Other big sectoral holdings are in healthcare, energy and industrials.
Desai says his strong view on financial stocks is linked to the economic backdrop, that India as a country is set to grow quickly with an expanding middle class.
“Banks and financial institutions in young, emerging markets like India are very macro linked,” he says.
“If you’re positive and you’re optimistic about growth across emerging markets, and in India in particular, then the banks are structurally a good space to be in,” he says.
Desai notes that prime minister Narendra Modi’s recent controversial move to crack down on corruption and tax avoidance by effectively removing 86% of the country’s currency from circulation was a major justification for his faith in the banking sector.
“In the three weeks after demonetisation, more than 30 million bank accounts were set up. That’s half the population of the UK in just three weeks,” he says.
“People who would usually save in gold and low-level property, are instead putting money into an institution where they get paid a fee, and that bank is then able to extend credit to businesses.”
However, he adds: “Be wary because there are some banks that have very poor asset quality, which have been affected in the last cycle where they have given out credit to poor institutions, or institutions that didn’t make a return on that investment.”
Consumer boom
Among the Neptune fund’s big holdings in the financial sector are Yes Bank, ICICI Bank and Industrial Bank.
Desai also likes companies that are set to benefit from a transition in India’s consumption habits.
“Consumption is a very powerful story in India. If you just look at the numbers, India has about 55 million households today in the middle class. That’s people earning between $6,000 and $30,000 a year. The expectations from recent population studies are that this will move to 110 million households in the next four years.
“Just that increase of 55 million households in the next four years is the sum of the UK and France put together. It’s creating a UK and a France just in its middle-income bracket,” he says.
The Neptune India Fund owns companies like Mumbai-based Zee Entertainment Enterprises, which provides Hindi TV, sports content and general entertainment, which they sell to cable companies and satellite TV companies.
It also owns auto companies Maruti Suzuki and Mahindra and Mahindra, which produce either small hatchback cars and SUVs and tractors, respectively.
“It’s playing into this consumer theme of rising, rapidly increasing disposable income, rural wage growth and urban improvements,” says Desai.
While India’s investment story looks to be a strong one, Desai acknowledges that for some investors, having seen the strong growth in emerging markets this year, may be put off.
“I think investors thinking about coming into India today are right to say, ‘Have I missed it? Am I too late to the story?’
“They’re right that they’re too late to India’s macro turnaround story. They’re also too late to the belief that India can never have a stable government as the political risk premium eases.
“What they’re not late to is India’s position in its capital cycle, which is India now emerging into its next earnings growth cycle. Demand is coming back because growth is reviving, but companies are still being very disciplined in terms of capital allocation. That sets the scene for a revival in this corporate cycle.
“Why I’m optimistic on this market is because the real reason for investing is improving cash flows and earning revisions, and that’s what is ahead for India now and over the next 18 months,” Desai said.
