India: Probe Equity Research

I enjoyed my meeting with W.S. Ravishankar, CFA.  Ravi runs Probe Equity Research.  They describe themselves as “an investment research and analytics company based out of Bangalore, India.  We provide high quality, in-depth coverage of companies, analytical models, and indices. Our clients include corporations, private equity firms, venture capital firms and fund managers in India, the United States and Europe.”

Ravi is a true expert on India’s financial markets, and Probe employs 80 people.  Here are some of the highlights from our discussion:

India is 10 years behind China, but India boasts a very open economy with a lot of available information.  It is often difficult to aggregate this information.

Historically, India is a high inflation economy.  Given this fact, individuals were quick to put money in gold.  In rough numbers, the Indian mutual fund industry is about $55 billion.  In 2011-2012, Indians put $55 billion into gold.  Controlling inflation is key.  With high inflation, the Indian government is paying interest at around 8%.  This requires about 15%-20% of government revenues to service interest.  Bringing down inflation (and interest rates) would help solve the government’s fiscal deficit.  Over the prior 6 years, inflation was often in the 10-12% range.  This shocked the consumer.  This has dramatically changed in the last six months, with inflation dropping to 4-5%.  With the inflation cycle broken, it could usher in a huge consumer boom over the 6-8 years.

India is very dependent on oil imports.  If commodity prices remain low, this would be a great benefit to the Indian economy.  Demographics will be of great benefit to the Indian economy.  Again, rough numbers, but Ravi estimates that the Indian mortgage market is about 8% of GDP.  In developed countries, the mortgage market is between 40-50% of GDP.  The demographic, consumer boom will be of great benefit to housing in India, and all of the industries that support housing and infrastructure. 

Infrastructure is succeeding in pockets of the country, but urban infrastructure has been poor.  In India, Ravi believes that capital is not the problem, but the economy needs to remove the bottlenecks of bureaucracy to move forward in an efficient manner.  One of the big picture positive points for India, is that it is moving from a socialist economy to a capitalist economy.

Ravi was clearly optimistic about the long-term opportunities in India.

Special thanks to Brennan Staheli, Peter Johnson, and the Lunt Capital team for their contributions to this report.