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Q&A with Excel India Fund Portfolio Manager Atul Penkar

For advisers only

 The following is a summary of our conversation with Atul Penkar, the Portfolio Manager of Excel India Fund, when he came to our headquarters during the Excel India Roadshow “Expert Insights into India: The World’s Growth Giant” in the middle of September this year. For brevity, we have paraphrased his responses. 

 Click here to watch the entire conversation.


What are the top reasons to invest in India today?

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Firstly, the long-term growth outlook for the Indian economy looks positive. The reforms that the Indian government initiated in the last three years, have laid a very strong foundation. We can expect to see material gains to the economy, because of these reforms, over the next three to five years and growth to accelerate from current levels.

Secondly, the demand from both urban and rural sectors is expected to pick up. Over the past 12 months, we witnessed a softness in demand due to demonetization, which occurred late last year, and more recently due to the GST rollout. Therefore, demand is now certainly expected to make a comeback, which is positive news.

Finally, we are at the bottom end of the earnings growth recovery cycle. We can soon expect to see corporate earnings picking up and the same reflected in the market behavior since markets tend to mirror earnings’ growth.

Therefore, it’s a good time to invest in the Indian equity markets now.


How does being on the ground in India help you generate alpha?

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The Indian equity market is unique. It has over 6,000 listed companies and the performance disparity between the index and companies outside of it can be quite high. For example, the index may provide 14% or 15% annual compounded returns over 5 years, but there are stocks outside of the index that have delivered much returns. In fact, some stocks in our portfolio have grown almost 5 to 6 times over the past 5 years. Therefore, having on-the-ground presence, bottom-up stock picking and active portfolio management approach can really help generate alpha in a market like India.


How does investing in India differ from investing in other emerging markets?

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The fundamental difference between India and other emerging markets lies in the very nature of India’s economy. Almost two thirds of India’s economy is driven by domestic consumption. Hence, the major driver of India’s economic growth has been India’s favorable demographic profile. India has a population of 1.3 billion and a median age of 27. It’s a very young country where consumption should continue to remain very strong over the next 3 to 4 decades. In the last 16 to 17 years, India’s GDP has grown between 7 to 8 percent. That’s a very healthy rate of growth for such a long period of time. Because of these structural growth drivers, India’s GDP should continue to grow between 7 to 8 percent over the next 5 to 10 years.


What are the corporate governance structures and accounting standards like in India?            

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The corporate governance and accounting standards, in India, have evolved in the last many years. All listed companies have a professional board and independent directors who are accountable. As far as accounting standards are concerned, India has adopted IFRS (International Financial Reporting Standards), which is in line with the global practice. Our regulator has also mandated companies to follow very stringent disclosures, to ensure uniformity and transparency in communication between companies and investors.


What could induce volatility or pull back in the Indian market?

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Any global event, which could take the oil price back to $100 levels could potentially induce volatility or result in a pullback in the Indian markets since over 70% of India’s oil requirements are fulfilled by imports. Political uncertainties that could pause economic reforms are also a potential risk. That said, reforms in India have occurred regardless of the political party at the center. Ultimately, the structural drivers of India should continue to drive the economic growth in India.


What impact has lower inflation had on India’s economy?

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 3 or 4 years ago, the retail inflation, which is the CPI, used to hover above 10%, consistently. Today, it has come down dramatically and stays close to 3% to 4% levels. With inflation coming down, the interest rates have gone down as well since RBI’s monetary policy is targeted towards maintaining inflation in the 4% (+-2%) range. In the last two years, the interest rate has come down by almost 200 basis points. With inflation remaining stable, the interest rates in India should remain benign for the next couple of years.


What is your earnings growth outlook for India?

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We estimate about 11 to 12% growth in earnings for FY18, and going forward into FY19, we expect about 19 to 20% growth in earnings. The major driver of earnings growth, in FY19, will be the demand recovery, especially in the rural sector which had gone down significantly, after demonetization.

The government should continue to spend on infrastructure development (roads, railways, port development, or power distribution etc.). In the near term, this should ensure that the investments in the economy remain robust.

Capacity utilization is another factor that is expected to drive earnings growth. Post demonetization, the capacity utilization had come down from over 85% to current levels of 70 to 72%. As demand recovers, the capacity utilization should also go up bringing about economies of scale which will, in turn, drive the margins up.

Finally, as corporate interest rates go down, earnings can be expected to grow at a much faster rate, compared to the revenue growth.


What is your investment philosophy?

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Our investment philosophy is growth at a reasonable price (GARP). We identify companies with a strong competitive advantage that are run by a strong management. Efficiency of capital allocation, and the return on equity which the company generates on a sustainable basis are extremely important considerations. At the end of the day, sustained earnings growth and the quality of those earnings, is what matters the most.

As far as portfolio construction is concerned, we adopt both top-down as well as bottom-up approaches. The top-down approach is used to identify the sectors to invest in. Based on macro analysis and evaluation, we identify sectors which appear positive from a medium to long term perspective and decide where we would like to be overweight or underweight on those sectors.

A bottom-up approach is then employed to identify companies in those sectors, which are growing faster than their peers and which may also be outside the benchmark index. This ultimately translates into better alpha generation in the portfolio because alpha generation is ultimately a function of stock selection. For instance, in the Excel India Fund, 40% of the portfolio is outside the benchmark index. This really helps us to generate alpha in the portfolio.


What is your medium to long term perspective on Indian equity markets?

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Investing in Indian equity markets has been quite rewarding over the last 15 - 16 years. The index alone has delivered almost 13.5% returns in the last 15 - 16 years and our funds have consistently outperformed the index. More importantly, looking at the growth prospects of the Indian economy going forward, we believe that there are healthy returns to be made by investing in Indian equity markets from medium to long-term perspective.


What is your perspective on India’s macroeconomic fundamentals?

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The Indian market has done well, and has got re-rated in the last few years, because of political stability and the progressive reforms undertaken by the current government. At present, India has very strong and robust macroeconomic fundamentals. It is on a fiscal consolidation path where the government is targeting the fiscal deficit to come down to 3% in the next couple of years. Current account deficit is also under control – about less than 1% – and is likely to remain stable within 1 to 1.5% for the next few years. Finally, India has over US $400 billion in foreign-exchange reserves which is a massive rise from about US $213 billion in mid-2013 when the Taper Tantrum occurred. And that’s the reason why, in the last 3 to 4 years, Indian currency has been one of the best performing currencies among countries in emerging markets. The Indian currency is likely to remain stable versus the U.S. dollar going forward.


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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.