A Good ‘Perfect Storm’ for India

Our Head of India Research Ridham Desai and leaders from Morgan Stanley Investment Management Arjun Saigal and Jitania Kandhari discuss how India’s promising macroeconomic trajectory and robust capital markets are attracting more interest from global investors. 

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Ridham Desai: Welcome to Thoughts on the Market. I'm Ridham Desai, Morgan Stanley’s Head of India Equity Research and Chief India Equity Strategist. 

Today, the once in a generation investment opportunities Morgan Stanley sees in India. 

Joining me in the studio, Arjun Saigal, Co-Head of Morgan Stanley Investment Management at India Private Equity, and Jitania Khandari, Morgan Stanley Investment Management, Head of Macros and Thematic Research for EM Public Equity. 

It’s Tuesday, September 23rd at 4pm in Mumbai. 

Jitania Kandhari: And 6:30am in New York. 

Ridham Desai: Right now, India is already the world's fourth largest economy, and we believe it's on track to becoming the third largest by the end of this decade. 

If you've been following our coverage, you know, Morgan Stanley has been optimistic about India's future for quite some time. It's really a perfect storm – in a good way. 

India has got a growing young workforce, steady inflation, and is benefiting from some big shifts in the global landscape. When you put all of that together, you get a country that's set up for long-term growth. Of course, India is also facing pressure from escalating tariffs with the U.S., which makes this conversation even more timely. 

Jitania, Arjun, what are the biggest public and private investment opportunities in India that you'd highlight. 

Jitania Kandhari: I'd say in public equities there are five broad thematic opportunities in India. Financialization of savings and structurally lower credit costs; consumption with an aspirational consumer and a growing middle-class; localization and supply chain benefits as a China +1 destination; digitization with the India stack that is helping to revolutionize digital services across industries; and CapEx revivals in real estate and industrials, especially defense and electrification. 

Arjun Saigal: I will just break down the private markets into three segments. The first being the venture capital segment. Here, it's generally been a bit of hit or miss; some great success stories, but there've also been a lot of challenges with scale and liquidity. 

Coming to the large cap segment, this is the hundred million dollars plus ticket size, which attracts the large U.S. buyout funds and sovereign wealth funds. Here target companies tend to be market leaders with scale, deep management strength, and can be pretty easily IPO-ed. And we have seen a host of successful PE-backed IPOs in the space. However, it has become extremely crowded given the number of new entrants into the space and the fact that regional Asia funds are allocating more of their dollars towards India as they shift away from China. 

The third space, which is the mid-market segment, the $50- to $100 million ticket size is where we believe lies the best risk reward. Here you're able to find mid-size assets that are profitable and have achieved market leadership in a region or product. These companies have obvious growth drivers, so it's pretty clear that your capital's able to help accelerate a company's growth path. 

In addition, the sourcing for these deals tends to be less process driven, creating the ability to have extended engagement periods, and not having to compete only on price. In general, it's not overly competitive, especially when it comes to control transactions. Overall, valuations are more reasonable versus the public markets and the large cap segment. There are multiple exit routes available through IPO or sale to large cap funds. 

We're obviously a bit biased given our mid-market strategy, but this is where we feel you find the best risk reward. 

Ridham Desai: Jitania, how do these India specific opportunities compare to other Emerging Markets and the developed world? 

Jitania Kandhari: I will answer this question from two perspectives. The macro and the markets. From a macro perspective, India, as you said, has better demographics, low GDP per capita with catchup potential, low external vulnerability, and relatively better fiscal dynamics than many other parts of the world.

It is a domestic driven story with a domestic liquidity