India – After significant underperformance, is this finally a buying opportunity in India?

Until the early 1990s, India was a closed and highly regulated economy. Decades of State intervention, capital controls and restrictions on private enterprise meant that India barely grew income per person until reforms kicked in during the early 1990s. Much like the reforms China implemented in the 1980s, the impact was astonishing. World Bank data shows that India’s GDP per capita, measured in constant US dollars[1], grew by a mediocre 1.8% per year from 1960 to 1990. In the subsequent 35-years through 2025, it grew by 4.8% per annum. The visual impact of such a boost in the growth rate is striking, as illustrated by Figure 1.

Figure 1

When incomes grow at 2% a year, it takes roughly 35 years for them to double. At 5% a year, it takes only 14 years. Within a generation (around 30 years), a country that grows its per capita income by 5% a year can see its people become more than four times richer. Since 1990 India has transformed from being one of the poorest countries in the world to having per capita income of close to US$3 000 per person, a firmly middle-income country when adjusted for the relative cost of living (purchasing power parity in economist speak).

If it continues to grow its US dollar per capita income at this rate, it could catch up to countries like South Africa and Brazil (in per capita terms) by 2050, as these countries are barely achieving any growth at all. This has profound implications for the world economy given the population is close to 1.5 billion. Importantly for India, the rate of population growth has stalled, so the demographic dividend[2] of people entering the workforce has the potential to play out in a beneficial way, while the social burden of having a large proportion of elderly people to support after retirement is still years away. This is very different from China, for example, where the workforce is shrinking and the number of people aged over 60 is rising rapidly.

WHAT HAPPENS AS PEOPLE BECOME WEALTHIER?

When people have very little income, they understandably worry only about surviving day to day. They spend their money on food, a basic roof over their heads, and transport to work and back. There is little room for luxuries and the range of goods they buy or services they consume outside of this core basket is minimal.

As people become wealthier, their behaviour changes, opening up a myriad of opportunities for businesses. There are a few industries that illustrate how this plays out over time, and I’ll highlight two relatable examples, starting with household personal care (HPC).  

Thirty years ago, the HPC industry may have reached all corners of the country, but actual usage of their products was relatively low. If someone bought shampoo, it was likely a single-use sachet. Few people bought laundry detergent as very few households owned a washing machine and, with widespread poverty, most people used long bars of soap to wash clothing. Even toothpaste was not universally used across the country. Fast forward to today and the range of products sold in the country by HPC companies is unrecognisable relative to 30 years ago. Single-use sachets have largely been replaced in the middle class by bottles of shampoo of every variety imaginable. Laundry detergents in this group are the norm, rather than the exception, and other standard products like toothpaste are now reaching 100% penetration and daily use is standard.

The revenue and profit opportunity for HPC companies has therefore multiplied. When a household uses a bar of Dettol soap to wash hands after meals, the cost could be as little as Rs40 ($0.42) per bar. When they buy liquid hand wash of the same brand the selling price is Rs80 ($0.83). This sort of premiumisation is a large opportunity for consumer-facing businesses across the board in India and is still in its early stages. As the share of the workforce that is comprised of women grows, there are significant shifts in the consumption patterns of HPC products, which will further benefit HPC companies.

While we are very positive on the long-term prospects of the HPC businesses in India, the valuations of the listed players have largely been too high to offer any margin of safety, with the market leaders like Hindustan Unilever (global Unilever’s Indian subsidiary) trading on 50 times forward earnings, which is quite expensive relative to much of the Indian market and other opportunities we see in emerging markets with similar earnings growth.

The second industry is financial services, which in much of the developed world is now ex-growth. However, in India, this is another sector with a long runway for financial deepening. India nationalised the banking sector in the 1970s and private sector banks were only to re-enter in the 1990s. Since then, private banks have taken about a third of market share from public sector banks, a trend we expect to continue.

In 2016, India implemented a demonetisation policy and cancelled all high value banknotes accounting for close to 90% of the value of currency in circulation, virtually overnight. This forced people to deposit affected notes into bank accounts. Some of this money was withdrawn immediately in the form of new notes, but a large proportion of the deposits remained banked. This manoeuvre brought more people into the banking system, and helped escalate India’s electronic transactions to levels on par with developed countries (Figure 2). The introduction of the Unified Payments Interface (UPI), which enables instant settlement of transactions at zero cost, helped accelerate the uptake. This killed debit cards since merchants had no incentive to accept them and pay the associated interchange fee when UPI cost them nothing. After a decade, the regulator is now finally allowing merchants to charge a small fee for UPI transactions above Rs2 000 (just over US$20), but this likely will not result in a return to cash usage since digital payment patterns are so entrenched.

Figure 2 

While bank accounts are largely fully penetrated in India, in the sense that anyone who wants one has got one by now, credit penetration is fairly low. Figure 3 shows how mortgage debt to GDP[3] in India compares to other countries around the world.

Figure 3

Among peer countries, only Brazil has a lower penetration of mortgage debt, but this is more a result of punitively high real interest rates (which make long-term borrowing very expensive) and historical issues with banks being able to exercise security on properties in the event of default.

India experienced something of a credit boom in recent years as more people entered employment and moved through different life stages. Mortgages accounted for barely 5% of GDP 15 years ago; now, as Figure 3 shows, they account for 13%. For most people, the first loan they will take is an unsecured personal loan. Then, at some point, they may take out a loan to finance a motorbike for commuting to work. As they marry and have children, they will take further life stage-appropriate loans, such as for cars and houses. There are tens of millions of people at each of these stages and the banks are seeing loan growth of around 15%, on average, per year. This is well above the ~10% nominal GDP growth for the country. Since overall credit penetration is still low by global standards, this differential growth rate can sustain for several years without causing systemic issues like those that led to the Global Financial Crisis (GFC) in the developed world.

Importantly, there is an acute shortage of housing and borrowers are required to have significant equity in their homes. Developments will only be financed if they are viable, which is very different from the construction binge that has taken place in China, the effects of which are now playing out. The large private banks in India can be bought on 13 to 14 times earnings multiples, and they will likely deliver through-the-cycle earnings growth of ~15% p.a. for the next five years, with a high degree of certainty. They’ve delivered well above this in terms of advances growth[4] over the last 25 years (Figure 4).

Figure 4

WHAT ROLE DOES INDIA PLAY WITHIN THE BROADER EM UNIVERSE?

Today, India represents around 10.7% of the MSCI Emerging Markets Index (MSCI EM Index), which makes it the fourth largest constituent after China, Korea and Taiwan. The current weight is a big decline from two years ago, when India was 20% of the benchmark (Figure 5).

Figure 5

Over the last 20 years, the return profile of India has had three distinct phases. For the first 15 years up to March 2021 (the middle of the two-year Covid-19 disruption), India outperformed marginally. In the second phase, lasting just over three years to July 2024, India outperformed massively; and more recently, to the time of writing, the combination of India delivering negative returns (in US dollars) and the MSCI EM Index returning 65% from July 2024, the two have largely converged again (Figure 6).

Figure 6

A large part of the MSCI EM Index’s returns has been driven by Artificial Intelligence (AI) beneficiaries. Indeed, over the last year, 100% of the benchmark’s 29% return has come from stocks that produce components required for AI data centres. These include chips, memory, servers, power supply, cooling and other essential inputs. From that perspective, there is nothing much India could have done as it is fairly light on AI beneficiaries. In fact, it has a large IT services industry, which could conceivably be disrupted by AI, although this is a small part of the overall listed universe in India.

It does appear that the Indian market valuations reached unreasonable levels, and they have now unwound to closer to their historical long-term range (Figure 7).

Figure 7

Figure 8 shows how foreign investors, who had been major investors in India, have been pulling out at an unprecedented rate after investing heavily during the strong run from 2021 onwards. Korea and Taiwan have been significant beneficiaries of these outflows.

Figure 8

At 20 times earnings, India is not necessarily cheap, particularly with the MSCI EM Index as a whole at 10 times earnings. That being said, with the benchmark becoming increasingly concentrated towards AI-related suppliers, which are now almost 40% of the overall weight, India offers helpful diversification away from AI. As Figure 9 shows, Korea and Taiwan are now effectively two sector markets, while India is less concentrated and has a broader range of sectors for investors.

Figure 9

TO CONCLUDE

We believe the banks and finance houses offer a very attractive entry point into India. Some of the best in this group have followed the general market down and de-rated such that they now trade at their lowest valuations relative to their 15-year history. In the Coronation Global Emerging Markets Strategy, we own HDFC Bank and ICICI Bank, as well as Bajaj Finance. They all offer a combination of high return on equity, high earnings growth and an attractive starting multiple, resulting in an aggregate five-year IRR of over 20%.

Other Indian exposures within the Strategy are to vehicles, online travel and food delivery/quick commerce. For the first time since the Strategy launched, we are finding enough opportunities in India to be above benchmark weight and the average upside in the Indian holdings is above 80%, itself an all-time high in the history of the Strategy.

[1] Constant US dollars express GDP in the prices of a chosen base year, adjusting for inflation so growth can be compared over time.
[2] The demographic dividend is the potential boost to economic growth that occurs when birth rates fall and far more people enter the workforce than leave it for retirement.
[3] The total amount households owe on mortgages expressed as a percentage of a country’s GDP.
[4] Growth in the total amount of loans outstanding by private sector banks

Insights Disclaimer