Pitchbook Template (Design 1) · PDF fileWhy India? 2 India is on the cusp of a multi-year,...
Transcript of Pitchbook Template (Design 1) · PDF fileWhy India? 2 India is on the cusp of a multi-year,...
INDIA is structurally INFLECTING… be
INVESTED!
July 14, 2017
Prem ManjooranCIO & Portfolio Manager
Tantallon India Fund
Why India?
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India is on the cusp of a multi-year,
sustained economic revival thanks to
Prime Minister Modi’s electoral
mandate.
Modi is confronting corruption, a
stifling bureaucracy, and wasteful
subsidies in order to reduce the cost
of doing business in India.
Modi is committed to a deliberate,
rational policy framework, to
incentivize and reward risk capital.
Modi’s explicit focus is on
infrastructure, industrialization, job-
creation, and urbanization.
The Reserve Bank of India’s explicit
adoption of inflation-targets to set
monetary policy is transformational:
True game changer in that it allows
for structurally moderating inflation
expectations, a stable current
account and currency, and for
significant monetary and fiscal policy
flexibility, encouraging investments
and consumption.
Sectors Current 2025e CAGR
Internet
- Ecommerce US$ 13bn US$ 150bn 25% +
- Internet Penetration 21% 46%
Healthcare US$ 100bn US$ 350 - 380bn 15% +
- Diagnostics US$ 3.6bn US$ 13.2bn 27%
- Domestic Pharma US$ 15bn US$ 55 - 65bn 15%
- Health Insurance US$ 3bn US$ 7.3bn 15%
Telecom Services
- Data Services 495MB/user 2.5GB/user 18%
Consumer US$ 37bn US$ 160 - 220bn 15% +
- Organized Retai l (Penetration) 6% 20%
Financial Services
- Credit Growth 15%
- Credit Penetration 55% 71% - 76% + 1.5% /yr
- Retai l Mortgage Penetration 7.5% 12% - 15% 20%
- Corporate Lending Penetration 43% 51% 15%
Autos 12% - 14%
- Cars 2.5m 11.3m 15%
- Two-wheelers 14m 40m 10%
Infrastructure
- Road Passenger Traffic 7,000BPkm 20,000BPkm 10%
- Road Freight Traffic 1,400BTkm 3,400BTkm 8.50%
- Solar Infrastructure 2.8 GW 20 GW 20% +
- Electrici ty Infrastructure 267 GW 375 GW* 7%
Oil & Gas
- Oi l Demand 3.7mbd 5.4mbd 3% - 4%
- Natura l Gas Demand 51bcm 107bcm 7% - 8%
Materials
- Cement 220mt 465mt 7%
- Steel 82mt 175mt 6.50%
*2020 estimate Source: Tantallon Capital, Barclays, M organ Stanley, IIFL Research, RBI
Why India?
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India’s demographic dividend will provide a sustainable, long-term tail-wind for
investments:
Currently, 55% of the Indian population is under the age of 30; by 2030, 48% of the
population will still be under the age of 30.
An educated / low-cost work force allowing for global competitiveness in IT services,
generic pharmaceuticals, light engineering manufacturing and exports.
Rising disposable incomes and aspirations to sustain domestic growth, consumption
and investments…the Indian millennial represents a significant investment
opportunity.
Economic Indicators Base Case Optimistic Case
GDP Growth 7.6% 7.0% 8% +
- Agriculture 3.6% 5.0% 5% - 6%
- Industry 7.2% 8.0% 8% - 10%
- Services 9.0% 10.0% 10% +
Savings (%GDP) 32.7% 34.0% 37.0%
Investments (%GDP) 34.1% 36.0% 40.0%
Fiscal Balance (%GDP) -4.6% -3.0% -2.5%
Current Account Balance (%GDP) -2.2% -2.5% -1.0%
Source: Tantallon Capital, Barclays, Morgan Stanley, IIFL Research, RBI
2015e - 2025e2004 - 2014
Why India?
INVEST on a 5 year+ view, across the capital structure, in Indian financials, industrials and
light engineering companies, infrastructure, e-commerce, supply chain management,
exporters, urbanization, and beneficiaries of public sector corporate reforms.
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MSCI INDIA MSCI CHINA MSCI EM MSCI WORLD S&P 500
Compound Annual Growth Return
12.7% 8.3% 4.8% 4.1% 6.0%
Standard Deviation (Annualized)
24.0% 27.6% 20.4% 16.5% 19.5%
What are we most excited about?
Investing in an unconstrained portfolio, in an under-researched pool of companieswith good financial disclosure and audit standards, which are attractively pricedrelative to the long term structural opportunity.
Sustainable demographic tailwinds - Millennials will drive consumption decisions
Education / job creation => rising disposable incomes and aspirations
Digitization of the real economy => technology enabled connectivity andconsumption
Financial Intermediation
Urbanization and infrastructure
Enhanced agricultural productivity
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Modi's Objectives: Manufacturing to form 25% of GDP by 2025Generate additional 100 million jobs in
manufacturingDevelop capacity in basic sectors
Increase value addition and global
competitiveness:
Defense, aerospace, ship-building and capital
goods
Textiles, leather, food, paper, gems and jewellery Steel, cement, coal, iron ore and fertilizers Auto, electronics system, pharma, petrochemicals
and paperSector-specific recommendationsDefense: increase domestic procurement from 30%
to 75%
Textile: Consolidate existing integrated Textile Parks,
modernize Ginning & Pressing factories
Steel: Acquire overseas coking coal assets,
facilitate port and steel capacity expansion
Auto: Improve logistics and infra at auto-hubs,
reforms in labor laws, make India a “Free Trade Area”
Ship-building: Grant infrastructure status and
specific tax incentives
Food-Processing: Greater involvement of states in
expanding cold chain, abattoirs and testing labs
Cement: Improve availability of cheap coal and
power, improve transportation infrastructure
Electronics: Set-up semiconductor labs, develop R&D,
reduce duty advantages for imports
Capital Goods: Acquire advanced technology
through FDI, create subsector clusters
Jewellery: Secure raw materials, set up bourses/clusters,
promote brand, ensure adequate credit
Fertilizers: Monitor end-use of fertilizers,
encourage alternative feed stocks like CBM and
coal
Pharma: Ramp capacity to meet WHO-GMP
standards, PPP in R&D, manufacture of medical
devicesCross-sectoral recommendationsLabor: Update labor laws on retrenchment and
strengthen safety nets
Skills: Adopt PPP model in skill development Roads: Restore construction awards momentum
for roads and highways
Power: Ensure adequate coal linkage and lower T&D
losses
Railways: Accelerate contract awards for the
Dedicated Freight Corridor
Taxes: Reduce import incentives that discourage domestic
value-add
Clustering: Development of NIMZ, FDI/JVs R&D: Provide tax credits for R&D expenditure
Targeted Sectors:
What is different this time: the implementation of a Goods & Services Tax is Transformational.
GST is arguably the most significant structural reform envisaged in India inthe last three decades, with the potential to boost annual GDP by 100bpannually.
GST creates a uniform national market, significantly reducing the cost of doingbusiness, increasing operational efficiency, and boosting overall productivity.
GST broadens the tax base, and further boosts tax revenues through increasedcompliance and reduced tax evasion.
GST accelerates the formalization of the Indian economy i.e. a move fromunorganized sectors to the organized.
The prescribed rates of taxation adopted under GST, are largely non-inflationary,and along expected lines with 80% of the goods taxed at 18% or lower.
That said, expect some ‘teething‘ issues given the scale of GST implementationnationally, and some short-term dislocations to reported earnings from inventorydestocking, working capital adjustments, and the investments required in terms oftechnology, systems and processes.
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What is different this time: domestic investors will determine market direction and valuations.
Historically, foreign institutional investors and ETFs have set the tone forIndian equity performance, establishing both direction and market multiples, andrelatively high correlation with global investor sentiment and risk appetite.
However, since Modi’s election three years ago, retail flows into domesticequity funds (with an AUM of ~US$100bn) have substantially surpassedforeign fund inflows - the fiscal year ended March 2017 alone saw domestic equitymutual funds grow AUM by 50%!
Demonetization and the subsequent digitization of cash savings
Structurally lower inflation and bank savings deposit rates
Government crack-down on nominee holdings of bullion and real estate
Systematic Investment Plans averaging US$560mn/month in equity inflows
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Key Risks to remain aware of:
India cannot completely decouple from global capital flows: geo-political risks,and in particular, the potential drag on global growth and global equity risk appetite,will, from time to time, impact flows and market sentiment.
A strong revival in private sector Capex remains the key for a sustainedinvestment cycle; however, we are encouraged by the visible green shoots ininfrastructure, housing, and renewable energy, reflecting both government incentivesas well rising utilization levels.
GST Implementation will be disruptive to reported earnings over the next 2quarters given the inevitable inventory and working capital adjustments.
The Reserve Bank of India is committed to enforcing the recognition of, and theadequate provisioning against legacy non performing loans, potentially limiting, in theshort-term, the banking system’s ability to support rapid credit expansion anda capex-led recovery.
The Indian rupee has appreciated against the US$ and most other EM currencies(on the back of the RBI’s commitment to deliver on its inflation targets, a sharplynarrowing current account deficit, and sustained capital inflows into the fixed incomeand equity markets), creating a headwind for IT/Pharma/Export sectors.
The vagaries of the monsoons can play spoilsport, negatively impacting ruralincomes and consumption.
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Who We Are: The Tantallon India Fund
Tantallon Capital is a Singapore-based investment firm, regulated by the Monetary
Authority of Singapore, set up in November 2003.
The Tantallon India Fund, managed by Prem Manjooran, is a fundamental,
long-biased, India-focused, total return opportunity fund.
Experienced investor (25 years+), across multiple cycles, with a deep
knowledge of, and a unique network of relationships across corporate India.
Investing with a 3-5 year horizon, in a concentrated portfolio (25-30
unlevered positions), market cap/sector/capital structure agnostic, but with
strong conviction on the structural opportunity, scalable business models, and
in managements’ ability to execute.
Being prepared to be opportunistic across the capital structure, with the
ability to engage actively with management.
We are not an asset gatherer.
We want to try and identify a well-defined pool of committed, long-term
capital, and to be able to translate that into a concentrated high conviction
portfolio invested for the long-term.
We will avoid proliferation and complexity of mandates.
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The Tantallon India Fund: A bottom-up, research driven, Concentrated, High Conviction Portfolio
25-30 unlevered positions in the
portfolio.
Leverage significant time-in-the-
markets to identify and invest in
high quality businesses with long
runways.
We spend disproportionate time
calibrating management,
competitive dynamics, supply
chains and distribution channels.
We rigorously review audited
financial statements, and build our
own models incorporating a cash
flow driven valuation framework.
The Tantallon India Fund: Key Statistics
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Sector Weights TIF MSCI India
Financials 25.4% 23.8%
Consumer Discretionary 16.9% 13.0%
Materials 14.2% 9.7%
Industrials 13.7% 6.1%
Health Care 11.7% 6.9%
Energy 3.7% 11.2%
Retail 3.7% 0.00%
Consumer Staples 3.4% 9.5%
Utilities 2.2% 2.1%
Information Technology 0.0% 14.9%
Telcos 0.0% 2.9%
# of Positions 27
Turnover 22.2%
% Portfolio < US$ 3bn 50.2%
% Portfolio < US$1bn 22.4%
Fund Statistics
Natco Pharma Ltd 7.0% HDFC 8.8%
Bajaj Finance Ltd 6.4% Infosys Ltd 6.7%
Kotak Mahindra Bank 5.7% Reliance Industries 6.5%
Hdfc Bank Ltd-Adr 5.6% TCS 4.5%
Asian Paints Ltd 4.5% ITC 4.0%
Zee Entertainment 4.2% Axis Bank 3.2%
Pvr Ltd 4.0% Tata Motors 3.2%
Eicher Motors Ltd 3.9% Maruti Suzuki India 2.8%
Vakrangee Ltd 3.7% ICICI Bank 2.6%
Aegis Logistics Ltd 3.7% Hindustan Unilever 2.6%
Total 48.6% 44.9%
Top 10 Positions
TIF MSCI India
Data as of May 31, 2017
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Conclusion: India is structurally Inflecting; look for Idiosyncratic opportunities to be Invested...
India is on the cusp of a multi-year economic revival; Intentionally Invest inIndia’s substantial runway for growth, under-pinned by the infrastructure build-outnationally, the digitization of the real economy, growing financial intermediation,rising rural income, the focus on mass housing, and strong consumption growth.
Intentionally Invest in Modi’s pro-reform/anti-corruption agenda, hisunambiguously pro-growth stance, and his focus on job creation.
Intentionally Invest in Indian equities, and in particular, in financial services, incapex linked, and in discretionary consumer stocks.
Contact: [email protected]; 1-310-729-5835