India equity market: not just another BRIC in the wall

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Investors may wonder whether India’s GDP growth pick-up will be reflected in improved companies’ earnings and thus better returns. In our view, India has an equity market that, especially when compared with those of the other BRIC economies (Brazil, Russia and China), is particularly well structured towards converting economic growth into shareholder value.

 

BRIC: equity market index weights – composition and comparison

India

A highly diversified market led by secular, consumer-oriented sectors

The first striking characteristic of India’s equity market is its broad diversification, with the service and consumer sectors representing over three quarters of the index. Compare this with Russian listed equities, dominated by industrials and commodities, representing two thirds of the index. Energy alone represents fully 57%. Consumer sectors in India benefit from the long-term trend of rising domestic consumption, driven by the mushrooming middle class.

World-class companies

The Indian equity market includes world-class companies. Within IT services and products, Infosys, Tata Consultancy Services and Wipro are internationally-known global leaders. Similarly, consumer staples companies include local subsidiaries of global leaders, such as Nestlé and Unilever. Although India’s private-sector banks operate exclusively in the domestic market, some have very strong balance sheets, world-class management teams, a growing market share and earnings growth in excess of 20%.

The dominance of the private sector

Another key trait of the Indian equity market is the dominance of the private sector, which represents 88% of the index. This is vastly different from the case in China, where 70% of the equity market comprises government-owned companies that almost by definition are less keen to distribute dividends or prioritise shareholder value.

India equity market premium over BRIC peers warranted

The unique structure of India’s equity market among its BRIC peers has historically translated into what some have called the ‘India premium’. This translates into relatively higher price-to-earnings multiples than its emerging market peers. The dominance in India of competitive private-sector companies that operate mainly in the consumer and services long-term growth sectors, provides good justification for such a premium. And on a sector-neutral basis, India is neither cheaper nor more expensive than any other emerging market .

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Paul Milon

Investment Specialist, Indian equities

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