Investing in India’s Macro Tailwinds & Aerospace & Defense with Andrei Stetsenko
Timestamps are as accurate as they can be but may be slightly off. We encourage you to listen to the full context.
Podcast Summary
In this episode of Monetary Matters, Jack Farley interviews Andrei Stetsenko, partner and portfolio manager at Gymkhana Partners, an investment partnership focused on undervalued small and mid-cap companies in India. (01:22) Stetsenko discusses why India represents one of the world's most compelling investment opportunities, driven by the fastest GDP growth among major economies and a rapidly expanding middle class. The conversation explores India's transformation into a global aerospace and defense powerhouse, the government's reform agenda under Modi, and specific investment opportunities in sectors like chemicals, agriculture, and financial services. (28:06) Stetsenko also examines the unique dynamics of Indian holdco structures and explains why India is largely insulated from trade wars, making it an attractive alternative to other emerging markets that have disappointed investors over the past decade.
- Main themes: India's economic transformation, aerospace and defense sector growth, undervalued small-cap opportunities, and the country's emergence as a sovereign manufacturing hub independent of traditional emerging market constraints
Speakers
Andrei Stetsenko
Andrei Stetsenko is a partner and portfolio manager at Gymkhana Partners, an investment partnership focused on India that has been investing in the country since 2013. He has made 18 trips to India conducting intensive fundamental research on over 2,000 companies, building a comprehensive database of corporate governance and management reputation data. Under his stewardship, Gymkhana has outperformed every US dollar-denominated India mutual fund and ETF, as well as major indices like the SENSEX and MSCI India.
Jack Farley
Jack Farley is the host of Monetary Matters and founder of Farley Capital. He focuses on macroeconomic trends and investment opportunities across global markets. His business partner consults for Gymkhana Partners, and his father Steve is Andrei's business partner at the fund.
Key Takeaways
Focus on Underappreciated Small-Cap Companies in High-Growth Markets
Stetsenko emphasizes targeting smaller companies (median market cap below $1 billion) that are positioned to benefit from India's rapid economic growth. (01:35) These companies trade at significantly lower valuations than large-cap Indian stocks while often serving markets growing 40% year-over-year. The strategy involves identifying "blue chips of tomorrow" before they become widely recognized, allowing investors to access superior growth at reasonable valuations. Companies in sectors like chemicals and agriculture can prosper domestically without relying on export demand, as India's internal market provides sufficient opportunity for sustained expansion.
Understand the Power of Regulatory Reform and Simplification
The Modi government's regulatory reforms have created a transformative business environment. (14:39) Key changes include GST implementation, which eliminated state-by-state tax collection and enabled pan-India businesses, and demonetization efforts that forced more economic activity into the formal sector. These reforms have benefited tax-compliant listed companies by reducing unfair competition from informal competitors who previously avoided taxation. The simplification of business regulations has removed barriers that historically prevented companies from scaling beyond certain employee thresholds, creating opportunities for well-managed businesses to grow larger and more profitable.
Capitalize on India's Aerospace and Defense Indigenization Drive
India is aggressively pursuing defense self-reliance, requiring 60% of military contracts to source from Indian vendors, up from 40-50% previously. (50:01) This creates massive opportunities for established Indian suppliers who have already gained approval from Western defense contractors. Companies like DCX benefit from being pre-approved vendors for complex work like aircraft wiring, as reliability and quality standards make it extremely difficult for new competitors to enter. The government now understands that profitable private companies are essential for building a sovereign defense industry, representing a sea change from previous decades of state-controlled defense production.
Exploit Holdco Discounts for Diversified Exposure to Quality Businesses
Indian holding companies trade at massive discounts to their net asset value, often 50-70% below the value of their underlying holdings. (56:03) Maharashtra Scooters, for example, provides exposure to high-quality businesses like Bajaj Finance at half the direct investment cost. Recent regulatory changes by SEBI now allow these holdcos to distribute shares in their portfolio companies without adverse tax consequences, creating potential catalysts for discount closure. This structure emerged from multi-generational family business succession planning and provides access to some of India's most respected business groups at significant discounts.
Recognize India's Insulation from Global Trade Disruptions
Unlike export-dependent economies, India's domestic consumption-driven model provides resilience against trade wars and tariffs. (22:13) US exports represent only about 2% of India's GDP - essentially one quarter's worth of typical growth. The economy's structure resembles the US more than China, with consumer demand driving the majority of GDP rather than exports. Even companies affected by tariffs often have significant non-US export markets or serve rapidly growing domestic demand. This insulation allows Indian companies to focus on capturing domestic market share in expanding sectors rather than depending on volatile international trade relationships.
Statistics & Facts
- India was the world's eighth largest aviation market a decade ago and is now third, behind only the US and China, with per capita flights still below 0.2 per year compared to multiples of that in other major markets. (29:08) This demonstrates the massive runway for continued growth in domestic aviation demand.
- Systematic Investment Plans (SIPs) in India now represent over $3 billion US per month in steady equity inflows, providing market stability that didn't exist when foreign investors were the primary drivers of flows. (20:01) This domestic capital base has made Indian markets less dependent on foreign sentiment.
- India's defense procurement now requires approximately 60% of contract value to be sourced from Indian vendors, increased from 40-50% previously. (50:01) This indigenization mandate creates substantial opportunities for qualified domestic suppliers in the defense sector.
