Small firms hold key to big returns

The manager of India Capital Growth aims to capitalise on rising consumer demand as affluence spreads, by investing in small and medium-size firms, with a bias to financials and industrials.


Mumbai-based David Cornell, a principal investment adviser to India Investment Partners, the manager of the India Capital Growth fund, argues strongly in favour of India as a long-term story. “What you’ve got to remember about India is the demographic story will create phenomenal opportunities for the next 20 to 30 years and beyond. The population is huge, and the middle class is growing. The under 25s make up more than 50% of the population.”

”There’s quite a lot of downside protection – the market had a little bit of a knock in the past three months or so”

All this, says Cornell, is leading to huge growth in the workforce. “This creates a fall in the dependency ratio – the number of workers per house will double, so real incomes per house should double. This is a huge driver of consumption. That’s a great structural support for the economy.” Another theme is the massive infrastructure deficit. The government is starting to address this, and is also encouraging private sector participation.

“India is a domestic story,” says Cornell. “Sixty per cent [of growth] is consumption-related. India is able to operate independently of the global economy. The world has survived on an export model. India is not export dependent. I think in a couple of years India’s GDP growth will exceed China’s.” (article continues below)

Foreign direct investment as a percentage of GDP is also on the rise. “That’s sticky, long-term structural investment,” says Cornell. “There’s also foreign portfolio investment. Thirty billion dollars [£19 billion] was invested last year. That said, the domestic market does also have a role to play in equity investment.”

Cornell highlights Jain Irrigation, which manufactures micro irrigation units. “As real incomes grow we see agriculture as a key area. There’s a massive shortage of water, but as the government is subsidising water bills there’s a lot of water wastage. The government has worked out that rather than subsidise water it should subsidise the purchase of these units, which give a crop yield benefit. Jain Irrigation has a 55% market share, and in terms of penetration it hasn’t even started.”

Another stock he likes is Prime Focus, which is a beneficiary of the outsourcing theme and represents 8% of the portfolio. “There’s a huge influx of demand for companies able to convert film and TV from 2D to 3D. It owns the technology to do that. Its killer edge is it’s able to outsource all that work to India. Now Japanese companies are flogging 3D TV sets, there’s interest from, for example, the BBC in trying to monetise its back catalogue. TV companies are desperate to find content now that, from a technical perspective, it’s a much better viewing experience.”