• Home
• |
• Careers
• |
• Sitemap
• |
• Contact us
• |
• Kotak group site

Home > Media > Optimistic on the merits of India

Media

Optimistic on the merits of India
FTfm (Financial Times)
15th November 2009

As investors crawl out from wherever they were hiding during the financial crisis, they are looking to emerging markets to drive both the global economic recovery and the recovery of their equity portfolios.

Of the Bric countries (Brazil, Russia, India and China), the first and last have attracted most attention, but India is also starting to feel the love, according to Paul Parambi, the head of international business at Kotak Mahindra, an Indian financial services company with more than $11bn (£6.6bn, €7.4bn) in assets under management.

“We’re seeing interest from a whole range of investors, from retail to institutional,” says Mr Parambi who is based in Mumbai. “Many of these investors are already loaded up on China and looking for alternatives.”

In order to capture some of this interest, Kotak is building a platform of Luxembourg domiciled funds. The first, due to be launched shortly, is an infrastructure and property fund investing mostly in listed companies with exposure to India’s immense infrastructure development programme.

“India currently has an underdeveloped and undercapitalised infrastructure set-up that requires significant investment to accelerate growth,” says Mr Parambi.

The Indian government is forecasting economic growth of 6.5 per cent this fiscal year, but Mr Parambi is more optimistic about corporate earnings, which he expects will grow by 15-20 per cent annually for the next few years. Companies with exposure to infrastructure, he predicts, will see even faster earnings growth.

He bases his optimism on a virtuous cycle of liquidity, rising consumption and a growing industrial base. The Reserve Bank of India controls liquidity in the financial markets closely by saying how much local banks have to hold in reserves, forcing them to buy or sell government bonds depending how much money it thinks should be available for the banks to lend.

During the financial crisis, it loosened monetary policy to allow banks to continue lending, although in the past month it has tightened its reserve requirements, prompting speculation about an interest rate rise early next year.

This has knocked Indian equity prices from their recent highs, but they are still significantly above the abyss they fell into in March, when the benchmark Sensex plunged to 847. Since then it has almost doubled to 1600, and investors who held back from investing over the summer as it rose past 1200 and 1400 for fear it would fall back are now buying into any dip that comes along, according to Mr Parambi.

Companies that had cut staff during the financial crisis are now recruiting again, and even existing staff have come to expect wage increases.

Combined with a general pay rise for Indian civil servants, a huge sector, and a minimum pay and employment guarantee for people in poverty-stricken rural areas, this means Indians can start spending more, thinks Mr Parambi. He dismisses inflation concerns, saying another global disaster would be a more pressing worry.

The infrastructure fund is the second fund Kotak Mahindra has registered in Luxembourg, where it joins an Indian multicap fund. These two will shortly be joined by a growth fund, which will have a large cap bias, and then in a few months a mid-cap fund.

Kotak Mahindra aims to market all three funds across a range of distribution channels, but institutional investors prepared to lock up their money as with a private equity fund can take advantage of a different structure.

The Kotak India Focus Fund is intended to exploit structural idiosyncrasies of the Indian market.

Mr Parambi explains many mid- and small-cap companies are manager- owned or family-owned, with a relatively small free float. Even if their share prices are trading at distressed levels, far below fair value, they can be reluctant to turn to the private equity investors who might otherwise snap them up.

“Friendly activism, however, works well,” says Mr Parambi. Working with a concentrated portfolio of 15-20 names, Kotak’s focus fund offers advice on growing the business, restructuring a company’s capital, unlocking value for shareholders and even simply communicating a company’s position better to other investors.

Because these companies are often relatively illiquid, the fund is structured in some ways like a private equity fund, with a five to six year lock-in, periodic drawdowns of committed capital and distribution of returns when a holding is sold.

“This is not for retail investors or anyone who needs liquidity,” says Mr Parambi, “but there is a set of investors who are okay with the long lock-in.”

Contact Us

Copyright © 2008 Kotak Mahindra Group. All rights reserved.

 

General Privacy Policy | Terms of Use |