The focus of major aircraft orders is shifting globally. Headlines once dominated by Chinese and Middle Eastern airlines placing massive orders with Airbus and Boeing now feature Indian airlines. This signals a significant change in the aviation industry. A similar trend is emerging in the defense sector, creating a common thread between India and Europe. Both are realizing the need to develop a more sovereign military-industrial complex. When governments in these regions look for partners to enhance their sovereignty in areas like missile defense, anti-drone systems, and avionics for fighter jets, they face a sense of urgency. They want these capabilities established immediately and are not in a position to start from scratch. Consequently, the logical beneficiaries of this push will be companies that have already proven their ability to deliver smaller-scale versions of what the governments are now seeking on a larger scale.

Andrei Stetsenko's firm, Gymkhana Partners, has been investing in India for over a decade, starting in 2013. The firm identified a specific opportunity in the market.

The opportunity we saw when we first went there over a decade ago was specifically in the underappreciated, mispriced, overlooked, smaller cap companies. Our median market cap... is below a billion U.S. and it's a really rich opportunity set in India.

Andrei notes that while India has thousands of listed companies, many high-quality ones require deep research to uncover. This focus has yielded strong results, with Gymkhana outperforming every US dollar-denominated India mutual fund, ETF, and the major SENSEX and MSCI indices after all fees. The primary difference from large-cap funds is the universe of companies they can invest in. Large ETFs are constrained to about 100-150 multi-billion dollar companies that everyone already knows, like HDFC Bank.

What we have the benefit of doing is we can move the needle with investments in smaller companies that are the blue chips of tomorrow that we're trying to own today.

This strategy also leads to a different valuation and sector profile. Gymkhana's portfolio has a forward P/E ratio of about 15 times, whereas the indices are over 20. Sectorally, their holdings differ significantly from the indices. For example, they hold no telecom stocks, a sector that comprises over 10% of the Sensex. This is a deliberate choice to avoid political risk.

We want to be invested in companies that have competitive advantages related to how they're running and the businesses they're in, not so much the licenses they have from certain parts of the government where we never want to wake up the day after an election and feel like our portfolio has suffered politically.

Major Indian stock indices, such as the MSCI India and the Sensex, have a high price-to-earnings ratio compared to other emerging markets. Andrei Stetsenko suggests this valuation is justified. He would still consider investing in these indices, even with their high multiples.

Critics often point to the high P/E ratio, but they tend to miss a crucial point. India is one of the only major equity markets globally that can compete with the US in terms of underlying earnings growth. Since long-term equity returns are ultimately driven by growth, it makes sense for a high-growth market to command higher multiples than a slower-growth market.

While some countries like China have experienced tremendous economic growth without corresponding earnings growth, India presents a different story. According to Andrei Stetsenko, India's equity earnings growth successfully matches its GDP growth. A key reason is the sheer speed of its economic expansion, where 6% GDP growth is considered a bad year. This high-growth environment creates a unique economic structure, vastly different from slow-growth markets dominated by incumbents.

In India, sectors catering to the rapidly expanding middle class can grow by 30-40% year-on-year. This rapid market expansion creates significant opportunities for disruption and for new businesses to thrive. Many companies are addressing markets that are growing much faster than the overall economy because they serve customers who are using a product or service for the very first time. This includes farmers buying agricultural seeds or young urban professionals making their first mutual fund investment. These trends are fueled by ongoing urbanization and the shift to formal employment, similar to what powered China's growth decades ago. With a majority of its population still in rural areas, India's growth trajectory has a long runway.

Andrei highlights the chemicals sector as a prime example of a multi-pronged opportunity. Local companies can prosper by simply replacing imports, as reduced shipping costs make them competitive even if production costs are slightly higher. India's vast domestic market allows businesses to succeed without relying on exports. However, the export opportunity is also a budding story, powered by India's cost-competitive labor and abundance of high-skilled engineering talent.

Unlike China, which has relatively weak internal demand and relies on exports, India's economy is driven by a large and growing consumer market, similar to the United States. Andrei notes that the story of India is one of "relentless growth in domestic demand for just about everything." This makes the economy more resilient and less dependent on global trade dynamics.

Many allocators group all emerging markets together, but countries like China, Brazil, and Russia have been disappointments. India, however, presents a different story, largely due to its political environment. Unlike in Russia, where investors ignored political risks, India has benefited from a reformist government under Narendra Modi since 2014. This has created a significant tailwind for the private sector.

One of the government's key policies has been reducing regulatory complexity. Before 1991, India had rules that disincentivized business growth beyond a certain point. Andrei notes this was a similar situation to what is seen in Europe today. He explains that in an effort to protect smaller businesses, the regulations inadvertently made it difficult for them to grow large.

In an effort to protect smaller businesses, they made it impossible to grow large. And so a lot of those regulations are the kinds that have been dismantled. There's just an effort to simplify the day to day of owning and growing a business.

The introduction of the Goods and Services Tax (GST) was another transformative policy, which can be understood in conjunction with demonetization. Before GST, India operated like the U.S. before the Interstate Commerce Act, with tariff collectors at every state border, making a pan-India business model nearly impossible. GST unified the country into a single market. This policy, combined with demonetization aimed at curbing untaxed "black money," has formalized the economy. It leveled the playing field for listed, tax-compliant companies that previously competed with smaller firms whose main advantage was tax evasion.

These reforms have also shifted savings away from unproductive assets like gold and real estate, which were often used to store untaxed wealth. Now, more capital is flowing into growing companies. This trend is amplified by a surge in domestic investment through Systematic Investment Plans (SIPs), which are similar to 401(k)s. These plans now channel over $3 billion into the Indian market every month, creating a stable undercurrent. As a result, the Indian market has become more resilient and is no longer primarily driven by foreign capital flows.

It used to be that foreigners really did drive the flows in India and that's just no longer the case.

India's stock market has been a relative underperformer, partly because foreign investors have been pulling their money out. Andrei Stetsenko explains that while foreigners are no longer the primary driver of flows, their net outflows have limited the market's upside. A major concern has been trade tensions with the US, but Andrei believes investors selling India due to tariff fears are "missing the forest for the trees."

India is largely insulated from trade wars for a few key reasons. First, total exports to the US account for only about 2% of India's GDP, which is roughly a single quarter's worth of typical growth. While some sectors like textiles might feel the pain, India's biggest export champions are in areas like pharmaceuticals. These sectors are often more high-skilled, exempt from tariffs, and export heavily to other regions like Europe, Asia, and sub-Saharan Africa. Many Indian companies are diversified, with agricultural businesses, for example, doing well in Latin America.

The core of India's economic resilience lies in its internal growth story. Jack Farley notes that, similar to the S&P 500, a large portion of the market may not be tied to the physical goods affected by tariffs.

The thing to keep in mind about India is that the majority of the population doesn't even live in a city yet. They're working agricultural jobs that are usually one third or less as productive as even the worst job that they would get if they migrated to a city. So there's just this deep well of continued economic growth, productivity improvements that is continuing regardless of what tariffs are.

This massive, ongoing migration from low-productivity rural jobs to better jobs in cities creates new consumers with disposable income. This internal transformation provides a stable, high growth rate for the economy, even in a difficult global environment.

A 50% tariff on Indian goods has been implemented by the US, but its application is very uneven. Crucial sectors like electronics and pharma are completely exempt. This inconsistency and unpredictability in US trade policy make it very difficult for companies to plan. There is also significant confusion in India about what the US administration actually wants.

The official reason given for an additional 25% punitive tariff is India's purchases of Russian oil. However, there's a belief that the real reason is a "bruised ego in the White House." This stems from the US administration reportedly demanding that India validate an inaccurate claim that Trump had brokered a peace agreement with Pakistan.

Despite these diplomatic tensions, there is confidence that the issues will be resolved. The US-India relationship is considered one of the most important in the world, second only to US-China. It would be highly unusual for the two largest democracies, both sharing concerns about China, not to work together.

A visible sign of India's economic growth is the rise of first-time flyers. In airports and on planes, many people are visibly excited about their first flight. This illustrates a key economic principle: as per capita income rises, discretionary income grows much faster. A person's income might not double, but the money left over after necessities could triple or quadruple, suddenly making things like plane tickets affordable.

The per capita income going from $3,000 to $4,000 conceals a lot of momentous change that's happening on the human level where someone might be going from a job that pays them enough after their necessities to buy maybe a movie ticket, suddenly they have enough money to spend to buy a plane ticket for the first time.

This trend is causing explosive demand in India's domestic aviation market. A decade ago, India was the 8th largest aviation market; now it's the 3rd, behind only the US and China. Yet, per capita flights remain a fraction of other major markets, indicating significant room for future growth. This is why Indian airlines are now placing the largest orders for new jets from Airbus and Boeing, a trend previously dominated by Chinese and Middle Eastern carriers.

On the defense side, India is undergoing a strategic shift similar to Europe's. Geopolitical events, including a 2020 border scuffle with China and tensions with Pakistan, have created a sense of urgency. Furthermore, observing how the US treats its partners has fostered a growing awareness within India of the need for a sovereign and self-reliant defense industry. There is a sea change in government thinking. Indian leaders now understand that to build a robust domestic defense sector, they need profitable private companies capable of investing in R&D and expanding capacity.

While the Indian airline market is experiencing enormous secular growth, the investment opportunity is not in the airlines themselves. Andrei notes they have never invested in an airline, calling it a historically tough business. The focus is instead on companies that supply complex parts to the duopoly of Airbus and Boeing.

India has become a compelling hub for these suppliers for several key reasons. It offers a unique combination of low-cost labor and an abundance of highly skilled engineering talent. This allows Indian suppliers to deliver reliable, cost-competitive, and high-quality products comparable to what manufacturers used to produce in-house. The model is so successful that European companies like Dassault, which have never produced aircraft outside of France, are now planning to do so in India.

Another major factor is India's massive addressable domestic market. For a company like Airbus, expecting a surge in orders from Indian airlines, building a local supplier base is strategically beneficial. It helps to have a strong presence in a country that is also a key customer.

The companies of interest are not suppliers to airlines themselves, but to companies that make or repair plane parts. This includes the Maintenance, Repair, and Overhaul (MRO) market, which presents a huge opportunity. For example, the company Unimection makes mission-critical tools used in MRO applications and for aero engine makers like Safran, GE, and Rolls-Royce.

The business model is centered on maintenance, spares, and extra parts. It is an attractive space because once a company becomes an approved vendor, it is locked in for decades. These suppliers are typically a very small part of the end product's cost structure, so their customers, like Airbus or Boeing, are not constantly trying to negotiate for lower prices.

Both Airbus and Boeing have order backlogs that extend for a half-decade or longer and need to scale up production. They are looking for reliable Indian suppliers to support this growth. When they approve an Indian supplier, they are counting on them as a long-term partner to grow with them.

When they approve an Indian supplier, they're counting on them to grow with them and to help be a reliable partner who's not presenting them with issues, who's not the reason that they have to cap production in a certain month going forward.

A fascinating example is Dynamatic. After a visit, Andrei Stetsenko felt confident the company would be a major part of the Indian aerospace industry's story over the next 20 years. It has built a strong reputation as a high-quality supplier to almost every major Western aerospace company. Dynamatic has its choice of business and recently won a contract to supply all the doors for every Airbus A220 worldwide. This positions them not only to meet Indian demand but also to become a significant export engine.

Sika is a company with multiple businesses, but the most interesting and fastest-growing segment is its MRO (Maintenance, Repair, and Overhaul) business. This involves specialized maintenance for complex aircraft parts like landing gear and seats. Sika's strength comes from a web of licensing and authorized provider agreements with suppliers, especially for Airbus jets, which have historically been the bulk of their business.

The company is positioned to benefit from significant growth in the Indian MRO market. Currently, most maintenance for Indian jets is done outside the country, in places like the Middle East or Europe. Sika stands to gain not only from rising air traffic in India but also from the repatriation of this maintenance work as Indian companies develop more capabilities.

Despite a recent surge in its stock price, leading to a high trailing P/E ratio of 57, Andrei suggests the standard valuation metrics may be misleading. He hints at a valuable asset on the balance sheet that provides an additional margin of safety and isn't reflected in the public P/E. The core investment thesis rests on a strong conviction that the aerospace sector will see sustained, high-quality growth for a long time.

Andrei explains that this growth could even accelerate. Many aerospace companies initially operate unprofitable business lines just to establish a relationship and become a vendor for a huge customer like Boeing or GE. As these relationships scale into fully commercial ones, there's a powerful, yet-to-be-realized driver for earnings growth.

In the US, a stock with a small market cap, like $70 million, is often a company that was once much larger and is now failing. In contrast, India seems to have IPOs that start out much smaller.

There is a wider range of companies going public in India. While there are large, blockbuster IPOs similar to those in the US, often involving private equity firms like Softbank offloading a stake, there is less adverse selection. In the worst US cases, a private equity firm might sell a company simply to meet its fund's internal timeline, regardless of the business's quality.

In India, many companies going public are exciting growth stories. They often follow the classic textbook reason for an IPO: they need capital to fund the next stage of growth, such as building a new factory. The primary motivation is not just for a large shareholder to monetize their stake.

Andrei notes a common thread between India and Europe: a strong push to develop a sovereign military industrial complex. Both regions are looking for domestic companies to build out capabilities in missile defense, anti-drone systems, and avionics for fighter jets. The urgency is high, with governments wanting these solutions developed rapidly. The companies poised to benefit are those that have already proven successful in delivering smaller-scale versions of what their governments now need on a larger scale.

This shift is driven by several factors. Overall defense budgets are increasing, with a greater share being allocated to equipment purchases over salaries and pensions. Within that equipment budget, there's a push to work with smaller, more nimble companies that can deliver systems in a couple of years, rather than the nearly decade-long timelines associated with large incumbents like Lockheed.

Why can't we have a drone system or an anti-drone system that doesn't take a decade to develop? Why can't we have something that's maybe lower cost and not as invulnerable to every possible threat, but we can produce thousands of them.

The war in Ukraine has served as a major lesson, showing that drones are far more critical and tanks are far more vulnerable than previously thought. This has influenced India's strategy, particularly within its Navy and Air Force, which are leading an "indigenization" effort. This involves moving away from Russia as a primary arms supplier and partnering with nations like Israel, France, and the US to import and eventually produce advanced technologies locally.

India's relationship with France's Dassault Aviation, the maker of the Rafale jet, exemplifies this new approach. Instead of simply buying jets and being locked into decades of maintenance contracts, as was the case with Russia, India is leveraging its position as a major customer. They are now demanding that a significant portion of the value, such as the aero engines, be created within India. The long-term goal is for India to develop its own capability to produce a complete stealth fighter jet.

The long production timelines for modern aircraft are due to their complexity and associated bureaucracy. Andrei describes them as "flying computers" where software is critically important. Inflexible projects, where hardware and software are rigidly integrated, have often run into problems. As a result, customers worldwide are increasingly demanding more adaptable platforms with the flexibility to swap out components and vendors, enabling faster delivery.

India has decided to indigenize its defense procurement. One of the government's main tools for this is requiring a rising share of content to be sourced from Indian vendors. This share has increased from around 40-50% to a typical level of 60% for new military contracts. This policy has been a significant benefit for companies like DCX. When a major foreign contractor like Boeing or Lockheed wants to sell aircraft to India, a labor-intensive and critical part of the work, such as wiring and connecting electrical components, is now often done in India by a company like DCX.

While it might seem like this policy creates an easy market, reliability and speed are crucial. Foreign defense companies are very reluctant to work with new vendors they haven't spent years testing and evaluating, as a single mishap could damage their reputation. This gives established and approved companies like DCX a strong advantage in winning more business.

The Indian government recognizes the need for these private companies to be profitable. Andrei clarifies this isn't about enriching industrialists, but about fostering a sustainable ecosystem.

There's a realization that there is no way to build this dynamic private sector defense ecosystem without allowing companies the level of profitability that will enable them to invest both in building new plants and in R and D, the kind of R and D that'll allow India to be completely self-sufficient in a couple decades.

This marks a significant shift away from the country's traditional reliance on an incumbent trio of state-controlled defense contractors: Bharat Dynamics, Bharat Electronics, and Hindustan Aeronautics. The Modi government has been instrumental in breaking up the cozy relationship between the government and these state-owned firms. This push has been accelerated by a renewed sense of urgency from border conflicts with China and Pakistan, as well as observations of Russian military equipment's performance in Ukraine. There is a growing consensus in the defense establishment that a new, more efficient approach is needed, prioritizing what is best for India over the interests of the incumbent state-controlled companies.

All three countries, India, China, and Pakistan, are nuclear powers, so a large-scale land war is not a central probability. Instead, India's primary concern is effectively monitoring its borders. The border with China is particularly challenging as it runs through the rugged, mountainous terrain of the Himalayas. This requires sophisticated electronic detection equipment to track any potential encroachments.

The economic divergence between India and Pakistan illustrates the power of liberalizing economics. In 1991, Pakistan had a higher per capita income than India. Now, India's economy is in a different league, allowing it to spend nine times more on defense without increasing the expenditure as a percentage of GDP. The situation with China presents a much bigger challenge, as China can outspend India on defense. This disparity forces Indian leaders to seek cost-effective solutions. As a result, they are increasingly turning to nimble, private-sector players for their defense needs.

Indian holding companies, or holdcos, often originated from industrialists seeking to pass down their empires to the next generation without disputes. By creating a holdco, they could distribute shares in a single entity, similar to a family trust, ensuring an equitable inheritance. Over generations, successful examples like Bajaj and Godrej have become very valuable and diversified.

Maharashtra Scooters is the second-biggest holdco within the Bajaj group. It offers a way to own a collection of high-quality Bajaj businesses at a significant discount. Andrei explains that while Bajaj Holdings is one such vehicle, Maharashtra Scooters allows investors to own the same underlying assets at an even steeper discount. Its portfolio consists of just four holdings: Bajaj Finance, Bajaj Finserv, Bajaj Auto, and Bajaj Holdings.

This structure is not like an active operator who might reinvest capital into new ventures. Instead, it functions as a passive investment vehicle trading at a large discount to its net asset value (NAV), in this case, less than half. The underlying companies, such as Bajaj Finance, are not cheap businesses. They are fast-growing leaders in powerful Indian markets like financial services. The core investment thesis is not about hitting a specific indirect P/E ratio, but about buying a portfolio of high-quality businesses with a greater margin of safety. By purchasing the discounted holdco, investors effectively pay a much lower price than they would by buying the shares of the underlying companies directly.

Andrei explains that Gymkhana's allocation to financials is lower than Indian indices like the Sensex because the indices gain exposure through "very fully valued" businesses like HDFC Bank. Instead, Gymkhana seeks financial companies that have a much longer runway for rapid growth.

A prime example is one of their biggest holdings, Cholamandalam Financial Holdings. This is a holding company (HoldCo) that trades at a large discount to its net asset value. Its main asset is Cholamandalam Investment and Finance, a financial supermarket dominant in prosperous parts of Southern India. Andrei was impressed by the management's focus on prudence over aggressive expansion.

They're not pursuing growth at any cost. They understand that the point of a financial business isn't about lending out money, it's about collecting money. They're not trying to build an empire, they're trying to grow earnings.

By investing in the HoldCo, Gymkhana gains indirect exposure to the high-quality operating company and other assets at a much lower multiple. The investment thesis isn't just about buying something cheap for a margin of safety. While the thesis doesn't depend on the discount closing, Andrei sees strong reasons to believe it will continue to narrow.

The most important catalyst is regulatory action from SEBI, the Indian equivalent of the SEC. SEBI is actively highlighting these valuation discounts and has introduced rules to make it easier for companies to unlock value. For instance, HoldCos can now distribute their shares in other listed companies directly to their own shareholders without adverse tax consequences. This allows the HoldCo to remove itself as an intermediary. Andrei expects this will lead to a simplification of complex corporate structures, which would be highly beneficial for shareholders of these undervalued HoldCos.

Competition for investing in India has grown significantly. While it was once common to be the first foreigner visiting a listed company, that is now rare as opportunities have become more obvious. Major funds, like the Quebec pension fund, now have dedicated teams for India.

However, within the specific niche of smaller-cap, high-quality businesses uncovered through intensive fundamental research, there isn't much competition. Andrei Stetsenko believes they have built a moat through their accumulated research. They are familiar with the reputations of nearly any significant name in India regarding ethics and corporate governance. This knowledge comes from extensive scuttlebutt.

We like to leave a little time at the end of every company meeting just to chat with managers about what they think of this CEO, what they Think of that controlling shareholder and you add up enough scuttlebutt and you get a really, really valuable database.

This database covers around 2000 companies, recording every impactful data point on their reputation and business conduct. It's a powerful tool for screening companies and creates a virtuous cycle, making each trip to India more productive. This research-intensive approach has been borne out in their performance, outperforming the Sensex, the MSCI India Index, and a peer group of over 50 India-focused funds and ETFs.

A key advantage in the Indian market is the short-term mindset of many participants. This allows patient, long-term investors to buy shares from people in moments of panic and sell during periods of euphoria at high multiples.

Andrei explains that there are cycles in India where certain sectors become very popular while others are deemed unsexy, creating opportunities to buy at low multiples. Currently, he is avoiding anything related to e-commerce and fast consumer delivery. He considers this sector a poor investment for several reasons.

If you're an e-commerce provider in India, you're competing against a SoftBank funded competitor, you're competing against an Amazon that's very active in India... and you're competing against Flipkart, which is Walmart. So you have some of the most deep-pocketed, long-term minded competitors you could imagine. They're completely content to not get much of a return out of those businesses while they crush their competition.

Instead, Andrei focuses on sectors like industrial goods, capital goods, financial services, and agricultural products. These areas serve demand created by economic development and rising prosperity. The competition in these markets is more rational compared to the hotter sectors.

Another area he avoids is the IT outsourcing world, which includes major companies like Infosys and Tech Mahindra. He notes these companies are already well-known to large investors, and their valuations reflect this. More importantly, they face significant risks. The rise of AI could automate the low-cost engineering work that is their primary advantage. Additionally, their customer base is heavily concentrated in the US, making them vulnerable to potential tariffs on services or further restrictions on H-1B visas, which they heavily utilize.

When considering the massive AI investments by tech giants, Andrei Stetsenko believes the bearish case against Alphabet was shortsighted. The primary concern was that users would switch from Google Search to ChatGPT. However, user behavior for commercially relevant searches, such as finding product reviews or a local attorney, has not significantly changed. This is Google's core business, and it remains strong.

Andrei argues that Alphabet's key advantage is its comprehensive ecosystem. It controls every part of the funnel, from the compute power of Google Cloud to the world's two largest search engines, Google and YouTube. Decades-old acquisitions like YouTube and Google Maps now form a powerful, integrated data silo. This allows Alphabet to create highly personalized and effective AI services.

Even if a Gemini AI model is, by whatever metric you want to track, quote unquote, worse than a competitor's model, it ultimately won't matter if it's able to deliver more effective, personalized, useful services to people by using that integrated silo of data.

Regarding OpenAI, Andrei views Microsoft's involvement as a strategic move to absorb intellectual property and prevent OpenAI's talent from going to a competitor. However, he sees this as just one component of Microsoft's broader AI strategy, which includes other products like Copilot and is not solely dependent on the OpenAI partnership.