The India Opportunity

We believe India’s growing population and young demographic, and its efforts

to build digital, regulatory, financial and physical infrastructure over the last

decade, will pave the way for growth acceleration over the next decade.

This will have significant implications for India’s share of the global economy

and equity markets.

India is home to a disproportionate number of high-quality companies

yet

remains underrepresented by equity indicies. Therefore, we see a significant

opportunity for bottom-up stock picking, by owning businesses with

strong balance sheets, robust growth and improving profitability.

Key highlights



India is underrepresented by equity indices



Infrastructure for growth acceleration was built over the last decade



Broadening opportunity set for bottom-up stock picking in India

OPPORTUNITY OPTIMUM | GLOBAL OPPORTUNITY TEAM | January 2024

AUTHORS

India is also home to a disproportionate number of high-quality companies (>15% 3 year revenue

growth CAGR and >15% ROIC).

KRISTIAN HEUGH

Head of Global

Opportunity

ANIL AGARWAL

Director of Research

DISPLAY 1

India is under-represented

17.6% of

Global Population

7.9% of

High-quality

Companies

3.4% of

Global GDP

1.7% of

MSCI All Country

World Index

Source: Morgan Stanley Investment Management, Factset, IMF, MSCI, as of November 30,

2023. Note: 7.9% of high quality companies is calculated based on the following. Out of 7,891

global companies with above 1 billion market cap, there are 1,774 companies with above 15%

return on invested capital (ROIC) and above 15% 3-year revenue growth compound annual

growth rate (CAGR). Of those 1,774 high-quality companies, 140 are Indian companies.

MARC FOX

Chief Operating Officer

EMILY TSUI

Executive Director

Opportunity

Optimum

discusses how

and where we

are finding the

best investments

around the world.

THE INDIA OPPORTUNITY

OPPORTUNITY OPTIMUM | JANUARY 2024

India offers a broad opportunity

set for long-term investors

yet it is under represented by

equity indices.

As an economy, India is likely to grow

much faster than global growth, and

despite quadrupling over the last two

decades, India’s weight in the global

equity index is just 1.7%, trailing its

current 3.4% share of global GDP. India

is also home to a disproportionate

number of high-quality companies

(>15% 3 year revenue growth CAGR

and >15% ROIC).

We believe India’s growing population

and young demographic, and its efforts

to build digital, regulatory, financial and

physical infrastructure over the last

decade, will pave the way for growth

acceleration over the next decade.

This should drive India’s nominal GDP

growth, in U.S. Dollar (USD) terms

at high single digits, taking its GDP

from USD 3.5 trillion in 2022 to USD

8.1 trillion in 10 years according to

Morgan Stanley Research.

We have made multiple investments

in India since the inception of our first

strategy in 2006, across financials,

consumer and industrials. As a team, we

look for leading businesses with large

addressable markets, opportunities

to gain share and strong management

teams we can co-invest with for the

long term. We believe India offers an

attractive hunting ground to find ideas

that meet our criteria for long-term

value creation. We expect the evolution

of the Indian economy over the next

decade will support our bottom-up ideas

rather than act as headwinds, as we

have seen in other emerging markets.

There will be volatility in performance,

but we believe that well run, high-

quality businesses in India, purchased

at a discount to intrinsic value, can

outperform over the long run.

In this note we discuss how we see

the Indian economy evolving over the

next decade, the building blocks that

have been put in place to support this

growth and the broad areas where we

are finding opportunities for investment.

India spent the last decade

creating infrastructure

A decade back, India was struggling.

Post-Global Financial Crisis, India grew

quickly, but this was followed by a

sharp slowdown. Bad loans in the

banking system increased as corporates

struggled to repay loans taken to build

projects that proved to be unviable. This

created capital issues in the banking

system that lasted for almost a decade

and led to a slowdown in investment.

Cyclically, growth was also impacted

by some of the structural reforms put

in place by the government, including a

uniform value-added tax, real estate laws

regulating builders and demonetization.

India’s young population is a tailwind

for growth, but this must be enabled

by proper policies, and, in our view, the

reforms undertaken over the last few

years have set up the infrastructure

needed to sustain strong growth

over the next decade or more. We

categorize these changes in three broad

infrastructure groups:

DIGITAL INFRASTRUCTURE: India has

taken the path of setting up digital

infrastructure as a public good, which

can be used by private enterprises

to deliver services to citizens more

efficiently. This has enabled various

services, from financial system access

to government subsidies to COVID

vaccines, being delivered to even the

weakest sections of the country with

maximum efficacy. The foundation

of this infrastructure was a universal

Biometric ID system, Aadhar (Hindi for

“Foundation”), which was launched in

2009. Today, 1.3 billion Indians have

an Aadhar ID. This is used for multiple

services. For instance, in March 2023,

Aadhar was used to authenticate 2.2

billion transactions, of which ~300

million were Know Your Customer

(KYC) transactions. This lowered the

cost of opening a bank account and

enabled 500 million new accounts to

DISPLAY 2

India stands out on long term total return

Total Return CAGR, USD

Past performance is no guarantee of future results

30%

20%

10%

■

MSCI EM ■ MSCI India

20 Years 25 Years10 Years5 Years1 Year

Source: Morgan Stanley Investment Management, FactSet. As of date: 31 December 2023

THE INDIA OPPORTUNITY

JANUARY 2024 | OPPORTUNITY OPTIMUM

be opened in the last decade, easier

and more targeted subsidies from

government among multiple benefits.

A big driver for formalization in the

economy has been the consumer

real-time payment system UPI (Unified

Payments Interface), which launched in

2016. UPI has made mobile payments

seamless and enabled the transition

from cash to digital payments.

Increased willingness of consumers to

pay through mobile has also extended

to credit cards, where payments have

grown at a 26% CAGR since 2016.

FINANCIAL INFRASTRUCTURE: A large

portion of the population had no bank

accounts until a decade ago. It was costly

to open a bank account. There was no

incentive for banks to open accounts

for economically weaker parts of the

population, leading to the exclusion

of a large part of the population from

the financial system. In 2014, the

government announced banking for all

to jump-start financial inclusion. Since

then, ~500 million new bank accounts

have opened. This was enabled by

Aadhar, as the cost of KYC dropped, and

now a vast majority of the population

has access to banking. This, coupled with

the launch of UPI, has driven rapid digital

adoption for financial services.

POLICY AND REGULATORY

INFRASTRUCTURE: Multiple steps have

been taken over the last decade to make

policies more conducive to investments.

A key move was the implementation

of the Unified Goods and Services

Tax (GST) across India. The marginal

corporate tax rate was cut to 25%, from

35%, in 2019. The monetary policy target

was moved to inflation targeting with

a 4% target (+/- 2% band) in 2016—

since then rates/currency have become

less sensitive to moves by the U.S.

Federal Reserve. The implementation

of insolvency to the bankruptcy code,

coupled with proper recapitalization

of state-owned banks, has enabled the

system to recognize bad loans.

India established a new law governing

real estate to ensure property

developers met their responsibilities in

their contracts with consumers. This

cleaned up the developer segment,

though property was a drag on the

economy for a few years. But now,

with inventory levels at historic lows

and the remaining developers having

strong balance sheets, real estate is

likely to contribute to an acceleration

in economic growth.

As an emerging market, there is a

risk of volatility in policy moves, but

these changes have made it easier for

businesses to plan for the longer term

and invest.

Growth should accelerate

compared to the last 10 years,

resulting in a broader set of

investment opportunities

India’s Prime Minister, Narendra Modi,

says the next decade could be “India’s

moment.” This could be true as the

measures taken by the country over

the last decade start contributing to

more efficient production of goods

and services. Morgan Stanley research

expects GDP per capita to increase

from USD 2,400 in 2022 to above

USD 3,600 in 10 years. Investors have

compared India to China at similar stages

of growth trajectory, but the underlying

markets, economic infrastructures and

growth drivers for the two countries

are different. We believe the relevant

economy to compare India with could be

the United States in the 1980s—given

the regulatory backdrop, consumption as

a key economic driver and large private

ownership of businesses.

The size of India’s economy is similar

to where U.S. was at the beginning of

1980. In the 80s, U.S. nominal GDP

expanded at ~7.6% CAGR and personal

consumption expenditure (PCE) grew at

~8.1%, with some of the sub-segments

even growing by more than 10% CAGR.

This drove the S&P 500 to grow 12.6%

CAGR between 1980 and 1990. India is

now at a similar stage, with similar GDP

growth potential over the next decade.

DISPLAY 3

Retail digital transactions have gone up Since UPI was launched in 2016,

helping increase formalization of the economy

80%

60%

20%

F2022F2010 F2018F2016F2014F2012F2008F2006F2004

Retail Digital Transactions as % of India's GDP

10%

30%

40%

50%

70%

F2020

F1H24

40%

29%

19%

12%

3%3%

2%2%2%

1%1%

1%1%1%1%

57%

73%

Source: National Payments Corporation of India (NPCI); Reserve Bank of India (RBI);

Morgan Stanley Research. Forecasts are based on current market conditions, subject to change,

and may not necessarily come to pass.

THE INDIA OPPORTUNITY

OPPORTUNITY OPTIMUM | JANUARY 2024

Another factor that enhances Indian

equities attractiveness over the

long term is increased savings from

households in equities. Historically, the

Indian macroeconomy and its markets

were both dependent on global liquidity,

with the largest incremental investor

in the markets being foreign investors.

However, domestic mutual funds have

become larger and provide a more stable

and sustainable investor base. Domestic

equity assets under management (AUM)

in India is around USD 350 billion, up 10x

since 2014—their average ownership in

top 75 companies in India has increased

from 3.5% in 2014 to over 10% now, as

per Morgan Stanley Research. There

may also be stickiness in this domestic

flow into equities, with Systematic

Investment Plans (SIP)—plans for

individual investors to save a small

amount in equity funds every month—

now annualizing at close to USD 25

billion a year.

Broadening opportunity

set in India

A large proportion of Indian companies

are managed with a focus on long-term

shareholder returns. This is helped

by the fact that founders, called

“promoters” in India, own fairly large

stakes in listed companies. Promoter

ownership in the top 70 Indian

companies was 45% in September

2023, as per Morgan Stanley Research.

A large number of businesses are

focused on efficient use of capital,

given the high cost of capital in the

country, and this, coupled with the

strong economic backdrop, has driven

good market returns.

FINANCIAL BUSINESSES OFFER AN

ATTRACTIVE WAY TO INVEST IN THE

STRONG ECONOMIC GROWTH

Retail credit penetration in India has

increased over last few years but

remains low at 40% of GDP, compared

to the global average. This will likely

increase over the next decade as

consumption behavior changes and

digitization helps with efficient credit

delivery. There will be cycles, but

over the next decade, we expect

retail lending and Small and Medium

Enterprise (SME) in all forms to grow

at a CAGR in the mid-teens, driving

strong revenue growth for the system.

For more than 20 years a structural

theme for Indian banks has been the

transition of market share away from

state-owned banks to private lenders.

Given the importance of technology

in terms of offering new services, we

believe it will be difficult for state banks

to stem the continued market share

loss to private banks. This should help

better-run banks grow revenues in the

mid to high teens for multiple years.

As banks gain scale, operating leverage

will be meaningful. The combination

of a large market, significant market

share opportunity, operating leverage,

attractive valuations and governance is

tough to find globally.

INCREASING ABILITY TO SPEND

WILL HELP DRIVE PREMIUMIZATION

ACROSS SECTORS

Strong growth, a young population

and urbanization should continue to

drive consumption growth in India. The

population will also get richer, with

the proportion of households earning

over USD 8,000 a year likely increasing

from ~25% in 2021 to over 50% in

2031. Historically, a large part of the

consumer basket in India has been

concentrated in daily necessities, but

rising disposable income will change

consumption behavior to luxury, travel,

out-of-home dining, health care, beauty

and entertainment, among other

things. We believe there are well run

businesses in these segments, which

will compound in the long run:

1. LUXURY: There are growing signs

of Indian consumers spending on

luxury products. Apple opened its

first retail stores in India in 2023

and its revenues in the country

were estimated at USD 6 bn in

FY23, and Morgan Stanley research

expects this to increase to USD 40

bn in a decade. This is permeating

other segments, where consumers

DISPLAY 4

Retail credit penetration for India can increase over next decade

Retail Credit as a % of GDP

120

India

United

Kingdom

Germany

China

Global

United

States

Thailand

Korea

Australia

Indonesia

Brazil

Mexico

Emerging

Market s

Japan

Hong

Kong

Source: BIS Statistics Explorer, Morgan Stanley Research. As of Date: June 30, 2023.

THE INDIA OPPORTUNITY

JANUARY 2024 | OPPORTUNITY OPTIMUM

are premiumizing their purchases.

A key beneficiary of this trend is

likely to be the jewelry sector, given

the importance of gold for Indian

households, with India being the

second-largest importer of gold. The

sector is dominated by unorganized

players, but market share has been

shifting to organized players, a trend

accelerated by the government’s

digitization and taxation moves. As

Indians get richer, they’re likely to

consume diamond jewelry, which

would expand margins for retailers.

2. T RAV E L: More Indians are travelling

within and outside the country. The

investment in infrastructure, from

~70 cities with airports a decade

back to likely more than 200 by

2025, makes it easier for people to

travel within the country. This will

give rise to multiple businesses, from

online travel agencies to hotels. For

instance, current hotel infrastructure

is limited in India. In 2022, India had

160,000 branded rooms, compared

to 4.7 million in China, implying

significant room for growth. The

large hotel chains are focused on

profitability, adopting asset-light

strategies, driving up profitability

and becoming less exposed to

cyclical downturns.

3. FOOD DELIVERY: Food consumption

accounted for a quarter of India’s

GDP in 2019, dominated by

home-cooked food, at 90% of

consumption. Restaurant and food

delivery is underpenetrated, with

only 10% market share of the

total food market. We expect the

industry to grow steadily, driven

by socioeconomic factors including

rising urbanization, nuclearization,

more working women and higher

disposable incomes, and digitalization

will further accelerate the adoption.

4. HEALTH CARE: India’s health care

industry has grown at 12-14% CAGR

over the past five years, but it is

still underdeveloped compared

to the global market. Health care

expenditure in 2022 was around 2%

of GDP vs. the U.S. at 18%, China at

6%, the United Kingdom at 11% and

Brazil at 13%. Aside from traditional

hospital and pharmacy services, digital

health can be an interesting area given

the high smartphone penetration

rate, 75% of the population living

outside urban centers and digital

health care adoption being boosted by

the pandemic.

Indian markets have delivered strong

returns over the last two decades and

many investors, even in the emerging

markets, have missed out. We believe

the backdrop of economic growth

acceleration and more prosperous

households, will likely provide well-

run businesses the opportunity to

gain share and improve efficiencies.

This will provide numerous attractive

Indian businesses to invest in across

our team’s strategies. May all your

investing be filled with opportunity.

DISPLAY 5

India’s Household Income Distribution shows middle class will dominate the economy by 2030e

High

(>US$40K, Rs30L)

Upper-Mid

(>US$8K, Rs6L)

Lower-Mid

(<US$8K, Rs6L)

Low

(<US$4K, Rs3L)

Total: 219 million Total: 293 million Total: 386 million

2030F20182005

1 million

(1%)

16 million

(7%)

51 million

(23%)

151 million

(69%)

8 million

(3%)

61 million

(21%)

97 million

(33%)

127 million

(43%)

29 million

(7%)

168 million

(44%)

132 million

(33%)

57 million

(15%)

Households

e=estimated

Source: World Economic Forum, Bain, Macquarie Research, Future of Consumption in Fast-Growth Consumer Markets: INDIA, January 2019. Forecasts/

estimates are based on current market conditions and subject to change, and may not necessarily come to pass.

THE INDIA OPPORTUNITY

OPPORTUNITY OPTIMUM | JANUARY 2024

DEFINITIONS

Compound Annual Growth Rate (CAGR) is the year-over-year growth rate

of an investment over a specified period.

Gross Domestic Product (GDP) is the monetary value of all the finished

goods and services produced within a country’s borders in a specific time

period. It includes all private and public consumption, government outlays,

investments and net exports.

Personal Consumption Expenditures (PCE) is a measure of price changes in

consumer goods and services. Personal consumption expenditures consist of

the actual and imputed expenditures of households; the measure includes data

pertaining to durables, non-durables and services. It is essentially a measure of

goods and services targeted toward individuals and consumed by individuals.

Return On Invested Capital (ROIC) represents the rate of return a company

makes on the cash it invests in its business.

INDEX DEFINITIONS

The S&P 100 Index, a sub-set of the S&P 500, measures the performance

of large cap companies in the United States. The Index comprises 100 major,

blue chip companies across multiple industry groups. Individual stock options

are listed for each index constituent.

The MSCI All Country World Index (ACWI) is a free float-adjusted market

capitalization weighted index designed to measure the equity market

performance of developed and emerging markets. The term “free float”

represents the portion of shares outstanding that are deemed to be available

for purchase in the public equity markets by investors. The performance of

the Index is listed in U.S. dollars and assumes reinvestment of net dividends.

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and there is a significant possibility of loss. Furthermore, because the strategy concentrates in a single region of the world, performance

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buy or sell for any product, service, security and/or strategy. A decision to

invest should only be made after reading the strategy documentation and

conducting in-depth and independent due diligence.

ASIA PACIFIC

Hong Kong: This material is disseminated by Morgan Stanley Asia Limited for use in

Hong Kong and shall only be made available to “professional investors” as defined

under the Securities and Futures Ordinance of Hong Kong (Cap 571). The contents

of this material have not been reviewed nor approved by any regulatory authority

including the Securities and Futures Commission in Hong Kong. Accordingly, save

where an exemption is available under the relevant law, this material shall not be

issued, circulated, distributed, directed at, or made available to, the public in Hong

Kong. Singapore: This material is disseminated by Morgan Stanley Investment

Management Company and should not be considered to be the subject of an

invitation for subscription or purchase, whether directly or indirectly, to the

public or any member of the public in Singapore other than (i) to an institutional

investor under section 304 of the Securities and Futures Act, Chapter 289 of

Singapore (“SFA”); (ii) to a “relevant person” (which includes an accredited investor)

pursuant to section 305 of the SFA, and such distribution is in accordance with

the conditions specified in section 305 of the SFA; or (iii) otherwise pursuant

to, and in accordance with the conditions of, any other applicable provision of

the SFA. This publication has not been reviewed by the Monetary Authority of

Singapore. Australia: This material is provided by Morgan Stanley Investment

Management (Australia) Pty Ltd ABN 22122040037, AFSL No. 314182 and its

affiliates and does not constitute an offer of interests. Morgan Stanley Investment

Management (Australia) Pty Limited arranges for MSIM affiliates to provide

financial services to Australian wholesale clients. Interests will only be offered

in circumstances under which no disclosure is required under the Corporations

Act 2001 (Cth) (the “Corporations Act”). Any offer of interests will not purport

to be an offer of interests in circumstances under which disclosure is required

under the Corporations Act and will only be made to persons who qualify as a

“wholesale client” (as defined in the Corporations Act). This material will not be

lodged with the Australian Securities and Investments Commission.

Japan

For professional investors, this material is circulated or distributed for informational

purposes only. For those who are not professional investors, this material is

provided in relation to Morgan Stanley Investment Management (Japan) Co.,

Ltd. (“MSIMJ”)’s business with respect to discretionary investment management

agreements (“IMA”) and investment advisory agreements (“IAA”). This is not for

the purpose of a recommendation or solicitation of transactions or offers any

particular financial instruments. Under an IMA, with respect to management of

assets of a client, the client prescribes basic management policies in advance

and commissions MSIMJ to make all investment decisions based on an analysis of

the value, etc. of the securities, and MSIMJ accepts such commission. The client

shall delegate to MSIMJ the authorities necessary for making investment. MSIMJ

exercises the delegated authorities based on investment decisions of MSIMJ, and

the client shall not make individual instructions. All investment profits and losses

belong to the clients; principal is not guaranteed. Please consider the investment

objectives and nature of risks before investing. As an investment advisory fee for

an IAA or an IMA, the amount of assets subject to the contract multiplied by a

certain rate (the upper limit is 2.20% per annum (including tax)) shall be incurred

in proportion to the contract period. For some strategies, a contingency fee may

be incurred in addition to the fee mentioned above. Indirect charges also may be

incurred, such as brokerage commissions for incorporated securities. Since these

charges and expenses are different depending on a contract and other factors,

MSIMJ cannot present the rates, upper limits, etc. in advance. All clients should

read the Documents Provided Prior to the Conclusion of a Contract carefully

before executing an agreement. This material is disseminated in Japan by MSIMJ,

Registered No. 410 (Director of Kanto Local Finance Bureau (Financial Instruments

Firms)), Membership: the Japan Securities Dealers Association, The Investment

Trusts Association, Japan, the Japan Investment Advisers Association and the

Type II Financial Instruments Firms Association.