For the first time, India has an honest shot

Published at Dec 3, 2015, in Features

India, perhaps for the first time since it became a democracy, has been given an honest shot at becoming an economic powerhouse thanks to the election of Prime Minister Narendra Modi – and businesses within the country are getting excited.

A lot has been written about the rise of Modi and the onset of so-called ‘Modi-nomics’, and for pretty good reason.

Modi has outlined plans to build 100 smart cities, get more Indians investing their money in the financial system and bring more foreign capital into the country.

Head of commodities research at Nirmal Bang, Kunal Shah, recently told the International Mining and Resources Conference in Melbourne that Modi’s record as state governor of Gujarat filled the investment community with confidence.

“When you talk about a leader, you see what he has done in the past. The 10 year performance of our Prime Minister when he was the head of the Gujarat state. Gujarat, in 10 years, produced the highest GDP,” he said.

“Out of all the states, Gujarat accounted for more than 10 per cent of total growth. 17 per cent of India’s factory value has come from Gujarat, so it has been just one and a half years since Narendra Modi since our Prime Minister.”

In fact, during his time as governor he managed to turn a state deficit of US$1.78 billion (A$2.43 billion) into a $780 million surplus, mostly by encouraging industrial growth in the state.

This is a man who knows what it is to achieve economic growth in the Indian context, where things tend to move at a glacial pace at best.

Elected with a clear majority, at least at a federal level he now has the biggest shot of any Prime Minister in recent memory to bring India’s economy up to the speed of its promise.

While western commentators have bemoaned the slow pace of economic reform in the country so far under Modi’s rule, Shah said they did not account for the time it takes to get things done in the country.

“Everybody is saying ‘it’s not working’, but it takes time for it to take effect. What he’s done in 10 years is commendable,” Shah said.

“So when you talk about Modi-nomics not working, you have to give time. India in the last three decades has not had quality leadership.”

One of the key measures Modi has outlined has been to put an ambitious target of lifting manufacturing’s share of GDP from its current base of 16% to 25%. Shah thinks this will end up reaching only 20-21%, but the ambition is there.

One of the unlikely companies set to benefit from the Modi revolution is ASX-listed NSL Consolidated (ASX:NSL), which is the only foreign owned and operated iron ore miner in the country and has been operating in India for five years.

Managing director Cedric Goode has seen the change first hand, and told Finfeed that while the change of pace was invariably slow in India, that the company was buoyed by the election of Modi and subsequent business-focused agenda.

“It’s providing hope that there’s a way forward for India to accelerate growth, and the normalisation of business practices compared to the western world,” he said.

“Especially with the potential in cutting through some of the lengthy time frames or some of the mulitlayered bureaucracies in place, that sort of thing.

“The language is quite uplifting in terms of what India could achieve and it’s creating that wave of sentiment and trying to pull India along with the potential of what the India could achieve and then the changes happening behind that.”

He makes the point that it was vital Modi was elected with a clear majority in a country where clear majorities are rarely given.

“Politics in India is very complex and there’s lots of political parties with lots of different viewpoints,” he said.

“Sometimes the country in the past has been bogged down by those politics, and it may still continue to do so to a certain extent, but the majority will help. A decisive majority allows you to pursue your agenda.”

NSL in India

NSL is set up as a low-grade iron ore miner in the Andhra Pradesh region, bringing grades from as low as 26% up to a saleable grade, about 60%, through beneficiation.

Because of the low-cost environment India offers, it has managed to bring cash costs down to the point where NSL, with a market cap of just over $10 million (at the time of writing), has managed to undercut the likes of Rio and BHP.

It has purchase orders with major industrial customers in the bag, and has recently drawn down on a loan which will allow it to build a phase two plant, already prefabricated in China, effectively doubling its production potential.

A conveyor working at one of NSL’s mine sites in India

Its game-plan is to use lower grade ore which domestic miners have simply passed over.

“So basically the industry has been established around consuming high grade iron ore, and there still is a substantial amount of high-grade iron ore in India,” Goode said.

“There has been no desire from an industry perspective, or no requirement, to actively pursue the beneficiation of low-grade iron ore.

“In India generally speaking, if you’re in a high-grade mining area, material below a 50 percent [iron] is considered waste.”

While some beneficiation in India exists, the reluctance of domestic miners to pursue this as they chase higher grades meant that there was an opportunity for NSL to come in as a foreign company.

If it were a foreign company looking for high-grade opportunities, Goode said, it wouldn’t have gotten a look in.

While NSL has been operating in India for five years, the entire journey has taken six to seven years.

Along the way, NSL has learned some lessons about operating in India.

“We have this great black box of intellectual property”

The dazzling array of rules, regulations and bureaucracies in India has put off a lot of companies from doing business in the country in the past, something Modi is trying to fix to grab more foreign direct investment dollars.

While NSL has been operating in India for five years, putting in the hard yards, Goode said NSL spent about two years trying to get its head about how best to operate in the Indian marketplace.

“There’s no doubt India is a difficult place to do business. Like many countries are...when you’re a pioneer a lot of things are difficult,” Goode said.

“Like in China, it used to be difficult to do business there 20 to 25 years ago but now it’s more simple because there’s a roadmap.

“But nobody else has done what we’ve been doing, so every time we do something, it’s the first time it’s ever been done by a foreign company.”

He said if there was one piece of advice he could give himself as NSL was first starting the journey, it would be the virtue of patience.

“The first piece of advice I would give is that if you think something is going to take a month, then allow six,” Goode said.

“The second piece would be to remain very patient.”

By sticking fat through all the bureaucratic bungles, NSL has learned valuable lessons about how to work with the bureaucracy, how best to approach an issue and how to conduct business in India.

“We have this great black box of intellectual property now about what to do, when to do it, how to do it, who to speak to about it, what process to follow, how long it’s going to take and all those sorts of things,” Goode said.

“We’ve been through these things with complete processes at so many levels on multiple mining leases, and so things do feel like they happen a lot more quickly for us now.”

He said because the company has the learnings in place, it’s hard to judge whether things have gotten better for businesses in the country or whether NSL just knows how to work within the system better after years of bitter experience.

“What I will say is that from an India level there is an absolute intent to try and speed up the processes and make things happen,” he said.

The reason NSL stuck things out is not just because of the low-grade opportunity, as there are other jurisdictions around the world where low-grade iron ore exists.

Why NSL is in India, Goode said was because of the huge growth already experienced by the steel industry and the expected growth to come.

The steel market – one of the big winners from Modinomics?

The steel industry is one of the key planks of Modi’s economic plan to supercharge the domestic manufacturing sector.

The steel industry has almost doubled in the past five years and is currently the third-largest steel industry in the world with about 90 million tonnes of steel produced per year.

However, on the bullish end of forward estimates, this could sky-rocket to about 200 million tonnes by 2020.

This steel is expected to use, almost exclusively, Indian iron ore.

According to an Ernst & Young report on the Indian steel industry published last year, the Modi government’s focus on manufacturing and beefing up infrastructure is expecting to fuel steel production.

“The new Government at the centre has, however, rekindled hope in the industry. The ambitious infrastructure projects and the thrust in manufacturing through the ‘Make in India’ campaign are steps in the right direction,” it said.

“The plan for smart cities, improved road and rail connectivity by building highways, bridges and dedicated freight and superfast rail corridors has huge potential to spur domestic steel demand.”

The Indian steel industry itself is very, very good at playing politics.

It recently lobbied the Indian government over the so-called dumping of Chinese steel into the Indian market.

By some estimates, Chinese steel manufacturers had managed to find a home for 3 million tonnes of steel in India.

Goode thinks, however, that the threat of Chinese steel dumping in India is there, it is somewhat limited by fast pace of the Indian Government introducing protective mechanisms such as import duties and tariffs.

Regardless of the actual impact of Chinese steel on the domestic market, the steel lobbied successfully and managed to get a 20% import duty on steel imposed.

To Goode, the episode speaks of the protective nature of domestic steel industry in India. With most, if not all, the domestic demand to be filled by Indian steel, this means the demand drivers for NSL’s ore should be strong into the future.

“It really highlights that steel growth in India will come from domestic steel rather than overseas, and with that domestic steel it is still cheaper to source ore from domestic operations delivered to the steel complex,” he said.

However, Goode said that NSL’s focus is not entirely on India.

Recently, the Indian Mines Ministry outlined plans to scrap an export tax of 10% on lower-grade iron ore.

While this was mostly aimed at producers in Goa, it applies around the country, giving NSL a potential opportunity to look at.

“What does it mean for NSL? I think it’s a positive in that we have the ability to either sell for export or domestically and we have the approvals in place to do either,” Goode said.

“So for us it’s another potential market if we choose to export some material, but our focus is strongly on domestic sales and supporting the local steel industry growth.”

However, with the hard yards done in India NSL remains well-placed to ride the wave of Modi-nomics into the future.

Shah says that after years of stagnation, Modi is providing hope that India may fulfil the potential which has gotten macro economists excited for years.

“[India] has ample potential,” he said.

“When I travel to developed economies like Australia the UK or US I see the kind of potential our country has.

“Despite that we don’t have the proper infrastructure, we don’t have the roads, and everything is missing because in the last 30 years there was no will of government.”

Now, crucially, there is will of government.

“We’re excited as a company about the change that Modi has brought to the country and hopefully that change is long-lasting and can continue to assist the company to grow,” Goode said.

S3 Consortium Pty Ltd (CAR No.433913) is a corporate authorised representative of Maven Capital Pty Ltd (AFSL No. 418504). The information contained in this article is general information only. Any advice is general advice only. Neither your personal objectives, financial situation nor needs have been taken into consideration. Accordingly you should consider how appropriate the advice (if any) is to those objectives, financial situation and needs, before acting on the advice.

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