The Tantallon India Fund closed 2.02% higher in September with most of the high-frequency data we track indicating a continued “normalisation” in activity levels as the country reopens, underscored by the Purchasing Managers’ Index jumping from 52.0 in August to 56.8 in September, the highest monthly reading since January 2012.
As we head into the home straight of the US Presidential election, punctuated with the aftershocks of the Rose Garden Covid cluster and a sojourn at Walter Reed, global risk appetite continues to vacillate between trying to layer portfolio insurance against any number of potentially messy election/geopolitical outcomes, while simultaneously trying to project diminished tail risks in the event of successful Covid vaccine interventions.
Situation in India
It is not off to the races by any stretch in India though. However, we expect a broad economic recovery in India over the next 12–18 months after interacting with dozens of companies across the market-cap spectrum over the last three months. We expect positive economic growth for the 4Q2020 ended December although consensus estimates are still building in another two to three quarters of economic contraction.
However, the passage of the three Farm Bills is a significant milestone. Wrong-footed again in the middle of the pandemic, the high-decibel Opposition histrionics was predictable, and especially so since the bills herald long-pending agricultural reforms to finally reduce supply-side bottlenecks, and to improve agricultural productivity, cost efficiencies, and cash conversion for SME farmers — at the expense of the vested interests in the agricultural sector that profit through wealthy farmers and middle-men intermediating the agricultural supply chains.
• The Farmers’ and Produce Trade and Commerce (Promotion and Facilitation) Bill allows farmers to seek out genuine price-discovery in a national market, as opposed to being forced to sell crop in the local state-government regulated and administered agricultural markets.
• The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Bill empowers farmers to enter contractual terms on guaranteed pricing and offtake agreements with private sector agri-business firms or large retailers, providing farmers with visibility on cash flows, encouraging investments into mechanisation and high quality seeds, fertilisers, and crop protection to improve productivity and yields.
• The Essential Commodities (Amendment) Bill removes cereals, pulses, oilseeds, potatoes and onions from the list of essential commodities, thereby deregulating the production, movement, storage and distribution of these commodities, and encouraging private sector investment into local supply chains, including for warehousing, storage and the cold chain.
Stock recommendation
The company we would like to highlight this month is ACC which, together with its sister-company, Ambuja Cements, accounts for the second largest cement capacity in India. Historically, ACC was an under-managed, cost-inefficient company with a bloated balance sheet. With both ACC and Ambuja now controlled by LaFarge Holcim and an explicit mandate to streamline reporting structures, grow capacity, meaningfully improve operating efficiencies, and to realise the significant economies of scale and logistics savings that go with a national footprint, our expectation is for ACC to significantly exceed market expectations for both top-line growth and sustained profitability.
We expect ACC to deliver on revenues compounding at about 15% annually over the next three years versus consensus expectations of revenues compounding at around 8% annually.
We also expect ACC to compound earnings at a CAGR of more than 20% over the next three years although the consensus seems to be modelling earnings compounding at sub10% CAGR. We would urge investors to take the long view and to look through any nearterm market volatility to increase exposure to Indian equities.
Looking ahead
We expect the real economy to re-establish a sustainable growth trajectory of more than 7% over the next two to three quarters.
In the face of spiking Covid infections, the government continues to press ahead with structural reforms and deregulation, encouraging long-dated private sector investments in infrastructure, urbanisation, industrialisation, and the consumer and digital economies.
The path to “normalisation” is in the resilience of the Indian rural and semi-urban economies sustaining the broad economy at more than 85% of pre-Covid levels, sector consolidation, tailwinds from accommodative monetary and fiscal policies, targeted domestic stimulus, low energy prices and a weak or weaker US$.
We remain focused on business models with sustainable moats, resilient balance sheets and cash flows, disciplined capital allocation policies, and the opportunity to take permanent market share away from weaker competitors.
We retain strong fundamental conviction in our portfolio holdings delivering on earnings and cash flows compounding at more than 15% annually over the next three to five years, under-pinned by strongly improving earnings visibility and compelling asset values.
