- Factors driving India's economy growth
- Will euphoria around India sustain in the long run?
Watch Samina Nalwala in conversation with Veteran Investor Mark Mobius on Talking Point.
- Will euphoria around India sustain in the long run?
Watch Samina Nalwala in conversation with Veteran Investor Mark Mobius on Talking Point.
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TVTranscript
00:00 [MUSIC PLAYING]
00:03 Hello, and welcome to NDTV Profit.
00:13 Joining me today is a very special guest,
00:16 veteran investor Mark Mobias, who
00:18 joins us from very exciting sunny Brazil.
00:21 Thank you, Mark.
00:23 It's always such a pleasure to have you on the show.
00:26 To start with, Mark, like you said,
00:29 you traveled extensively in India a few months ago,
00:32 visiting six cities across various states.
00:37 Tell me, how do you feel?
00:38 Do you feel the real economy on ground
00:40 is as exciting as the equity markets seem to show it to be?
00:46 There's no question.
00:47 There's an incredible amount of growth and dynamism in India.
00:51 In all the places we visited, I felt this incredible energy.
00:55 And what's so important in India, in my mind,
00:57 is the different cultures.
01:00 You've got these different states
01:02 with quite different cultures, but something
01:05 holds everything together.
01:07 So there is a sense of being Indian,
01:09 but yet also being from a different part of the country
01:13 and having a different language, which gives India
01:16 tremendous strength, in my view.
01:18 So I was very excited and very pleased
01:21 by what we found in India.
01:25 Mark, you've tracked India for decades,
01:27 and you've always been a fan of India in some sense.
01:30 Do you feel like the tide is finally turning in our favor?
01:34 Do you feel like on ground, the real economy
01:37 is truly changing?
01:40 Oh, there's no question about that.
01:42 It's very, very clear that things are changing dramatically
01:45 and very fast.
01:46 And I think there are two reasons for this.
01:49 One is technology.
01:52 Thanks to the government, they are pushing technology
01:57 and digitization.
01:59 And I think that is very, very critical to the growth of not
02:03 only India, but other countries around the world.
02:05 But India is grasping that very forcefully.
02:09 That's number one.
02:10 Number two, you've got a young population.
02:13 And these youngsters can adopt and adjust
02:17 to this new technology more quickly than older people
02:21 like me.
02:22 So I'm learning from my young staff now about technology.
02:27 And it's a wonderful thing to see.
02:29 So India's got those two very dynamic things happening.
02:33 And of course, added to that is the incredible cultural
02:37 background that you have in India,
02:39 the tremendous creativity.
02:41 Just like we were mentioning, the beautiful picture
02:44 behind you illustrates how young people can create something
02:50 so great, so colorful, and so creative.
02:55 Wow, you've really put that well.
02:58 Let's talk about it in a little more detail.
03:00 And I know this because we've seen this in the last decade.
03:03 India's always been an exotic location of sorts
03:06 for a lot of foreign investors.
03:08 It was all about a little bit of exposure to India
03:10 just because it's a large country.
03:12 And that was the story.
03:15 Now, of course, we've become rather significant
03:18 for the world.
03:19 India's inclusion in the JP Morgan Bond Index
03:22 was a step in the right direction.
03:24 A Bloomberg inclusion could be on the charts as well.
03:27 Do you feel like when you're tracking emerging markets,
03:32 you will continue to see the euphoria around India now
03:36 and going ahead that's only going to get larger and bigger?
03:43 Yes, I think so.
03:44 You're going to see the euphoria continuing.
03:46 But you must remember that when we look at stock markets
03:50 around the world, whether it be India, US, China, wherever,
03:53 there'll be ups and downs.
03:54 So you've got to remember that there
03:57 will be times when the Indian market comes down by 10%,
04:00 15%.
04:01 But that won't be significant.
04:03 The significant thing is that the long-term growth
04:06 trend is in place.
04:07 And what I think has really changed
04:10 is not only the fact that India is growing at 7%,
04:14 but the fact that China now has become a place where many,
04:20 particularly US investors, but global investors generally,
04:24 have burnt their fingers and are very careful about putting
04:28 more money into China.
04:30 And of course, where do they look?
04:32 What's the next place?
04:33 It's got to be India, because it's
04:35 the only other country in the world
04:37 with over a billion people.
04:39 And the young people are bad.
04:41 So I think India has benefited from that situation in China.
04:48 Now, it doesn't mean that China is going to be down forever.
04:52 There will be some recovery.
04:53 It will take time.
04:54 In the meantime, India will benefit
04:56 from the shift of investment money from China to India.
05:03 Mark, you're an ace investor, and you've
05:06 invested in emerging markets for a very significant period
05:09 of time.
05:10 In your emerging market portfolio,
05:13 how much percentage of exposure do you hold in India?
05:17 Right now, we have 25% in India.
05:22 And that will probably be growing.
05:24 And of course, my new fund will look very carefully at India
05:28 and probably have more than that.
05:31 So what happens to incremental funds in that sense?
05:35 Will you continue to still add to India?
05:38 Or would you then balance it out and add
05:40 to other countries across the emerging market back?
05:43 Well, of course, we've got to be diversified.
05:45 There's no question about that.
05:46 We can't put everything in one country.
05:48 But India will probably be the largest single country
05:54 allocation for a number of reasons.
05:56 One, of course, the values are there.
05:57 The growth is there.
05:59 But also, the size is there.
06:02 The Indian market is big, and it's growing.
06:07 So Mark, and this brings me to my next question,
06:10 and you alluded to that.
06:11 India has historically been doubted as an expensive market.
06:16 It still is expensive.
06:17 Not very much has changed.
06:18 The only thing that's working against us, maybe,
06:20 is that China has become really cheap now.
06:23 Do you still feel like the risk-reward and the growth
06:26 prospects are in favor of India, even at this stage?
06:29 So while the structural story is intact,
06:32 and it's still remaining, what do you
06:34 say, the bio-depth market, at these current valuations,
06:37 at these current prices, India is still
06:40 as lucrative and attractive, you'd imagine?
06:44 You know, when people look at valuations,
06:47 more often, they will look at price-earnings ratios.
06:51 The problem with that metric is that you're
06:55 in a situation in China where the earnings growth is not
07:00 as great as what you see in India.
07:03 So the P/E ratio in India, because the prices moved up
07:10 faster than the earnings, looks expensive.
07:14 But if you consider the growth rate of earnings,
07:19 India could be considered cheaper.
07:23 So that's the reason why we usually
07:25 don't look at price-earnings to value a company or a market.
07:30 We look at return on capital.
07:33 And of course, we look at EPS growth,
07:35 earnings per share growth.
07:37 But the key, of course, is how much
07:40 is a particular stock or market returning
07:43 in terms of the money invested, the capital invested.
07:47 And in that case, India is doing very well.
07:51 Right.
07:52 Mark, I did listen to a recent interview you did,
07:55 and where you said you like the broader markets,
07:58 because they do have a larger potential to deliver.
08:00 And the next leg of growth is going
08:02 to come in from the mid-cap stocks or mid-cap companies.
08:07 Have you spotted the next HDFC Bank or the next Infosys
08:11 or even the next Reliance Industries?
08:13 Of course, we are always looking for those companies.
08:16 And as a rule, we try to avoid companies
08:19 that are in the index, which means that they're big,
08:23 they're well-researched.
08:25 We like to look at companies that
08:26 are in the middle and small category, which
08:30 are not in the index, but which have good growth potential.
08:36 Not all of them are good targets,
08:39 but many of them have tremendous growth potential
08:42 and have a high return on capital.
08:44 So what we do is we look at those companies
08:47 and see which ones are going to be the next companies
08:51 in the index, because eventually, they
08:52 will graduate to be part of the index
08:55 and then be heavily researched.
08:57 The advantage of looking at the small and medium category
09:01 is that there's not much research.
09:04 And so we can do our own research,
09:06 and we know that we're learning something that perhaps
09:09 other people don't have.
09:12 Right, and I'm going to try and pick your brains
09:14 to understand what those stocks are and what sectors they are
09:17 in.
09:18 Government-facing sectors, such as railways, defense,
09:22 infrastructure, has been the big theme all through 2023.
09:27 Some of them have done upward of 200% to 300% returns.
09:32 With a continuity of policy expected--
09:36 I know we have elections around the corner,
09:37 but a lot of that is already discounted and given
09:40 in that sense, with the ruling government staying on.
09:43 Do you feel like this is a good space or a good proxy
09:47 to play India?
09:48 And if yes, do you own anything in the railway or defense
09:51 space?
09:52 Or infrastructure?
09:54 Yeah, some of these infrastructure stocks,
09:57 like the railways, airlines, roads, tow roads,
10:01 that sort of thing, are quite interesting.
10:04 But many of them have a relatively low return
10:07 on capital.
10:08 So you have to be careful.
10:09 And then also, you have a problem
10:11 with government regulations, which
10:12 could limit the profitability of some of these enterprises.
10:18 And of course, most of those companies are large.
10:20 They're not in the middle income or the middle profit sector,
10:27 but in large size.
10:29 So we try to not look at such companies.
10:33 But certainly, it's not beyond the realm of possibility
10:37 that we will look at some of these companies.
10:39 I think the key, whether it be in transportation,
10:44 whether it be in infrastructure, whether it be in banking,
10:49 the key, of course, is technology.
10:52 To what degree are these companies utilizing technology
10:56 to improve their profitability and improve their growth
11:00 prospects?
11:01 So that's what we look at.
11:04 And there's some of them that are doing very well
11:07 and are doing some very interesting things.
11:09 So we love technology, but it doesn't
11:13 mean we're going to buy only software companies
11:16 or the hardware companies in the tech sector,
11:20 but we will buy companies that use this technology
11:24 to improve growth prospects and profitability.
11:28 Mark, would it be possible to give me
11:30 examples of those companies?
11:31 I can't give you any examples now,
11:36 because we're in the process of buying.
11:40 Anything that's already been bought.
11:44 So I prefer not to name specific names.
11:49 OK.
11:50 Talking about technology, AI, and I
11:52 know that's a theme you're enjoying learning about.
11:57 The big conversation these days is about EV.
12:01 Uncharted territories, we're only
12:04 scratching the surface in India.
12:06 Is this a theme you like?
12:07 And if you do like it, how would you play EV in India?
12:10 Would you buy OEMs?
12:12 Would you buy auto and systems?
12:14 And celery?
12:15 I mean, is this even a space you're
12:18 attracted to in that sense?
12:21 Right now, we're not too excited about EV for the simple reason
12:27 that it is a very crowded market.
12:30 Recently, I was in China, and we were driving from one city
12:34 to another.
12:35 We were using different electric vehicles,
12:38 and they were all very, very good.
12:40 They were excellent, and the costs were low.
12:45 And I think the same thing is going
12:47 to happen in India, where the competition will be very keen,
12:52 and prices will be competitive.
12:55 Profitability will not be that good.
12:57 Of course, you could have a Tesla in the horizon,
13:02 but I think that is pretty much over.
13:05 The opportunities are over.
13:08 And now, the other side of EV would be the suppliers
13:13 to EV companies, whether it be the batteries, the battery
13:18 components, or other aspects of the electric vehicle.
13:26 The electronics in electric vehicles
13:28 would be an interesting area.
13:31 So that's what we would look at.
13:33 We would look at the suppliers to electric vehicle makers.
13:39 So batteries, tires, anything to do
13:42 with going into the manufacturing of the EV car?
13:48 No, just the suppliers.
13:50 For example, software.
13:53 Self-driving would be kind of--
13:55 I'm already thinking of a company in my head.
13:57 Tata Tech does some of that work for EV space, but sure.
14:02 Yeah, there's lots of other--
14:05 Yeah.
14:06 Also, keeping the focus with tech,
14:09 do you like FinTech in India?
14:12 Yes, I like FinTech.
14:15 But you must remember that the central banks
14:18 around the world, including the Reserve Bank in India,
14:21 are looking more and more at FinTech
14:24 and are devising their own FinTech solutions.
14:28 Here in Brazil, for example, the central bank
14:31 has created a payment system, online payment system,
14:37 that's very efficient.
14:38 And it would be very difficult for the private sector
14:41 to compete with that.
14:43 In India, as you know, the central bank
14:44 has instituted a system for payments,
14:47 which obviates the need for some private sector
14:52 initiatives in that area.
14:53 So I think you have to be careful,
14:55 not get too excited about FinTech.
14:58 Not that it's not important, and in critical and growing growth
15:02 area, but still, you've got to be
15:04 careful about the investment in such areas.
15:07 Do you own FinTech stocks in India, Mark?
15:11 No, we do not.
15:14 You talked about how you saw roads and the construction
15:17 activity that was happening around the space.
15:19 And I want you to talk a little bit more
15:20 about infrastructure for me.
15:22 Just like auto, do you think for the infrapack,
15:25 the better way to play the space is
15:27 through the ancillary or the supply side that goes in?
15:30 So cement, for example, paints, pipes.
15:35 Is that a better way to play the infrastructure story in India?
15:38 Or would you still go with--
15:39 I would say so.
15:40 --a lot of markets, smaller infra companies?
15:43 Yeah, I would say so.
15:45 Normally, we stay away from infrastructure construction
15:51 companies because you get involved
15:54 with a lot of problems.
15:57 Corruption in the construction industry
16:00 globally is a big, big issue.
16:03 And of course, that's true in India
16:04 as well as anywhere else in the world.
16:07 So you don't want to get into that sector.
16:10 But some of the people who supply the materials,
16:13 for example, pipes and steel, that sort of thing,
16:19 if you have an efficient producer,
16:21 then there would be good opportunities in that area.
16:26 You know, Mark, we've seen a few data points.
16:29 We've seen earnings.
16:30 It's a bit of a divide when we talk about the consumption
16:33 cycle in India.
16:35 The biggest story in India has been the population,
16:38 like you said, which sort of translates into the fact
16:41 that we've got a massive rural population as well.
16:45 What we've seen for a lot of these companies
16:47 is rural consumption is still not picking up.
16:50 Interestingly, what's picking up is aspirational consumption.
16:54 How do you look at that space?
16:56 Do you feel like rural consumption is probably
16:59 the best place to be in?
17:01 Because in order to get to aspirational,
17:03 the rural has to move up the food chain in that sense.
17:07 Or would you stay invested and buy
17:10 companies that play the aspirational segment
17:12 in the country?
17:14 Well, I would say that rural consumption actually
17:17 is going up.
17:18 But it's not being consumed in the rural areas.
17:21 It's being consumed in the cities
17:23 because you are having a massive move away from the rural areas
17:28 into the cities.
17:30 So it may seem that the rural areas are not consuming.
17:33 But in fact, those rural area inhabitants
17:39 are moving into the cities and consuming.
17:42 And of course, a lot of this consumption is aspirational.
17:47 If you go to any part of India, you'll
17:49 see people not only buying the essentials,
17:52 but buying all kinds of other things that are not essential,
17:56 but are aspirational.
17:59 So if you had to bet on the space, would you pick staples?
18:05 Or would you pick urban consumption-focused names?
18:12 I would look at the urban branded area.
18:17 At the end of the day, it's a very interesting phenomenon.
18:20 People in rural areas, when they consume,
18:24 they want to buy a brand.
18:26 Because even though the price point is very low
18:32 and the unit volume is low-- for example,
18:35 if you buy soap powder, it'll be in a little packet
18:39 rather than a big container--
18:42 they will want to buy a brand.
18:43 Because they don't want to waste their money on something
18:46 that doesn't work.
18:47 So I would look at branded products.
18:50 And if you look at India, the most successful companies
18:55 are those with very credible brands.
19:00 Mark, also with the amount of money
19:01 that's been flowing into this country--
19:03 and you mentioned that as well--
19:06 do you feel like private investments are still
19:10 attractive in India?
19:11 Or do you think secondary markets are so compelling
19:14 at this stage in India that it'd rather
19:16 go into a space through the secondary market
19:20 as opposed to go into private investments?
19:22 Where do you feel like all this money is flowing in?
19:25 Well, private sector investment is
19:29 going to be growing at a very rapid pace in India.
19:32 It's already big, but it's going to be growing faster.
19:35 And the reason for that is that so many family-owned companies
19:40 that don't want to go public, at least at this stage,
19:44 but they need capital, they want capital,
19:46 and that's where the private sector will come in.
19:50 Private equity will come in and invest in these companies
19:53 and help them grow.
19:54 Then at the next stage, they will go illicit.
19:58 And of course, as you can see, it's already happening in India.
20:00 The number of IPOs in India now this last year
20:06 is more than, I think, five times more
20:08 than the previous year.
20:10 So 22 versus 23 has been quite a dramatic increase in IPOs.
20:17 And I think you're going to see that continuing going forward.
20:20 Nevertheless, there are a lot of family companies
20:24 that have not gone public and don't want
20:27 to go public at this stage.
20:29 Have you subscribed to any of those IPOs in India?
20:33 No.
20:33 We normally don't like IPOs because usually they're
20:38 priced to perfection.
20:40 So we prefer to see a track record first.
20:46 Mark, we've talked about all the good things in this country.
20:50 Are there any risks?
20:51 Are there any obvious risks that you're
20:52 concerned about at this stage?
20:56 Of course, there are always possible risks.
21:00 One is the overheating of the market.
21:02 I mean, there's been so much optimism about the market.
21:05 And there's a possibility there'll be a correction
21:08 along the way.
21:09 So that's a possible risk.
21:11 The other possible risk is a change in government policies.
21:16 Now, the current government is doing a terrific job.
21:19 And I know Modi has recently announced a big infrastructure
21:24 program, which is terrific and badly needed.
21:27 So far, things are going very well.
21:30 But if there's any pullback from that,
21:32 it would not be good news.
21:35 Right.
21:36 Also, with your portfolio, Mark, your India portfolio,
21:39 I mean, what is the period of holding
21:42 that you have in some of these stocks?
21:44 How do you call for exits?
21:45 Is it when there's a requirement of cash from a client?
21:48 Is it when you see a specific company topping out?
21:51 Or when there's a trend reversal?
21:53 Help me understand that.
21:54 I want to know when you buy a stock, what is the time horizon
21:59 and what are the triggers that you watch out for before you,
22:01 of course, take profits off the table?
22:03 What we do is we look at a stock and we like--
22:06 and we make the plan to hold it forever.
22:10 In other words, there's no reason to sell a stock
22:13 if they continue to do good, have good profitability,
22:17 have good growth.
22:18 So we normally say, well, about five years
22:21 would be the time frame.
22:22 But in fact, we don't plan on five years.
22:25 We plan on forever if the company continues to do well.
22:30 Nevertheless, as you've mentioned,
22:33 if you're running an open-ended fund,
22:35 some clients want their money back.
22:37 And you've got to give it to them.
22:39 And that means you've got to sell some stocks.
22:41 So we're forced sometimes to sell.
22:44 And that's the reason, by the way,
22:46 we want some degree of liquidity when we buy a stock.
22:49 But the plan when we buy a stock originally
22:53 is not to sell but to hold as long as the profitability
22:57 continues and the return on capital is good.
23:02 And what is the return on capital that you look for?
23:04 What are the sort of returns that you
23:06 expect when you enter a given company or the country?
23:11 At this stage, what is a fair expectation for investors
23:15 to expect from the Indian equity markets over a three
23:18 to five-year period, even though I
23:20 know you're a forever investor?
23:22 20%, at least 20% return on capital is what we look for.
23:28 And by the way, companies that have that characteristic often
23:33 meet our second criteria, which is low debt.
23:37 Because if a company has a 20% return on capital,
23:43 chances are they don't have to borrow.
23:45 They can finance their growth internally.
23:49 Low debt, that is a good one.
23:51 So low debt has to be a tech AI play.
23:54 Anything else, anything else of your tracking
23:57 that you like, just forward-looking, sectors
24:00 maybe beyond tech and AI that you actually
24:03 seem that have caught your fancy?
24:06 One of the things we're looking at now,
24:08 it's not too early actually, but we're definitely
24:11 looking at the area of technology
24:16 in terms of hardware.
24:19 As you know, India is an incredible producer of software.
24:25 And of course, India is a big exporter
24:27 of software around the world.
24:30 But what we are thinking is that going forward,
24:35 India will have to be a big producer of semiconductors
24:39 and of other components, hardware components.
24:42 Of course, they're already producing cell phones,
24:46 laptop computers, that sort of thing.
24:48 But that will grow.
24:50 And all the ancillary industries that
24:53 support the computer side, the cell phone side, and so forth,
24:59 particularly semiconductors, will become a big industry
25:02 in India.
25:05 That's a good one.
25:06 So semiconductors, that's another space
25:07 to watch out for.
25:08 Very lastly, Mark, green energy, I
25:11 mean, it's all about new age and sunrise sectors.
25:14 Anything in the green energy space
25:15 that's caught your attention?
25:18 Of course.
25:19 If you look at solar energy, it's
25:21 growing by leaps and bounds around the world
25:24 and will continue to grow.
25:26 Again, unfortunately, it's a very crowded area.
25:29 So we have to be careful.
25:31 The Chinese have pushed prices down to very, very low levels.
25:35 So it'd be difficult to get into that.
25:37 But I would say the silicon and all the other components
25:42 going to solar cells would be something of interest.
25:47 Very lastly, Mark, in your new fund,
25:50 how much percent of India allocations are already
25:53 completed?
25:55 We haven't started yet.
25:56 We're just in the process of forming the fund.
25:59 So it'll be, let's say, three or four months from now.
26:04 Exciting.
26:04 So hopefully, we can catch you then
26:06 and get some more on those stocks
26:08 that you've cherry picked.
26:10 I look forward to it.
26:12 Great talking to you, Mark, as always.
26:14 Thank you very much.
26:14 And yeah, we hope to see you soon.
26:18 OK.
26:19 Bye-bye now.
26:20 See you again.
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