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Monday, February 26, 2007

'Tata Motors could be the next GE'

Born in Kolkata, he got a scholarship to study in the US. He majored in economics and with a minor in mathematics from Davidson college. Today, as a Portfolio Manager for Emerging Markets Management, LLC, Arindam Bhattacharjee is one of the larger investors in India.

After he graduated he says, "I actually applied to the World Bank and after a wait got in as a consultant. Initially, with the infrastructure financing division at IBRD, which is part of the World Bank that finances big infrastructure projects and other projects in developing countries. My role was really to assess a lot of these projects with the technical teams, look at the financial aspects of it, analyse the cashflow, go and actually look at the projects in these countries."

These projects took him to Africa and South-east Asia, where the country in question could not afford to finance the project or the commercial banks were not willing to lend finances for it. He witnessed a huge dichotomy in South Africa, that is probably as apparent here - that a section of the population had high standards of living while the others just barely survived.

He told CNBC-TV18, "It was a strange dichotomy because in terms of GDP per capita, South Africa was a middle-income country. In terms of the population of 40 million people, about 5 million people led a life that was equivalent to European standards- very high per capita income. However, the rest of the country was actually a very poor country because they had almost 35% unemployment rates and the black population, (the disenfranchised) in those days, actually had a per capita income, which was probably less than $300 per year. So there was a huge dichotomy between the two."

So, while working with the World Bank, he got his business degree from the American University at Washington DC and moved to the IFC, which is the arm of the World Bank that finances private companies in developing countries and in emerging markets. It was around this time, that he began to look at equity in emerging markets with the focus being on southern, eastern and northern Africa.

But despite a measure of success in Africa, it is still a forgotten continent compared to Asia. Asia, on the other hand is steaming ahead, which is why experts are calling it the Asian century. He elaborates, "Asia itself has gone through restructuring. We started out in the early 90s, when there were economic miracles. Then, they went through a major crisis because the development model was skewed and it was not sustainable."

"It was export-oriented but funded by short-term financing and was running huge current account deficits, which the US is doing now. Clearly that took its toll and a lot of these countries went back from close to becoming middle-income countries (Indonesia and Thailand) to being very low-income countries."

"What we are now seeing is that, the basic principles are in place. The emphasis on education - a very strong, technically educated force. In a lot of these countries, English is spoken. So you have a workforce that is very well motivated, well educated and the fact that they constantly innovate in their processes and also have to work with a lot of difficult conditions in these markets. They are also focused on the fact that, the only way forward is to harness their entrepreneurial spirit in these countries."

Emerging markets are so hot right now because saturated markets are looking for a more diverse portfolio and better returns. He explains, "Today investors look at returns that are so muted from anywhere in the world, where earnings are at all-time high, return on equity, RoE, are at an all-time high, so the mature markets are really looking at incremental returns and they would want to go anywhere in the world to get that incremental return. So, the ability or the appetite for risk has increased."

"They are focusing on the future. They are saying that these are countries and companies in these countries are now having critical mass and over the next ten to thirty years, the global multinationals of the world will come from emerging markets, rather than from the US. So don't be surprised if the next GE is from emerging markets. Tata Motors might be the next GE."

He warns though that the competitive cost structures won't be around forever and that as wages escalate in India, cost erosion will take place. He adds, "The second aspect, which is very important, is the domestic markets. They are now much bigger with 10-15 years of good growth, in these markets and with interest rates have been brought down, affordability is much higher. So, emerging markets, incrementally, now provide 50%-70% of the growth - led by China and a lot of the global multinationals. So this has opened up a huge domestic market for companies."

He also feels that India is actually a more attractive destination than China. As an investor in the Indian stock market and having looked at companies from the bottom up, he realized Indian companies were more attractive.

He says, "Indian companies actually have a true cost of capital. So there is a big focus on profitability and it has been magnified in the last five years. There has been a lot of focus on cashflow generation. These are companies - while a lot of them are very small but they have the ability to scale up their business models, restructure and become globally competitive after trade barriers came down in the late 1990s.

"In China, on the contrary, what we see is that the top-down picture is very attractive. The government has been very sanguine on getting investments and we all know that China gets close to $70 billion of foreign direct investment, FDI, and great infrastructure. But the quality of the companies are much inferior. A significant portion of the domestic markets are state- owned enterprises, that are heavily mismanaged and those that have been privatised are also having significant corporate governance issues and low profitability. I also think that the realisation that minority investors actually look for profit is not there in China. That is the biggest difference."

But that apart, China will actually pick itself up from any economic slowdown and continue to be a dominant global power. Meanwhile, he says, if India gets all of its reforms and restructuring in place, then India could actually take some of that burden from China and provide the growth engine into the next century.

While, he looks at companies balancehsheets, he also checks out the management and sees if they are cost competitive, have a niche in the market, have innovative technology and can it hold on in a fight for marketshare, when it comes down to it. Also, whether the management has actually delivered on promises they have made matters.

He explains. "Actually spending time with their clients, their supply chain managements and their vendors helps us to see what do they think of the management, because sometimes that is a great indicator of their capabilities. If their clients or their suppliers don't have confidence in them, then as investors we shouldn't either."

However, for the moment, he is bullish on India. He says, "Our allocation to India is almost about $1 billion at current NAV. It is actually a very fairly diversified portfolio. We run fairly concentrated positions in terms of the number of holdings that we have in the portfolio, but it is diversified across various sectors. Among the holdings, we have a lot of midcaps or smallcaps companies and a combination of companies that we believe would grow into a largecaps over a period of time."

Another region that he thinks is an upcoming emerging market is Latin America but on the whole, he affirms, this century does in fact belong to Asia.

Written for www.moneycontrol.com

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