Corporate India’s resilience has been severely tested over the past decade. Since 2010, there has been a long, drawn-out downturn, caused by a series of corruption and scams, a banking and financial crisis, and now a devastating health pandemic.
However, in our view, India responds best when her back is against the wall. This has been clear throughout history. Since India’s economic liberalisation in the 1990s, there have been several governments with different ideologies, political strength and tenures; but India has always moved forward, with political and economic reforms to accelerate growth and, by extension, the wealth and prosperity of her people.
We are confident that India can rise up from the current crisis, just as she has done in the past. India has a young population, high aspirations and growing levels of urbanisation. With 1.4 billion people, we believe there is massive under-penetration across sectors, which should fuel growth across different categories. As disposable incomes grow, we believe consumers will buy more premium products, or start to buy discretionary products which they previously could not afford.
This includes air-conditioners (helped by the availability of financing and better electrification), property (where regulations are a tailwind for home-buyers), and financial products. These are strong structural tailwinds, which we believe should continue to propel India’s growth over the long term.
That said, our investment approach is not about finding tailwinds for a particular industry or category that will make our investments grow. It is more often about finding management teams who can understand the risks and opportunities, and position themselves to sail with the winds and not against.
One example that comes to mind would be Blue Star, a leading air-conditioner brand in which we have been invested for many years. Mr Vir Advani, from the third generation of its founding family, was appointed CEO in 2016. Under his leadership, the company has gained market share in every year since.
In our past meetings with Mr Advani, he talked about how the company is navigating the increasingly competitive landscape, or about the inevitability for the air-conditioner industry to find alternatives which release less polluting gases. This leads us to believe that he has set his sails prudently for a long-term haul.
More recently, this has been highlighted in Blue Star’s performance amid the pandemic. The company reported a 24% growth in sales and more than doubling of its operating profit in the quarter ended March 2021, compared to the same period last year. Mr Advani remains optimistic about an improvement in Blue Star’s profitability despite a significant increase in raw material costs, and has continued to invest in expanding capacity.
Looking beyond the pandemic, we believe air-conditioner penetration in India will continue to rise from the current low levels. As Blue Star strengthens its market position and improves profitability, we believe there is no reason why it should not be valued several times higher in the years to come.
Source: Company data retrieved from company annual reports or other such investor reports. Financial metrics and valuations are from FactSet and Bloomberg. As at end June 2021 or otherwise noted.
Note: Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. All securities mentioned herein may or may not form part of the holdings of FSSA Investment Managers’ portfolios at a certain point in time, and the holdings may change over time.