A twenty-two-year veteran of investment banking and HBS alum returned to her alma mater and found the perceptions about her home country, India, much changed. "We've come a long way from being seen as a land of snake charmers and famine," said Naina Lal Kidwai (HBS MBA '82), the first Indian woman to graduate from Harvard Business School.
"I gauge the spirit of India through its capital markets," continued Kidwai, who is managing director and vice chairman at HSBC Securities and Capital Markets (India) Private Ltd. With a threefold increase in the stock market over the past twelve months, India is clearly in good spirits. Kidwai, who Time magazine named one of fifteen "Global Influentials" in 2002, outlined why she believes the current rally is more than a flash in the pan. She spoke to an overflow audience of MBA students on April 4 as a keynote speaker at the first Indian Business Conference at HBS.
India's ratio of global market capitalization to GDP is still quite low, and its global price/earnings ratio averages 16 to 17—so its companies don't appear to be overvalued at this point. There has also been significant flow into the capital markets, with $2.5 billion in issuances offered recently by the Indian government.
Other factors that Kidwai believes will contribute to the Indian market's long-term success:
- The market's underlying system for processing transactions is world-class. "It's been tested to the hilt with a huge amount of issuance and coped beautifully," said Kidwai.
- The SEBI (India's equivalent of the SEC) is strong, vigilant, and on the right track.
- There is increasing liquidity of stocks.
- There is growth in the futures and options markets, as well as global funds markets.
India's economy looks different today than it did in the past, said Kidwai. Retail consumption is no longer the dominant engine of growth; instead, corporate investment in capacity additions may soon become the economy's prime driver, thanks in part to low interest rates. Corporations are unlikely to repeat mistakes of the mid-1990s, when they overestimated demand at a much higher cost of capital. Today, demand is pushing some companies to work well over their current capacity, but there's a clearer understanding of the market and a company's core competencies. Any upgrades to capacity will most likely be put to good use.
Beware the negaholics
Industrial sectors behind India's current growth include infrastructure, steel, engineering, and chemicals, said Kidwai, while growth in the capital goods markets is being driven by the electrical, automobile, telecom/IT, railway, and medical sectors.
| We've built the roads and ports, but there's already more traffic than we'd want. |
Kidwai countered the naysayers who believe India's current growth won't last. "For the first time, companies are engaging in why they should be in a particular business," she said. There's been a shift in thinking, from an inward-looking India to one that measures its products against the global competition. Companies have also learned to focus on the customer and apply a more rigorous approval process to new investments. While the stock market rally of the mid-1990s was driven primarily by IT, she added, the current surge has been seen across all sectors.
It's all good news, but there are other factors to consider in assessing the market's future, such as:
- The outcome of pension sector reforms.
- The need for a more developed VC/PE market.
- Family-owned companies. "India has a number of these. Will they allow dilution of their holdings in favor of growth? Or will they try to hold on to their stake?"
- The need for a healthier M&A and restructuring environment.
- Potential consolidation in the banking sector.
India's largest weakness continues to be infrastructure, said Kidwai. "We've built the roads and ports, but there's already more traffic than we'd want." She described India's airports as "those horrible gateways to our country," adding, "The good news is that they're finally up for privatization. The bad news is that we will still have to cope with it for a while."
Agribusiness and food processing are neglected industries that employ 60 percent of India's population and contribute 25 percent of India's GDP, she added. Another negative is the unit cost of electrical power, one of the highest in the world. "There are serious efforts afoot to privatize the distribution and transmission of power," said Kidwai. "Delhi has demonstrated that with a good chief minister, it can happen." In general, however, a bureaucratic government and high tax structure are hindering, not helping, growth.
Kidwai hastened to highlight India's success stories, with the automotive sector leading the pack. Multinationals like Ford and Hyundai are using India as a manufacturing base for auto components, and its own Tata Motors is enjoying significant success with the mid-sized Indigo model. Pharma is also doing well, as is telecom, with an average of 1.5 million new subscribers each month.
To some extent Indians have become "negaholics" who aren't taking full stock of the economy's promising trends, said Kidwai. It's easy to forget the positives when the negatives (such as those terrible airports) are so visible on a daily basis, she continued. Perhaps Indian nationals living abroad have a clearer perspective on India's future potential.
"This is clearly India's moment. But it is only a moment," Kidwai cautioned. "Can we grasp it?"
The student-run conference was organized by the South Asian Business Association (SABA) at Harvard Business School. 