FII | Saurabh Mukherjea: Half a trillion-dollar FII inflows may be heading India’s way and focus is on 3 sectors: Saurabh Mukherjea

We are not starting with or or Kotak. We will have to start with something different.
I spent two weeks in America meeting institutions. If you want, I can give you a sense of why they are getting ready to load up further on India.

Are they getting ready to load up to India and if yes, why? Also what was the broader theme which you in a sense argued when you met them?
We were surprised by the degree of despondency vis-à-vis China. I have to confess I have never been to China. I have been to Hong Kong several times but I have been to mainland China like everybody else. I just read the newspapers about what is happening in that vast country. But meeting the endowments and the pension funds in America, it is pretty clear that they have got fairly dire news coming out of China.

The rolling Covid lockdowns, which will have their third anniversary soon, are having an impact on people’s morale, on the economy, on the production facilities that western companies have there and more specifically, the new Chinese Politburo has created real alarm in the western world. Given that western investors have $3.5 trillion invested in China, the sense I got from our meetings is that a substantial amount is going to leave their country.

Out of that $3.5 trillion, even if half a trillion dollars comes to India, that will virtually double the FII investments in our country. Obviously, we at Marcellus are trying our best to see if we can bring some of that half a trillion to the Indian stock market. But leaving Marcellus aside, the broader story of India over the next couple of years will be very significant FII inflows. They have already begun but these FII inflows will step up over the next couple of years as China continues to unravel.

Tempted to ask where is that money going to find its way? I wanted to probe a bit about the China plus one advantage that India is currently seeing and manufacturing seems like the big beneficiary. Is that a pocket of interest for all the investors that you met overseas?
There is a lot of interest in three sectors. Remember, we are talking to these pension funds and endowments and they are basically talking to people like us to leave it to us to decide what to buy. Based on what these endowments and pensions funds are reading in The Financial Times and The Economist, they are very keen to understand three sectors.

The fact that the iPhone 14 is being made in India and that Foxconn is having trouble making iPhone 14 in China has got people really intrigued. I know roughly a billion dollars worth of iPhone 14 has been exported out of India every month. Apple has also announced their AirPods are going to be made in India and therefore the broader question that a lot of people were asking is how big can the smartphone opportunity be for India? On some estimates, we have seen the whole smartphone and the supply chain feeding into smartphones can be as big as the auto sector in India. Sso there is a lot of curiosity about whether one can one make money from that.

The second area is the whole API market. The global API market is around $250 billion. China accounts for around $200 billion dollars of that. It is relatively clear that the US government is quite uncomfortable with that and the question we were asked was how materially can India capitalise on the API market? Can this become a $100 million sector for India and if so. which companies can benefit from that and we have discussed that on your channel for a couple of years.

The third is defence. We import $70 billion of defence equipment every year and as you would have seen from the Tata deal, it looks likely that there will be more of these deals where the foreign defence company – be it Lockheed Martin or Raytheon – will do a JV with Indian partner and that $70 billion have been going out and become part of the Indian economy.

If we add these three sectors, we are probably looking at least half a trillion dollars of extra economic activity which for a country like ours with a $3.5 trillion economy, is very meaningful. So lots are happening in the background which is also leading to the buzz around India and there are a whole bunch of unfortunate things happening in China which is leading to western despondency about China.

What has changed in the last one year and a lot will perhaps change in the next one year whether it is geopolitics, interest rates, commodity pricing or India positioning. When things change so dramatically, what changes for the companies you track? What changes for your portfolio positioning?
One of the things I have seen in my career and I have been doing this for the best part of two decades is that when the world changes quickly and there is a rising cost of capital, one has to go with the highest quality management team. One has to back the champion capital allocators, promoters who have proven themselves decade in and decade out that they can run high quality businesses regardless of whether GFC is happening, Covid is happening, China is booming or China is going down.

I think that remains the Marcellus call. We obviously discuss these changes to debt internally but ultimately the call remains to let us back promoters who have proven themselves time after time that we are champion business operators and that will be the core of the Marcellus portfolios. It is not going to radically change even if China crumbles over the next two-three years.

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