Wherein we met 14 companies :
- This list includes financials likeKotak Mahindra, State Bank of India, IDFC First Bank and Shriram Finance, HDFC Life Insurance and ICICI Prudential Life Insurance,
- Property developers DLF and Macrotech Developers,
- IT services providers Infosys and Cyient,
- Consumer goods manufacturer Crompton Greaves Consumer,
- Electronic manufacturing services provider Kaynes Technology,
- Hospital Global Health
- Specialty chemical manufacturer Aarti Industries.
We took this opportunity to exchange with management teams about the surprising election outcome and the expected consequences. After 10 years in power, Narendra Modi won a third term but failed to win outright majority. As National Democratic Alliance (NDA), a coalition government has been formed by BJP and its allies, the stability of such a coalition has become a new concern. Now the new government has already announced an income support scheme of $2.3bn to 93m farmers, investors wonder to what extent the upcoming budget (on 23rd July) would reflect a populist bent compared to a growth-oriented budget with fiscal consolidation which would be favored by the markets.
Overall, business leaders seem to agree that BJP retaining almost all significant ministries seems a relief and as such, strong economic momentum could be sustained despite above-mentioned political changes.
Post a resilient 1Q24 (GDP +7.8%), India is on track to become the 3rd largest global economy by 2027. The steady increase of tax revenue contribution (11% of GDP in FY19 to 11.6% in FY24), a result of economy formalization, should allow the financing of ongoing infrastructure investments (2.7% of GDP in FY23 to 3.3% of GDP in FY24). While Central Bank RBI has kept its rate unchanged (at 6.5%), it has found comfort in the gradual moderation in inflation (CPI at 4.75%) toward its target (of around 4%). Its recent much-bigger-than-expected dividend payment of $ 20Bn (vs. $ 10Bn expected) to the government also help to offset the fiscal pressure (fiscal deficit target of 5.1% in FY25).
In this environment, Indian corporates remain in a healthy position: with utilization rate already increased to 76% in 2024 (vs. 72% in 2022), their strong balance sheet (corporate debt to GDP remains at its lowest in 10 years) offer them a backbone to accelerate business investments and seize structural growth opportunities from current low base (GDP per capital at $2,800). Such prospect should be expected in various sectors (infrastructure, financials, property, consumption, industrials…). And for listed companies, the steady inflow from domestic investors ($ 3 Bn+ per month) offers an important incremental funding source, as well as a support to their valuations.
Company focus: DLF (Market Cap: $ 25Bn - Sales : $ 776M)
Company was founded in 1946 to develop low rise urban colonies in Delhi. In 1985, it expanded into the then unknown region of Gurugram (outskirts of Delhi) wherein they acquired large parcels of lands to develop residential, commercial and retail properties.
DLF is the largest real estate developer in India and has developed ~31mn sqm. The company has grown their pre-sales at CAGR of 82% between 2020-2023 and now has a market share of 19% in Delhi-NCR region.
Over the years, the group has developed 132 residential complexes across 27mn sqm in the premium to luxury segment with marquee properties such as: DLF Magnolias and DLF Camellias. The rental portfolio for commercial and retail properties is spread across 4mn sqm with marquee properties such as DLF Cyber City, DLF Emporio and DLF Promenade. Between 2015 and 2017 the company faced a debt crisis on the back of aggressive expansion which kept Net Debt to EBITDA between 6.5x and 8.6x. In 2018, the group sold ~40% stake in rental business division for $1.4bn to ease debt concerns and as of FY03/24 Net Debt to EBITDA stood at 0.03x.
During the same time, the Indian government implemented the RERA (Real Estate Regulatory Authority) Act to protect homebuyers and boost investment in real estate, which led to consolidation of developers in the country.
Demand for residential property remains strong (need for ~100mn homes) and affordability ratio has fallen from 50% in 2013 to less than 40% in 2024.
DLF has a land bank of 18mn sqm across 12 cities which has potential sales of $45bn. The management is targeting to grow their pre-sales in a sustainable manner of 15-16% per year with EBITDA margins of ~35%.
Over a 3-year period (2024-2027e) the company is expected to grow sales by 27% and EPS by 35% per annum as demand for real estate remains robust and supply is limited (~8-9mn homes per year). The stock trades at a high FY03/25 PER of 61x but at a discount of 5% to NAV.
Company focus: Kaynes Technology (Market Cap: $ 3.3Bn - Sales: $ 218M
The company started in 1988 as an electronics manufacturing services (EMS) provider and has transformed into an end-to-end IoT solutions provider. Kaynes has developed strong capabilities in providing conceptual design, process engineering, integrated manufacturing and life cycle support.
While the company serves 360+ customers across Automotive, Aerospace, Industrial (including EV’s), Railways, Medical, Consumer Electronics and IT across 28 countries. It has been listed since 2022. Over 34 years, the group has built a strong network of 10 manufacturing facilities, 2 service centers, 2 design facilities across 7 cities with 12 global certifications (most certified ESDM company in India) and supplier base of 1,700+. Despite the manufacturing capabilities, group sales grew at a CAGR of 4% between 2019-2021, as clients mainly sourced from manufacturers outside of India.
However, in the past 3 years, the group sales have accelerated at a CAGR of 56% from $56M (FY21) to $218M (FY24) with margins expanding from 10% (FY21) to 14% (FY24). The group is starting to benefit from customers shift in strategy to move their supply chain to Indian manufacturers, which has been reflected in the order book : +55% to $500M in 2024. The group is now in investment mode: setting up an advanced HDI Printed Circuited Board (PCB) plant and Outsourced Semiconductor Assembly and Testing Services (OSAT) plant, wherein 75% of capex will be funded by the government under the PLI (Production Linked Incentive) scheme.
The capabilities of PCB and OSAT plants will enable the group to further backward integrate their electronic manufacturing business and expand their presence with their customers.
Over a 3-year period (2024-2027e) the company is expected to grow sales by 45% and EPS by 38% per annum. The stock trades at very high valuation of FY03/25 PER of 95x, as there is an upside risk to earnings as PCB and OSAT plants could contribute to sales. Kaynes is also the only listed Indian company domestic investors can invest in, to participate in the semi-conductor supply chain growth opportunities.
