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Capital MSL: India Investment Study

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A research study conducted by Capital MSL, MSLGROUP's UK-based financial communications consultancy. Featuring views of institutional investors about investing in Indian companies. Study conducted in …

A research study conducted by Capital MSL, MSLGROUP's UK-based financial communications consultancy. Featuring views of institutional investors about investing in Indian companies. Study conducted in partnership with the London Stock Exchange.


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  • 1. India Investment Study June 2011
  • 2. IntroductionCapital MSL and the London Stock Exchange undertook a research study of internationalinstitutional investor attitudes towards investing in India and Indian companies. The aim of thesurvey was to research the views of fund managers from blue chip institutions in Europe thatinvest in emerging markets.This research was conducted ahead of two major conferences hosted in June by the London StockExchange in Mumbai and New Delhi for Indian companies interested in understanding how to raisecapital domestically and abroad.We hope you find the following study informative.Richard Campbell & Nick Bastin Tracey Pierce Director of Equity Primary MarketsCapital MSL London Stock Exchange Group+44 207 307 5330 +44 207 7797 4152www.capitalmsl.com www.londonstockexchangegroup.comAbout Capital MSLCapital MSL is an international strategic communications consultancy that delivers advice tomany of the world’s leading businesses and financial institutions, often during critical stages intheir development. The foundation of our success is the quality of the long term relationships that we nurture with our clients, our staff and the intermediaries that impact an organisation’s reputation. We lead the industry in client and staff retention. We are committed to senior advice, and combine deep sector knowledge with a thorough understanding of capital markets. Part owned by the management team, we are majority owned by MSLGROUP, Publicis Groupe’s flagship specialist communications, PR and events network. MSLGROUP is the world’s fifth biggest PR firm, with 2,500 communications professionals in 22 countries, including in every major capital market. Our sister company, Hanmer MSL, is one of India’s largest communications firms.We build corporate reputations that are envied, in sectors that we know and understand. Our teams deliver innovative, bespoke solutions, across a diverse set of stakeholders, that address the communications demands of organisations, both large and small. Our capabilities are broad, and range from helping to build corporate reputations to employee and capital market communications, including M&A and IPO support.Together with our client Essar Energy, Capital MSL was recently awarded the UK’s CharteredInstitute for Public Relations (CIPR) Excellence Award in Investor Relations for our work advisingEssar Energy on its May 2010 $1.9bn IPO on the London Stock Exchange. 2
  • 3. SummaryIndia unquestionably remains of significant interest to foreign investors. While there are someshort term issues, such as inflation and rising interest rates, the longer term picture is recognisedas being very strong.The key findings of the research are: Top market: 23% of participants gave India and Brazil the most positive ratings as an investment destination relative to their emerging market peers. China was in third place with 20%. Strong outlook: The overwhelming majority of investors remain confident in the Indian growth story in the longer term, with 73% of investors very confident in respect of India’s outlook in 12-18 months time. However, the short term picture is less positive, with only 5% of respondents being very confident of the picture for the next six months, pointing to concerns over the inflation outlook and interest rates. Investors believe that, despite these issues at play, Indian corporates will continue to perform well and record strong growth. Macro criteria: When looking at India as an investment destination, 17% of investors cited inflation and corporate valuation as the most important investment criteria, with GDP growth and regulation cited by 14% and 11% of investors respectively. Company specific factors: Investors rated corporate governance, disclosure and transparency equally, with 15% of top ratings each, as the most important considerations when making an investment decision in an Indian company. These were followed closely by management access (14%), regulation (13%) and liquidity (12%). Sectors: Consumer industries (14% of top ratings), financial services (12%), infrastructure (11%) and technology (9%) were highlighted as the most attractive sectors, although power (7%) and renewable energy (7%), if combined, would have ranked joint first. Horizon: 67% of investors said that a one to three year period is the preferred term for holding investments. This was usually determined by a combination of factors, including investment policy, long term return potential and tax considerations. However, 29% said their time horizon was in excess of three years: a sign of commitment to, and confidence in, the Indian market. Access: 46% of those surveyed access the Indian market through the domestic exchange, due to the liquidity available. However, a number cited regulatory constraints as a hindrance, and 24% of respondents prefer to invest through the London Stock Exchange and a further 24% through depositary receipts and / or participatory notes. 3
  • 4. While the research does show that Indian companies could make improvements that would makethem even more attractive to foreign institutional investors, these are eminently resolvable.Those areas highlighted by investors include corporate governance, financial reporting andtransparency and access to management:Reporting standards and transparencyRespondents were keen to stress the importance of adequate reporting and the following of bestpractice standards by Indian companies. “I would like to reiterate the importance of reporting standards, which is a hindrance at the moment. We are taking a wait and hold policy, watching progress on this. There is a lot of capital on the sidelines that could potentially find its way if this is addressed.” “India must improve institutions, governance, regulation & reporting before its companies can be taken seriously.”The need for improved corporate governance… “India is strangled by a public sector that is too big. This encourages conglomerates and discourages transparency.” “We need to see better corporate governance and better alignment with minority shareholders.”…and more frequent interaction with managementAll survey respondents agreed that better exposure is required to Indian companies – of all sizesand from all sectors – to improve understanding and access to these businesses. “We believe that better roadshows need to be held, whether in London or in India, to give investors wider exposure to Indian companies of all sectors and sizes.”Is summary, the picture for listed Indian corporates is bright. There is significant interest frominternational investors that could be converted into capital to fund India’s continued growth andthe London Stock Exchange remains an attractive market for Indian companies looking to raisemoney – either through main market listings or depositary receipts. While there are areas whereIndian companies need to improve their interaction with investors, these are easilysurmountable. 4
  • 5. Detailed investor feedbackInvestors were asked a series of questions about access, confidence in India, concerns and areasof interest. Almost all investors were currently invested in India and had a good knowledge of theIndian market.Below is an analysis of the survey findings broken down according to the questionnaire. Verbatimcomments from respondents are included in italics. To show an accurate picture of the strengthof views, we have also shown the conviction of investors by including the percentage of totalrespondents that gave a 4 or 5 rating from the response scale. Not every investor answered everyquestion. 5
  • 6. Access1. What is your preferred route of investing in emerging market / Indian companies?Almost half of the investors surveyed (46%) access the Indian market through the domesticexchange due to the liquidity available. However, a number of respondents cited this as ahindrance due to regulatory constraints. 24% prefer to invest in India through ordinary shares ofcompanies / investment vehicles listed on the London Stock Exchange and an equal numberthrough depositary receipts or participatory notes. 46% 24% 24% 5% Investing directly Through ordinary shares Through ordinary shares Through Depositary through ordinary shares of companies / of companies / Receipts or Participatory of companies on investment vehicles investment vehicles Notes domestic exchanges listed on the London listed on the other Stock Exchange exchanges “It is often easier to invest in local markets and exchanges, which opens more options and access to companies.” “We prefer to go where the liquidity is, for India this is through domestic exchanges and hence that currently tends to be the preference to invest through.”Almost half of the respondents (48%) stated a preference to invest in India through companieslisted on the London Stock Exchange or through Depositary Receipts or Participatory Notes. “We would prefer to invest in Indian companies and access investment in India through listings on the London Stock Exchange.” “It must be said that reporting standards at Indian companies leave a lot to be desired and prove a hindrance. Access is also difficult and takes time to open the market. We would hope to see a lot more of Indian companies come to London in the near future.”Just 5% expressed an interest in investing through ordinary shares of companies / investmentvehicles listed on other exchanges. 6
  • 7. Sentiment2. As a firm, what is your overall sentiment towards India in the near and long term?The overwhelming majority of investors (73%) remain confident in the Indian growth story in thelonger term. However, in the short term there is concern regarding the macro outlook – withrespondents citing rising inflation and interest rates.90%80%70% 18%60%50%40% 73% 9%30% 63%20% 32%10% 5%0% Very confident Somewhat confident Neutral 6 months 12 - 18 months “We are positive towards the longer term.” “Longer term we are seeing some head winds and expect the market to improve further.” “We remain positive towards India despite the recent volatility – the long term story is strong.”63% of investors still remain “somewhat confident” towards India in the short term, while 32%chose “neutral” as their response. Notably, a number of respondents voiced caution on therecent volatility and developments in India, saying that they have revised their outlook, butbelieve that the long term story remains robust. “At the macro level, India is still among the best. Indian companies are witnessing real economic growth and strong performance despite rising inflation.”Investors believe that despite the macro issues at play, Indian corporates continue to performwell and record strong growth: nearly three quarters of survey respondents remaining buoyant onIndia in the next 12-18 months. 7
  • 8. 3. How has this changed in the past six months?An equal number of investors (39%) stated that they had become more cautious over the past sixmonths or their views on the Indian market remained unchanged. About a fifth (22%) ofrespondents, however, recorded a more positive outlook. “We have become more cautious towards emerging markets, including India. The macro picture looks cloudy at the moment. However, we are confident that Indian corporates are charting the waters comfortably.”45%40%35%30%25% 39% 39%20%15% 22%10% 5% 0% Increased Decreased No change “We believe the whole market has moved from being optimistic to being more cautious. There are interest rate concerns.” “We are concerned about inflation as well as interest rates, which have been rising.” “India has had a good run in the past 18 months, so we expect a correction. Commodity fears also add to our caution.” 8
  • 9. 4. As an investment destination, please rate the following markets.In terms of the relative attractiveness of India, it was ranked the highest alongside Brazil by theinvestors surveyed. 23% of participants gave India and Brazil the most positive ratings (a rating offour or five, on a scale of one to five, where one is low and five is high) as an investmentdestination relative to their emerging market peers, with China in third place with 20%. India 23% Brazil 23% China 20% Indonesia 10% Turkey 8% Russia 8% Frontier markets 7% Middle East 2% 0% 5% 10% 15% 20% 25% % of respondents who gave a 4 or 5 rating India Brazil China Indonesia Turkey Russia Frontier markets Middle East 0% 20% 40% 60% 80% 100% 1 2 3 4 5 Scale from 1 to 5, where 1 is low and five is high 9
  • 10. Investment considerations5. When investing in India, how important are the following criteria?When looking at India as an investment destination, 17% of investors cited inflation and corporatevaluation as the most important investment criteria, followed by GDP growth and regulationwhich were cited by 14% and 11% respectively by those surveyed. Valuation 17% Inflation 17% GDP growth 14% Regulation 12% Liquidity 11% Political risk 9% Currency stability 7% Quality of research 7% Volatility 6% 0% 5% 10% 15% 20% % of respondents who gave a 4 or 5 ratingWhile political risk and currency stability were not high on the agenda with respect to India,valuation was, and a number of investors were of the view that “Indian stocks are overpriced”and “India is an expensive market.”Concerns around rising inflation in India continue to dominate investor attitudes with inflationranking closely with valuation as the primary concern.A few investors also highlighted the hindrances regulatory requirements pose in accessing theIndian stock market. These investors stated that they prefer investing in Indian companies listedin London and access exposure to India through depositary receipts. “Indian stocks are overpriced, it is an expensive market.” “We would like to have access to the market, but this is a headache to get the requisite licenses etc. We prefer to invest in companies listed in London and through DRs and ADRS.” 10
  • 11. 6. When making an investment in an Indian company, how would you rate the following considerations?Investors cited corporate governance (15% of top ratings), disclosure (15%) and transparency(15%) as the most important considerations when making an investment decision in an Indiancompany. This is followed closely by management access (14%), regulation (13%) and liquidity(12%). Corporate governance 15% Disclosure 15% Transparency 15% Management access 14% Regulation 13% Liquidity 12% Investor relations 8% Financial communications 7% Dividend yield 0% 0% 2% 4% 6% 8% 10% 12% 14% 16% % of respondents who gave a 4 or 5 rating Corporate governance Transparency Disclosure Management access Regulation Liquidity Investor relations Financial communications Dividend yield 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1 2 3 4 5 Scale from 1 to 5, where 1 is low and five is high 11
  • 12. Corporate governance, disclosure and transparency remain top of mind and the most criticalevaluating criteria when fund managers are making an investment decision. A number ofrespondents stressed the need for better reporting by Indian companies.Disclosure was highlighted as an area for potential improvement, but it was acknowledged that alot of good work is already done by the larger companies and that this just needs to continue todevelop. “Reporting standards can be quite weak for Indian companies.” “Reporting by companies is usually inversely proportional – with big companies having better structures in place in comparison to smaller ones that report inadequately.” “Reporting is an important consideration.” “Quality of financial disclosure is very important.”Management access ranked highly. Investors stressed the need to meet with management beforemaking an investment decision. Furthermore, they also added that, on average, meetings withmanagement in London or the home country are necessary at least twice a year. “Management access is always poor and an issue. We like to meet management at least two to three times a year.” “Compared to other emerging markets, there is poor access to management at Indian companies.”On the issue of dividend yield, this was ranked as a low priority by a majority of investorsreceiving a ranking of 1to 3 on a scale of 1 to 5, where 1 is low and 5 high. While this may not betotally surprising, given the nature of a fast growing market like India, where share priceappreciation is typically the focus, two investors did comment that Indian companies are not onpar with other emerging markets in respect of dividend policy and payout. “India ranks worst in almost any emerging markets on the matter of dividend yield. I believe this is its greatest failing.” “Dividend yield is an issue. India’s atrocious policies on this are in stark contrast to those of other emerging markets, especially Brazil and Chile, where they have good payout ratios.” 12
  • 13. 7. Investment prospects by sectorConsumer industries (14% of top ratings), financial services (12%), infrastructure (11%) andtechnology (9%) were highlighted as the most attractive sectors, although power (7%) andrenewable energy (7%), if combined, would have ranked joint first. Consumer industries 14% Financial 12% Infrastructure 11% Technology 9% Renewable energy 7% Power 7% Healthcare 7% Industrials 6% Oil & gas 5% Metals and mining 5% Telecommunications 5% Transport 5% Leisure 2% Real Estate 2% Utilities 1% 0% 5% 10% 15% % of respondents who gave a 4 or 5 rating Consumer industries Financial Infrastructure Technology Renewable energy Power Healthcare Industrials Oil & gas Metals and mining Telecommunications Transport Leisure Real estate Utilities 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1 2 3 4 5 Scale from 1 to 5, where 1 is low and five is high 13
  • 14. 8. For what length of time do you usually hold Indian company investments?67% of investors said that a one to three year period is the preferred term for holdinginvestments. This was usually determined by a combination of factors, including investmentpolicy, long term return potential and tax considerations. However, 29% said their time horizonwas in excess of three years. 70% 60% 50% 67% 40% 30% 20% 29% 10% 5% 0% Under 12 months 1 – 3 years Over 3 years “We give management time to deliver results and the market to appreciate and correctly value it.” “We hold if the investment is performing in line with expectations.” “The generation of cash flows as expected, relative valuation and no “accidents” are all considerations for the length of tenure.” “The four things that matter to us are quality, value, change and valuations – these are the criteria we use in determining the term of an investment.” “We have a buy and hold approach, and invest for over five years. We don’t take these investments lightly.” 14
  • 15. MethodologyThe London Stock Exchange and Capital MSL conducted the research survey amongst keyemerging market investors located in Europe to gauge current perceptions of investing in Indiancompanies from an equity investment perspective.The survey consisted of an online, quantitative survey and a number of telephone interviews withfund managers.A total of 30 fund managers participated in the survey which was conducted on an anonymousbasis.The survey was undertaken in May and June 2011. 15
  • 16. Capital MSL81 Whitfield StreetLondonW1T 4HGTel: +44 (0)20 7307 5330Fax: +44 (0)20 7307 5331www.capitalmsl.com 16