[Investing] Your Compounding Machine - India

Successful Investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can’t produce a baby in one month by getting nine women pregnant
— Warren Buffet
Vibhav Viswanathan, '17

Vibhav Viswanathan, '17

The long term annualized return of the BSE Sensex, the Indian stock index, is approximately 17%. This means that it takes ~30 years for an initial investment to multiply a hundred times. To be specific, the BSE Sensex went from 100 in 1979 to 10,000 in 2006. In other words, a $10,000 investment in the BSE Sensex in 1979 would have returned $1 Million today. A $10,000 investment in the S&P 500, in the same time frame, would have returned about $200,000.

India has an even better story looking at the future and I am optimistic and confident of the country’s future intrinsic business value, due to several factors. Let’s first look at some interesting numbers: 1.2B population, 5% real GDP growth, 300M mobile internet users, <$2 monthly data costs and 5%+ YoY growth in labor productivity. A simple example can put in perspective the economic impact of the above numbers. The total brand value of the Indian Premier League for Cricket today is worth just over $4B (note that this number has grown at over 100% in the last few years). This is expected to sky rocket to over $100B within the next five years.

Sensex earnings growth: Expected to pickup from FY16

Sensex earnings growth: Expected to pickup from FY16

Given the enormous business potential India offers, it should not be surprising that private equity and venture capital investments have been growing at an exponential rate. In 2005, the total private market (PE and VC) deals in India was a meager $2.5B while in 2015 this number was $20B+. More importantly, the fund-raising environment is even better with an expected deployment of $100B+ over the next 5 years.  

In my opinion the most important catalyst of change for India is the new Government. Our prime minister, Narendra Modi and his leadership team, which includes a Booth professor, Dr. Rajan, have stellar long-term track records. Mr. Modi works over 18 hours a day and is known to call for 6am meetings.

Since taking over, there have been significant changes that have eased the operational aspects of running a business in India (Note: India currently ranks 130/189 in the ease of doing business index; I expect this to improve significantly, possibly below 50, within next 5 years). For instance, the ‘Make in India’ campaign enables relaxation of Foreign Direct Investment norms, creation of special economic zones with tax exemptions and access to Government loans while the ‘Start-up India’ initiative for early stage entities provides freedom from capital gain tax for 3 years, freedom from tax in profits for 3 years and 80% reduction in patent registration fee.

Annual PE and VC Investments in India

Annual PE and VC Investments in India

Given such strong economic tailwinds, smart investors should target to beat the benchmark and achieve 100x returns within 20 years. In fact, the top 50 companies have returned a remarkable 300x+ in the last 15 and at this rate of compounding one can achieve 100x in 12 years. I want to conclude by saying this - find a money manager, preferably one from the outgoing batch, willing to invest into India with a time horizon of a decade or more, and start planning your retirement!

Special thanks to Aman Mohunta, Aanchal Bindal and Rob Grube for giving me directions on this article.