Standard Life Investments

Through the Lens

The importance of on-the-ground research for Indian mid-caps

India is one of the world’s fast-growing major economies, offering numerous investment opportunities. Within this market, domestically focused mid-cap stocks are an interesting niche, historically outperforming their more globally centred large-cap peers.

India Mid-Cap Performance Line Chart

Despite this, the vast majority of foreign investment in India is in large-caps, perhaps in part because mid-caps are tougher to research and to access. We believe that to uncover the potential of this asset class requires resource-intensive, on-the-ground research. It also requires good company access and an understanding of local business environments.

At Standard Life Investments, our HDFC AMC joint venture – India’s biggest mutual equity fund manager – has the scale, reputation and resources to provide comprehensive coverage of this market. Our India colleagues are therefore ideally placed to advise us on our strategy and stock picking.

This helps us uncover many companies that we believe have the potential to deliver excellent longterm returns. Here, we detail four mid-cap firms to illustrate the depth of this local insight.

Going hi-tech

Take Mumbai-based Hexaware. The company installed a new management team over two years ago, a move which brought fresh clients and revitalised the sales process. The company’s ‘Shrink IT, Grow Digital’ strategy, which encourages clients to automate workflows and redeploy to digital projects, is also helping it to win new business. We expect this to continue as Hexaware rolls out its ‘best-inclass’ offerings.

A welcome break

Subscription holiday club operator Mahindra Holidays is an example of a business driven by local demand. Domestic leisure travel has grown exponentially thanks to the burgeoning Indian middleclass – and Mahindra Holidays has exploited this niche.

Despite this, the stock is only on the radar of a few foreign brokerages or investors. However, our on-the-ground team recognised that the combination of a new management team, re-invigoration of the subscriber base and economic recovery made this an interesting story – which has been borne out by the stock’s performance.

Keeping cool

Two final names that typify the depth of quality in the Indian market are Blue Star and Voltas, both of which manufacture domestic air conditioning units. Demand for air conditioning in India is set to grow for the foreseeable future, with Blue Star and Voltas ideally placed to continue to take market share thanks to new product lines and growing distribution networks. Both companies have shed underperforming commercial contracts in the Middle East, with new deals agreed at better prices. Margins for both now look set to improve, as a consequence of better revenue profiles and reduced commodity costs. Finally, the regulatory drive and policy support for affordable housing in India should also increase demand for both companies’ products.

These are just a few stocks that demonstrate the benefits of having first-hand access to this growing market. They also demonstrate the plethora of exciting and under-researched companies available in the Indian mid-cap space for investors willing to undertake the research.