Thoughts from the road: India

Frances Lim, a managing director on the Global Macro, Balance Sheet, and Risk team, and I recently traveled to India and where we met with a variety of CEOs, policymakers, deal teams, and investors. We discuss our findings in more detail later in the piece, but our key conclusions are as follows:

• There are two reasons why the India story remains a powerful one. First, it has a strong, domestically-driven, consumer-focused economy that is inflecting upward, boosted by compelling demographics linked to the best fiscal plan that we have seen in over a decade from a governing Indian Prime Minister. Second, this country is still enjoying the benefits of globalization for both the goods and services parts of its economy at a time when several other large Asian economies are experiencing the negative impact of leading multinational corporations rethinking their global supply chain footprints. As a result, we think that India could represent 20% or more of total incremental global growth over the next five to seven years.

• Capital markets conditions have seasoned well since the pandemic, including a more stable currency. In addition to increased foreign capital flows, a more targeted domestic savings program is providing a new, steady tailwind that adds depth and breadth to the public equity markets. Previously, savings was largely funneled into Real Estate, Gold, and/or Cash. At the same time, Private Equity in India has matured, and there are now more opportunities to partner with established, large-scale entrepreneurs. This cohort has serious ambitions to grow both domestically and internationally and to do more control deals, especially with succession planning as an incentive.

• Several additional positive catalysts have emerged since our last visit in 2019. High end consumers are now increasing their spending exponentially (Exhibits 4-5), banks provisioning is running well below trend across all segments of the consumer and wholesale markets, and much needed infrastructure investment is on the rise, especially the build out of high-speed road corridors. At the same time, conversations in Delhi lead us to believe that there could be as much as four to five billion U.S. dollars of annual infrastructure transfers from the government to the private sector in each of the next five years, a signal that more efficient growth could lie ahead. At the same time, heavy investment in data centers is actually helping India to better harness its 900 million Internet users.

• The democratization of commerce-driven technology stands out relative to global peers. Digitalization of key consumer and business focused infrastructure such as payments, which are called Unified Payments Interface or UPI in India, as well as the development of the Open Network for Digital Commerce or ONDC, which is essentially an unbundled version of Amazon for business/logistics/buyers, suggest that India’s e-commerce industry will look quite different, and more democratized, than what has unfolded in both the United States and China, we think. If we are right, it likely means a more balanced outcome as it relates to private sector value creation linked to e-commerce as well as technological innovation than what we have seen in the United States and China so far.

• Unfortunately, valuations now reflect some of this optimism. It may not feel that way right now, but India’s success will not be a straight line. When these dislocations inevitably occur (which happens in all emerging markets and is usually linked to excess credit creation and/or a policy mistake), volatility in both business activity as well as in the capital markets will unfold. When dislocations do occur, however, we want to be clear in our messaging: we view these as opportunities, and long-term allocations to India should be increased, not reduced, particularly as it relates to owning more secular compounders.

• Differentiated sourcing across Private Equity, Infrastructure, and Credit remains a prerequisite for success, we believe. Moreover, within asset classes, allocators must also spend time discerning relative value across sectors and across capital structures to create competitive advantage in a market like India. 

• A local presence has become increasingly required, because – as we detail below – not all consumers are enjoying the same economic uplift. Separately, as the corporate sector matures, partnering with the right local players who intend to properly scale their businesses has become a key differentiator. Key themes that resonated during our trip included high-end consumer brands, differentiated consumer experiences, wealth/savings, energy distribution, and digitalization.

Our Bottom Line: Stay the Course. Even for someone who travels a lot, this past week was unique as I was able to spend time in the United States, Europe, and Asia. This ability to ‘comparison shop’ the global economy is a unique feature of KKR, and my trip reminded me why, in today’s increasingly complex global economy, more and more investors are reallocating capital to India. To be sure, sentiment in the near-term feels ebullient, but our trip reinforced why India could be one of the largest investment arenas to deploy capital in Asia over the next five to seven years if the country continues to Stay the Course on its current reform-minded approach.

EXHIBIT 1: What a Difference a Decade Makes

Acknowledgements
Deepali Bhargava, Allen Liu