The Tantallon India Fund closed down 0.98% in October with the markets roiled by resurgent Covid-19 infection rates and the risks to global recovery and growth from the imposition of new lockdowns, the cacophony over the prospects of a bitterly-contested US Presidential and Congressional Election, and the growing risks of significant antitrust measures being imposed upon Big Tech globally.
Having won the popular vote and a mandate, President-Elect Joe Biden will probably have to accept an obstructionist Republican Senate majority, the first newly-minted President in the last 30 years starting without an accommodative Congress, effectively securing Trump’s pro-business stance on deregulation and the tax code. In the absence of big-ticket fiscal stimulus, the Federal Reserve will likely continue to have to do the heavy-lifting, maintaining accommodative monetary policies for the foreseeable future, “encouraging” a weaker USD outlook. We expect that Biden will prioritise the pandemic-battle (from masks to contact tracing and vaccines) and the economy while looking to systematically restore local and global linkages on climate change, co-ordinated responses on pandemics and health issues, trade, equity and social justice, and regional military alliances. Not surprisingly, the markets have rallied, assuming greater policy predictability; a more modest stimulus package than Nancy Pelosi’s aspirational US$3 trillion ($4 trillion) proposal; corporate tax rates remaining “low”; no immediate change to the current capital gains tax regime; a potential “easing” in the trade war and tensions with China; diminished regulatory scrutiny for Big Tech; and rational, apolitical Covid-19 vaccine intervention.
Recovery in India continues
On India specifically, the economic recovery continues to build momentum, reflecting pent-up demand as the country “reopens”, the lagged impact of fiscal and monetary stimulus, the revival in global trade, and crucially, the resilience of rural India.
India’s manufacturing PMI rose to an all-time high of 58.9 in October, up from 56.8 in September — the third consecutive month above 50, suggesting that the manufacturing sector is finally in expansion mode.
The happy confluence of a bountiful spring harvest, a good monsoon season encouraging an uptick in area under cultivation for the monsoon crop, and the government’s proactive rural employment programmes have translated to a resilient rural economy, and robust demand for farm equipment, agro-chemicals and seeds and discretionary a consumption items.
It is also important to highlight that even as new Covid-19 infection rates start to moderate, the government continues to press ahead with structural reforms and deregulation.
With last month’s passage of the agricultural and labour reform bills (following the introduction of GST, the bankruptcy code, real estate reforms, the deregulation of FDI into key sectors, power sector reforms, and the cut in corporate tax rates), Modi continues to surprise the market with intent, and the ability to actually implement key reform measures.
On the flip side, in terms of lingering concerns, we would point out that a resurgence in Covid infections that might require more aggressive “lockdowns’ globally; supply-side bottlenecks and stubbornly high agro-inflation that is starting to creep into inflationary expectations, constraining the Reserve Bank of India’s ability to use monetary policy to further buffer the pandemic drag; and geopolitical flashpoints, and in particular, tensions along the border given China’s seeming willingness to “escalate” stress-points while the US is “distracted”.
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We are clearly more positive than market consensus. We expect India’s real GDP growth to actually turn positive in the December quarter, and for persistent global liquidity and a weaker USD outlook to be supportive of Indian equities.
We expect the real economy to re-establish a sustainable 7%+ GDP growth trajectory over the next two to three quarters.
We retain strong fundamental conviction in our portfolio holdings delivering on earnings and cash flows compounding at 15%+ annually over the next three to five years.
We urge investors to take the long view and to look through any near-term market volatility to increase exposure to Indian equities.
Stock highlight
The stock we want to highlight this month is Cholamandalam Investment and Finance Company (CIFC), a Murugappa Group consumer finance company with a diversified portfolio spread across commercial vehicles, automobiles, used vehicles, tractors and property. A prudent credit culture, and disciplined collections systems and processes have enabled CIFC to navigate the Covid-19 landscape well. Adequately capitalised, and having substantially front-loaded pandemic-related credit provisioning, CIFC is poised to grow at the expense of weaker competitors, strongly leveraged to a recovering credit cycle.
With over 80% of its 1,100+ branches in rural and semi-urban areas, CIFC is uniquely poised to benefit from a robust agrarian economy, and the burgeoning demand for tractor, automobile, two-wheeler, commercial vehicle, and mortgage loans.
We expect CIFC to compound its loan book at a 20%+ CAGR over the next three years, versus consensus modeling a much more sedate lowteens run-rate. CIFC is also well-capitalised to sustain the next three–four years of strong organic loans growth without needing to dilute shareholders.
We expect CIFC to compound earnings at 30%+ annually over the next three years, with ROA to expand to 3%+, and for ROE to track at 22%+; market consensus is looking for ROEs to trend below 18%.
The Tantallon India Fund is a fundamental, long-biased, India-focused, total return opportunity fund, registered in the Cayman Islands and Mauritius. The Fund invests with a three-to-five year horizon, in a concentrated portfolio, market cap/sector/capital structure agnostic, but with strong conviction on the structural opportunity, scalable business models and in management’s ability to execute. Tantallon Capital Advisors, the advisory company, is a Singapore-based entity, set up in 2003, and holds a Capital Markets Service Licence in Fund Management from the Monetary Authority of Singapore
