December 2024 / Q3 FY25

01Zooming Out: India’s Long-Term Opportunity

History offers valuable lessons on how emerging nations can transform into economic juggernauts. China, South Korea, and Japan took distinct paths but shared key strategies — manufacturing, exports, and infrastructure. Their macroeconomic indicators provide a lens to assess India’s growth story.

1ALaying the Groundwork: Bold Reforms & Vision

China, Japan, and South Korea each embarked on transformative policy overhauls to catalyse long-term development. While their contexts differed, they converged on four essential pillars:

Through a blend of government incentives, strategic capital allocation, and corporate alliances, these economies laid robust foundations that supported years of growth. These strategic reforms also brought challenges — rising inequality, environmental costs, and economic dependencies that required continuous adaptation.

1BProduction-Driven Growth

Major economic powers achieved rapid growth by opening up to global markets, prioritising exports, and supporting domestic manufacturing with subsidies, tax incentives, and infrastructure investments. This strategy created a virtuous cycle:

Engines of growth are built on manufacturing strength. Over decades, we’ve seen:

This production-led model also unlocks technological advancement and workforce upskilling — further improving global competitiveness.

1CExport Engines: Amplifying Global Influence

By strategically aligning domestic production with global market demands, these economies leveraged exports as a catalyst for rapid expansion:

Export-driven growth not only boosted GDP but also facilitated technology transfers, enhanced global brands, and large-scale inward FDI — forming a self-reinforcing loop that expanded each country’s economic profile.

1DImpact on Wealth Creation: Equity Markets & Beyond

Rapid increases in output and exports typically translate into soaring corporate profits, attracting both domestic and foreign investors. Not surprisingly, equity markets in these high-growth nations delivered impressive returns:

Market gains often spilled over into property, infrastructure, and household incomes, culminating in broad-based wealth creation. This underscores a fundamental rule: when GDP and corporate earnings grow in tandem, investors stand to benefit substantially.

02Where Does India Fit In? A Familiar Strategy

2AMajor Reforms

Over the past decade, India has methodically implemented structural reforms inspired by the East Asian growth playbook. These reforms are now translating into tangible economic gains, setting the stage for India’s rise as a top-three global economy by 2030.

2BIndia’s GDP Growth

Economic history suggests that emerging economies undergo sustained high-growth phases when structural reforms align with global economic shifts. India is now in a similar phase:

India’s GDP growth in the post-COVID period has exceeded 8%, closely aligning with the historical growth trajectories of China, Japan, and South Korea during their formative years. Prior to the pandemic’s disruption, India maintained a steady growth rate of over 7%.

2CIndia’s Manufacturing Boom

Since 1995, India has been the second-fastest-growing contributor to global production, increasing its share by 2–3%. As global supply chains look beyond China, India is positioning itself as a key alternative.

India’s manufacturing sector has rebounded strongly after COVID-19, despite temporary setbacks from global supply chain disruptions due to the Russia-Ukraine conflict. This recovery signals the dawn of a new manufacturing era, with India poised to become a top-three global production hub.

2DTargeting Exports: The Next Growth Frontier

Global tensions with China and declining manufacturing in parts of Europe have positioned India as a prime hub for new export-driven growth.

Multinational industry giants have established both greenfield and brownfield projects in the country — bolstering India’s foothold across electronics manufacturing, renewable energy, defense, textiles, chemicals, and automotive parts.

Over the past few years, India’s merchandise exports have experienced a sharp turnaround:

India’s exports are growing at a 14.4% CAGR, a sharp reversal from the -1.02% decline between 2015 and 2021. This growth is driven by global supply chain shifts as companies reduce reliance on China, along with policy changes like President Trump’s tariffs on Chinese goods, which have boosted demand for Indian exports.

03Outlook for 2025: Market Dynamics and Portfolio Strategy

After a remarkable rally, the equity markets took a breather as valuations soared and select Q2 FY25 earnings fell short of expectations. Since December 31, 2024, the NIFTY Small-Cap 100 index has corrected ~7%, yet our portfolio is down only 0.8%, highlighting the benefits of a staggered buying approach and cherry-picking businesses.

Despite a “mixed bag” in recent earnings, our portfolio comfortably trades at 21.8× FY25E and 16× FY26E PAT, suggesting room for growth as fundamentals catch up with prices. We have long maintained that “returns eventually follow earnings,” a stance reinforced by sharper corrections in high-valuation names lacking strong profit growth. We expect this trend of valuation resets to continue in pockets where earnings disappoint, making 2025 a “stock picker’s market”.

Looking ahead, we are well-positioned to capitalise on potential market dislocations with our 16% cash position. This quarter, we initiated a position in a telecom EPC firm, attracted by its compelling macro tailwinds and high entry barriers. Additionally, we have several companies on our watchlist that could be added to our portfolio should they align with our valuation criteria.

Pulling It All Together

Short-term volatility and sector-specific earnings hiccups cannot obscure the broader macro opportunity that India’s evolving growth story presents. As we’ve highlighted, structural reforms and rising exports have unlocked new drivers of sustainable economic expansion — mirroring patterns seen in other global success stories. Although corrections are inevitable, quality companies with healthy balance sheets and robust earnings potential should emerge stronger over the long run.

We sincerely thank you for your continued trust in Equitree Capital. Our team remains dedicated to navigating market fluctuations with discipline and conviction, consistently aiming to build lasting value for all our investors.

Should you have any feedback or require further information, please feel free to reach out to us.

Sources

01

PMS Bazaar — PMS rankings across 850+ schemes (1-month, 1-year, 3-year, 5-year time frames) as of December 2024.

02

Nuvama Custodian Services; Equitree Capital internal performance and NAV records (December 31, 2024). Returns are TWRR, net of fees and expenses, and not verified by any regulatory authority/SEBI.

03

Ministry of International Trade and Industry — Reform timelines for China (post-1980), South Korea (post-1962), and Japan (post-1952).

04

CEPR.org; Foundation for Economic Education — Country-wise share of global manufacturing output, 1970–present.

05

Kellogg Institute — The Korean Miracle; Macrotrends — Country export trajectories during high-growth phases (China 1980–2000, South Korea 1965–1981, Japan 1952–1970).

06

Bloomberg — Equity index growth across China (Shanghai Composite), Korea (Kospi), Japan (Nikkei 225), and India (Nifty 50).

07

Reserve Bank of India (RBI) — Foreign trade, manufacturing, and merchandise export data (post-2014 reform era).

08

RBI; Kellogg Institute — The Korean Miracle; Yale University — Postwar Economic History of Japan; Bloomberg — Cross-country GDP growth comparisons.