India – A land filled with compounders
The Indian market is an attractive opportunity for public market investors due to the surprisingly large number of companies generating high Returns on Capital Employed (ROCE). The forced listing of most multinational corporations (MNCs) in 1978 allowed Indian businesses to learn from the global brands about management practices and corporate governance standards. The MNC’s set the standard for several forward-thinking home-grown companies to emulate and become best in class. Additionally, India’s historically high cost of capital has also led the savvier Indian entrepreneurs to think of high ROCE as an imperative. The result of the above factors is the creation of a large set of investible, well-run companies. We believe this depth is unique among Emerging Market economies.
Family ownership
The average ownership of private Indian promoters in our portfolio is ~60%. Many trees have been cut dedicated to writing about the negative aspects of such large insider ownership, the most obvious management transitions within families leading to bad governance. However, we beg to differ and feel that companies that can look out over the long-term (and not be forced into financial engineering tricks) are usually able to make smart capital allocation decisions while protecting minority investors. Specifically, cash generative companies which trade at large premium PE’s usually have little incentive to cheat (large dividends) and large disincentives to steal (high PE’s) from minority shareholders.
Power of reinvestment rates and high ROCEs
India’s large size and relatively nascent stage of growth presents an opportunity which is not present anywhere else in the world; long reinvestment rates. The upside is that we can find several companies with high returns on capital, reinvesting for long periods of time, creating a land of compounders.
India index performance over the years
India’s stock market returns, measured in dollars, caught the attention of the Financial Times in a November 2023 article. Note India’s surprising resilience compared to the S&P 500 across various timeframes. This impressive performance, in our view, is driven by a unique blend of high Return on Capital Employed (ROCE), substantial reinvestment rates, and the influence of family stewardships.
