India Business and Finance, November 15th

What happened in Indian business and finance during the past week

1)    Credible India

After numerous failed attempts, India enacted a new bankruptcy law in 2016 in the hope it could expedite previously endless litigation, scrape rot out of the banking system and transfer productive assets into productive hands. The results have been mixed. Although there have been some positive wind-ups, recoveries have been low and the glue still gumming up the Indian legal system has resulted in 65% of all cases pending beyond the statutory deadline. This sort of delay comes with direct costs - the chief executive of a cargo airline said an extended legal wrangle had destroyed the value of assets held by bankrupt Jet Airways.  A “grounded plane is metal with corrosion” was how one news report summed up his comments. Effective distress investing has yet to take root in India.

Defence of the new law often rests on how it will be improved. An important step in this direction occurred last week (on November 9^th ) when the country’s Supreme Court ruled that placing a company into the insolvency process does not negate personal guarantees of its debts made by its promoters (controlling owners). More than 350 former promoters were part of the court case, hoping to slither away from past commitments. Included in the group was Anil Ambani, brother of India’s richest person, Mukesh Ambani (who also happened to plan a key role in Anil’s fall). Implications of the ruling have not yet received much attention. The most important change may be hard to see, in as much as the changes will not unfold through litigation but rather throughout the economy and particularly in the acquisitions market. Indian entrepreneurs are infamous for dodging accountability. At the very least, the ruling means they have real incentive to resolve their affairs (likely by selling troubled assets and coming to terms with creditors) before putting them in the hands of the court.

2)    Investment in India

A)    Flow. Local news stories about investment in India typically focus on flows.  But enthusiastic stories about India’s prospects and announcements by global investment banks of higher holding recommendations for India have not been matched by actions. Foreign portfolio investment has recently turned negative, as had been the case last year and the year before. But fiigures released by the country’s primary regulator, SEBI, provide an alternative context. For the first half of India’s fiscal the year (Apr-Sept), assets held by foreign portfolio investors rose 20%, largely a result of the strong appreciation of share prices in the Indian market.

B) Sector

What worked in India’s stockmarket over the past year:  A screen run by The Financial Express showed industrials up 57%, then property (54%), public sector banks (53%), capital goods (50%), autos (28%), metals (24%), healthcare (23%). Of these, property and public sector banks reflect turnarounds in troubled sectors based in part on government steps taken years ago. The others reflect outright growth.

C)    Contrarian India

WeWork has gone bankrupt in America and is now seen as evidence of delusional startup euphoria that ended with the 2020 lockdown. In India, where the parent company has a 27% stake in a local WeWork entity, revenues for the first half of the fiscal year were up 40% over the year before and another 1.5m to 2m square feet of space will be added over the next year, bringing the total to 8m. Why has India WeWork done so well?  The facilities are often under-ventilated, over-crowded, and excessively noisy by American standards and lacking in all the small things that made the various outposts fun. The flip side of the more miserable product is that it is doubtless cheaper to run. And in India, offices in general are not particularly nice. Some are awful and critical needs for modern work like internet and electrical connections may be missing. Supply is limited. Other co-working spaces have popped-up so there is competition but there is room for competition.

3) A clever observer perhaps sees a related opportunity

Rekha Jhunjhunwala, the widow of Rakesh Jhunjhunwala, a brilliant investor known as the “Big Bull” who passed away in 2022, was reported to have just purchased multiple floors of office space in India’s new business district, BKC, and in nearby Andheri. Along with the purchases came more than 100 parking spaces in each location - a key addition given the necessity of cars in India and the difficulty of finding a place to put them. As was the case with her husband, investors closely follow Rekha’s purchases and while she does not carry, at least yet, a nickname like “big bull”, she is considered formidable in her own right.

4)    Patents/Creative India

According to the World Intellectual Property Organization, India had the largest increase in patents applications, (up 31.6%) and patents granted (15.5%) of any country in the world.  The total number, 56,000, is still a tiny fraction of China’s 1.5m and America’s .5m but the direction is encouraging in as much as it suggests increased innovation. Historically, India’s success in key industries, notably pharma but elsewhere as well, has come from replicating the intellectual property developments that emerged from other countries. India has, however, become more protective of intellectual property rights, perhaps to encourage the growth of domestic research.

5)    What higher tax collections mean

Taxes collected from April 1^st through October are 22% higher than a year earlier. This is an important number with multiple possible, non-exclusive, explanations, two of which are encouraging.:

a)     Stronger earnings of companies and individuals

b)    A shift of earnings from India’s vast, untracked, informal sector to its taxed formal sector (reflecting a change in the nature of India’s economy)

c)     The infamous “tax terrorism” of India’s revenue service becoming more effective

6)    Friends with benefits

America’s International Development Finance Corporation will loan Gautam Adani $553m to enable the development of a port in Sri Lanka. This has been portrayed in the press as an effort by America to counter China’s politically motivated overseas loans. Adani does have a good reputation for getting big projects done and is particularly well-known for his management of ports. There may be no better person in the world to do this sort of thing. That said, the Adani group has experienced a fair amount of controversy both in terms of financial issues (accounting, valuation and ownership) and its close relationship with the Indian government. USAID, seen overseas as an appendage of the CIA, recently announced a project with the other Indian tycoon whose governmental relationships draw particular notice, Mukesh Ambani. In India, these moves will be seen as evidence that the political and judicial navigational skills that these two tycoons have demonstrated in their home country have now been extended to America.

7) Update on an unfolding disaster

Indigo, India’s leading airline, will ground 30 more planes, bringing the total to 70 – or more than one-fifth of its fleet–because of troubled Pratt & Whitney engines. This is an absolute disaster. There is an argument that the P&W engines are actually based on good technology but just don’t work in India because of the climate, pollution and Indian maintenance. But aircraft engines that don’t work have no place in the sky.

8) The business of creating a bubble

The American School in Mumbai has spent $3m installing centralized air filtering to protect its students from the polluted city air and is just one of many private high schools to take this sort of step, according to The Times of India. Interior air filters have also become popular equipment for cars, with Hyundai, Kia and Tata experiencing higher demand for models which carry them. This makes sense given that driving in the city requires being stuck for hours behind cars belching fumes.

 9) Non-credible Mumbai

Several newspapers are reporting that although there have been fresh delays, large road, metro and bridge projects will be finished next year, which just happens to be right before a major election and so is seen to have some validity (incentives matter). However, because even elections in the past have failed to resolve delays, there remains much local scepticism. The most recent example is the case of a company that was supposed to fix roads in the southern part of the city but after tearing up a bunch, did no further work. The scene is so common in Mumbai that it has become part of the already dystopian landscape. In this particular case, according to the Times of India, a former government official said the delay amounted to criminal negligence. The municipal authority went so far as to hold a hearing on the subject. The contractor did not show up. And that is where the story stands. It is just a tiny incident, one of many that are similar, and of the sort that doesn’t merit global reporting but it is of the sort that explains why the hopes for India felt strongly by people looking at it from overseas vanish when they set foot on its broken ground.

For distribution in America