Life at all-time high

- Vikram Kotak

Dear Investors,

Hope this letter finds you in good health and spirit.

It is not very easy to be bullish at 19,400 Nifty which is an all-time high, but this rally has many legs like liquidity, strong fundamental and many economic indicators moving at an all-time high.

Let's deep dive in few data points. Please refer to the table below which shows the robust five-year CAGR as on FY23 for the given parameters. GST collections, Demat accounts and SIP flows showed strong double-digit growth; UPI transactions being an outlier grew three-digits CAGR over 5 years. Last but not the least, Capex also joined the race with a decent double-digit growth. The overwhelming fact remains that this has not even touched the pockets of larger population of India.

Let me give you a few anecdotes here: ~1% of Indian population equates to 45% of unique airline traffic; ~1% of Indians take ~22% of country's income; ~3% of Indian makes up all unique credit card holders; less than ~3% of Indians invest in mutual funds; and ~8% of the population account for ~100% of car ownership. These statistics indicate a skewed concentration, but to see this from a positive perspective, a massive opportunity is waiting to explode for an even deeper penetration.

I believe growth in India may be delayed but cannot be denied. There was a quote attributed by Napoleon some two centuries ago: “Let China sleep, for when she wakes, she will shake the world.” Well, China did wake up, and the world has been shaken. The whole economic landscape of the planet, the geopolitical balance of power, and even the Earth's environment has been irrevocably changed over the last three decades by the addition of 1.4 billion human beings to the ranks of the (more or less) developed world. Now India is aiming to migrate another 1.4 billion to the developed world.

India always gives me feel of four different countries in terms of per capita. The top ~0.5% makes income equivalent to Swiss per capita, then next 9-10% earns around $9,000 which is alike Mexico per capita, next 10% are like Philippines economy they earn appx $3,200-3,500 per capita, and rest are like $1,200-1,500 per capita like any under-developed country. The major task India has on its plate is to narrow this gap. Government must work more towards upgrading larger audience to higher income bracket.

Biggest challenges India faces today are how quickly we can create infrastructure, improve education and industrialisation because feeding over 1.4 billion population needs huge manufacturing capacity. India's growth till now, unlike China, has happened more from consumption and services. The question here is that whether India can Industrialize or become manufacturing workshop of the world. There are enough indicators that shows India is keen to be next China in terms of global hub of manufacturing, it may not execute at the speed of China due to variety of reasons, but it is surely going to do it. In the last five years PLI schemes, corporate tax cut and friendly foreign policies has paved the path towards the right direction.

Lot of hard work has been done by the current government from an infrastructure and manufacturing front, but still a long way to go. However, on education reforms are much below than what India needs. We need similar improvement in education sector like we have seen in other sectors. For example, we doubled airports in last 9 years, defence manufacturing capabilities, railway and road infra is going through a massive overhaul. Needless to say, that the value of mobile phone production in India has more than doubled from Rs 1,320 billion in FY2018 to Rs 2,750 billion in FY2022 and is still growing at a faster pace. Our new trains, Vande Bharat (VB) looks like big export opportunity. Indian Railways are looking at becoming a major exporter of VB train by 2025-26 to markets in the Europe, the South America, parts of Africa and East Asia. The latest version of the indigenous trains with sleeper coaches will be operational by 1HFY24. Indian railways want to clock 10-12 lakh kilometres on 75 VB trains over the next few years so that it can be export ready.

Same is the case with defence, India's defence exports have reached an unprecedented peak. From a modest Rs.686 cr in FY 2013-14 to about Rs.16,000 cr ($2 billion) in FY 2022-23, representing a remarkable 23x increase. India's defence industry has demonstrated its prowess in design and development by exporting to more than 85 countries, with a staggering 100 firms, across public and private sector, currently engaged in defence product exports. Over the past nine years, Govt has implemented numerous policy initiatives and introduced reforms to stimulate defence exports.

Last but not the least, in the year 2021 Apple began manufacturing its products in India with 1% of total production and in last 2 years it has reached to 7%, which is further going to accelerate in the next decade. It may not necessarily be a China +1 strategy or a low cost or geopolitical stability, but most importantly vast domestic consumer markets is the major attraction. India like China gives a dual advantage of market opportunity and a low-cost manufacturing hub. From any outsourcing giants' perspective, agglomeration effects are very easy to understand. Companies want to locate near their customers, workers, and suppliers & prefers people, who are both employees and customers. Smart capital allocation model suggests that deploy money only where one can take profit out rest is localised. The Apple store at Jio World Drive in Mumbai's Bandra Kurla Complex (BKC) is spread over 20,000 square feet over two levels, about a third the size of Apple's flagship store in New York but similar to Apple's outlet in London's Regent Street. This reminds me of scale and size of Louis Vuitton shop at Marina Bay, Singapore with size of 25,000 square feet.

One key limitation of India which needs improvement is the Education. Today India's total education budget is about $15 billion for 250 million Indian students (19% of the total population). On the other hand, every year more than 5 lakh students are going abroad for higher studies and spending over $10 billion. In 2020, 7,70,000 students went abroad for higher studies. This trend of going abroad for higher studies has only increased in the last five years. This trend and the attendant anomaly can be reversed by building an institutionalised education framework for all levels of people. This can be achieved through cost efficiency and value addition. With the availability of cheap telecom bandwidth, the marginal section of the society is able to onboard the schooling system, which hitherto was difficult. India not only needs improved education policy, forward looking curriculum, but we also need global knowledge transfer which will also reduce migration of talent outside India and save this huge outlay of money.

Coming back to markets, which has been on a non-stop journey over last 3 months, however one should keep in mind that when it looks like nothing can go wrong, one needs to be more watchful of uneven monsoon, global slowdown can have its own impact on inflation and business. China revival can also put some pressure on subdued commodity prices we need to be watchful of that.

Undoubtedly this is India's time, and we can do it.