Emerging Markets – A Letter from India
21 May 2025
At the end of March, the Warakirri Global Emerging Markets Fund had a portfolio country weighting of 23% in India, followed by Mexico (19%) and South Korea (16%). Northcape Capital’s Emerging Markets (EM) team recently visited India to conduct on the ground research. Here they share their insights from the research trip and why they continue to be positive on India as an attractive investment destination.
This information has been prepared by Northcape Capital, the underlying investment manager for the Warakirri Global Emerging Markets Fund.
India – A resilient emerging market
In March, the Northcape EM team visited India, with meetings spanning Mumbai, Pune, Bangalore, and Delhi.
Our trip occurred before the 2 April announcement of “reciprocal” tariffs by the US. India’s 26% tariff is reasonable from a relative perspective in EM – well below China’s 54%, Vietnam’s 46%, Thailand’s 36%. India’s goods trade surplus with the US was US$46 billion in 2024 (representing 1.2% of GDP). Fortunately, there was no incremental impacts on India’s large exporting sectors such as IT services, autos (a 25% tariff was already levied on 26 March), or pharma – which was exempted.
While India will face some impact from the US tariffs, its status as a domestic demand-driven economy (60% of GDP is household consumption), coupled with its favourable demographics (India adds the equivalent of Australia’s population annually) positions it among the more resilient EMs in the face of evolving global trade policies.
The announced tariffs on India will almost certainly represent the peak level, and there is hope that they will be negotiated downwards. India began working on a Bilateral Trade Agreement with the US during the first Trump administration (2017-21), there is optimism that this can be accelerated.
Particularly given the amicable relationship between Trump and Modi, and the US recognition of India as a key ally and counterbalance to China in the Asian region.
The US tariffs are anticipated to have minimal direct impact on our investments in the subcontinent. We also provide a macro update on the Indian economy after a period of slightly slower growth and compare the stark differences in the return on capital focus between Indian and Chinese corporates.
US reciprocal tarrifs announced 2 April
Source: The White House
India portfolio holdings travelling well
Our strategy focuses on investing in high-quality businesses that address large, structural growth opportunities. We seek market leaders in consolidating sectors that generate strong returns on capital and have the potential to expand into adjacent markets. India is home to such companies in abundance. Amidst the current uncertain global economic backdrop, we believe that holding market leaders will be even more essential for capital preservation.
HDFC Bank, India’s leading private lender, has demonstrated remarkable growth in expanding its branch network and solidifying its market share. Over the past decade, the bank has grown its network from 3,500 branches to 9,000, with ambitions to reach 13,000–14,000 in the coming years. This aggressive expansion has been particularly focused on semi-urban and rural areas, home to 60–70% of India’s population, where branch banking remains critical for mobilising deposits.
HDFC competes with inefficient public sector banks who lack the risk management, customer service, and cost efficiency of HDFC and other leading private banks. As a result, public sector banks experience much higher cost-to-income ratios, elevated non-performing loans, and lower ROEs, further underscoring HDFC Bank’s competitive edge.
HDFC Bank’s network expansion and deposit share gains play a pivotal role in fuelling the bank’s loan growth and strengthening its leadership position in a vastly underpenetrated credit market – domestic private credit is just 50% of GDP, significantly below global and regional averages (China is at 171%). HDFC Bank is also benefitting from a changing credit culture in India – where consumers are embracing borrowing as a strategic means to elevate their standard of living. With the economy rebounding and consumer confidence improving post last year’s election, HDFC Bank is poised for double-digit loan growth in FY26 and mid-teens growth in FY27.
In terms of tariff impacts, exposure to exporters represents just c. 5% of HDFC Bank’s loan book. Preliminary data for the March 2025 quarter shows HDFC Bank grew its deposits by a very solid 14% YoY, and loans 5.4% YoY.
Maruti Suzuki is India’s leading automobile company, commanding a market share of 42% – well ahead of competitors like Hyundai and Tata, which hold 10-15% each. Maruti’s unparalleled dominance is rooted in its extensive distribution network, high degree of localisation, and deep understanding of Indian consumers’ value-driven priorities.
With over half of India’s cars on the road carrying the Maruti badge, the company has fostered a thriving ecosystem for its dealers. Servicing Maruti vehicles generates substantial profits for dealers, incentivising them to expand their reach and prioritise the brand over competitors. Maruti’s highly localised supply chain adds another layer of efficiency, ensuring parts can be delivered within 24 hours and reducing vehicle downtime significantly. This stands in sharp contrast to rivals who face prolonged repair times, cementing Maruti’s reputation for reliability and strong customer satisfaction.
This operational excellence, paired with competitive pricing, superior resale value (around 50% after five years), and low ownership costs, has firmly established Maruti as the preferred choice among Indian car buyers. The long-term growth potential remains immense – car penetration in India is a mere three vehicles per 100 people compared to 86 in the US, and 74 in Australia. In a demonstration of Maruti’s manufacturing prowess, Suzuki has designated Maruti’s plant in Gujarat to be its global production hub for electric vehicles (EVs). Maruti does not export to the US, so there is no direct impact from the US tariffs.
New Suzuki Vitara EV at Maruti’s HQ showroom in Delhi
Source: Northcape Capital
Bharti Airtel has established itself as India’s leading telecom provider, overcoming challenges brought by Reliance Jio’s market disruption in 2016. The telecom industry has undergone significant consolidation, shrinking from 12 players in the early 2010s to just three today. Despite mobile services being a daily necessity, tariffs in India remain among the lowest globally (Monthly ARPUs: Bharti – $2.90, Jio – $2.50, VI – $1.90). However, these tariffs are gradually increasing, and Bharti anticipates strong price inelasticity, providing room for 10-15% annual ARPU growth through selective price hikes and subscriber upgrades. With VI’s financial struggles, Bharti is well-placed to strengthen its market position further.
Beyond its core telecom business, Bharti is leveraging its extensive 400 million-strong customer base and advanced data analytics to expand into digital financial services through Airtel Finance.
This rapidly growing platform has scaled to disburse $30 million in loans monthly, underlining Bharti’s ability to unlock new revenue streams and tap into adjacent markets. We see Bharti Airtel as being unimpacted by the US tariffs.
Tata Consultancy Services (TCS), as the pioneer and undisputed leader in the Indian IT services sector, is well-positioned to capitalise on the growing adoption of artificial intelligence (AI). TCS views AI as a transformative growth opportunity and is seeing its clients accelerating large-scale AI adoption. TCS is engaged in over 1,000 AI-focused projects, embedding AI into nearly all new contracts, and enabling workforce transitions toward higher-value responsibilities such as quality assurance, oversight of AI systems, and strategic decision-making. AI is set to drive the next wave of IT spending, with its faster ROI and declining cost trajectory, mirroring but potentially outpacing earlier cloud adoption trends.
TCS enjoys structural advantages that underpin its continued leadership. These include a robust talent pool of over 600,000 employees, the industry’s largest AI-ready workforce, deep client relationships, and operational efficiencies that deliver the highest margins and returns on capital in the sector. With just 2% share of the global IT market share, TCS has substantial runway for growth. Vendor consolidation is benefitting TCS as companies prefer fewer, reliable partners, who can offer scale, end-to-end services, global reach, and proven results, aligning with their digital transformation goals.
Although services are not covered by the latest US tariffs, North America still contributes approximately 48% of TCS’s revenues. The significant disruption and uncertainty caused by the tariffs may lead US corporations to halt some of their discretionary IT spending. However, cost-cutting projects are expected to continue, as corporates leverage TCS’s substantial labour cost advantages to mitigate cost inflation in other parts of their business.
Indraprastha Gas (IGL) is a leading player in India’s City Gas Distribution (CGD) sector. It operates primarily in the National Capital Region (NCR) and surrounding areas, supplying Compressed Natural Gas (CNG) for vehicles and Piped Natural Gas (PNG) for domestic, commercial, and industrial use. IGL is playing a crucial role in supporting India’s goal of increasing the share of natural gas in its energy mix from 7% to 15% by 2030, as part of a broader strategy to transition to cleaner energy sources and cut carbon emissions. Additionally, with the Indian government’s strong commitment to enhancing air quality, the push for natural gas – far cleaner than coal and petrol – is likely to remain a central focus in the country’s energy agenda.
Serving as an indicator of India’s economic momentum, IGL anticipates 9-10% volume growth over the next two years. This expansion is underpinned by rising demand for CNG vehicles, with automakers like Maruti Suzuki introducing an increasing number of CNG-specific models, backed by warranties that make them a compelling choice for consumers – especially as EVs remain out of reach for most Indian consumers.
Adjacent market opportunities for IGL include potentially expanding into Liquefied Natural Gas (LNG) for long-haul transportation and regions without pipeline connectivity, leveraging its expertise in gas distribution to address the growing demand for cleaner fuel alternatives in logistics. Additionally, it is exploring renewable energy solutions, including solar power for its facilities and biogas production, aligning with the company’s net-zero emissions goal. The direct impact on IGL from the US tariffs is negligible.
Beyond our current portfolio holdings in India, we have identified several additional Approved List companies and promising new prospects as potential candidates for inclusion in the portfolio.
India’s economic recovery is on track
Prior to the tariff announcement, which will likely weigh India’s growth rate modestly (economists expect a c. 30-60bps reduction in India’s FY26 growth rate), India’s economy was regaining a bit of momentum after a temporary dip in recent quarters. This was due to a slowdown in government spending during the general election held between April and June 2024. The recovery is being fuelled by a sharp rebound in central government capital expenditure, which had declined by 15% during April-October 2024. Since then, capex has surged by an impressive 67% YoY and is projected to grow an additional 15% over February-March 2025, according to revised budget estimates. Looking ahead, the government has budgeted a 10% increase in capex for FY26, signalling its sustained focus.
Indian central government capex growth
Source: Controller General of Accounts
The country has a large population of 37 million, the biggest in Central Europe after Germany, is highly educated by regional standards and possesses a strong work ethic. This will help underpin solid economic growth, as Poland steadily closes the gap with its wealthier neighbours to the West.
Infrastructure investment fuels growth
Infrastructure investment remains a cornerstone of the Indian government’s economic strategy, serving as a crucial driver to keep the flywheel of economic growth in motion. The advancement of large-scale projects is reshaping India into what can only be described as a vast construction site. Unlike certain infrastructure endeavours in other EMs, e.g. China’s “ghost cities” and infrastructure ‘overkill’ in certain areas, that have questionable utility, India’s initiatives are driving tangible efficiencies and productivity gains – evidenced by significantly improved transportation within cities compared to just a few years ago. India’s logistics costs as a percentage of GDP have decreased by 0.8–0.9 percentage points between FY14 and FY22.
Some key infrastructure projects include:
- The addition of 50 new airports over the next five years – catering to surging demand, with packed flights and terminals on this trip a testament to their necessity.
- Doubling the length of national highways under Prime Minister Modi’s administration – enhancing connectivity nationwide.
- The development of a high-speed rail corridor between Mumbai and Ahmedabad.
- A dedicated freight corridor between Delhi and Mumbai, set to cut travel time between the two cities from over 20 hours to just 3-4 hours.
Visiting GMR’s Aero city development in Delhi
Source: Northcape Capital
These transformative projects are also serving as catalysts for private sector capital expenditure. According to analysis by Jefferies, which examined over 2,100 listed companies in India, private sector capex has been growing at an impressive compound annual growth rate (CAGR) of approximately 15% over FY21-24, and this momentum has been sustained in the 1HFY25. This marks a notable shift after a decade-long period of subdued private sector investment activity. However, it will be crucial to keep an eye on this private sector capex trends in light of the recent global trade shock.
Listed Indian companies’ capex growth
Source: Jefferies Research
Providing a further boost to the capex cycle, the Reserve Bank of India (RBI) commenced easing its policy rate in February 2025 – the first rate cut since May 2020. With inflation now within the RBI’s target band of 4% +/- 2%, additional rate cuts are anticipated before year end. Rate cuts should provide a boost to the Indian auto market where 75% of vehicles are purchased on credit.
New central bank governor Sanjay Malhotra has embraced a pro-growth stance which beyond rate reductions includes liquidity support and regulatory easing measures, such as the deferment of liquidity coverage ratio (LCR) norms and reduced risk weights for microfinance lending. Insights from meetings with banks and non-banking financial companies in India reveal optimism about loan growth recovery in the upcoming year.
To stimulate consumption, the government has implemented significant tax cuts, effective 1 April 2025. Under the updated framework, incomes up to Rs1.2 million (US$13,700) are now tax-exempt, providing a notable boost to middle-class disposable income. This is expected to fuel consumer spending and incentivise capital investment by businesses catering to the market. Additionally, last year’s favourable monsoon has strengthened rural demand. Consumer-focused companies we met with expressed more optimism on demand in the upcoming quarters.
The Indian equity market is also benefiting from strong domestic inflows. Systematic Investment Plans (SIPs) by retail investors are contributing around US$3 billion monthly to local assets under management. Total domestic net equity flows are around US$5 billion per month. These inflows provide a critical buffer against market volatility and periods of foreign investor outflows. With equities currently representing only about 5% of household assets – compared to 15% in gold and bank deposits, and 50% in property – Indian households are in the early stages of adopting a stronger equity ownership culture.
Monthly SIP contributions and SIP accounts
Source: Association of Mutual Funds
While we may see a modest downgrade in India’s GDP growth outlook over the medium-term – the economy is still projected to grow around 6% in real terms over next three years – the fastest growth rate for a major economy globally. In contrast, the Chinese economy is expected to grow closer to 4%, and economists warn this could be hit by 1-2.4 percentage points due to the impact of tariffs.
The continued expansion of the Indian economy will help drive solid underlying growth for leading companies across various sectors. Importantly, the country’s status as a domestic demand-driven economy, coupled with its favourable demographics, provides a foundation of resilience against an uncertain global backdrop.
Return on Capital – India vs. China
Another point that was clearly apparent in our recent travels and corporate meetings was the focus on returns on capital by the leading Indian corporates, and how this stands in stark contrast to companies in China.
Many Indian companies are promoter-owned, meaning that the founding individuals or families retain substantial ownership and control over the business. This ownership structure instils a strong sense of stewardship, as promoters often view the company as an extension of their legacy and responsibility, rather than just a financial asset. The best promoters in India tend to prioritise long-term value creation over short-term gains, emphasising sustainable growth and prudent capital allocation. Their vested interest in the company fosters a disciplined focus on return on capital, as decisions directly impact their personal wealth and reputation.
In contrast, China operates under a unique economic model wherein capital allocation decisions – even within private sector companies – are significantly influenced by goals other than maximising shareholder value, including provincial development goals, fostering employment creation and stability, aligning with national strategic initiatives, and other broader societal objectives.
This was vividly demonstrated during a high-profile meeting on 17 February, between President Xi Jinping and prominent leaders of China’s tech industry. Among the attendees were Jack Ma, co-founder of Alibaba; Ren Zhengfei, founder of Huawei; Wang Chuanfu, chairman of BYD, an electric vehicle manufacturer; and Pony Ma, CEO of Tencent.
Chinese state media reported that Xi told the audience that the Communist Party and the government’s approach towards the private sector has been incorporated into “the socialist system with Chinese characteristics”. In essence, Xi underscored the Communist Party’s dominance, emphasising that private companies are expected to actively contribute to China’s vision of national rejuvenation.
Xi meets with Business Leaders on the 17.2.25
Source: AP News
Following this meeting, there was a surge in announcements of AI investment commitments from the companies present at this meeting. Alibaba, for instance, has pledged $53 billion over the next three years – an amount equivalent to its entire free cash flow from the past three years. However, when our team meet with Alibaba at an investor conference in North Asia, they candidly admitted that there is no specific return-on-investment targets for these AI investments(!).
While Alibaba’s share price has performed well recently, its deteriorating capital allocation strategy (in addition to the punishing tariffs the US has imposed on China) raises concerns about the sustainability of this rally. In contrast to Alibaba’s ROE at 8%, the average ROE of Northcape’s India holdings is above 20%.
Alibaba’s return on equity (%)
Source: Bloomberg Finance LP
Summary
While India and China are the two biggest emerging markets, the contrast between them on the issue of capital allocation could not be starker. The findings from this recent research trip confirm our positive view on India. Accordingly, the Warakirri Global Emerging Markets Fund has a high portfolio weighting to India’s equity market, especially relative to China’s.
For more information, please contact us on 1300 927 254 or visit Warakirri Global Emerging Markets Fund.
The information in this document is published by Warakirri Asset Management Limited ABN 33 057 529 370 (Warakirri) AFSL 246782 and issued by Northcape Capital ABN 53 106 390 247 AFSL 281767 (Northcape) representing the Northcape’s view on a number of economic and market topics as at the date of this report. Any economic and market forecasts presented herein is for informational purposes as at the date of this report. There can be no assurance the forecast can be achieved. Furthermore, the information in this publication should only be used as general information and should not be taken as personal financial, economic, legal, accounting, or tax advice or recommendation as it does not take into account an individual’s objectives, personal financial situation or needs. You should form your own opinion on the information, and whether the information is suitable for your (or your clients) individual needs and aims as an investor. While the information in this publication has been prepared with all reasonable care, Warakirri and Northcape do not accept any responsibility or liability for any errors, omissions or misstatements however caused.
