One of the main attractions in investing in India is that there are several sectors that are underpenetrated, including financial services, consumer and technology, which should provide investors with long-term growth opportunities, according to Vinay Agarwal, First State Investments’ lead portfolio manager for the First State Indian Subcontinent Fund.
Indeed, financial services and technology account for the largest sector allocations for most India-focused funds. On average, India funds have allocated nearly 30% of their assets in financial services, followed by around 15% in technology, according to data from Morningstar Direct.
However, while Agarwal acknowledged the opportunities presented in these growing sectors, his fund has huge underweights in these areas. For example, financials only account for 14.2% of his portfolio, which compares with 21.9% of the fund’s benchmark index (MSCI India Index). Technology, meanwhile, only accounts for 9% of the portfolio, versus the 17.6% of the benchmark.
The First State Indian Subcontinent Fund
“We do not think, ‘let’s go and find the latest internet company or an Indian pharmaceutical company’,” Agarwal told FSA, noting that he does not pay too much attention to the benchmark.
“We are absolutely index agnostic. I have been investing in India for the last 18 years, and when you ask me, I have never bothered to look at it. Because when one starts to look at it, then one starts to do strange things,” he said.
Even Reliance, which is the largest company in India and has been a key positive driver of the MSCI India Index’ performance in the past two-to-three years, is nowhere to be found in Agarwal’s fund.
“It is not even part of our investment universe,” he said, adding that the company doesn’t meet his criteria in investing.
A bias on quality
Good corporate governance, the quality of the franchise and a good management team are the key criteria for Agarwal when looking at India stocks.
“One of the things that I don’t compromise is the quality of management and owners. The company should be aligned with the interests of the minority shareholders and management should also take care of all its stakeholders, not just the shareholders.
“The management team should also take care of their employees, that’s why we also have conversations about remuneration and succession,” he said.
In terms of the quality of franchise, Agarwal looks at return on capital and cashflows.
“We don’t like leveraged businesses in which they do not generate cash to support its own growth.”
Agarwal believes that these qualities should provide investors with long-term opportunities. For Agarwal, his investment horizon is five-to-seven years.
While he likes companies with “sensible growth”, Agarwal noted that he is also conscious of valuations. For example, while he sees opportunities in consumer staple names, they now only account for around 15% of the portfolio compared with 40% seven years ago.
“While they are well-managed companies and have great franchises, some consumer staple names have become very expensive relative to the growth in their earnings,” he said.
On the flipside, he is now seeing opportunities in some cement companies.
“Two-to-three years ago, I did not own cement in India. Today, I have at least 10% in the cement sector.”
He explained that during the sell-off in March, cement companies were “punished disproportionately”, despite having strong balance sheets and good management teams.
“This has been very positive in my view. When the share prices fell to very attractive levels in March, we bought a lot of it,” he said.
One of the cement companies in Agarwal’s fund is Ambuja Cements, which is one of the top 10 holdings of the portfolio.
The First State Indian Subcontinent Fund
Agarwal’s investment universe only includes 200 names out of the 5,000 stocks in the Indian subcontinent region. Out of that 200 names, he will only invest in around 40 companies.
The First State Indian Subcontinent Fund versus the MSCI India Index and its peers
| YTD | One year | three years | five years | 10 years | |
| First State Indian Subcontinent Fund | -8.74 | -0.89 | -4.97 | 26.86 | 140.69 |
| MSCI India Index | -4.95 | 3.18 | 2.07 | 29.03 | 36.37 |
| SFC-registered India funds avg performance | -7.05 | 0.4 | -8.37 | 16.47 | 25.17 |
