Kenneth Andrade, who made a name for himself in the late 2000s backing India’s consumer stocks, says the next big opportunity is companies tied to the rural economy.
Makers of farm products such as seeds, fertilizers and agrichemicals have plenty of policy support as government measures such as providing crop insurance and depositing subsidies directly into bank accounts should fatten disposable income among growers.
“Any part of the economy that gets an enormous amount of money usually creates an industry by itself, where the allocated capital creates an output,” Andrade, founder and chief investment officer of Old Bridge Capital Management Pvt., said in an interview. “You will see disproportionate amount of capital getting reallocated into the rural economy. That is our larger play.”
The government in its Feb. 1 budget proposed increasing purchase prices for crops to more than 50 percent of the input cost, a move aimed at fulfilling Prime Minister Narendra Modi’s promise of doubling farm incomes by 2022. The ruling party faces general elections in 2019.
The plan “resets the farm economics” said Andrade, who oversees about 30 billion rupees ($463 million) across three funds.
He quit IDFC Asset Management Co. in 2015 after spending a decade as head of investments. Andrade was rated as one of India’s best mid-cap managers by Morningstar Inc. for his bets on stocks including Page Industries Ltd., which sells Jockey International Inc.’s innerwear. Page has soared more than 40 times over the past decade.
Below are some of the views he shared at the interview:
Why bet on the rural economy?
- “Nearly 70 percent of the economy is in that part of the world, contributing to 30 percent of GDP. India cannot grow as an economy till you even out this imbalance.
- “A lot of this won’t happen in a year or two or three, but maybe over decade, where you bring 70 percent of your population into the earnings cycle.”
Which companies benefit from a buoyant rural demand?
- “Everything from firms that make tractors and tillers to agrichemicals and crop input producers. There are only 30-35 companies in this universe.
- “If you’re able to identify the right part of the cycle, you will end up buying companies at a price that you want.”
- Andrade declined to name stocks, citing client confidentiality.
Which other businesses are you investing in?
- “We look for industries where the capital-expenditure cycle has slowed or gone to zero, while demand is still consistent. One example are power generators.
- “The biggest spend in this business happened from 2010 to 2016, where the producers added about 300 gigawatts capacity. Today, only about 10 percent of it is idle.”
What is your outlook on India company earnings?
- “In the PE ratio, I can only have an outlook on the denominator i.e. earnings. And that number looks fairly buoyant going into the next couple of years.
- “Earnings will rise in ‘high teens’ annually up to March 2020.”
Will election outcome impact investor sentiment?
- “We’ve been through multiple governments. The most fortunate part of politics in India is that big policy initiatives have always continued.
- “Luckily for us, it’s never been a ‘stop-start-stop-start’ kind of an economy.”
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