Sunday, October 2, 2022

Welcome to The Weekly, where our team shares a few thoughts to take you into the week. This week’s thoughts have been brought to you by Sagar Lele, Founder of Rupeeting. He manages the All-Weather Portfolios at Rupeeting.

The Indian Valuation Ceiling

India is likely to be the fastest-growing economy in the world in 2022-23, with India's GDP growth averaging 7% during this period. This high-growth situation comes in at a time when globally economies are being pushed into a recession. Clearly, given the growth, it makes sense for the world to stay invested in India.

But, what about valuations?

  1. At 20x PE, India is one of the most expensive markets globally, second only after Nasdaq. While valuations for the world have come off sharply over the last few months, India hasn't seen a material de-rating yet.
  2. Compared to the MSCI Emerging Market Index, India has historically traded at a premium of 60%. However, it is currently trading at a 130% premium.

Why it matters

With no (or little) potential for valuation re-rating, market performance will be dependent on corporate earnings growth. Say earnings were to grow by 10%, and valuations to remain intact at the current highs, any foreign investor would make no money in India, given depreciation in INR.

Foreign investors would just be better off buying into developed market government securities, especially in an increasing rates scenario.

<aside> 💡 Our view: India being the fastest growing economy alone isn't enough a reason to drive the markets. Valuations being too high act as a resistance, and so do global economic factors. Given that the tide on the latter isn't looking too great, we’d be positive but still cautious on the markets at this time. We’d like to ride the India growth story, but by only buying into the markets at reasonable prices, that is, when they see dips.

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An Idea - Is Hero Motorcorp Losing out on the EV Game?

With a 28% market share, Hero is the top seller of EV two-wheelers in India. But it isn’t the same Hero as the listed entity. This is Hero Electric, the unlisted company under the Hero EcoTech family, and controlled by Naveen Munjal, Pawan Munjal’s brother.

While Hero Electric launched products under the Hero brand, and dominates the EV market, Hero Motocorp in fact, has not made a launch in this segment yet. But with no first-movers advantage, and the Hero brand already used by the brother, does Hero Motocorp stand a chance in making a mark in the future of two-wheelers?

We think there’s still a chance! Why?

  1. Massive capabilities: Hero Motocorp is a giant, compared to the teeny Hero Electric. It’s 35% market share in the traditional two-wheeler market gives it several advantages, which the little brother lacks: sales and distribution network, service centres, scale (ability to manufacture at lower costs), technological and R&D abilities, marketing budget, dry powder to invest in new areas, and even burn money if required
  2. Market still small: Hero Motocorp hasn't launched a product yet, but it does plan to kick its EV suite into the market by the end of 2022. Given that the market is still nascent (1% of total two-wheelers), no one is late into the market yet.