Stock markets in India have been soaring as the economy enters a prolonged period of political and economic stability. At elevated valuations, near term returns seem uncertain but investors should focus on riding the mega trends. India's per capita income has grown by 300 per cent in rupee terms in the last decade creating an aspirational consumer of goods and services. This coupled with government policies have kickstarted mega trends that will drive India's growth story over the next decade creating massive investment opportunities.

Formalisation of the economy

Unorganised sector accounts for nearly 75 per cent of trade and 90 per cent of employment in India. With initiatives like GST, the tax arbitrage available to the smaller traders will slowly erode increasing addressable market for the organised companies. Opportunities for established players in the consumer, healthcare, textiles, jewellery is immense.

Organised hospital and diagnostic companies control only 10 per cent of overall market which is growing at mid-teens every year. With only 3-4 large players in the country, they are expected to catapult 5-6x in the next decade.

Dr Lal Pathlabs is the second largest pathology service provider growing at an impressive 27 per cent revenue growth in the last five years, 11 per cent above the industry growth. It generates a healthy cash flow and has seen a PE contraction recently to 30x against 45x historically providing a good entry point to long term investors.

Housing boom

Low cost housing is the focus area of the government and the best way to play this is through housing finance companies (HFC). Mortgage to GDP is less than 10 per cent in India versus an Asian average of 20 per cent. Owning a house is still a dream for most Indians, hence most of home buyers are end users resulting this sector delivering the best risk-adjusted returns. Consider this, HDFC, a blue chip industry leader, has delivered a compounded annual return of 23 per cent in USD terms for the last 15 years. Recently, my favourite has been Canfin Homes, the fastest growing mid-size HFCfocused on lending to salaried class first time home owners. Canfin's $2 billon balance sheet has grown its loan book by 30 per cent annually and stock price at 100 per cent (USD terms) every year in the last five years with a NPA of just 0.2 per cent.

Physical to financial savings

Demonetisation may not have achieved much on black money, but it did put money to work. Banks received $230 billion of new deposits and a major portion of the same has stayed in the banks. Falling currency holdings and low deposit rates are pushing more savings into capital markets chasing better returns. Household savings percentage in mutual funds and equity markets have increased fourfold since 2011. This is another mega trend which will re-shape the financial services industry.

The direct plays on this theme would be capital market oriented companies like IIFL holdings, and Edelweiss which have been doing well. Since their model is more cyclical in the long run, I prefer a pure play on this theme, the recently listed Central Depository Services Limited (CDSL).

CDSL is the only listed play on the depository services which is a duopoly market in India. It is been growing at an impressive 23 per cent in the last three years with expanding margins of 54 per cent. Its annuity revenues with operating leverage make it a cash generating machine. The stock trades at 35x earning, but expect it to be lapped up by institutional investors on every correction.

For those who feel markets are at the top, you risk missing the bus. India has one of the highest real rates since 2002 which provides room for last few rate cuts by the RBI (Reserve Bank of India). The spread between the 10 year paper and nifty earning yields at just 60 bps, one of the lowest levels in history. This is the reason valuations of Indian equities shall remain high compared to previous years and other emerging market peers.

The elevated PE levels or the recent IPO boom may signal revival of animal spirits in the economy or an over exuberant market. Historically, bull markets in India have never peaked with interest rates bottoming out, rather this happens mostly at the initial phase of a bull cycle. "We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten." This Bill Gates quote is apt for investors who focus too much on the short term noise and miss the Mega trends.

The writer is managing director, Asas Capital. Views expressed by him are his own and do not reflect the newspaper's policy.

Source: Khaleej Times