Prashant Khemka, manager of Ashoka India Equity (AIE ), believes it is ‘naïve and misleading’ to describe Indian share valuations as expensive.

He likens it to looking at the price-to-earnings (PE) multiples of the biggest US tech companies and arguing that the most highly valued stock is the most overvalued, while the company on the lowest multiple is the most undervalued.

‘This does not take into account the different growth prospects or governance standards – and governance is a bigger contributor to differences in multiples than growth is,’ Khemka told Citywire.

‘For the last 11 years, the average India multiple was 20.7 times. Today it is 21.3 times. Since Xi Jinping got the unprecedented third term in China, which in a way prompted the derating of China, India on average has traded at an 83% premium multiple to emerging markets.’

Today, India trades at a 72% premium to emerging markets. Khemka points out the number one reason for this premium is down to India’s status as a democratic country, unlike China.

However, the fund manager adds that this premium was even higher a few years ago.

‘If you go back to the last nearly 20 years, India traded at a 1% premium to the S&P [500]. Today, we are at a 10.2% discount to the US,’ he added.

Khemka (pictured) and co-manager Ayush Abhijeet try to identify companies that are attractively valued, scalable, well-managed and have the potential to generate superior returns on ‘incremental capital’, which refers to the additional capital a company requires to generate more revenue.

‘Scalability is about growth, which is the denominator. The higher the growth, the more valuable the business,’ said Khemka.

‘And when you have the potential for cash flow and growth, you must have strong execution DNA at the organisation to deliver on those sustainably.’

Top holdings in the £484m portfolio include ICICI Bank, global telecoms company Bharti Airtel, Onesource Specialty Pharma and Inventurus Knowledge Solutions, a tech-enabled healthcare provider.

‘The problem of governance is universal’

The fund manager highlighted governance as the starting point of the team’s analysis, which has helped it to avoid a number of major disasters over the years.

‘People say there are more governance issues in emerging markets. I have managed money in the developed world as well, and covered telecoms at the peak of the TMT bubble in 2000. The problem of governance is universal,’ he said.

‘If you do the job right you cannot guarantee 100% safety, but you can avoid most of the disasters – and that meaningfully contributes to overall returns over time.’

Where do current opportunities lie? The trust’s weighting to the industrials sector has increased, which Khemka attributes to a ‘multi-year reset’ in global defence spending.

The fund manager believes Indian companies that supply parts and ‘produce the final assembled output’ have the potential to benefit from this spend.

‘I think Indian companies will be substantial beneficiaries, not only from increased spending at home in India, but also increased defence spending in Europe and elsewhere,’ he added.

China’s loss is India’s gain

Khemka is not overly concerned about the impact of US tariffs on India. The big headwind to look out for, he says, is whether US levies spark a global slowdown.

‘As India is more domestically oriented, my expectation would be that the impact of a global slowdown could be lower compared to other countries,’ he said.

‘Regardless of the extent of a global slowdown, the other important structural factor would be the competitive impact on India. How does India fare relative to China, Indonesia, Vietnam, Thailand and the other countries with whom it competes for global exports?’

America’s 10% baseline tariff rate currently applies to Indian imports and from 1 August it will increase to 26% (unless a trade deal is agreed beforehand). Even without a trade deal, Khemka notes the 26% rate is lower compared to other emerging market nations, which should bolster India’s competitive position. For example, US tariffs on Chinese imports are around 30%.

He believes the tariff saga has once again underscored the dangers of relying too much on a single country in supply chains, particularly China. Khemka believes the shift away from China is likely to accelerate from here – and this is a trend that will benefit India.

‘Apple has built or is building supply chain in India and other places to diversify from its excessive dependence on China. Approximately 20% of iPhones are now exported from or produced in India, including some of the latest versions,’ he said.

As companies look for alternative locations for manufacturing, he views India as a key contender given it has a large pool of labour available, a large domestic market and a government under prime minister Narendra Modi that is trying to make it easier for companies to establish manufacturing in India.

Rare premium

During a challenging five-year period for London-listed investment trusts, Ashoka India Equity has been a rare bright spot. Launched in July 2018 with around £46m, it has since grown to a market cap of £478m. Unlike so many of its investment company peers, it trades at a premium to net asset value (NAV), currently 0.3%. 

Over the past five years its shares are up 167%, far ahead of a 109% share price gain by the average trust in the AIC’s India / Indian Subcontinent sector. Its NAV is up 154% over the same period, according to Deutsche Numis data.

Khemka said that in his 27 years of investing, he has learnt that if you can generate alpha (returns ahead of the market), sooner or later investor flows follow.

‘One of the reasons we trade at a premium is the performance compared to the peer group. And remember when we compare to a benchmark, the benchmark doesn’t pay taxes but the fund does.’

He believes the trust’s charging structure also helps it to stand out from peers. Manager Acorn Asset Management does not charge an annual management fee. A performance fee is charged only if the fund outperforms the MSCI India IMI index. The performance fee equates to 30% of the trust’s outperformance.

It was triggered for the first time in October of last year after strong three-year figures to the end of June 2024.

Investment decision are carried out by Mumbai-based White Oak Capital Management, which was founded by Khemka in 2017. 

Khemka is hoping to repeat this success with the £49m Ashoka WhiteOak Emerging Markets Trust (AWEM ), which he co-manages with Wen Loong Lim and Fadrique Balmaseda. Launched in May 2023, it has the same charging structure and currently trades at a 0.7% premium.

‘Whenever the asset class comes back somewhat in favour, I think it can scale up very quickly as long as we have performance,’ he added.