India has been at the forefront of the scramble for emerging-market investment exposure for several years as strong economic growth and a rapidly expanding middle class created a compelling investment story. But in 2011, as the western world stumbled from one crisis to another, risk appetite faded away - with catastrophic results for Indian-themed shares listed here.
The table below shows the extent of the rout, with just five out of 30 shares finishing the year in positive territory.
Table: 2011 was a year to forget for Indian shares
| Company | TIDM | Performance in 2011 |
|---|---|---|
| India Hospitality Corporation | IHC | -88% |
| GCM Resources | GCM | -77% |
| Essar Energy | ESSR | -69% |
| Trinity Capital | TRC | -69% |
| DQ Entertainment | DQE | -67% |
| International Mining & Infrastructure | IMIC | -63% |
| Vedanta Resources | VED | -59% |
| Dhir India Investments | DHIR | -56% |
| OPG Power Venture | OPG | -56% |
| Beximco Pharmaceuticals | BXP | -46% |
| India Capital Growth Fund | IGC | -45% |
| Oilex | OEX | -38% |
| Greenko Group | GKO | -35% |
| SKIL Ports & Logistics | SPL | -35% |
| Ishaan Real Estate | ISH | -33% |
| Eredene Capital | ERE | -31% |
| West Pioneer Properties | WPR | -31% |
| Hirco | HRCO | -29% |
| Elephant Capital | ECAP | -26% |
| Great Eastern Energy | GEEC | -19% |
| Photon Kathaas Productions | PKP | -19% |
| Unitech Corporate Parks | UCP | -16% |
| EIH | EIH | -12% |
| Mytrah Energy | MYT | -6% |
| Mortice | MORT | -3% |
| Noida Toll Bridge Company | NTBC | 1% |
| Eros International | EROS | 2% |
| Indus Gas | INDI | 15% |
| Alpha Tiger Property Trust | ATPT | 17% |
| iEnergizer | IBPO | 55% |
source: LSE and Bloomberg
The economic data coming out of India has revealed signs of turbulence at a time when the eurozone crisis is sending shock waves across the global economy. Growth in GDP has dipped below 7 per cent for the first time in two years, and although this could hardly be described as a crisis, it reveals the negative impact of the Indian government’s monetary tightening as well as the developed world’s economic woes. The latest industrial production figures for India showed industrial production declining by 5.1 per cent in October.
Lost in translation
The main bugbear for the Indian government over the past two years has been a stubbornly high inflation rate, particularly for food items. A series of interest-rate rises have failed to make much of a dent in inflation, but do now seem to be hampering growth.
On top of this, since July, the Indian rupee has come under sustained pressure in world currency markets, losing more than 16 per cent against the dollar. It was down as much as 20 per cent in early December. Many Indian companies quoted in the UK convert their rupee revenues into dollars, sterling or euros for reporting, so this has hit their financial results.
But this does not mean India's investment case is broken. Edward Bland, head of investment research at Duncan Lawrie Private Bank, recently said it was the country to watch in 2012. "The effect on India from the continuing crisis in the Eurozone is likely to be less pronounced than on other Asian economies, including China, as the Indian economy is less dependent on exports than its neighbours. Currently I see India as a contrarian buying opportunity for investors," said Mr Bland.
And among the UK's India-related shares, there are plenty of opportunities to tap into long-term growth themes on the sub-continent. Energy and infrastructure are well represented among the Indian companies listed in London and even consumer stocks, such as entertainment group Eros International, are well placed considering the long-term consumer spending trends among India’s growing middle class.
Where needs must
Power cuts and black-outs are a way of life in India. Power demand continually outstrips supply and even the ambitious plans of the Indian government for power generation investment are unlikely to meet the burgeoning demand of its fast growing economy. For this reason, the power generation sector has been opened up to private sector operators, several of whom have come to London seeking funds for growth.
According to the Central Electricity Authority, peak load production in India during 2011-2012 will fall around 25 per short of supply, growing to around 30 per cent by 2015. This creates a huge opportunity for the likes of KSK Power Ventur, OPG Power, Greenko and Mytrah Energy, all of whom are investing in energy generation. Both Greenko and Mytrah are involved in the growing renewable energy sector in India, where wind and hydro-power are priced competitively due to the high cost of inputs for traditional power generation.
Two Indian companies occupy places in the FTSE100, but Essar Energy and Vedanta Resources were two of the worst performing stocks in the blue-chip index in 2011. Both lost around 60 per cent of their value. Their exposure to commodities prices hampered sentiment with the downturn in confidence in India later in the year also playing its part.
It is a similar situation in infrastructure, where the government has earmarked $1trn for investment in its 2012-2017 five-year plan. It is anticipated that at least 30 per cent of this will be provided by the private sector. With huge investment in ports, roads and logistics, private sector operators such as Infrastructure India, Ishaan Real Estate and Unitech Corporate Parks are well placed to benefit. Nevertheless, the market sell-off has hit shares hard. Encouragingly, the recent takeover offer for Dhir India at 42p a share, compared with the share price in the market of 15.25p the previous day, suggests value investors are eyeing the sector. But even the 42p offer represents a discount to the company’s declared net asset value (NAV) of 74p a share.
| Favourites |
|---|
| The compelling fundamentals of India’s energy sector mean those companies that are building up their energy-generation capacity are likely to perform well over the coming years as their portfolios begin to mature and move from the development to the generation stage at which cashflow becomes significant. Our favourites in this sector are Greenko and KSK Power Ventur. Both have financing in place to advance their portfolios to critical mass over the coming three years. |
| Outsiders |
|---|
| Vedanta Resources, which has recently completed the acquisition of a controlling stake in Cairn India, has diversified its interests in recent years through the acquisition of copper production in Africa as well as oil in India. And while this leaves the company better placed should the global economy pick up and commodity prices move with it, it has also left it with hefty debts. If the global economy lurches downwards dragging emerging markets with it, then Vedanta is heavily exposed to investor concerns on several fronts. |
IC View:
Few of these companies will find themselves immune from a wider sell-off of Indian equities if investors continue to trim the riskier bits of their portfolios. But economic growth in India remains at close to 7 per cent, a figure the developed world can only dream of, and companies plugged into strong themes such as Indian energy, infrastructure and consumer spending are likely to rise again when markets calm down. In the meantime, 2012 could be a great year for bargains in south Asia.
