Purpose of the trip

We were keen to gain a deeper insight into the local political dynamics, and the majority of our meetings were focused on what could potentially upend India’s growth story, given how the market is now a consensus buy and the outlook is unequivocally positive.

Key takeaways

1. Politics: A potential super majority for Modi

It is highly expected that Prime Minister Narendra Modi will win a super majority at the upcoming elections in April-May. Having won 303 seats in the lower house in the 2019 election (282 in 2014), many expect the ruling Bharatiya Janata Party (BJP) to win 350-400 seats this year. This far exceeds the 272 needed for a majority in government and will be the best number that a government has achieved since 1984.

This result, if it materialises, should enable Modi to make reform progress post elections of which the most significant appears to be (i) a step-up in privatisations (including some state-owned banks) and (ii) agricultural reform, of which the Land Acquisition Policy is the most important. The key opposition party, Congress, is in disarray and Rahul Ghandi is not a popular leader, which will give the BJP even more confidence to push forward with its economic agenda.

2. Economy: Full steam ahead with Made In India

The country’s economic growth remains robust, with notable strength in manufacturing and construction, and the “Made in India” story is increasingly tangible across several sectors. Investment-led growth is likely to benefit sectors such as industrials, infrastructure, power and real estate.

Manufacturing has already increased from 14% to 22% of GDP and there should be more to go with the government introducing production-linked incentive (PLI) schemes across 14 sectors¹, given that companies in the private sector can use tax breaks and incentives to increase manufacturing capacity. Gross fixed capital formation as a % of GDP has risen to 29.3%, but this compares to a peak of 35.8% back in 2008².

3. Policy: Fiscal discipline very much intact

Modi is a fiscal hawk, so we are unlikely to see much in terms of fiscal transfers and therefore undue pressure on the government’s finances and the currency – albeit oil imports remain an area of vulnerability, given rising oil prices.

4. Equities: Domestic flows are big source of support

As domestic savings continue to be channelled into local mutual funds, equity markets should continue to broaden out and new companies come to market. The domestic investor has helped to create a low-volatility environment in Indian equity markets over the past few years despite the occasional spikes in outflows from foreigners. In the view of a sell-side broker, India has now become a market that even global mandates cannot ignore.

5. Valuations: Froth building up in small and mid-caps

We see the risk that valuations in India are perhaps already pricing in all the good news, and it was interesting to hear some companies admit that they could not make sense of their valuations. This is primarily a problem for small and mid-caps with the regulator even stepping in recently to suggest that mutual fund houses need to put in place measures to protect retail investors given the froth building up in this space.

Company meetings: Two in the spotlight

1. Cyient: A good play on engineering R&D

What does the company do?

Cyient provides engineering and IT services to clients mainly in developed markets in areas such as automation, innovation and manufacturing. Its core business is engineering research and development (R&D), which has plenty in common with the software outsourcing industry. More companies are outsourcing high-end, complex engineering work to places like India, where there is an abundance of skilled engineers at comparatively lower costs, benefiting service providers like Cyient.

Meeting highlights:

We spent several hours with Cyient and received a good overview of its 3+1 strategy where 80% of the business is from three key areas and 20% from new growth areas.

The three key areas are transportation (30% of revenue), sustainability (30% of revenue supported by a few recent acquisitions) and connectivity (20% of revenue). The new growth areas include digital healthcare, automotive and semiconductors.

Cyient has more of a geographic focus on the UK, Germany, Nordics, Australia and the US, as well as India. The IPO of its DLM or design-led manufacturing subsidiary has been a success and Cyient’s timing in setting up this business was prescient in hindsight, as it is now seeing good demand owing to the impetus around “Made in India”, with the CEO noting that it had signed a very large 20-year contract and are seeing a few core US customers look to shift manufacturing presence to India from China. The company is keen to focus on low volume, high mix manufacturing with decent margins and are confident of delivering double-digit growth.

2. Aegis Logistics: Key beneficiary of move towards clean energy

What does the company do?

Founded in 1956, Aegis Logistics is India’s leading integrated oil, gas, and chemical logistics company. With state-of-the-art terminals across major Indian ports, Aegis is also a top importer and handler of liquefied petroleum gas (LPG) amongst private players. More broadly, the macro dynamic for the industry Aegis operates in is also attractive given the clear import requirement that India needs when it comes to LPG usage and the push away from dirty fuels. While energy demand is ever increasing, the domestic supply in India is not keeping pace, which has pushed natural gas prices higher, thus benefitting companies like Aegis.

Meeting highlights:

We had a good meeting with the CFO, who was upbeat on the earnings outlook over the next few years. He was convinced that LPG, LNG (liquefied natural gas), ammonia and hydrogen will be fuels of the future. Of these, LPG already has a substantial price advantage over LNG, and LPG is the only gas that the government is building inter-state truck pipelines for. As a result, the CFO believed that this will greatly benefit Aegis due to its connection to existing domestic ports.

In terms of capacity, it took Aegis 67 years to get to 3,000 crore of capex and now within a few years by FY25, the company would have spent another 4,500 crore. The rapid pace of this capacity building – with significant increases in LPG terminal throughput, distribution this year with Mangalore providing a big boost, and liquid storage by FY25 – gives high earnings visibility, albeit we will be monitoring execution and how the investment phase bears fruit over the coming years.

Our thoughts

Outlook

The Indian economy is in the early stages of a cyclical upswing. It is one of the fastest-growing countries in the world, supported by a resilient domestic macro environment. Inflation eased to within the Reserve Bank of India’s tolerance range, and the central bank has stayed on the sidelines since February 2023 when it last raised interest rates.

Public policy also remains supportive with sufficient fiscal discipline to reassure investors. In the latest interim budget for 2024, the government targeted a sharp fiscal consolidation but kept the focus on a capex-led growth momentum for India. This is expected to create more jobs in the economy, and eventually spur a private capex cycle.

In a stark contrast to other major emerging markets, India’s real estate sector is seeing strong growth momentum, particularly in the residential segment. Meanwhile, Indian private sector banks remain fundamentally strong, with healthy balance sheets, albeit there have been some concerns around liquidity and future loan growth.

All of this is helping to sustain attractive earnings growth and a recovery in return on equity. We have added new names in the portfolio and topped up existing ones to take advantage of the recent market correction.

India still faces some near-term risks, most of which are external. This includes potentially higher global energy prices and a slowdown in the world economy. On the domestic front, India’s parliamentary elections will take place in seven phases starting mid-April, with results being announced in early June. The market expects political continuity in Modi and BJP being re-elected for another term.

While there could be the near-term headwinds, we expect our core quality holdings to continue to deliver resilient compounding earnings growth over the medium term, come what may in terms of macro conditions. The consistency of earnings growth of the portfolio remains healthy and company fundamentals of our holdings, including pricing power, strong balance sheets and the ability to sustain margins, remain solid. We maintain confidence in the experienced management of these companies.

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.

Important information

Risk factors you should consider prior to investing:

• The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
• Past performance is not a guide to future results.
• Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
• The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
• The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
• The Company may charge expenses to capital which may erode the capital value of the investment.
• The Company invests in smaller companies which are likely to carry a higher degree of risk than larger companies.
• Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
• There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
• As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
• The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
• Specialist funds which invest in small markets or sectors of industry are likely to be more volatile than more diversified trusts.
• Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.

Other important information:

An investment trust should be considered only as part of a balanced portfolio. The information contained in this document should not be considered as an offer, solicitation or investment recommendation to deal in the shares of any securities or financial instruments. It is not intended for distribution or use by any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication or use would be prohibited. Nothing herein constitutes investment, legal, tax or other advice and is not to be relied upon in making an investment or other decision. No recommendation is made, positive or otherwise, regarding individual securities mentioned. This is not an invitation to subscribe for shares and is by way of information only. Investment should only be following a review of the current Key Information Document (KID) and pre-investment disclosure document (PIDD) both of which are available on www.invtrusts.co.uk. Any data contained herein which is attributed to a third party (“Third Party Data”) is the property of (a) third party supplier(s) (the “Owner”) and is licensed for use by abrdn*. Third Party Data may not be copied or distributed. Third Party Data is provided “as is” and is not warranted to be accurate, complete or timely. To the extent permitted by applicable law, none of the Owner, abrdn* or any other third party (including any third party involved in providing and/or compiling Third Party Data) shall have any liability for Third Party Data or for any use made of Third Party Data. Neither the Owner nor any other third party sponsors, endorses or promotes the fund or product to which Third Party Data relates. * abrdn means the relevant member of abrdn group, being abrdn plc together with its subsidiaries, subsidiary undertakings and associated companies (whether direct or indirect) from time to time.

Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London, EC2M 4AG, authorised and regulated by the Financial Conduct Authority in the UK.