India’s Opportunities: Impossible to Ignore

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)

Source: Macquarie Capital. Data as of March 15, 2023. FY= Fiscal Year; FY2023 and FY2024 = Fiscal Year forecasts. Past performance is no guarantee of future results. Not intended as a prediction of future results.

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 (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.

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