The Tantallon India Fund closed 2.18% lower in November as uncertainty over the US presidential election quickly gave way to concerns about sustained foreign portfolio outflows and headwinds for the Indian yield curve and rupee and “restricted” government spending in the build-up to the national and state elections, disruptive tariffs and geopolitical realignments, and stubborn inflationary expectations limiting the Reserve Bank of India’s (RBI) options.
Despite the very “noisy” few weeks, we have focused on fundamentals and tried to take advantage of stock price volatility to buy high-conviction names when valuations are compelling. Taking a step back from the markets, our recent meetings on the ground drove home the saying: “History doesn’t repeat itself, but it often rhymes.”
We are on the cusp of corporate India meaningfully re-leveraging. Despite the elections-related slowdown in government spending over the last six months and the unseasonal rain and flooding in several states, aggregate corporate capex for the BSE 1000 clocked in at INR10 trillion ($158 billion) for the 12 months ended September, up 18% y-o-y. This exceeds government capex and reflects boardroom optimism in India over the resilience of underlying economic fundamentals, high utilisation rates across consolidating sectors, and the willingness to commit under-leveraged balance sheets and free cash flows to a new corporate capex cycle with good visibility on sustained revenue and margin uplift.
“Discretionary” capex — as opposed to “maintenance” capex — inflects off a two-decade low. With corporate credit growth tracking 1 s.d. (standard deviation) below the average of the last four decades, a current Capex/Depreciation ratio of 1.78 times for the BSE 1000 suggests significant headroom to approach the 2004–2009 Capex/Depreciation cycle peak of 4.8 times.
The current corporate India capex cycle maps well with the 2004–2009 cycle, where, in tandem with corporate investments across multiple sectors, we saw a sustained revival in real estate markets across the country (underpinned by improving urban transportation infrastructure), and simultaneously, deliberate investments into communications and power grid infrastructure, logistics and warehousing facilities, and improving road, rail and port connectivity between manufacturing zones.
India’s current Gross Fixed Capital Formation (GFCF) is almost perfectly analogous to China’s back in 2002, tracking at US$1 trillion ($1.35 trillion) with a core investment rate of 34% of GDP. From this point, China was able to leverage the enabling infrastructure being built to accelerate manufacturing sector-driven growth, new employment creation and real wage growth.
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Beneficiaries from China + 1
After drilling deeper into our meetings with listed and unlisted corporate entities across the country and the market cap spectrum, we share the following points:
India is one of the most significant beneficiaries of China+1. Notwithstanding the uncertainty inherent in Trump’s tariff “intentions”, the manufacturing, supply chain and logistics management companies we met are convinced that the threat of tariffs will accelerate the relocation of manufacturing capacity away from China, creating an even more significant opportunity for each of them as India accelerates its industrialisation goals.
Election-year government spending is typically back-ended, so despite the deceleration in GDP growth in 1HFY2025, given the Election Commission’s restrictions on spending ahead of the elections), we expect government capex to accelerate over the next 12 months.
The central government only achieved 37% of its budgeted capex target in the first half of the current fiscal year ended September, while the 20 largest states, at an aggregate level, only achieved 28% of their budgeted target. To be more granular, government spending averaged INR600 billion/month in 1QFY2025 ended September (versus an average spending rate of INR928 billion/month in 1QFY2024). Sector consolidation and pricing discipline in the “old economy”, from industrials, financials and real estate to telecoms, cement and chemicals, are standout features. This is in sharp contrast with the increased competitive intensity in private equity- or venture-funded e-commerce and fintech platforms looking to scale aggressively.
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Easing liquidity and stabilising non-performing unsecured consumer loans will be a net positive for well-capitalised banks with strong deposit franchises, accelerating market share gains and profitable growth. The RBI has preemptively clamped down aggressively on fintechs and unsecured consumer lending over the last three quarters and has held off on an interest rate cut despite the growth slowdown (tacitly acknowledging that persistent inflationary trends in both India and the US limit current options for both the Fed and the RBI), the RBI hedged its bets by easing the Cash Reserve Ratio (CRR) requirements for the banks by 50 bps, easing concerns on a liquidity crunch.
After three years of poor agri-income growth, rural spending would seem to be finally inflecting positively on the back of a good monsoon/sowing season; however, bottom-of-the-pyramid, urban and semi-urban consumption remains depressed by persistent inflation weighing on disposable income.
The key risks we continue to monitor closely are geopolitical — such as global growth vulnerability to trade/tariff policies and the political risk premium embedded in global energy prices — of a shallower-than-expected RBI easing cycle and the potential constraints on executing the government’s industrialisation agenda.
Call to action
Notwithstanding the short-term concerns on liquidity/growth/flows, we are clear that India’s investment-driven expansion remains on track, validated by the strong rebound in government spending, consumer confidence, and high-frequency data post-elections.
We are intentionally increasing our exposure to our highest convictions in industrials, consumer discretionary, financials and real estate, where valuations are compelling relative to the structural growth runway ahead of us.
Stock highlight of the month
This month, we highlight Gail (India), India’s dominant gas pipeline operator, with a diverse portfolio spanning the entire natural gas value chain, from the core gas transmission and distribution business to trading, LPG production and transmission, LNG re-gasification, petrochemicals, city gas distribution, and exploration and production.
Impressively, Gail has advanced its net-zero targets for Scope 1 and Scope 2 emissions to 2035 and for Scope 3 emissions to 2040. Given its strategically located network of 16,000km of natural gas pipelines and marketing infrastructure, commanding a market share of more than 70% for the gas transmission market and 60% of the gas trading and distribution market, Gail is ideally positioned to benefit from India’s strategic intent to boost natural gas to 15% (from 6.7% currently) in the overall energy mix over the next five years.
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We are modelling Gail to compound its volume throughput at 12% and revenues at 15% annually over the next three years (versus the market projecting mid-single-digit growth).
We expect Gail to commission six new pipelines (increasing the network by 4,000km) over the next 12 months, enhancing connectivity with guaranteed throughput contracts in Uttar Pradesh, Bihar, Jharkhand and West Bengal.
City gas demand across the country is growing in double digits, and given constraints on sourcing domestic gas, Gail’s sourcing and transmission capabilities position it well to benefit from increased LNG demand from established city gas operators.
Gail’s petrochemical business has stabilised, and the investment-boosting scale is starting to manifest itself in volume/revenue growth.
At this point, we are not building in any estimates to monetise Gail’s substantial investments in green hydrogen, which include India’s only operational plant and initiatives in renewables and compressed biogas plants.
We expect Gail to deliver on earnings compounding at a higher than 15% run rate, well ahead of Street estimates projecting earnings growth rates in the 6%–7% range.
We expect a substantial uplift in volume throughput/revenues as GAIL commissions new sections of pipeline infrastructure with guaranteed off-take contracts with anchor fertiliser and petrochemicals customers, driving operating leverage and free cash flow conversion.
We are more constructive than the market and expect that the Petroleum and Natural Gas Regulatory Board (PNGRB) will allow for a potential 10% uplift to regulated tariffs by next March. This would reflect the reality of higher tariffs currently being realised by private sector pipeline and transmission operators providing much more limited connectivity.
Gail’s investments in optimising both feedstock and operational efficiencies in its petrochemical plants and the benefits from boosting capacity/scale will sustain much improved profitability as demand recovers.
Additionally, having largely completed much of its current growth capex plans and underpinned by good visibility on free cash flows, we are comfortable modelling a 40% dividend payout ratio.
The Tantallon Asia Impact Fund SF is a fundamental, long-only, Asia-focused, total return opportunity fund. The fund invests with a horizon of three to five years in a concentrated portfolio (30–35 positions without leverage), market cap/sector/capital structure agnostic but with strong conviction on the structural opportunity, scalable business models, and data-driven analysis of sustainability, innovation, societal trends, and material environmental and governance initiatives to drive profitability. Tantallon Capital Advisors is a Singapore-based entity set up in 2003. It holds a capital markets service licence in fund management from the Monetary Authority of Singapore
