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Aditya Narain on how ESG is going to be next growth theme in India

, ET Now|
Feb 11, 2019, 11.48 AM IST
Aditya Narain-Edelweiss-Sec-1200


  • Almost $23 trillion is ESG benchmarked in terms of global assets.
  • Returns have tended to be much higher with ESG high companies.
  • These opportunities are hugely scalable in India.
Aditya Narain, Head of Research, Edelweiss Financial Services, talks to Ajaya Sharma of ET Now, ahead of their Annual Conference the theme of which this time round is investing the ESG Way. Here is curtain raiser of the conference

What is the focus and the theme of the conference this time?

First of all, it is a very large one. We have about 190 companies and 8,000 plus meetings scheduled. We have 500 plus institutional investors with a huge set would be offshore investors. The second bit is we are actually focussing on the ESG (environment, social & governance) theme. Our theme title literally is ‘Seeking Growth the ESG Way’ which we think is going to be the next leg of growth as far as both businesses, markets and investing are concerned.

It already is globally and it is yet to begin in India yes.

Many sense is yes. If you were to look at the stats, there is almost $23 trillion of money that is ESG benchmarked in terms of global assets. That is like over a quarter of global assets. Those assets have been growing much faster than overall equity assets. Not surprisingly, at some level, the returns have actually tended to be much higher with ESG high companies.

Some of the themes that are mentioned in the note that you touched upon are affordable housing, healthcare and digitalisation. How can one capture these opportunities best and what really is the outlook here, what are you looking forward to?

There are two things. Firstly, typically a lot of ESG investing is still based on benchmarks and matrices and cut-offs. What is very interesting in India is that some of these businesses might not actually qualify for typical or traditional ESG investment opportunities but we think these businesses are phenomenal in terms of the value of growth that they get, the social system that they have, the governance that they support and the environmental push that they actually provide.

In many senses, these are unique opportunities for us in India where you can actually be very high on the ESG metric even though at this point in time you would not necessarily get the tick marks that you effectively require for it. That is one part.

The second bit in terms of your specific questions of how does one play it and we have listed in this note a lot of companies which are very much in this space and you could have a few businesses that focus only on this.

You will have a lot of businesses which have this as an integral part of their business and so you can effectively afford higher valuations which are very widespread. It is very unique to India in terms of these opportunities and they have really come about over the last couple of years. I think they are hugely scalable.

Who are the key speakers?

As I said, it is full of stalwarts. We have about 190 companies. We have over 75 CEOs speaking there. The who’s who from the investing side is there. We have a panel which has all key CIOs that invest in the market place. It is actually very large. It would be unfair to single out one person. It is very wide, very vast and very high profile.

The conference is also coming at a very interesting point. We are just done with the interim budget. The market is looking little wobbly. Four-five names holding the index up. What to your mind is the market construct which is going to be a key discussion point?

The market construct, I would say is a little shaky at this point in time because you are in the midst of a lot of things. You have actually seen a lot of change. Over the last three-four years, you have seen a fair amount of corporate restructuring which should actually play out very well.

Very interestingly, you have had a push from both the fiscal and the monetary side and you actually had a differentiation in terms of valuations which has been much sharper than it has ever effectively been. So, at the tailend of a lot of change that is happening, it sets itself up very well into the second half of the year.

Once you got past some of these uncertainties around the elections and issues, the flux will still play through and the market is going to be a little nervous over the next couple of months.

To talk about the overall macro setup as well, how do you think things stand at this point in time based on what was spoken about on the overall fiscal deficit, the targets that we are looking at and inflation as well? Where do you see India standing?

Our call has been that given where you are on the business cycle, you effectively require an external push or a stimulus of some for or the other to actually get things moving. Otherwise, as I ,said you have had a certain amount of restructuring, earnings have started moving up a little bit but you just do not have the excitement of things actually getting and extra fillip or an extra kick-start.

That is what to some extent has effectively been provided and to that extent, the macro is reasonably enabling for a decent bout of growth. But it will be a little back-ended rather than upfront. I would argue that this credit policy has been very interesting because in our view, this is where you have had a structural recognition of the fact that inflation has moved to a lower band.

It is not about inflation being low for now. So, I cut interest rates a little bit. It has been a while since inflation has been low, it has been soft and it should have actually moved to a lower framework, which is what this policy has precipitated. Fundamentally, this gives you a lot of flexibility in terms of monetary policy going forward and it also dampens some of the risks that might exist because you have had a little bit of a fiscal stimulus.

Since we are at the fag end of earnings, what has been your reading of how corporate India’s report card has been so far? Where do you see meaningful growth coming in Q4?

The report card remains mixed. To some extent, at the aggregate, it has really been in line with expectations. You remove a couple of the big outliers, ex of that, it has really been in line with expectations.

It has been a little bit short in terms of those who are expecting a material bounce back or a reversal or an acceleration. For those, who are very bullish on earnings I think it probably keeps getting pushed out a little bit. But our overall sense is you have got to look at the economy. Over last quarter or two, we have seen volumes starting to look reasonably good. What you are not seeing is pricing and for the bulls they are extrapolating that mix of pricing and volumes coming back, we would actually like expect volumes to come back. Pricing will be a taller order for the economy.

We have been more muted in terms of how rapidly earnings come back. We also need to step back a little bit to get a sense of how earnings have effectively panned out. We have had this earnings slowdown for six to seven years and what that means is that the cycles in India have actually become longer.

Historically they have been for three, four years and that is why for the last two years, people have been expecting them to come back. What has really happened is as cycles have got longer, they have become shallower also.

In the six-seven year period, you never had negative earnings at the aggregate, but going forward, the bounce back will also tend to be shallower but it is going to be longer too. The challenge with expectations at the moment is everyone expects a sharp cyclical recovery. We would not get sharp cyclical recoveries. We will get a structural recovery where the positive surprise will be in the duration of it, the negative will be in the amplitude of it.

And this is why if you are sitting back and looking at it, you should be comfortable with earnings. If you are looking at it very closely, in terms of looking at it from a quarterly perspective, it will tend to fall short and I do not see that changing one or two quarters down the line.

What is the outlook for this year? How important is the election going to be as a market moving event?

Very simplistically, from a 12-month perspective. the elections will make very little difference. We actually have just a single target of 11,700 on the Nifty at the end of the year. In the interim, you will definitely get much more volatility and the opportunity will be where the markets come off a lot. If the market stays very comfortable where it is and then you have an election and everyone starts believing there is a lot of return after that, if the market is not really attractive enough from a valuation perspective, it will be very muted returns.

But overall, it will matter less and less. The hype is more short term. In many senses, you have got the structure in reasonable position. The acceleration is the challenge both because the cycle is longer and because I think the risk appetite is little dimmed.

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