Speaking at Last Word Media’s Expert Investor Forum in Singapore last week, Asnani said he is finding investment ideas coming from business that have pricing power created through product innovations or value-added work.
Companies with pricing power have a unique product or service proposition that allows them to raise prices without losing business to competitors. They are therefore better equipped to deal with inflation that may re-emerge as the Indian economy improves.
He gave as an example a small cap Indian pharmaceutical company, which he declined to name. It was one of the few pharma companies that outsourced manufacturing.
“The company used their savings to develop new drug delivery methods and new products. Otherwise, there is no pricing power in drug industry. The company used their acumen to do innovation and generate pricing power.”
Such businesses are found across sectors including financials, consumer and some power companies, he told Fund Selector Asia.
“Any sector which offers a differentiated product or service gives you pricing power,” he explained.
“The underlying growth is very resilient in India and we should find a way to access that growth without worrying over the challenging macroeconomic environment.”
Mid-cap overweight
As of 31 August, Matthews Asia India Fund’s top holding was in consumer staples company Emami, with a 4.3% weighting, followed by financial companies such as Shriram City Union Finance and Kotak Mahindra Bank with 4.3% and 4.2% weighting, respectively.
The $5.01m fund has 41 companies in its portfolio with the top 10 stocks accounting for 38.5% of the total. Ajanta Pharma was one of the healthcare companies that featured in the top 10 holdings.
The fund has an emphasis on small- and mid-sized companies with domestic demand-oriented business models.
The fund was overweight mid-caps with a 40.1% weighting compared to the 11.3% weighting of the fund’s benchmark index BSE 100 Index and compared to small-caps (22.2% as against the 0.2% of the fund’s benchmark).
Large-caps accounted for with 32.9% of the portfolio, a significant underweight compared to the benchmark that had 88.5% representation.
During his presentation, Asnani said there were more opportunities in small- and mid-caps six months ago, but today these exist across businesses of all sizes.
A look at the one-year performance of the Matthews Asia India Fund compared with the benchmark:
Sector positioning
The top sector allocations were in financials, consumer staples, industrials and consumer discretionary companies.
The fund is overweight consumer staples and industrial companies while it is underweight financials.
Any sector that is too dependent on reforms, policy changes or macroeconomics, such as energy, utilities, and telecom services, is not on the managers’ list.
“In the energy sector, issues such as subsidies and mis-governance limits such opportunities. India’s telecom sector has few opportunities because the companies are much too dependent on policies and tariffs that are among the lowest in the world.”
“Utility companies compete for limited projects that are available, so whatever little returns that they were making earlier they are not making now.”
Tricky reforms
Asnani said the widely-anticipated reforms in India are going to come through gradually.
“In order of increasing difficulty where [Prime Minister Narendra] Modi can make reforms, the easiest ones are executive reforms where the government has to take action and it doesn’t need any policy change or legislative approval.”
“If they have to obtain legislative approval at the parliament level, those are relatively doable. But in areas where you have to involve state government, it’s tricky. Those are the important ones like land acquisition, labour, agriculture, goods and services and tax reforms.”
In regards to Modi’s recent ‘Make in India’ proposition to drive investments in the manufacturing sector and create jobs, Asnani said it won’t happen throughout the country. The best case scenario would be to create a manufacturing hub between Mumbai and Dehli.
“A freight corridor coming up between Mumbai and Delhi is going to revolutionise the logistics function in India, as it will increase the freight throughput. Hopefully, other state government will follow, but it will be gradual.”
