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I had the privilege of attending a presentation by my good friend Raamdeo Agrawal at his conference recently. He shared some interesting statistics and thoughts on the retail equity revolution in India. It was a fascinating presentation, leading me to ponder the implications of the impending tidal wave of savings.
Raamdeo highlighted that over the past 25 years, India had built up gross domestic savings of approximately $12 trillion. Over the coming 25 years, this number is expected to surge to over $100 trillion. While still relatively modest, an increasing portion of these savings will find its way into financial assets, particularly equities. The presentation highlighted the surge in retail equity flows. It took 10 years for demat accounts to grow from 20 million to 40 million (2010-20), and they have now tripled in three years to 120 million. We have more than 2 million accounts being added per month. The average retail daily turnover of the equity markets has soared nine-fold in the last three years, from Rs 7 trillion to more than Rs 60 trillion. Systematic investment plan inflows are also rising consistently, moving from Rs 3,000 crore per month in 2016 to over Rs 15,000 crore per month today.
Positive regulatory changes such as the easing of online KYC rules by the Securities and Exchange Board of India (Sebi), the expansion of products and expiries in options and the emergence of new discount brokers seem to have catalysed this surge in retail flows.
While we can see the path ahead for equity capital markets benefiting from the coming surge in savings, a policy issue worth consideration is: How do we ensure that debt markets benefit equally? We need to ensure that an architecture of debt funds gets created of varying risk appetite and sophistication. Our banks are not set up to finance infrastructure, riskier stacks of the capital structure and structured credit. We do not want credit concentration again. Having come out of a horrendous non-performing asset cycle, banks do not have the risk appetite or investor backing to go down the road of riskier corporate credit again. This is a gap in our capital markets. Specialised funds will have to fulfil this critical role, and we must ensure that some of the coming tidal wave of savings is captured by these specialised credit funds. If we are to tap into the global supply chains and build manufacturing and infrastructure in India, it will be asset-intensive and debt will be essential. Regulatory support may be needed. What makes it interesting is that this wave of savings will remain almost entirely in India, as full capital account convertibility is unlikely in the near future. China is five times our size and functioned well with capital controls until recently.
What are the implications of $100 trillion of savings (with a rising portion into equities) over the coming 25 years? To begin with, domestic capital flows have already become more important than global flows, and this trend will only accelerate, making India one of the few emerging markets where domestic capital flows will be large enough to compensate for global volatility. With this quantum of savings, our dependence on foreign capital flows to fund the broad economy will decline, and we may be in a position to eventually export capital. Global asset managers will start eyeing these flows on the assumption that some of this capital will be allowed to be taken overseas.
With the surge in equity flows anticipated, we may continue to have structurally higher valuations. The high multiples in India today can be attributed to a belief in the structural growth story of the country, its visibility and tenure. Additionally, this tidal wave of domestic savings will structurally lower our cost of capital. This belief is combined with a lack of alternatives in the emerging market (EM) world and a demand-supply imbalance between incremental equity capital flows and new equity issuance. The markets remain focused on buying quality and paying up for corporate capital efficiency. However, the companies that investors want to buy rarely issue new equity. Corporate India has never had a more robust balance sheet, with large swathes of industry having no debt. This creates a fundamental demand-supply imbalance as long as investors remain disciplined and focused on quality equity paper.
This sets up the stage for India to become an extraordinary place to raise capital for companies and sponsors. In a market hungry for quality equity paper, if you can bring good paper, it will be lapped up. In my opinion, all Indian startups should list in the country, as the valuations and attention they will receive in India will be unmatched by any other jurisdiction.
India will be a great market for the private equity/venture capital (PE/VC) ecosystem. They are going to be the sponsors of most of the future quality listings. They will generate most of the incremental high-quality equity paper in India over the coming years. As long as these funds are reasonable in their valuation expectations, they will find a very accommodative market for their companies. Initial public offerings (IPOs), to my mind, will be the bulk of their exits. The current spate of large block sales by the PE funds is a precursor of what we should expect going forward. While we have probably seen the end of the golden era for private equity in the West, with rising rates and lower leverage, it may just be beginning in India.
Multinational corporations (MNCs) should also consider listings in India. Any global MNC listed in India today is getting multiples that are three to four times their global valuations, and a case for creating a sum of the parts valuation by listing can be made. This potentially robust listing environment should also be used strategically by the government for its disinvestment programme. However, the risk remains that the structural demand for equity paper may trigger market overheating , leading to a surge in poor-quality listings as promoters take advantage. Investors need to be disciplined to ensure quality standards are maintained.
As our dependence on foreign capital reduces, the days of structural rupee depreciation may also be coming to an end. Lower and less volatile inflation in India, a weaker dollar and productivity gains in the domestic economy should combine to be less of a drag on returns for dollar-based investors.
The outlook for wealth management/asset management and broader capital market players is extraordinarily positive. These are structural growth industries with scope for many players to scale up. We are still in the early days of industry evolution here.
In conclusion, a surge in savings is imminent, structurally lowering our cost of capital and giving us a chance to be one of the most dynamic capital markets in the world. Our focus, therefore, should be on maximising the benefits for the economy and finding a way for a part of this capital to reach debt markets as well.
The writer is with Amansa Capital
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