US Election 2024: India To Get Larger Share Of US Import Basket, Says Nilesh Shah
Nilesh Shah emphasises that India's export potential could rise significantly as the US adopts stricter trade measures against China, fostering a more predictable geopolitical and trade environment.
Donald Trump's return to the White House would usher in big changes with a shift towards a more stable, predictable geopolitical environment—a development that could bring much-needed calm to trade relations and, notably, boost US-India strategic ties, according to Nilesh Shah, the founder of Envision Capital.
One of the major shifts Shah expects is a tough stance on China, marked by rising tariffs and trade barriers. Shah told NDTV Profit that this could allow India to gain a greater share of the US import market as both countries strengthen their economic ties.
In a trade environment less prone to disruptions, global cargo movement and supply chains may see a smoother path, potentially easing the logistical nightmares that have plagued freight costs and delayed deliveries worldwide, Shah noted.
On the tech front, Shah underscored the need to differentiate between two classes of Indian IT companies—the top-tier giants and a rising crop of smaller players in the tier 2 to tier 4 space.
While large caps continue to grow, the real action lies in the smaller firms as global investments in AI swell to unprecedented levels, said Shah.
Shah also sees opportunities in conventional sectors. Consumer goods, fintech, and AI stand to benefit as urbanisation and digital adoption reshape the global economy. While fast-moving consumer goods giants once rode high on vast distribution networks, the future may belong to smaller direct-to-consumer brands that leverage niche markets and innovate faster. Adjusting for inflation, large FMCG firms have struggled to post substantial growth over the last decade.
One standout sector in Shah's view? Beauty and personal care. Disruptive small players are increasingly challenging legacy brands and capturing consumer attention.
Turning to commodities, particularly metals, and the electronics manufacturing space, Shah is bearish. He believed that the EMS space has seen its best days for now.
Watch The Whole Conversation Here
Here Are The Excerpts
Nilesh, it's a new year, and it's a new world order of sorts, if you will, after what happened yesterday. What's the most important thing that you believe will be your hypothesis about a new Donald Trump presidency, coinciding with the five-year third term of the NDA as well?
Nilesh Shah: In the first place, the most important impact that yesterday's election outcome in the United States will have is perhaps on geopolitics. The world has been a lot more troubled on the geopolitical front for the last almost three calendar years, right from early '22 then going on to '23 and the entire '24 and we have a few pockets around the world where there has been some really escalated conflicts going on, and it's expected that with this change in presidency in the United States, it's expected that we're going to see a lot more normalcy on the geopolitical front. So I really believe that's going to be the first big impact that I envisage.
The second is less disruptions on global trade, movement of cargo, movement of goods, and we've seen that’s led to a lot of delays, heightened freight costs, challenges in the global supply chain. So this is the second big impact that I see directly from an economic point of view. In terms of what impact it will have between the US-India ties. I clearly believe that this, again, augurs well for the US-India's strategic ties. I mean, it's pretty well known that both the leaders, which is President Trump and Prime Minister Modi, both have a very, very good equation between the two of them.
These very good personal equations should translate into really strong strategic as well as business, economic and trade ties between the two of the world's largest economies. So I clearly think on the whole this event yesterday augurs well for the world and for the global economy, and for India in particular.
Nilesh, the first term of Donald Trump, India and the U.S had fabulous ties. It's not that the ties withered too much. There were some things here and there, but some large events in those four years as well that the Democrats were in power.
Is there a step-up or a step-down shift that you anticipate in any of individual policies which might have an impact or is it continuation of the recent ties that India and U.S seem to have developed with U.S wanting to ensure that it doesn't antagonise both India and China at the same time, if you will?
Nilesh Shah: What is the most widely expected policy move by the Trump administration, is likely to be a significant spike in tariffs and other trade barriers for China. That's something which has already been very widely debated and expected as well. Therefore, the China plus imperative becomes even more important for all global players. I believe that this China plus imperative will actually become an India plus kind of policy thrust, meaning thereby that is going to become more expensive and less competitive for U.S companies to import from China, and I believe in the process that's going to directly benefit India and India is expected to have a larger share of the import basket of the United States.
So I think this augurs really well, particularly for the manufacturing sector. So that's really the big thing that I expect, that we will have to see what are the policy initiatives that can materialise in terms of directly in the U.S- India side, but clearly believes that there is going to be a lot of collateral benefit which India, Indian economy, and India's manufacturing sector in particular, which it can gain.
Keep in mind that in the last few years, we have been enrolling various initiatives to promote the electronic ecosystem, the semiconductor ecosystem, manufacturing of chips and it's quite possible that in the next couple of years, we are going to make significant strides. I think once we have an ecosystem on the electronic side, on the semiconductor side, which is beginning to take off. I think the U.S-India ties, essentially, will provide strong tailwinds for India not being able to just take care of its own domestic requirements, but probably being a meaningful player in the global arena. So I clearly believe that whole China plus plus, or China plus should be seen more as India plus plus.
Just before I come back to manufacturing, yesterday, Tech was the most sought-after index. Of course, it was a reactionary move. But was it a false reaction or do you believe there is some method to that madness over a six-month period, or that maybe corporate tax cuts and thereby some more spending, or maybe a stronger dollar and a weaker rupee, or a combination of these things, plus just the cycle, what's your sense there, on IT services, or even ER&D and product companies?
Nilesh Shah: That's honestly a great question, and probably the most relevant topic going forward. When I say this, when we kind of talk about I.T. services, we need to essentially, kind of, you know, bifurcate them into two buckets. One is really the top four five companies, which you could call them as the large caps, mega caps and then there are a whole bunch of smaller companies, which you could call them as tier two to maybe tier four companies. That's a pretty large universe.
Now, at the first level, in terms of what happened with the surge in stock prices across the board, for the I.T. services sector, I probably think that was more like a response to a strengthening of the dollar and that, and basically the Indian tech sector is going to be a direct beneficiary of that. It's not necessarily that all those benefits come in, but it can be material enough because the big I.T. services companies are probably growing at about maybe 4% or 5% and so if you have another 2-3% coming in because of the dollar appreciation, it means a lot in terms of uplifting that growth rate. But having said that, that's about it. That's really not the growth pocket or the growth bastion.
The real growth lies in the other bucket, which is the tier two to tier four companies and why I feel so strongly about this space it’s because globally, the kind of investments which I expected in artificial intelligence is simply mindblowing. Just to kind of put some things in perspective, for this year alone, or for the next one year just, the Big Four technology companies globally are going to be spending $200 billion in just one single year on artificial intelligence versus that of the entire exports of I.T. services from India are about $200- $250 billion okay, that's the kind of step up.
Now, yes, the larger companies will have some role to play, but it won't move the needle materially for them, whereas the tier two, tier three, tier four companies, they will benefit disproportionately from this. So whether we talk about companies which specialise in ER&D or companies which are into providing AI ML applications or providing big data applications or providing big data analytics. These are companies which probably today are at maybe $100- $200 billion in terms of revenue but could potentially gravitate towards half a billion or maybe a billion-dollar revenues in maybe the next five or 10 years.
Meshy himself has said that I don't think that number was right or so, but he thinks over the next 10 to 15 years as the world tries to develop an ASI, which is Artificial Super Intelligence, which is going to be 10,000 times more powerful than the human brain. He probably discovered a number like $900 trillion. Now I don't know whether you forget $900 trillion, even if it's $9 trillion. That's a massive number, and the big beneficiaries would really be companies outside the top five or six companies in India.
You know, we never talk stock recommendations here, but just so that we can crystallise our thoughts, where within the Indian I.T. landscape do you find managements which are doing this and by the way, I'm not asking you to name an exclusive list, and it's not an exhaustive list, but is it mid cap IT the likes of Persistent, Emphasis etc. Is it that bucket? Is it ER&D stocks like Tata Technologies or KPIT or LTIM. Where is it that you find this opportunity or is it completely different companies that don't come into mainstream conversation nowadays?
Nilesh Shah: It's going to be all of these companies which you mentioned, it's going to be all of these companies, but I just want to drive home a point, or make an important point, that as you probably go down the pecking order in terms of the size of these companies, maybe that's where the impact would be the highest. So, the winning mantra is going to be to really kind of carve out this universe of companies and then look out for companies which probably, I mean, the names which you kind of alluded to, have probably got significantly re-rated.
But I still think below this very list of names, down below would be a bit of the companies that are relatively smaller than the four or five names that you mentioned, and within that, if you can spot companies which are going to have a disproportionate amount of their revenues from these newer areas versus the legacy areas, those are the kind of companies which will benefit.
So typically, it would be essentially kind of trying to figure out the companies which would probably kind of grow at a hyper pace over maybe the next five years. When I say hyper pace, which means if the larger I.T. companies are going to grow at 5% the names that you took are probably going to grow at 10-12% but they are likely to be companies which will probably grow north of 20% in terms of their revenues and maybe be in a position to even expand margins, and that's really where a lot of the Delta will creep in, and that's really what is going to result into Alpha for investors.
But just on this topic, until recently, Nilesh, the belief was for a lot of people that look at the inward facing sectors, because domestic is a lot more predictable than global. Has yesterday's move, coupled with the fact that domestic is going through a bit of a slowdown as well, has that changed? Maybe the portfolio should be evenly balanced, and you should have enough presence of the outward facing sectors as well, be it Technology, be it Pharmaceuticals, be it Chemicals or or maybe some of the Manufacturing companies which are catering to the global markets?
Nilesh Shah: Again, that's massively pertinent, especially in context of what's happening. Clearly, the domestic-driven businesses essentially have very strong tailwinds. I mean, undoubtedly, and it's going to be a mix of both the domestic facing businesses as well as the export-oriented businesses. But clearly, believe that the universe on the domestic side is significantly larger than the universe on essentially the global side. If I were going to look at three big opportunities, as investors, I think one is going to be around the conventional consumer stuff and when I say conventional, I mean the opportunity consumer. I'm not talking to conventional companies.
The second is around FinTech, and the third is essentially around artificial intelligence and the one around AI is something which we just kind of discussed, and that, to me, is the most attractive opportunity from a global perspective, in terms of the global market. I think back home, keep in mind that India and the Indian economy, and I think this is not just going to be relevant for the next two years, but maybe for the next 5-10-15-20 years. I think it's a generational opportunity which is around urbanisation and around digitisation. These two essentially are going to be the most powerful themes which will play out in India over the next few years and maybe over the next couple of decades.
Therefore, domestic facing businesses, which are able to kind of ride this wave of urbanisation and this wave of digitisation, are going to be the challenges to the incumbents, and therefore, they will be the winners of today and tomorrow. Therefore, I think it's important that when you kind of look at any domestic facing business, be it financials, be it consumer, the most relevant question that we as investors need to ask is, is this business a challenger, or is this a business which is going to get disrupted? I think the big players in this space essentially are already getting challenged by smaller, but more agile players who are able to embrace technology, embrace digitisation and provide cutting edge solutions to the consumer segment and are becoming category defining companies. I think that's really where a fantastic opportunity lies ahead for us as investors.
Just one follow up on that, and then I go to Metals, which is the talking point today. Nilesh Shah, for years now, FMCG has enjoyed very strong return ratios, great multiples, great margins. I think you were making a point earlier that at some point of time, companies outside will see these numbers and come to dent those... because they would want a piece of the pie as well.
We've seen e-commerce companies maybe do some bit of that, category defining companies, maybe in consumption. I don't know if you're referring to FMCG disruptors, but maybe some of those companies have done that too. Do you see more of this happening and therefore, would pure play FMCG the HULs, Nestle's, Daburs of the world, are they are under a bit of a cloud, if not for earnings down tick, then valuation down ticks over the course of the next three, five years?
Nilesh Shah: Absolutely. There is clearly no doubt in our mind about this to happen. It's almost a very predictable and almost certain event and that's because these are the kind of companies which have essentially enjoyed benefits in the past because of their distribution reach. Now that distribution reach is no longer a mode. It is an era of D2C companies, where smaller, smarter, agile companies, well-funded companies, essentially are coming in, identifying the niche and essentially coming in, challenging the incumbents and the very large players in every segment.
So, if you look at the conventional FMCG companies, traditionally, over the last 10 years, several of these companies have grown 5-8% in terms of their revenues. If you adjust for inflation, then in real terms, there's probably been very little growth. If you again strip out any growth which is coming from acquisitions, then the organic volume growth has probably not been there in a significant manner over a period as long as the last 10 years. So, I think one has to keep in mind and still, I think if we look at each one of these categories and not restricting oneself with just FMCG, but Consumer as a pack. I think we have had some homegrown companies which have either recently IPOd themselves, or who've been around for a while, which are challenging some of these multinationals, very large multinationals, who probably dominated the Indian consumer market for maybe the last three to four decades.
I think that's really where the opportunities are. Look at alcoholic beverages. We have the two big global giants who probably are growing in single digit, and then we have a couple of homegrown players which are growing in double digit. You look at biscuits as a category, okay? You look at Dairy as a category. Some of these categories essentially are where you have individual category defining companies, and that's really where the opportunity again, BPC, I mean Beauty Personal Care is a segment, again, that is a very promising segment. Again, out there you have a smaller player who has come in and challenged and disrupted the established brands and the incumbent brands, and that's been where the opportunity is.
So, I don't think one should write off Consumer and FMCG, in fact, it remains a very exciting kind of area, but that whole approach of just going out there and buying the big boys, I don't think that approach has worked, and I don't think it will work going forward as well for the foreseeable future. Really, I think the key lies in stock picking and doing a bit of cherry picking there.
An EBITDA guidance, pull back. Notwithstanding, we have this big Chinese NPC meet underway as well, with Donald Trump in the saddle. Would China be forced to give out a much larger stimulus than otherwise anticipated? Could it be positive for Metals? Is it just a tactical call, or is there fundamental merit in trying to own any metal names?
Nilesh Shah: We've not been very big believers in Metals. These are very cyclical industries which get governed a lot by policy changes, interest rate movements, and at best, they are a bit of a catch up on inflation. So, I think we just think of these as basically an inflation catchup trade, and nothing more than that. So, to that extent, we are not very enthused by the space, unless there might be an individual company or an individual player which is undergoing some bit of restructuring, which essentially can be a bit more of value enhancing kind of opportunity or a special situation.
But beyond that, we're not very big believers in owning commodity stocks. We just believe that their management has a very little role to play apart from driving efficiency. But if they really have no way to control their realisation. So I think honestly, apart from being any kind of practical or trading opportunities, we really are not big believers in owning metal stocks for the very long term.
Well, let's see how things play out. But I think we've already seen some run up in metal prices over the last few years. So I really don't think there's any more potential from here on. Keep in mind the other thing is, the dollar is strengthening. The dollar X is strengthening and when that happens, typically, metals tend to kind of weaken a bit. So one needs to just kind of be a little cautious there.
Last question and that's on because you alluded to Manufacturing in some fashion, but yesterday, the EMS stocks really got a big shout out. Now I because I know you, at times, or most of the times, think about things, not from a one year, two-year perspective, but a really long perspective, to an Average Joe, EMS stocks started the rally in 2020 have rallied significantly aur kya hoga? I would like to know if you think about it that way, or do you think that the best is yet to come?
Nilesh Shah: I think by and large, they've run the course, the EMS companies, especially the kind of valuation at which they are trading in. Keep in mind that yes, there is still top line growth, but the margins still are kind of, you know, relatively low, and the pace at which they will have to continue to grow, they will need a lot of capital.
When businesses need a lot of capital, they don't end up being great businesses over the long term, and especially at these kinds of valuations, where maybe some of these are trading at some100, 200 P/E. I don't think it's a great place to be in. I probably think that there are better opportunities on the manufacturing side, and especially areas like Decarbonisation and Energy Transition are where valuations are still kind of meaningful in context of the kind of growth which lies ahead. So probably, that's a better pocket to bet on today versus the EMS space.
