Value investors are known to possess two traits. One, they focus on good companies, and segregate them well from good stocks. And, two, being believers in long–term investing, they tend to spot capital cycles early. For them, anticipating such cycles early works better than participating in them.
And Kenneth Andrade—founder and chief investment officer of the portfolio management services firm Old Bridge Capital Management, and a veteran with nearly three decades of experience—hardly has anyone to match his skill sets in the investment industry.
At a recent virtual round–table, Andrade detailed his views on the coming industry capital cycles and the opportunities that the new decade has to offer.
While using specific companies, like Infosys, Larsen & Toubro, and Hindustan Unilever, as proxies for highlighting the capital cycle of the sectors they represent, Andrade made a strong and obvious point that corporate profitability has never de-grown, but has always been replaced by a new segment of market performers.
The opportunities for investors, in Andrade’s view, stand closer to where investors were in the 1990s, albeit with a different set of ground realities. The rise and dominance of India’s large information technology (IT) and pharmaceutical companies, is the big difference when compared to the ’90s; then, these two sectors were much smaller in size.
Alongside these two now-large industries, Andrade argues that a host of smaller industries, too, are in the fray, battling it out in order to reach the top. And these industries largely comprise sectors such as auto components, engineering, building materials like ceramics, and basic commodities like iron and steel.
“In a way we are heading back to the ’90s when a large part of our economy was driven by exports while the domestic economy was repairing itself before taking off in the following decade,” says Andrade. A little government spending this year will aid the economy, but largely corporate India will deliver sizeable growth that will come through. And exports will be true game–changers too. “We have a domestic market, but that is just 3% of the global GDP,” Andrade points out.
On the macroeconomic front, according to Andrade, the government is likely to remain challenged with deficits, as its focus would be on the social sector in order to address the concerns of those who had to largely bear the brunt of the Covid-19 pandemic. “In effect, the growth capital to stimulate the economy will be nominal,” argues Andrade.
Also, Indian companies serving markets abroad are likely to gain disproportionately even as other tailwinds help with major areas of cost deflating. In Andrade’s view, factors around the costs of electricity, labour, and finance will provide a major advantage in the current decade.
Come 2025-26, Andrade expects electricity cost to become half of what we pay currently as the rising share of renewables will bring costs down. On labour cost, Andrade thinks that India is in a phase of stagnation as a significant amount of automation and digitisation is taking place and productivity is increasing. “Through the pandemic, the shift to automation has been significant,” Andrade tells Fortune India. “And that is here to stay for an extremely long period of time.”
On the interest cost side, Andrade points at the double–digit inflation of the ’90s which moderated to mid single-digit in the following decade. He is of the firm view that the rest of the world will catch up with India on inflation, or vice versa. “That will see a huge moderation in terms of the cost of finance,” Andrade says.
Overall, in the context of the total revenue of India Inc., labour cost accounts for 7%–7.5%, while energy and interest costs account for 10% and 6%–6.5% each. “Around 23% of India’s cost-line will see deflation which will help India to be phenomenally competitive compared to the rest of the world,” Andrade says.
Going forward, there will be no de-growth in the profitability, but there will be more companies who will enter the profit pool. Andrade also highlights that corporate balance sheets are exceedingly deleveraged at the moment, and one big capital expenditure drive would be coming through on the back of renewed interest in Indian manufacturing.
The cyclicality of India will play out, Andrade believes, and new growth leaders will start showing up with higher share of increasing market capitalisation. The fruits of this shift will take time to mature, and, hence, staying invested for the long term will remain the 'not so secret' mantra for success.
