I have been quite worried and am still so as to the short-term prospects for the Indian equity markets. In the short term the worries are many - the global slowdown, the possibility of our economy getting overheated, the slow pace of reform, huge market gains over the last three years and the lack of valuation support.
These issues have been bothering me for some time and continue to do so. We can have and most likely will have another correction in the markets, which can cool things down, but that will be in the short term.
However, having been recently given a mandate to look at stocks with a genuine 3- to 5-year view, the picture and nervousness change quite dramatically. There is little doubt in my mind that the country is transforming, and if you are willing to take a three-year bet, ideas abound. The longer you extend your time horizon, the more the feeling of the markets being too expensive fades.
What lies at the root of my optimism are the changes evident in both manufacturing and agriculture. The services story in India is very well-known, and it will undoubtedly be a strong growth engine, but on the margin the growth surprises will come from elsewhere.
In manufacturing the single-biggest announcement to my mind is the statement that Nissan will set up a unit of about 250,000 cars, largely for export; this is over and above the use of Maruti's facilities to contract manufacture and export.
The auto industry is a big driver of industrialisation, and has huge multiplier effects across the economy. It is not by chance that prior to globalisation, each developed country had its own national champion in auto (witness Fiat, Volvo, Rover, Renault, etc), or that China even today wants to (and says so explicitly) develop its own national champion.
Autos are at the very heart of manufacturing, and anyone doubting India's ability to compete in high value-added manufacturing has to look only at Nissan and its actions.
Basically two global automobile giants are testifying to the quality and productivity of Indian skilled manufacturing. Despite all the logistics and infrastructure hassles, they feel that India is the best location globally to manufacture compact cars.
This is as much a testament to the quality of the Indian component base as it is to Maruti's undoubted manufacturing prowess.
The fact that Maruti makes over a 14 per cent PBT (profit before tax/sales) margin, one of the highest in the world for an auto company, and that too at Indian net realisations, again proves the cost and quality of Indian auto components.
This message is delivered not by Nissan alone as even Hyundai has announced plans to make India the hub for small cars and export almost 500,000 cars by 2010. In terms of engines and assemblies just see what Tata and Fiat have announced in terms of using Ranjangaon as a base to export diesel engines or the plans of Toyota for manual transmissions, and one can see an explosion in volumes.
While I am continuously harping on the auto industry, similar stories abound across sectors. India is clearly set for a take-off on higher value-added manufacture, and the numbers will surprise people.
In terms of mass manufacturing, the hope here has to be textiles, the only sector where I think we can compete and have the scale to make a difference to the economy. While the signs here are quite good initially, especially if you see the backlog with the textile machinery companies, it is still too early to thump the table.
The other leg of growth is agriculture. The move towards corporate involvement in agriculture is real and gaining momentum. Whether it be Sunil Mittal, Mukesh Ambani or Anand Mahindra, the big boys of corporate India are now getting involved.
The scope for both yield improvement and value addition is huge. Cotton is a good example, where over the last 2-3 years there has been a demonstrable improvement in yield as BT cotton seeds and other varieties have gained ground. Currently the hybrid penetration in India is only about 30 per cent, but taking off very rapidly across crops like maize, sunflower and just starting in rice.
Hybridisation will further accelerate as contract farming gains share and acceptability. The potential for yield pick-up as the hybrid movement gains ground is enormous. Combine this with the improvements in logistics and price discovery brought about through direct purchase by large companies disintermediating the middleman, and the building blocks for accelerated growth in agriculture are now slowly coming into place.
On top of all is an improved and simplified regulatory framework governing the commercialisation of agriculture.
Combine all of the above with Indian entrepreneurship and the mix becomes truly heady. Having met dozens of small companies after a long gap, one again comes to realise the extent of hunger, drive and risk-taking abilities present in mid-sized Indian companies.
This is the one thing that continues to differentiate India from most other emerging markets, and it is something very difficult to replicate. Even among the large Indian companies, their willingness and drive for growth are unabated. Witness the house of the Tatas, considered slow and bureaucratic a few years back - can anyone doubt their growth ambitions today?
As Mr Ninan (India's furious economic pace is no accident) pointed out in a piece written a couple of weeks ago, chances are that India has taken off, and it would need a particularly incompetent pilot to crash this plane now.
India is a classic growth story, valued like a growth stock, wherein it will continue to trade expensive as long as it can deliver growth. The spreading out of growth and competitiveness beyond just services is critical in underpinning the longer-term growth prospects of the country. There are clear signs that this is now happening, and to the extent growth sustainability is improving that can only help valuation multiples.
