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Dear Jim,
Our relationship is one way. I have heard you few times in person and many times in print. You might not know me but I am part of a team which has produced seven times more USD returns than Berkshire Hathway over the last 17 years. We have beaten benchmark index by double the margin of Warren Buffet's outperformance since our inception.
I recently read your interview about India. You made some profound statements. I am taking the liberty of putting them in right context. We have a weakness of giving disproportionate weightage to what foreigners say and hence it is important to convey correct picture to everyone.
Jim Rogers - Stock market performance is not equal to India's performance.
Nilesh Shah - I completely agree that India should focus on economy rather than on markets. India should focus on Domestic Investors and FDIs rather than hedge fund managers. India should not give undue attention to markets as it can run ahead of economy on bullish sentiments and can fall behind on bearish sentiments. Thank you for letting us know that the economy drives markets and not other way round.
Jim Rogers - I had bought shares in India-it was one of the few times I've done that in my life, and it was because of the new government.
Nilesh Shah - India should have been part of your core portfolio. While many banks in your part of the world trade at a price which was first seen in early 90s, my parent company, Kotak Mahindra Bank has gone up 186 times in USD since 1997. You would have made far more money if you were an investor in India rather than a trader. I will urge you to consider investment in equity mutual funds as most of us are outperforming benchmark indices by a margin which will make you astonished.
Jim Rogers - First, get rid of exchange controls and make it easier for foreigners to invest in India.
Nilesh Shah - Please show me one market where the largest bank, mutual fund, telecom company, consumer staple company etc. is majority owned by foreigners. Foreigner's easy access to India is demonstrated by the fact that they own more than half of the free float in just about two decades. India also permits P- Note investment to facilitate investments. Even at the bottom of the stock market in 2008 or sharp rupee depreciation in mid-2013, FIIs had full freedom to take their money out. While we have few things to improve on taxation related issues there are no exchange controls for foreigners. You should actually be asking India to enforce its exchange control rules unless you are long Swiss banks.
Jim Rogers - I still own Indian shares, and I wonder if I should continue holding, because, after a year of no action, you begin to wonder if anything is going to happen.
Nilesh Shah - It will be unfair to judge India from the headlines. Any economic parameter be it GDP growth, inflation, fiscal deficit, Current Account Deficit (CAD), currency volatility, foreign exchange reserves, sovereign rating, interest rates for government and corporates, savings rate, investment rate have shown significant improvement over last 12 months. Qualitative parameters like transparency in decision making, availability of decision makers and regulators, auctioning of natural resources, government's push for infrastructure development etc. also shows significant improvements over the last 12 months.
Let me narrate few incidences which will help you understand that things have started moving on ground.
- I met a road contractor. He had bid for the NHAI project on E Tender basis and got the LOA in three hours on e mail. In previous era it used to take 6 months. Government is planning to spend 4 times more than last year for building of roads. It will be fair to say that "aache din" are coming for the road sector.
- I met an Iron Ore miner. As you are aware many iron ore mines are closed due to court orders. India had to import iron ore in last few years to run its steel plants. Iron Ore mining is likely to begin in Odisha in near future boosting domestic production by more than 20 %. Many coal mines will also become operational post auctions to sustain mining boom.
- I met a Railway Contractor. He mentioned that railway orders have started flowing with transparency in tendering. As the rules of games are changing there is a little bit of turmoil as old business models are giving way for new and better business models.
- I met a Power Equipment Supplier who mentioned that there is a hope for future as PSUs have started giving orders.
There are many people who are complaining for things which are not accomplished or the pace of change is not up to their expectations. However an oil tanker can't run at the pace of a speed boat. We are not the most perfect nation on earth. We need to manage pulls and pressure of democracy. Our infrastructure is below global standards. Our governance needs to improve. We have to ensure that trade and commerce is encouraged. We need to create jobs for millions of young people who are aspiring for better life. We have to improve our standard of living, lift millions of people from poverty. The journey has just begun and destination is far away but that is what is making the journey attractive. Despite many more challenges in the past, SENSEX has delivered 8.9 % return in USD since 1991. I am sure future will be more rewarding for patient investors.
Apple is the world's largest market capitalization company. It has gone where no other company has gone in terms of market capitalization. It has a fan following all over the world. It is an iconic brand and has a pull all through the world. It has delivered a compounded return of 19 % p.a since 1991. We have many companies which have operated in India alone and without the pull of a brand Apple, have delivered better returns in USD terms than Apple has over last many years. More importantly they have similar growth potential which they had decades back to build India growth story.
Jim Rogers - I bought Chinese shares last week, even though it was going through the roof. The risk at this point in China is that it looks like there is a bubble developing.
Nilesh Shah - Chinese markets having doubled in last 12 months are probably a bit over valued. The Chinese government is trying to cool down market boosted by the cheap and easy leverage to domestic investors. India has outperformed China by more than two times in USD over last 15 years. In one state of India called Gujarat, without the benefit of undervalued currency, lenient pollution norms, access to huge foreign flows or autocratic government which provided cheap land, labour and capital, we have grown at a rate better than China for last 15 years. If we can replicate the Gujarat model across India, we will create an alternative growth model. It will be fair to say that both China and India need to be part of your core investment portfolio.
Jim Rogers - Rating agencies rarely get it right about anything.
Nilesh Shah -I completely agree that rating agencies have been unfair to India. Despite the longest track record of non-default since Harappa and Mohenjo Daro days India gets a much lower rating than what it deserves. One day I am sure rating agencies will look at our over 5000 year's track record to assign a rating or maybe we need to learn art of marketing India to rating agencies.
Jim Rogers - I am not saying he ( RBI Governor ) is great-all central bankers are bad-but, he is certainly the least bad. Nilesh Shah - It is a very unfair statement on the central bankers. Our governors have been doing a great job. They manage conflicting objectives of: -
Stable rupee Improving growth Controlling inflation Maintaining banking system stability and Managing government's borrowing program.
Many foreigners make a comment on our system without understanding our scale of operations. When our railways carry more than the population of Australia every day on its network, they need to be evaluated on separate benchmarks. Your economies are based on surplus capacity. Our economy is based on over utilisation of capacity. I will recommend you to visit a Kumbh Mela to see what the complexity of managing India is and how successful India is in managing this scale.
Jim Rogers -I own gold. But I've constantly said I am not buying gold. I expect another opportunity to buy gold sometime in the next year or two.
Nilesh Shah - As you must be well aware, Indians are the largest owner of gold in the world. Gold prices are supported by the Indian consumption. We have spent more money in importing gold, silver and diamonds than the FDI and FII flows in last 5 years. In the current budget Government has announced two schemes of gold deposits and gold lending and borrowing along with stringent laws against black money. If executed well, these schemes have ability to reduce Indian's craze for gold. If India stops importing gold, you can guess where the gold prices will move.
I have always found that instead of investing in gold it is better to invest in golden entrepreneurs. Since the inception of SENSEX, it has outperformed gold by more than 21 times in USD in last 35 years.
India is changing with existing business models being replaced by the newer and better models. Crony capitalism is giving way to transparency. There will be many winners and few losers. Don't go by the headline. Do your own analysis and be a part of fabulous opportunity which Indian market is today providing you.
When I heard you first time at a mutual fund award function decades ago, you mentioned that one should invest in orange juice and sugar. I bought Indian Sugar Stocks which multiplied far more than physical sugar. Most of the time, it make sense to listen to all but choose your own path. We need many friends like you to pass the true message of Indian growth story to investors.
Your well wisher
Nilesh Shah
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