Aussie mid-caps that could benefit from India’s growth story

INDIA’s growth story — propelled by reforms and digitalisation — was recently highlighted by Pendal’s emerging markets team.

But Aussie equities investors need look no further than the local bourse for stocks with exposure to the sub-continent, says Pendal portfolio manager Brenton Saunders.

Saunders, who leads Pendal MidCaps Fund, recently returned from a research trip in India.

“India — a democracy of 1.4 billion people — has had a number of false starts in growth, political and economic reform,” says Saunders. “But now it’s had four or five years of achieving reform.

“Sovereign wealth funds and private equity money is moving into the economy.

“India has a lot of similarities to China in the early 2000s with it’s fast-growing, economically-active population. “

“Right now only about 70 million indians are economically very active — and they’re responsible for the recent growth. But that number is accelerating.”

A growing middle class

On his recent trip, Saunders observed rising literacy rates, improving education standards and a huge, skilled workforce.

“There are a lot of foreign-educated business school graduates and engineers who have returned to India.

“They are very entrepreneurial and successful at sourcing capital and building businesses.”

With a growing middle class, there are opportunities across the economy, from consumption to infrastructure and housing, Sauders says.

ASX-listed stocks with India exposure

Property-focused digital advertising business REA (ASX: REA) is an example of an ASX-listed mid-cap with a presence in India.

“REA is taking its home-grown skill set and applying it in a marketplace where private ownership of real estate is still at a formative level, and consumption is growing with demand for new and better housing.

“There’s a lot of technology associated with price discovery and sourcing of properties by commercial and private buyers.

“That’s where REA is strong. It has a powerful, well established, AI-based classifieds platform, which it can leverage into a very fast-growing real estate market that is gaining momentum.

“It’s a small but fast-growing business in India with a very impressive management team.”

While the REA business in India isn’t “needle-moving” yet, it does provide an opportunity for the mid-cap in coming years, Saunders says.

Another Aussie mid-cap operating in India is IDP Education (ASX: IEL), a former Seek-owned operation which listed on the ASX in 2015.

“IEL has established a powerful global students placement business and has a big share in the world’s largest English language proficiency testing business,” Saunders says.

“India makes up the biggest geography for those businesses globally.

It has about half a million students in terms of placements into foreign universities and education facilities. Mostly they are going into Commonwealth countries like Australia, Canada and the UK – all big beneficiaries.

“IEL is by far the largest incumbent and most respected provider in India,” he says.

Competition has increased for IEL with a growing number of well-funded competitors in the space in India.

“That competitive dynamic is still going to play out in terms of placements and English language testing.

“But the system is still growing. There will be a bigger part of the population wanting to become more English proficient and travel for education as GDP per capita continues to increase.

“Remember, there’s 70 million active consumers in the Indian market. You can expect that to double over the next seven or eight years.

“And that provides enormous opportunity for anyone that is well positioned in the Indian marketplace.”