Nilesh
Shah is often the first port of call for any foreign institutional investor keen
on investing in India. A cost and chartered accountant, Mr Shah possesses an
uncanny understanding of bonds along with an intuitive ability to gauge value
even within the equity market. Nilesh is part of a rare breed of fund managers
who have participated in the retail fixed-income market from its infancy to its
present state. Mr Shah is the deputy managing director and chief investment
officer at ICICI Prudential Asset Management
Company.
Why should I invest in India?
Investing in India makes sense as it will create long term wealth for you. A case in point is Maruti Suzuki’s stock performance since the time of its listing compared with that of its Japanese parent Suzuki. Maruti got listed in 2003 and has outperformed Suzuki by over 11 times. Maruti has been the biggest value creator for Suzuki. You should invest in India only if you want to make serious money.
What about India’s fiscal deficit? Isn’t that a cause for worry?
The government has a clear road map for containing the deficit and has committed to bring it down to 4.1% of GDP over the next two years. Moreover, India’s GDP is also understated as there exists a parallel economy, which is slowly getting integrated into its main counterpart.
I am also worried about trade and current account deficit (CAD).
Our trade deficit does not take into account two of the largest exports, namely software services to markets like the US and the movement of labour to regions such as the Middle East. CAD is likely to be around $30-35 billion for FY11. The deficit turns to a surplus if you remove gold imports worth $25 billion and the expense incurred on overseas education which Indians are lavishing on their children. Even that should be treated as investment for the future rather than consumption.
I am worried about your low rating with global rating agencies.
For 5,000 years since the days of the Indus Valley civilization, India has not defaulted on its overseas debt obligations. Will you trust this longest track record of no default or the rating agencies?
I am worried about India’s record on corporate governance.
While our physical infrastructure is not at par with global standards, our financial regulation is equal if not better than world standards. Our regulatory watchdogs are at par with the best in the world and are always evolving to ensure that India’s governance standards match the best globally. We have had our share of the Enrons and the WorldComs, but they are easy to detect and avoid.
How will India’s economy progress without a world-class infrastructure?
We lack adequate infrastructure. But things are progressing apace. Three decades ago, we had to wait for more than 10 years to get a telephone at home. Today, the situation is completely reversed — mobile connections are available on demand, we have the cheapest call rates anywhere in the world and our telecom networks are at par with global standards. Today, we have power cuts in most part of India. But we are building our generation capacity and, hopefully like telecom, electricity production will expand and cut into shortages. India did not develop its infrastructure as we were short of capital. Now if you provide the money, infrastructure will get built.
Why should I invest in India?
Investing in India makes sense as it will create long term wealth for you. A case in point is Maruti Suzuki’s stock performance since the time of its listing compared with that of its Japanese parent Suzuki. Maruti got listed in 2003 and has outperformed Suzuki by over 11 times. Maruti has been the biggest value creator for Suzuki. You should invest in India only if you want to make serious money.
What about India’s fiscal deficit? Isn’t that a cause for worry?
The government has a clear road map for containing the deficit and has committed to bring it down to 4.1% of GDP over the next two years. Moreover, India’s GDP is also understated as there exists a parallel economy, which is slowly getting integrated into its main counterpart.
I am also worried about trade and current account deficit (CAD).
Our trade deficit does not take into account two of the largest exports, namely software services to markets like the US and the movement of labour to regions such as the Middle East. CAD is likely to be around $30-35 billion for FY11. The deficit turns to a surplus if you remove gold imports worth $25 billion and the expense incurred on overseas education which Indians are lavishing on their children. Even that should be treated as investment for the future rather than consumption.
I am worried about your low rating with global rating agencies.
For 5,000 years since the days of the Indus Valley civilization, India has not defaulted on its overseas debt obligations. Will you trust this longest track record of no default or the rating agencies?
I am worried about India’s record on corporate governance.
While our physical infrastructure is not at par with global standards, our financial regulation is equal if not better than world standards. Our regulatory watchdogs are at par with the best in the world and are always evolving to ensure that India’s governance standards match the best globally. We have had our share of the Enrons and the WorldComs, but they are easy to detect and avoid.
How will India’s economy progress without a world-class infrastructure?
We lack adequate infrastructure. But things are progressing apace. Three decades ago, we had to wait for more than 10 years to get a telephone at home. Today, the situation is completely reversed — mobile connections are available on demand, we have the cheapest call rates anywhere in the world and our telecom networks are at par with global standards. Today, we have power cuts in most part of India. But we are building our generation capacity and, hopefully like telecom, electricity production will expand and cut into shortages. India did not develop its infrastructure as we were short of capital. Now if you provide the money, infrastructure will get built.
I
am worried about rising corruption here.
Show me one country where it is not present in various degrees. India is fighting and reducing corruption by increasing education and awareness. The Right to Information Act is one giant leap in this direction. Also, remember that there are very few places in the world, where hotel staff will put themselves in front of bullet ahead of their guests or the police, armed with only bamboo sticks, will capture a fully armed terrorist alive.
I am worried about the bureaucracy.
Every coin has two sides. Look at the Reserve Bank of India. No other central bank in the world is managing conflicting objectives like growth, inflation, financial sector stability, interest rates, currency, government’s borrowing programme, etc, like the RBI.
India has created $1.2 trillion-plus economy with all these limitations and more. Imagine what can be created as these hurdles are gradually getting reduced.
I am worried about valuations. Isn’t India expensive?
Good things don’t come cheap. We had a bargain sale between the third quarter of 2008 and the second quarter of 2009. Bad luck, but you missed out! India is expensive relative to peers for the current year to March, but not when compared with earnings expected in FY12. Higher return on equity and better earnings growth will always keep India at the higher end of valuation among peers.
How does India compare with China?
Autocracy, undervalued currency and large inflows of foreign capital have helped China grow much faster and far ahead of India. But some parts of India, like Gujarat, are growing at comparable rates for many years without support from above factors. India and China are complimentary to each other in your portfolio.
If India is so good, why do I always lose money on India?
Growth is not a substitute for valuation. You lose money on India because you try to trade on stocks rather than be an investor in the growth story. India is not an exception to the rule of economics. If you become a long-term investor, you will have to work really hard to lose money.
Show me one country where it is not present in various degrees. India is fighting and reducing corruption by increasing education and awareness. The Right to Information Act is one giant leap in this direction. Also, remember that there are very few places in the world, where hotel staff will put themselves in front of bullet ahead of their guests or the police, armed with only bamboo sticks, will capture a fully armed terrorist alive.
I am worried about the bureaucracy.
Every coin has two sides. Look at the Reserve Bank of India. No other central bank in the world is managing conflicting objectives like growth, inflation, financial sector stability, interest rates, currency, government’s borrowing programme, etc, like the RBI.
India has created $1.2 trillion-plus economy with all these limitations and more. Imagine what can be created as these hurdles are gradually getting reduced.
I am worried about valuations. Isn’t India expensive?
Good things don’t come cheap. We had a bargain sale between the third quarter of 2008 and the second quarter of 2009. Bad luck, but you missed out! India is expensive relative to peers for the current year to March, but not when compared with earnings expected in FY12. Higher return on equity and better earnings growth will always keep India at the higher end of valuation among peers.
How does India compare with China?
Autocracy, undervalued currency and large inflows of foreign capital have helped China grow much faster and far ahead of India. But some parts of India, like Gujarat, are growing at comparable rates for many years without support from above factors. India and China are complimentary to each other in your portfolio.
If India is so good, why do I always lose money on India?
Growth is not a substitute for valuation. You lose money on India because you try to trade on stocks rather than be an investor in the growth story. India is not an exception to the rule of economics. If you become a long-term investor, you will have to work really hard to lose money.
