For those seeking to make gold of lesser metals, alchemy is no longer considered a viable option due to pesky issues such as scientific fact and so on. However, speaking to Hiren Ved, chief investment officer of India-based Alchemy Capital, his firm has been striking gold for some time albeit in the hardly leaden world of Indian equities.
Speaking to UK-based managers, including boutiques such as Aubrey, there seems to be a feeling that India is fast becoming the emerging market of choice, more appealing than the once darlings of the sector, China.
So, what does Mr Ved offer investors that can’t be found by international firms such as Fidelity who also have a fondness for the sub-continent? Well on the ground expertise goes a long way.
Accessing Indian equities, even those in the Nifty 50, the largest stocks by market cap in the country, is hard to do. Speaking to Vermeer Asset Management recently, one of their selling points was that a co-founder, James Roswell, had a relationship with a sell side firm in India, Phillips Capital, which allowed them to diversify away from ADRs (the easiest way to access the most liquid stocks).
Those stocks that find themselves in the ADR range are often part of a passive instrument such as an ETF or Index tracker and are already ‘juiced out’ as Mr Ved says. Whereas he points to a financial company the firm holds that was bought when it had a market cap of around $450 million, it’s now worth over $40 billion. Using a firm with a presence on the ground is clearly a benefit for investors.
Mr Ved mentions that anyone who had invested in his firm’s offshore fund would have enjoyed the share price lift of that holding which was bought in 2010.
The background of this firm is Mr Ved has both sell and buy side experience although the former was at the beginning of his career and he formed the firm over 20 years ago so has witnessed first-hand the many changes in the country.
Some liken the rise of India to that of China’s a couple of decades ago although it doesn’t have the political issues that continue to be a consideration when investing in what was once dubbed "the V8 engine of emerging market" growth.
“India is much more than just the big banks and the big conglomerates,” says Mr Ved, partly in relation to the aforementioned stocks that become ADRs.
While many international investors view urbanisation as a major theme driving growth in India, the country is still largely rural, a point that again London-based boutique Vermeer made recently. Mr Ved agrees that urbanisation is important but adds that the textile industry in India is booming and this is due to changing trade agreements.
The ban on importing cotton for the Xinjiang region in China has resulted in India being one of the largest growers of the fibre in the world which also gives the country a competitive edge in the textile industry.
The textile industry in the country which was developed during Britain’s colonialisation of India in the 1800s was largely forgotten about due to cheaper labour costs in Bangladesh and Vietnam. It is back with a vengeance and this fund is riding the wave of the resurgence.
“Because we have boots on the ground, we have the ability to pick these high quality fast growing companies and position ourselves pretty early in the game, before the institutions crowd in,” states Mr Ved.
It’s not just companies servicing the needs of the large agricultural areas of India that Mr Ved points out, he also highlights the sophisticated banking system which is due in part to the sweeping reforms put in place by prime minister Narendra Damodardas Modi.
One of the firm’s most successful holdings is Bajaj Finance. It was one of the earliest entrants into the consumer financing space and from 2013 to 2020, it enjoyed a CAGR of around 35 percent and return on equity averaged around 19.6 percent annually.
Driving this impressive performance was product innovation, a strong cross-selling culture and the all-important technical prowess.
One part of the Indian growth story which is not particularly well-known is the development of the Rupay system which works like Visa and Mastercard and allows payments to be conducted instantly from mobile phones. Mr Ved asks ‘How many emerging market countries can boast of a similar technology?’. The answer is very few if any.
The sophisticated banking system probably explains why financials is Alchemy’s Long Term Fund’s largest sector holding at over 20 percent.
The fund also holds Bajaj Finserv which as the name suggests is a Fintech company. The firm operates an open architecture model which allows its customers access to products offered by other institutions and given the nature of these products, suggests growth in the middle classes. This was the hallmark of China’s ascendancy into the economic powerhouse status it enjoys today.
Taking a leaf out of China’s ultra-successful insurance company Ping An’s ‘Good doctor’ playbook, the company intends to create a healthcare ecosystem by connecting hospitals to patients and selling ‘wellness/healthcare packages’ to customers in India. It also offers mutual funds, car loans and life insurance to an increasingly well-off populace. The company has performed extremely well in share price terms and again is probably relatively unknown to market participants not based in India.
At the other end of the spectrum, one stock which has contributed to the Long Term Fund’s success is Barbeque Nation, a restaurant chain. While it was hit with the rest of the hospitality sector during the height of Covid, its ability to transform itself into a primarily delivery-based company saw it continue to thrive during lockdowns and due its modest pricing model, is favoured by a wide range of Indians.
Indian growth compared to the West
While India is subject to similar drivers as other countries from a macro-economic perspective, the country’s growth stock dominance is not due to huge amounts of stimulus put into its market.
“The concept of buying growth in the context of massive stimulus is very different from buying growth in India,” says Mr Ved.
He tells international investors the long-term structural attractiveness of India is that it’s a natural growth market. “You don't need to stimulate India to grow, it will grow. You probably need to stimulate Europe to grow because of the demographic, it's an ageing population.”
Some managers have been put off Indian equities due to somewhat racy multiples they trade on. However, returning to the point about the inherent growth prospects of a large proportion of Indian companies, Mr Ved observes that for high ROE type businesses, compounding at over 15 percent a year, "you can’t expect them to trade on single digit price-to-earnings multiples".
The firm though is resoundingly GARP in its investment approach, it might pay a slight premium for a company which is growing fast but won’t pay any price for growth stocks which some might accuse many of doing for US mega tech stocks at the height of the Covid-19 pandemic.
He admits the Indian market trades on something like a 35 percent premium compared to other emerging markets although adds “we are happy to pay a slight premium for higher growth and higher quality of business. That's the kind of investor that we are”.
Investors in the firm’s India Long Term Fund will tend to be institutional as its structured as a hedge fund with a minimum investment of $500,000. However, multiple investors may club together and invest in the fund it they’re not worried about co-mingling their cash.
Mr Ved does not use any sell-side research, preferring to do the research in-house. Given his presence in the country, he can easily catch a flight to meet with the management of a firm he’s interested in and recalls a time when a large international asset manager was selling large swathes of stocks in a company.
This was the ultimate buying opportunity and given the haste the US-based firm was selling its holding, he picked it up for pennies on the pound (or the Indian equivalent) and as he’d done the fundamental research on the firm the move paid off.
“We have that historical institutional knowledge of many sectors some of which may not be very big, but could still be very interesting and high growing,” says Mr Ved and although the firm Is well regarded in its home market, with the changing winds of emerging markets it may be wise to look at Alchemy as it appears to have the Midas touch.
