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One trend to bet on next decade is financialisation of India: Mehul Jani, IIFL AMC

Business models are being formed across different sectors. Even if you take consumer lending, you are seeing microfinance grow quite rapidly in rural India, says Mehul Jani, Principal | Fund Manager - Listed Equity, IIFL Asset Management. Excerpts from an interview with ETNOW.

PMS and AIF have been gaining ground with HNIs and fund managers are taking concentrated bets on these. What is the size of the opportunity you are eyeing when you say consumer lending opportunity could be really big for India? 

We look at India as three buckets. India-1 is the most affluent part of India. So, 8% or 24 million of India’s households are rich and affluent. This part accounts for 60- 70% of all consumer lending as well as a lot of on the consumer discretionary side. Their per capita income is around $8,000 and there is anecdotal evidence also.
There are 45 million credit cards. The number of demat account holders is 30-35 million. Whether you look at any consumer metric or consumer lending or consumer discretionary side, the number of ACs sold in India seems to be dominating a large part of this consumption.
India-2 is almost double the size of India with about $3,500 per capita income at 40 million households. This bucket is largely untapped because banks, NBFCs in the past had very limited data on these customers. They were not able to lend out to these guys but we are seeing a change. The biggest reform that has happened in the last five years or so is that the available data on these customers has improved; banks and NBFCs can reach out using digital methods to some of the second rung of the pyramid, the middle class of India and offer products there.

How exactly are you playing this theme of financialization of India in your fund? This involves greater penetration of consumption in tier-2, tier-3 cites. Maruti for example has been saying that metros are flat but tier-2, tier-3, tier-4 are having good growth.

Business models are being formed across different sectors. Even if you take consumer lending, you are seeing microfinance grow quite rapidly in the India-3 segment. There are companies like Bandhan, CreditAccess Grameen. A lot of these companies are growing in the India-3 segment.
In the India-2, affordable housing is growing. So companies like Avaas, which we have in our portfolio, are targeting these customers as well. New business models are evolving. With electricity now available in most parts of India, demand for consumer discretionary, consumer durables, electrical appliances are growing. Companies like Crompton, Voltas etc will stand to be beneficiaries of these trends.
When we ask global investors what do they come to India for, there is one thing that sets India apart. It has a huge population which over time can borrow more and consume more. In a way, these two sectors are related in some way. So, consumer lending as well as consumption are intertwined. We have seen the effects of the NBFC crisis over the last one year. As soon as the crisis hit, consumption took a beating as well.

Your scheme has actually managed to perform the benchmark quite nicely in various periods of time. Tell us what led to this kind of outperformance.

It is down to superior stock selection. We have had a lot of winners from sectors which actually were quite challenged over the last one year. Most of the NBFCs we own are currently sitting at 52-week highs. Even within pharma, we were playing the domestic pharma story which is again a consumption proxy to some extent. Our pharma stocks are again close to 52-week highs and even within industrials, we had better stock selection coming through

I am very curious to know about the SCDV framework. What is it exactly? How have you have formulated this kind of a formula?

We wanted to define what are the kind of companies that we look for and what are the kind of companies that we want to avoid in our portfolio. Clearly in the long run, if you want to deliver greater shareholder returns, you need high ROE with high growth. That is the holy grail. If you get high ROE along with high growth, what we define as high ROE and high growth is north of 15% which has been the long-term ROE of India. Anyone who is delivering higher than that consistently is something that we should look at.
Coincidently most of the sectors that show up there are in financial services, in consumer discretionary, retail, insurance, etc. Those sectors we want to make as a core. The index has about 40% weightage to the secular bucket. We will always be overweight and so between 40% and 60% of our portfolio will be in the secular bucket and quality cyclicals are also important.
Having the balance between secular, cyclical defensive is again key because across the Street, most managers tend to be very biased towards one of these. Some focus on value names in cyclical segment. Some focus on quality in the defensive segment. Some only go for growth and the secular growth drivers. It is important to have a balance because unfortunately investors will only come in after you style has performed and they will face a down cycle after that.

How are you navigating this environment right now? I understand you are in conversation with a new set of investors about the new fund which you guys are planning?

You are referring to the AIF which we are in the process of collecting money for. We launched an AIF last year as well and that time, things were a lot more uncertain. The NBFC crisis had just hit and that time, the worry was how bad will things get over the next 12 months. But fortunately, things have panned out quite well for us. Now the concern is the reverse. Since markets are at all-time highs, is this still the right time to invest? We keep telling investors that invest for the long run. Over a five-year period you will get your returns. Past data shows one should expect between 10% and 15% return.