India - a share in the world’s fastest growing economy
1.3bn reasons why these UK companies are looking to India for growth
India is the world’s fastest growing major economy. With a population of 1.3bn people, this means a significant uplift in wealth for over 17% of the world’s population.
A larger, wealthier population creates huge opportunities for companies with established positions in India. Consumption of goods and services is only likely to increase, while higher disposable incomes create opportunities to upgrade customers to premium products. Below, I assess three UK companies with high-profile Indian operations. Like all stock market investments, their shares will fall as well as rise so invetors could make a loss.
A more premium mix
Diageo, owner of brands such as Johnnie Walker, Guinness and Smirnoff, is a great example of a UK company with plenty of potential to succeed in India.
It may only account for around 9% of revenues at the moment, but the Indian market is among Diageo’s most promising. The company expects its addressable market to grow by 18-19m people a year. Net sales growth at the interim stage was 4%, impressive given the upheaval caused by the government scrapping high value notes.
Diageo’s £1.6bn marketing budget ensures its brands are pitched a cut above the local offerings. This not only ensures its products command high prices, but also that the group is plugged into an expanding middle class.
Diageo has an enviable record of dividend increases stretching back to the 1990s. Its world-class stable of brands, combined with an exposure to emerging markets like India, mean we wouldn’t be surprised to see this record continue, although of course there are no guarantees.
View our Diageo factsheet
For all its strengths, investors shouldn’t assume exposure to India is a one-way street to riches. While many UK listed companies have exposure to India, the sub-continent’s contribution to group profits is often small, meaning even rapid growth will do little to move the dial at group level. Even among those companies with meaningful exposure there are no guarantees of success.
Two UK names that leap to mind when talking about India are Vodafone and Vedanta Resources. Both have the potential to benefit from the economic surge, but both are also proof that a growing market doesn’t guarantee success.
The raw materials for 7% growth
Vedanta is a mining and oil & gas conglomerate, and although it has operations across the world, the majority are in India. Operations include iron, copper and zinc mines as well as oil & gas fields and aluminium smelters. It recently completed a merger with its Indian oil & gas subsidiary, Cairn India.
As with all natural resources, the price of what Vedanta produces is largely set by the market. However, Narendra Modi has said he expects to increase infrastructure spending to around $1.5tn in the next decade. That brings increased demand for raw materials. The government has sought to encourage increased local production by reducing burdens on domestic producers. Vedanta has already been a beneficiary.
However, as with any company, investors should look at more than a favourable backdrop. The group operates a hugely complicated corporate structure, with multiple layers of partially owned subsidiaries. Combined with Chairman Anil Agarwal’s 68% shareholding, this has raised concerns about corporate governance in the past, a common story in emerging markets.
View our Vedanta Resources factsheet
The race to connect 1.3bn people
Mobile phones are firmly established as India’s primary means of communication. Combined with rapid economic growth it’s easy to see why Vodafone invested heavily, entering the market in 2007. Over the last five years Vodafone has added an average of over 12m new customers a year and last year 11% of revenue came from India.
However, Vodafone isn’t alone in spotting the opportunity. Jio, a new network with the backing of the mighty Reliance Industries, has spent over $25bn on infrastructure, and customers flocked to sign up, drawn by the offer of six months of free data. Vodafone was forced into a €5bn write-down of its Indian business.
Going forward, Vodafone’s Indian business will be split from the main group, instead being reported as a subsidiary. $8.2bn of debt will come off the balance sheet, helpful given that net debt has expanded to €37bn, close to three times earnings before interest, tax, depreciation and amortisation.
View our Vodafone factsheet
There are relatively few UK companies with significant exposure to India, and those that do often require detailed scrutiny. That could leave investors looking for broader exposure to the Indian economy scratching their heads. To help, our research team has highlighted an Indian focused fund for those willing to take on the extra risk of emerging market investments in exchange for the potential rewards India can offer. They also suggest two options for investors seeking broader emerging market exposure.
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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