Contributed By: Parvez Abbas, CFA
On July 13, 2019, the Delhi Chapter of the CFA Society India organized a session with Mr. G. Maran, Executive Director of Unifi Capital. The topic was ‘Know Your Country’. Mr Maran had a unique way of presenting. He along with his team had collated some interesting facts about India in a Q&A format. The audience were given 25 questions and three options to choose the correct answer. The questions were picked from various subjects about India. The idea was not to test knowledge but to help understand our country by knowing the past and current trends and how to interpret them to identify future winners. Mr. Maran, in his unique style, added data points and insights to every question. Some of the questions discussed are mentioned below:
Q: Which of the following has one of the Top 20 busiest airports in the world?
(a) Delhi (b) New York (c) Singapore
The answer is Delhi. Delhi airport handled ~69 million passengers last year. Delhi was not even in the list 10 years ago.
Q: Which is the 2nd largest Indian state in GDP?
(a) Gujarat b) Tamil Nadu c) Karnataka
The answer is Tamil Nadu though it does not have great industry like Gujarat and great services sector like Karnataka. However, Tamil Nadu invested in education. During 1960s and 70s, Tamil Nadu had 7% of the country’s population and ~23% of the colleges opened in the country. In 1993, the state had many districts with 100% literacy rate. Mr. Maran explained that with high literacy rate, life expectancy is high (~83 years in Tamil Nadu) and productive population age group (between 15 to 65 years) is high, which is a driver of GDP.
Q: India’s GDP derives 15:25:60 proportionately from agriculture, manufacturing and services. What proportion of our population is dependent on agriculture, manufacturing and services?
(a) 45:25:30 b) 60:20:20 c) 25:40:35
The answer is 45:25:30. At the time of independence the proportion was 60:15:25. At the time of independence, ~76% of the population was dependent on agriculture which was 60% of GDP. Mr. Maran pointed out that the problem is 60% share in GDP has come down to 15% but still 45% of the population is dependent on agriculture. This translates to per capita income of just ~$700 in agriculture in stark contrast to ~$4000 per capita income in the services sector.
Q: India’s life expectancy rate is 68 years now. What was it when we got independence in 1947?
(a) 30 b) 50 c) 75
The answer is 31. Mr. Maran made the audience to think about the productivity of the country when on an average a person dies at the age of 31. Mr. Maran further explained the denominator bias. Of the people who survived at the age of 30-31, they lived longer and we conclude that life expectancy was higher during 40s and 50s which is not true.
Q: According to World Economic Forum, how many of the top 10 cities (GDP growth wise) in the world are from India?
(a) 3 b) 7 c) 10
The answer is, all 10 are from India. Mr. Maran told that the problem is only 1 out of 10 is from North India and none from East India. Most of these are from South India and they are growing at a higher rate compared to other cities of India.
Q: There are 6 countries in the world that has more land mass than India. India’s agricultural yield per land is less than world average. What is India’s rank in global agricultural output?
(a) 7 b) 17 c) 2
The answer is 2. Mr. Maran put a question to the audience how can we have 7th largest capacity and under-utilization of capacity but still the 2nd largest producer of product in the world. This is because of climate. The other 6 countries though larger in size but have less arable land.
Q: Oil is the largest net import item of India. Which is the second largest?
(a) Coal b) Gold c) Electronics
The answer is Electronics. Gold was the second largest item 3 years ago. Mr. Maran explained that electronics is the second largest because 2/3rd of India is aged below 34 and half of that is woman. Women are not buying as much gold compared to the prior generation and hence gold volume is declining. Mr. Maran said that we are living in the world of big data but many of the multibaggers come from small data. He advised if one understands that small piece of information one can know where to look for future returns.
Through these questions, Mr. Maran touched upon various trends in the Indian economy. Mr. Maran talked about the middle-class population which forms 78th to 96th percentile of the population. Overall, there are 270 million households at an average of 4.9 persons per household. So middle class population is roughly 18% of households, which is close to 50 million. Even though this is just 18% of households, yet this is a huge consumer market in the world. He also talked about that only 14%-15% of India’s GDP is from exports and rest is from domestic. Yet, we get concerned about the health of the Indian economy thinking 56% of revenue of companies in the Sensex is from international markets. He advised that we should be concerned as an investor if the portfolio companies’ earnings are dependent on global events. A company which generates its revenue from the domestic economy would not be affected by global events. We give disproportionate importance to things that are less direct.
In 1991, direct tax revenue of India was less than Rs. 12,000 crs. ($260 billion GDP) but now it is ~11.5 lakh crs ($170 billion; $2.6 trillion GDP). Direct tax collection has improved dramatically through better compliance and increase in income levels.
He explained why many things that work in the global markets do not work in the Indian market because promoters are the dominant shareholding class. Only 2 out of Dow Jones 30 companies have promoter stake above 10% whereas more than 20 Sensex companies have promoter stake of more than 40%.
Mr. Maran concluded the presentation with an exercise for the audience. Each person has to choose a number between 1 to 100. The winner would be the one who has chosen 2/3rd of the number which majority chose. In 1997, this exercise was conducted by Nobel Prize winner Richard Thaler by publishing a letter in Financial Times newspaper. Mr. Maran told that he had conducted this exercise many a times and every time the answer comes close to a range. If majority chooses 67 then a person thinking one step ahead would choose around 44 (2/3rd of 67). A person thinking that majority would choose 44 by this logic would choose around 30 (2/3rd of 44). If majority chooses 50 then 2/3rd of that would be 33. So a person thinking one step ahead would choose 22. So, if one has to be a successful investor then one should think ahead of the rest. He explained with an example that if the average age of a home buyer is falling then a level one thinker would buy housing finance companies. A level two thinker would buy real estate companies and a level three thinker would buy ancillary companies.
Mr. Maran explained that in P/E ratio, earnings drive the price and not the other way round. Performance of a company drives perception. A good stock picker should have the skills to evaluate the earnings of a company. For earnings growth, one should know the drivers of earnings growth which means one has to think ahead of the majority.
Mr. Maran emphasized that trends keep on changing. In 1991 when India was less than half a trillion-dollar economy, steel, cement, power and textiles sector constituted more than 50% of the Sensex and financial services was just 3%. In 2004, when India was a $1 trillion economy the weightage of the above four sectors shrunk to ~20% of the Sensex. IT, pharma and engineering constituted 50% and financial services sector was less than 10%. As of now, these three sectors constitute less than 20% of the Sensex and financial services sector is 40%. Mr. Maran said that we always see the leaders of the economy in the index. There are various elements of consumption that are extremely fragmented where leaders are emerging one by one.
In his closing remark, Mr. Maran advised the audience that if one is informed and familiar of the surroundings, an agile consumer and an average person with not a high intellect but a good temperament then one can become a good investor.
Link to the session video – https://youtu.be/OCElrQmsPS8