.

India is a prime example where companies have generated substantial and sustainable earnings growth over the long term. Indian corporates have consistently managed to maintain a high return on equity (RoE). In fact, the RoE of Indian companies was above 14% even during the crisis period as companies were able to capitalise on resilient local consumer demand to offset much of the weak global sentiment. Indian companies exhibit a very favourable combination of strong RoE and low earnings volatility compared with other markets as shown below.

High Return on Equity and Quality Earnings Growth


For many international and Australian companies, due to lack of growth in top line revenue, share-buybacks, productivity gains and cost cutting have led to EPS growth. As a result, investors are demanding companies distribute dividends rather than reinvesting into their business. In a country like India, the reverse dynamic is true as many companies are rewarded for growth by reinvesting in their business. As a result, India’s payout ratios and dividend yield are low at 26% and 1.4% respectively compared to 70% and 4.3% in Australia. This is a key indicator of a stock market that is able to create significant wealth through compounding earnings growth. This is not to say that dividends are not important, but you cannot ignore organic growth as a significant driver of stock prices. In fact, dividend growth can only occur when earnings are also growing sustainably. Or in other words the lack of growth can lead to eventual decay of dividends.

Companies operating within India generate strong ROE. This is a reflection of well managed businesses, employing capital effectively to generate profit and create shareholder wealth. Several companies in India are growing their earnings at over 30% per annum through strong revenue growth from an vibrant and growing middle class, huge consumption spend, particularly from the 600m Indians under the age of 25 and required infrastructure development initiatives by the government.

India is rapidly changing. Perception is often not reality and stereotypes are quickly becoming outdated. I think it’s time investors consider India as a more serious and strategic investment destination. Why not, given growth from equities is scarce? Unlike China, investing in India’s equity market has provided double digit returns since the turn of the century.

You also get a freebie if you do. How? Well, India’s economy benefits from lower commodity prices due to significant imports of Oil, Coal and Copper etc. Commodity exporting regions like Canada, Norway and the Middle East have already understood this diversification benefit and have invested significantly in India. Therefore, with India, there is not only strong capital growth but significant diversification within an investment portfolio, particularly for countries like Australia that share this export dependency.

In fact, in contrast to investing in Emerging Markets, an investment in India gives you strong growth potential and more diversification as an Australian investor. Sure, valuations are higher on a one year forward basis. However, you should recognise you are considering a successful growth investment over 5-10 years.

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