Sparx Asset’s Kohei Matsui on why Japanese investors like India

Kohei Matsui is no stranger to India. As the portfolio manager of the Asia (Ex-Japan) Fund of Sparx Asset Management — one of the largest independent money managers in Asia -- Matsui is studying India more closely than before and is looking to increase the fund’s exposure. In an interview with ET on the sidelines of Motilal Oswal’s global investor conference, Matsui shared his views on various issues.

How do Japanese investors perceive India?
One fact I can share with you is that one of the largest mutual funds in Japan is an India-dedicated fund. Judging from this especially, retail investors like India as a market because India has long-term growth. Also, in Japan, the mindset is that Indians are really good at IT. We think that the country is heading into the future.

Japanese companies are looking to move supply chains out of China. How much will India benefit from this?
I was looking at some data. There are over 1,400 Japanese companies operating in India and this number is growing every year. If you look at Vietnam, there are 1,800 Japanese companies. So far, we have seen faster growth in Vietnam than in India and the number of Japanese companies is growing faster in Vietnam than in India actually. But, eventually, what we need is a huge demand that Vietnam doesn't have and India has.

Supply chain companies in automotive and machinery need a domestic demand to support their capacity if they expand a lot. They cannot solely rely on exports. So, I expect India to overtake Vietnam eventually. But, in China there are about 13,000 Japanese companies. So, there is a huge gap between China and India.


What do you think India needs to get more of these Japanese companies here?
Everyone understands the growth potential in India. Japanese corporates tend to be slow to move into a market but once they come in, they stay longer. One thing that India could improve is infrastructure like power generation, ensure absence of blackouts, and provide protection from natural disasters. These are on the top of the mind of Japanese corporates.

On top of that, GST may change the ease of doing business. There is some uncertainty regarding the tax regime and some regulations regarding the environment. If India clears these problems, Japanese corporates are more than willing to invest in India. Most of the large corporates are already located in India. So, it’s a matter of how they can ramp up capacity. Then it’s easier for them to invite supply chain companies into India.

What is your Asia fund’s exposure to India? Do you have plans to increase it?
India is the second largest exposure in our Asia-ex Japan fund after China. If you look at the normal benchmark of the MSCI Asia, India is the fourth largest country after China, Korea and Taiwan. India will be the largest market after China in the long term. We do find a lot of strong companies in India with competitive advantage and solid balance sheets. These are companies that can navigate these turbulent situations well. This is a good opportunity for us to add some India exposure.

Your current exposure to India is mostly through financials. Could you tell us more about your exposure?
The near-term outlook is gloomy. There is a moratorium measure taken by the central bank. So, we are unable to see the near-term. But there are companies that have managed to navigate the Global Financial Crisis (2008-09) and have had satisfactory ROE (Return on Equity) over a period of time. I believe these companies will be able to overcome such tough situations, which can actually be an opportunity for these leaders.

Between banks and insurance companies, which one would you prefer?
Insurance sector has a big opportunity because selective leaders in the sector can leverage the brand of the parent bank. When you need to sell insurance, you need trust of your policyholders. I am unable to talk about valuations because of compliance issues but India's accounting methodology makes their reported earnings lower than actual economic profit. There is a kind of an accounting treatment which also makes the insurance companies attractive for us.

What are the other themes that you are looking at in India?
We have been researching digital enablers because we see a lot of development on the digital side and how they have disrupted incumbents across Asia especially China. Digital technology can improve the entire society. We are also actively looking at the building material space. Here, we are looking at companies generating sufficient ROE. Consumer companies in India also make a good Return on Investments (RoI) but they have no large place to invest except for a few players. That is why they keep returning money to shareholders, which is also great. But, if they can invest in new businesses, that is even better. Leaders (in every sector) can accelerate market share growth because of the GST implementation. Industries are moving to a more organised segment. GST is not happening overnight but gradually. This is not exciting for short-term traders but good for long-term investors.