India's Opportunities: Impossible To Ignore

The momentum built by reforms and innovation, which includes improving logistics and infrastructure and increasing digitalization, are already broadening and democratizing growth in India.

The Emerging Markets Investment Team’s recent trip to India further reaffirmed our conviction in the investee companies of the VanEck Emerging Markets Equity Strategy that we believe are poised to benefit from the structural growth trends shaping the Indian economy. We are particularly impressed by the speed and scale with which the public and private sector infrastructure spending is transforming the country’s business landscape. India is progressing toward its economic goals while the rest of the world battles an economic slowdown. Following a clear implementation of bold policy as well as private sector investment (mostly enabled by those policies), the country is undergoing an unprecedented transformation, catalyzed by a simultaneous combination of social, economic, and political change. A good way to demonstrate this would be, first of all, the FY 2023 forecasted GDP growth of 6.9%.¹ Additionally, tax revenue growth is about 3x that number, giving the current administration considerable optionality to tackle a lot of the friction caused by poor infrastructure and weak fiscal policy.

India Central Gov't Tax Revenue (Rs, tn)

We believe that the corporate and household balance sheets are strong, the banking system is mostly in good shape, and, as mentioned already, the fiscal situation is improving nicely. In our recent trip to India, we could not help but commend the incredible scale and speed with which recent reforms have been implemented to improve and catalyze most future growth metrics. It appears that improving logistics and infrastructure and eradicating inefficient bureaucracy are already broadening and democratizing growth. We believe the high nominal and the past variance of inflation looks set to be a thing of the past and should ultimately result in structurally lower long-term interest rates – benefiting many areas of the economy.

India already surpassed China as the world’s most populous country this year² and has a much younger population with a median age of 27.6 years.³ Wage growth is at a healthy 8-10%, which means more disposable income in the hands of Indian consumers. The growing scale and efficiency in logistics in India are reducing food basket costs for individual households. These trends make India an attractive economy from a domestic demand perspective.

The demographic backdrop coupled with increased digitalization of the economy - the mass adoption of smartphone use with access to digital applications ranging from payment platforms to banking and retail - is building growth resilience that is likely to persist for some time. We believe our portfolio companies are at the forefront of the transformational change in India and are set to benefit from these forward-looking trends. We would like to highlight a few of the portfolio companies that we analyzed on the ground during our recent trip to India.

Reliance Industries Limited

Reliance Industries (4.82% of net assets^*) is India’s most valuable company by most metrics. The conglomerate is at the forefront of transformation focusing on telecommunications, retail, and renewable energy industries. More recently, Reliance has doubled down on its commitment to pursue these strategic ventures. In August 2022, Jio Platforms, the internet arm of Reliance Industries bid $11.5 billion for the 5G spectrum in India. Mukesh Ambani, the chairman of Reliance Industries, announced a $25 billion commitment to launch 5G in India. Ambani announced that Jio aims to provide 5G service to every district in the country by December 2023.⁴ Jio’s ambition is to become the world’s largest and most advanced 5G network, ahead of China and the United States. A dominant position in this space allows Reliance to build digital, scaled adjacent businesses in e-commerce, entertainment, education, etc.

Reliance Industries has plans to usher in an era of renewable energy in India with $75 billion committed to its renewable energy endeavors. Reliance has shared plans to build five mega factories in India for the production of solar panels, energy storage devices, electrolyzes used in green hydrogen, and fuel cell systems, and power electronics (used to integrate new energy systems).⁵ Perhaps, the most ambitious plan is to be a global leader in green hydrogen production over the next five years with a renewable energy capacity of 100 GW of hydrogen power. Our on-the-ground visit confirmed that Reliance is executing quickly and efficiently in this ambition by backward integrating - often through the acquisition of U.S./European niche businesses - at an unbelievable speed. By our estimates, the company has a line of sight on its end goal, as they are already beginning a pilot program to design and manufacture advanced hydrolyzers. Reliance Industries recently announced setting up a 10 GW solar energy power plant in Andhra Pradesh.⁶ Reliance Industries has a two-prong goal, a) to be corporate energy independent with 100% reliance on its low-cost renewable power, and b) to become the largest global player in the end-to-end solar and hydrogen capital equipment solutions with strategic partnerships to deploy these solutions in the Middle East and North Africa regions.

ReNew Energy Global

We believe ReNew (0.40% of net assets*) is going to be a likely beneficiary of India’s plan to boost renewable energy capacity to 500 GW by 2030.⁷ BloombergNEF estimates India will need $223 billion over the next eight years just to meet its solar and wind capacity targets.⁷ Indian government recently announced U.S. $2.4 billion of financial incentives to expand domestic manufacturing of solar panels.⁸

As India’s ambitions in renewable energy progress, we expect additional bold and transformative regulatory changes. Much of this trip was spent researching bottlenecks and solutions, as well as confirming ReNew’s core skills, financial strength, and operating capabilities. Implementation is still quite flawed, from the tender process to local rules that make local component sourcing preferred. This means that the company’s investment is likely to be lumpy, but over time we believe that this business will be one of the major winners in India’s renewable energy buildout.

HDFC Bank Limited

HDFC Bank Limited (HDB) (4.60% of net assets*) is a private sector bank in India that caters to a range of banking services covering commercial and investment banking as well as transaction or retail banking. In scale, it could be conceptualized as the “J.P. Morgan Chase of India.” India has a flourishing middle class of 350 million people⁹ and we have previously discussed the strength of domestic consumer-led demand growth in the country. Access to credit is an important factor of economic growth, and currently, India is one of the most under-leveraged countries in the world.¹⁰ We believe the strong household and corporate balance sheets put India at the cusp of a new credit cycle taking off and we are already seeing a property boom in the country. HDFC is one of a small number of businesses that grew up in the “old India” but which was an early adopter of technology and strong corporate governance, likely making it a continued and longer-term winner. HDFC recently used its vast balance sheet to acquire HDFC Ltd, the country’s largest housing & mortgage lender. This acquisition brings new skills and customers, and, for shareholders, there are some valuable synergies to be exploited post-acquisition. We view HDFC as a high-quality bank that could offer a persistent high return of equity, per our estimates, up to 23% over the next 2-3 years.¹¹

Delhivery Limited

Delhivery (0.79% of net assets^*) is India’s fastest-growing logistics operator by revenue. The company provides an ultra-low-cost, asset-light software platform for express parcel transportation, partial truckload, cross-border, and supply chain services. Delhivery supports India's leading e-commerce marketplaces, direct-to-consumer e-tailers, consumer brands, and enterprises across diverse sectors. We met with the company’s CEO during our recent trip and collected on-the-ground observational data. We believe Delhivery’s competitive moats around integrated logistics networks and low-cost structure largely protect it from competition. The organizational culture, momentum, and operational excellence along with adoption speeds continue to impress us. While the short-term market share of the company might be impacted by cyclical factors, we believe Delhivery is competitively positioned to capture India’s logistics growth over the long term.

We believe it is impossible to ignore India as an emerging market investment destination from a tactical and strategic point of view. While understanding the nuances of India’s economy, it might not be too far-fetched to draw a parallel here with China. Many investment themes that have taken off in China over the past decade, such as digitalization, growth of financial services, e-commerce, and growth in industrial and consumer goods, are gaining traction in India. The real takeaway from this trip is that most likely, the broad opportunity for global investors may be even more exciting than we had thought and that the momentum built by reforms and innovation will be difficult to disrupt.

The VanEck Emerging Markets Fund (GBFAX) offers access to the structural digital growth story of India for investors seeking technology or growth exposures in emerging markets.

VanEck Digital India ETF (DGIN) offers access to the structural digital growth story of India and could be an appealing investment opportunity for investors looking to seek technology or growth exposure in emerging markets.

DISCLOSURES

Sources:

^* Net assets of the VanEck Emerging Markets Fund (GBFAX). Data as of 2/28/2023.

¹ Bloomberg, “World Bank Bumps Up India’s Growth Projection for FY23,” December 6, 2022.

² Bloomberg, “India’s Population Has Already Overtaken China’s, Analysts Estimate,” January 27, 2023.

³ World Economics, “India’s Median Age.”

⁴ The Wall Street Journal, “Reliance Industries Commits $25 Billion for 5G Rollout in India,” August 29, 2022.

⁵ The Wall Street Journal, “All Eyes on Ambani and Adani to Deliver India’s Green Goals,” September 9, 2022.

⁶ The Economic Times, “Reliance Industries plans to set up 10 GW solar project in Andhra Pradesh,” March 4, 2023.

⁷ The Wall Street Journal, “For India’s and Japan’s Green Ambitions, the Heat Is On,” June 29, 2022.

⁸ PV Tech, “First Solar, Tata Power and Reliance Industries bid for India’s solar panel manufacturing incentive,” March 6, 2023.

⁹ Barron’s, “13 Ways to Invest in India, the World’s Fastest-Growing Major Economy, According to Our Roundtable Pros.” November 21, 2022.

¹⁰ Morgan Stanley, “India’s Impending Economic Boom,” November 8, 2022.

¹¹ VanEck.

This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities/financial instruments mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and forward-looking statements, which do not reflect actual results, are valid as of the date of this communication are and subject to change without notice. Information provided by third-party sources is believed to be reliable and has not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third-party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its employees. Past performance is not indicative of future results.

An investment in the VanEck Digital India ETF (DGIN) may be subject to risks which include, among others, special risk considerations of investing in Indian issuers, equity securities, small- and medium-capitalization companies, communication services and information technology sectors, emerging market issuers, foreign securities, foreign currency, cash transactions, market, operational, index tracking, authorized participant concentration, new fund, absence of prior active market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, non-diversified and concentration risks.

You can lose money by investing in the VanEck Emerging Markets Fund (GBFAX). Any investment in the Fund should be part of an overall investment program, not a complete program. The Fund is subject to the risks associated with its investments in Chinese issuers, Indian issuers, Latin American issuers, direct investments, emerging market securities, ESG investing, foreign currency transactions, foreign securities, communication services sector, consumer discretionary sector, financial services sector, information technology sector, other investment companies, investments through Stock Connect, management, market, operational, restricted securities, sectors, small- and medium-capitalization companies and special purpose acquisition companies risks. The Fund’s investments in foreign securities involve risks related to adverse political and economic developments unique to a country or a region, currency fluctuations or controls, and the possibility of arbitrary action by foreign governments, or political, economic or social instability, all of which may be enhanced in emerging markets. Emerging market securities tend to be more volatile and less liquid than securities traded in developed markets.

ESG integration is the practice of incorporating material environmental, social and governance (ESG) information or insights alongside traditional measures into the investment decision process to improve long term financial outcomes of portfolios. Unless otherwise stated within an active investment strategy’s investment objective, inclusion of this statement does not imply that an active investment strategy has an ESG-aligned investment objective, but rather describes how ESG information may be integrated into the overall investment process.

ESG investing is qualitative and subjective by nature, and there is no guarantee that the factors utilized by VanEck or any judgment exercised by VanEck will reflect the opinions of any particular investor. Information regarding responsible practices is obtained through voluntary or third-party reporting, which may not be accurate or complete, and VanEck is dependent on such information to evaluate a company’s commitment to, or implementation of, responsible practices. Socially responsible norms differ by region. There is no assurance that the socially responsible investing strategy and techniques employed will be successful. An investment strategy may hold securities of issuers that are not aligned with ESG principles.

Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of a fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.

© 2023 Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.