India is the crown jewel in the MSCI EM index, just as it once was for the British Empire. Yet Nifty now trades at the same stratospheric valuation as it did in December 2007, not exactly the best month in Vedic history to go long Bharati equities. Two metrics make me go gaga on Modinomics. One, the free distribution of sanitary pads to millions of poor women have led to a plunge in cervical cancer rates for 40 year old plus ladies in India’s chawls/ghats. Bravo. Two, Deepika Padukone is now Louis Vuitton’s global brand ambassador. My aesthetic bet would have be for Katrina Kaif but the real winner in the choice is Namonomics because the macro zeitgeist suggests that the 5 million Indian families who earn $35,000 a year will rise 6X to 30 million by 2030 and create one of the world’s great money making opportunities in bling bling brands momentarily stinged by the China bust.
I see macro storm clouds on the horizon for Dalal Street, from $95 Brent to a possible sad sack coalition win next year to even a global recession that would decimate the Nifty since India, the back office/wannabe factory of the world, Vishwaguru from the Kama Sutra to Bollywood, now exports 20% of its GDP. Many sectors on Dalal Street trade at Two Sigma relative val premia, I want to hide in a Cinderella niche of incredible India’s $3.5 trillion economy that just delivered 7.8% 2Q GDP growth – banking.
The best long term proxy for India’s macro nirvana in the next decade are banking stocks. Since the credit to GDP ratio is only 56% while digital India/Aadhar and the quantum rise in middle class/rural consumption/offshoring and the green energy revolution will all converge to deliver 16-18% loan growth for India’s private bank colossi and SBI. Indian bank shares have underperformed MSCI India since April because Mr. Marketji has dissed their mediocre profit margin contraction, which is bottoming. I love it. The time to load up on Indian banks is when their valuation multiples compress but loan growth/EPS momentum accelerates. It makes no sense to me that HDFC bank and ICICI have lost a third of their val metrics since Powell’s U-turn on inflation in Nov 2021 even though HDB delivered 15%+ EPS growth since then.
Operating profits will rise sharply as profit margins bottom and loan growth accelerates in both banks. The RBI has done the heavy lifting on inflation and deposit rates will now peak even as loan pricing tightens and loan growth pops. This is not a flash in the pan/thali as I agree with Goldman Sachs that real GDP will rise by 6.5% in the next 3 years. Net net (or mota mota), India’s TBTF banks are cheap, unloved and on the verge of a secular loan growth/EPS explosion not priced into the shares.
From retail to corporate, trade finance to capex loans, credit demand now revs up. I prefer the House That Aditya Built over the House That Kamath Built And Chanda Kochhar Soiled since operating profits for HDB will grow 17-18% with 2X ROA and a 16% ROE. Baazigar!
Also published on Medium.
