India’s structural strength makes it a long-term winner despite global challenges: Ridham Desai

“India’s growth has become more predictable and all these things contribute to the PE ratio. But if you do a little bit more intrinsic valuation, stocks are cheap and this is not something that people outside India have completely understood, which is why they are underweight,” says Ridham Desai, Morgan Stanley.

Well, the India story is not a rare story. It is the most consensus story in the world. Macros are strong, valuations are reasonable, growth is decent, and other macro parameters are stable. Is that the positioning which India has enjoyed? Do you think we will continue to enjoy for a long period of time?
Ridham Desai: Actually, I disagree with you. India is not a consensus story. It is a consensus story, it is far from that actually because if you look at foreign portfolio positioning, they are the most underweight on India they have ever been in history. So clearly, they have not understood that India’s macro stability, its growth kind of justify the valuations at which equities trade at. So, they look at the headline PE multiple and they think oh my god this is very expensive, but it is not. I do not think Indian equities are rich.

Actually, I think they are very reasonably priced. We just actually wrote a note yesterday which is titled as equities appear cheap and it requires a little bit of exploration, a little bit of digging. You cannot just look at the headline PE multiples and this is expensive. India’s growth has become more predictable and all these things contribute to the PE ratio. But if you do a little bit more intrinsic valuation, stocks are cheap and this is not something that people outside India have completely understood, which is why they are underweight.

You set the tone that India is the best story but globally it is not a consensus trade in terms of investment but we will interweave our today’s interaction on the mega trends, macros, valuations, and where you are finding money-making opportunities. So, let us first start with the macro setup. Is this the best you have seen in a long time? Inflation is coming under control. Crude is behaving itself. On the tariff front things are looking okay now. And GDP data also seems to be encouraging. Is this the best macro setup we are in in a long time?
Ridham Desai: I would not characterise it that way. I would say that this has been the setup for many months now, give or take a few months here and there. We always go through a little bit of cycle stuff, but we have been in this situation where we have had reasonable growth with low inflation but more critically with low inflation volatility.

Interest rate volatility has been low. So, that has been the setup for India for a while now and it has been driving earnings growth. We did go through a soft patch last year. We have easily come out of that. We came out of that soft patch a few months ago. But the global macro is actually more challenging than it has been for India in a long time.

China is facing deflation pressures and will export its deflation to the rest of the world and that may bring some problem for Indian exporters. The US is going through its tariff stuff which is definitely hurting US growth. Our US growth forecast suggests that US growth will be half of what it was last year, so that is a tough global macro environment.

More structurally speaking the world is heavily indebted more than ever before and it is aging and that is not a very good complex to have. So, India is in this is, what I term as, the oasis in a desert. It is a tough global environment and in that India shines like a bright star in a dark night. So, that is how I would characterise this and the global story has only worsened at the margin and India’s story has at worst remained steady, at best has continued to improve.
Can I conclude from your answer that it is a matter of time the flows which have come back into India in the month of May that will only accelerate and you see the stance shifting at least for global allocators back to India from at least US?
Ridham Desai: They wish to and they will want to, but the problem here is that domestic investors are persistent buyers of Indian stocks. There was a lot of scepticism when the smallcap, midcap correction happened that retail will run away from the market. Well, retail investors in India have an average holding period of over 35 months, 3 years. They are far more long-term oriented than all the institutional investors in the world and they are not getting scared by a 10-20% correction.

So, unless somebody starts selling in the domestic market, how are foreigners going to buy? They can only buy if somebody sells. There are two cohorts that can sell, either domestic sell or corporate start issuing paper. I suspect as we go into the second half and beyond that and there is some stability in US policy, corporate issuances will pick up and that will give an opportunity for foreign investors to continue to engage in Indian stock markets.

The net flows which come into India. Second is that the demand is going to be strong, but what about the supply side which is since you mentioned that new issuances, IPO, promoter block, could that be the impediment going forward while the gross numbers will be strong, it is just that new paper in a sense will have an impact in terms of what the existing stocks would do?
Ridham Desai: Now, we are actually very far away from that moment. In the 2007-08 cycle, issuances rose to 3% of GDP before the market got affected. That number means corporate issuances have to go at a run rate of about $10 billion a month and that has to continue for 7, 8, 9 months on the trot for it to actually cause damage to share prices.

We are a little bit far away from that cycle. That happens when there is a full-blown private capex cycle and valuations are much richer than where they are today. Neither of those conditions are satisfied. So, I do not expect those issuances to happen, those type or level of issuances to happen over the foreseeable future. It is a little bit far away. So, we are okay. If you look at the net number, it should still favour the market. So, the bid will outstrip the supply or the offer.