‘Markets Work On Expectations … Not Surprising That They Run Ahead Of Economy’

Why is India’s economy not keeping pace with its stock market performance? At around 12% annually since 1991, the Sensex is growing at double the rate of the economy which is about just 6% to 7%. What explains this difference over a period of 30 years?

It’s hard to attribute these differences, really. I just looked at some data from the US economy and I believe that if you look at the growth pattern, India is similar to the US economy in the late 1980s and early 1990s in terms of policy, the balance sheet, etc. I think the US. economy in the early 1990s until the 2000s grew about one and a half times, but capitalization grew five times. So there are periods when the market cap may be ahead of the economy.

After the reforms in the 1990s, we saw a rush of capital coming into India, including global capital. I have always believed that markets work on expectations. I don’t find it surprising that the markets run a little ahead of the economy.

Is the Indian economy actually growing in double digits while the market is growing at 15% to 20%?

It’s hard to say. If you look at our average scenario over the next five years, I would say 6% to 7%, or 7.5%, that’s the kind of growth that’s on the table. Now increase it by a couple of percentage points, you really need next level stuff. I think a major trigger that has the potential to expand GDP is reforms such as production linked incentives (PLIs).

I think one of the things that China has done well is that it has built manufacturing as a major industry over the past decade. India went from agrarian to service, almost skipping manufacturing in some ways. Now PLI and other such reforms, and private Capex are also coming, giving a race to manufacturing. Even in sectors like defense, you see an indigenous push in manufacturing.

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So manufacturing will be an important part of the delta if it happens. I don’t know if the two digits can happen, but even if 6% to 7%, or 7.5%, happens, we will achieve an economy of $ 5 trillion by 2027.

Which sector, in your opinion, has generated maximum value for investors?

First, IT and IT-enabled services have been great value creators for India. If you look at the tech companies that were listed in the early 1990s, the sector virtually didn’t exist before that. But today, it has become a sort of bellwether of the indices. IT as a sector also doesn’t get enough credit for improving corporate governance standards in a big way with measures like really robust succession planning. In some ways, IT companies have become the benchmark.

And I think financials have created tremendous wealth for India, be it the HDFC twins or Bajaj. India benefits from a very strong banking sector. It’s a much more cyclical industry, so it has its problems too. But our banking system has gotten progressively better over the years with regulation. Also, financials represent 35% of the references today.

Interestingly, even PSU banks have made more of a structural change. Historically, lenders, like banks, have done very well. But as India’s economy evolved, you had non-lending financials like exchanges, brokers, asset management companies and life insurance companies come into play. I’m not sure about fintech because of the whole profitability problem, but yes, a wave of new financial guys will also come.

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What are you banking as a sector in the future?

I would say the beneficiary of private capex, the PLI and the real estate boom. So homebuilding, capital goods and the financial sector that allows a lot of that. Manufacturing, infrastructure and capital goods have not had their day in the sun except for maybe 2003 and 2006. Even defense is a sector now, so I think these may be the sectors of the future.

Which sectors are likely to suffer in the coming years due to the changing nature of the Indian economy, especially with digitization and formalization?

Rather than sectors, I would say there are some themes. A major trend that will continue over the next five years is the shift from the unorganized to the organized sector. It could be in hospitality, financial services or any other sector. Organized business is the business of the future.

As I run a fund company, I always say that one will be fine to invest in just diversify funds, because eventually, you don’t need too many sectors. India is a story of under penetration. Every sector has a space for opportunity, and every sector will have winners and losers. But the unorganized sector is where I would worry. I think the market also has less appetite for companies that don’t check the governance box. This has evolved over the years.

What do you think about technology startups across sectors facing problems in corporate governance?

I find that so ironic. I said this at a NASSCOM event that if you look at all the issues that people are raising about the governance of new age start-ups and what the model should be, they don’t need a model; They have original models of technology entrepreneurship that were high on governance. That is why the sector has institutions that have outlived the founder. You have a model sitting in your own home soil and in your own industry. I think that’s it.

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On new age start-ups, we run both listed private equity and IPO funds only in retail. I don’t think there is a blanket rule. Some thoughts: there are good guys and there are bad guys. But I think the market will be much more discerning about business, business models and business people. I find it frustrating when entrepreneurs come to the market saying we can’t explain our business model clearly or people don’t understand. I say, then don’t list.

A company should only be listed when it has a business model, when it has a clear narrative and when it can make money in a sustainable way. There is no rush to list. Every company goes on a journey from consumers to revenue to EBITDA, so a company must find out where it is in the journey and then think of getting listed.

Certain companies are becoming too big to fail in the modern Indian economy. Do you think it is good for wealth creation and economy?

I think it is inevitable. Indices have their own checks and balances; Asset management companies that invest in these companies have their own checks and balances, but what can you do to control them from getting bigger?

The thing is that there is a sort of limited capital and limited players who want to invest in some of these sectors. These are capital intensive sectors. So, I think there are limited guys who want to put money on the table.


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