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Identifying Future Winners Among India’s SMEs

A Broad and Diverse Market Creates Opportunity for Generating Alpha

India represents one of the largest and most varied markets in all of Asia.

The number of publicly listed companies in India, currently stands at over 7,200 – comparatively, China has around 4,700 which includes shares of public companies that trade in Hong Kong.1 Conventional wisdom suggests that this vast landscape creates a far-reaching scope for investors to generate greater returns if they have the right access and are exceptional stock pickers.


But, what exactly constitutes the right access? Well, the majority of publicly listed companies in India, close to 7,000 in fact, are small and medium enterprises (SMEs) which do not trade in the major indexes or as American depository receipts (ADRs). Therefore, if investors want to tap into the growth that is offered by SMEs, and at 45 percent of India’s GDP it is quite a sizable chunk of growth, they need an investment vehicle that has the capabilities to access these ‘off-benchmark’ stocks.2

 

Access the India Small and Mid-Cap Market Through Excel Funds

Atul Penkar, Head of Offshore Equities at Birla Sun Life Asset Management, echoes the sentiment that having a large and heterogeneous investment universe helps in the pursuit of producing higher capital gains. “The Indian market is extremely diversified, with a lot of opportunities across several sectors including consumer discretionary, consumer staples, industrials, materials, energy and financials,” notes Mr. Penkar. “This allows for many ideas to generate alpha, in an environment where corporate earnings can continue to grow, on average, at a rate of two times the real GDP growth rate, for the next 5 years or so.”

Birla Sun Life Asset Management is one of the largest fund managers in India with over US$25 billion in total assets under management, as at December 31, 2016.

Mr. Penkar is also the lead Portfolio Manager of the Excel New India Leaders Fund, which is an actively managed mutual fund, that is completely “benchmark agnostic”, and predominantly invests in small and mid-cap names in India -- it is one of the only products in Canada that offers this type of access. Through a pure bottom-up, selection process that is driven by industry analysis, financial analysis, management evaluation and various channel checks, the investment team selects companies with high growth visibility of more than 20 percent and a return on equity (ROE) of more than 15 percent. The output is a portfolio that is highly concentrated, the maximum number of holdings is 35, with stocks that exhibit the potential for above-average upside.

From a sectoral point of view, the Excel New India Leaders Fund is currently overweight financials which comprises 24.2 percent of the portfolio, versus a 17.0 percent weighting in the benchmark.* The fund also has a greater tilt towards consumer discretionary (21.1 percent), industrials (18.2 percent) and materials (18.1 percent) compared to the benchmark.3

 

Government Initiatives Increase the Appeal of Specific Sectors in India

On February 1, 2017, the Indian government, announced its Union Budget for the coming fiscal year, intended to boost infrastructure spending as well as the housing sector. Mr. Penkar sites two portfolio holdings, PNB Housing Finance and Dewan Housing Finance, which will be direct benefactors of the government’s long-term plans. Both companies form around 5 percent of the Excel New India Leaders Fund. Opportunities also exist in the power and infrastructure space where Mr. Penkar referenced other portfolio names such as Techno Electric & Engineering Company Limited (5.0 percent) and Skipper Limited (4.2 percent) which are among the top ten holdings in the Excel New India Leaders Fund.4

After a period of consolidation, Indian markets have begun to climb again and the economy is expected to fully shake off the after-effects of the demonetization program which surprised investors back in November, 2016. Demonetization will ultimately work in tandem with the government’s Goods and Services Tax (GST) bill to improve tax compliance and increase revenue. Mr. Penkar believes organized players will receive a major boost as a result, and that the Excel New India Leaders Fund is well-positioned to seize growth opportunities that may arise in key sectors.

 

To learn more about investing in the Excel New India Leaders Fund click here.

 

1 Goldman Sachs, The Asian Consumer: India Consumer Close-Up, June, 2016.
2 Business Insider, India SMEs contribute 45% to country’s GDP, June 22, 2016.
3 Excel Investment Counsel Inc., Birla Sun Life Asset Management Company Limited data, as at February 10, 2017.
4 Excel Investment Counsel Inc., Birla Sun Life Asset Management Company Limited data, as at January 31, 2017.
* The Excel New India Leaders Fund benchmark is represented by the Nifty Free Float Midcap Index.


Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing.

Statements in this document, other than statements of historical fact, and including statements regarding the future economic effects of events, are “forward-looking statements”. These forward-looking statements reflect the current beliefs of the respective fund’s portfolio manager and are based on information available to the respective fund as of the date of this document. Actual results may differ materially as they are subject to a number of significant risks and uncertainties. The fund has no obligation to update or revise the forward-looking statements in this document.

 

 

Disclaimer

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

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