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My top 10 Indian plays

Created:

17 June 2009

Written by:

Nick Louth

Here are the ten companies that I think offer the best exposure to India's rapidly growing economy and middle class. They're all traded on the Alternative Investment Market so they can be bought and sold through your stock broker just like any other share. All the usual Aim caveats apply, though: liquidity may be restricted, spreads may be wider and regulation is lighter.

KSK Power Ventur

India is chronically short of power stations and generation capacity, and KSK Power Ventur believes that whatever happens to Indian economic growth, large industrial companies are still likely to need 15 per cent more power than is available. Output is just 184 megawatts (MW) now, but it has financed and fuel-sourced another 675 MW for delivery by 2010, plus 1,973 MW under development. The company is spread over a number of different niches within the industry, some more cyclical than others, which provides resilience against uncertainty. These include project management, resources, green energy and fund management as well as power generation itself. A fabulous stock, but heftily priced with a PE ratio of 45, this is one for the long term. More patient investors may want to wait for a cheaper moment to get in. Fairly priced.

West Pioneer Properties

Bringing western-style shopping malls to India is a big departure in a country where the logistics and transport to support such developments are patchy at best. However, by cautiously targeting only middle class areas near those second-tier cities not paralysed by gridlock, West Pioneer is doing comparatively well, as shown by the small premium that the shares have over net asset value (NAV). The last results were hit by the strong dollar, as this is the currency in which the results are reported. Nonetheless, of all the many Indian property companies on Aim, this appears to be one of the most solid. Good value.

Elephant Capital

Despite first listing in 2007, the company formerly known as Promeathean India has shown an appropriately thick hide in resisting the risky investments that lured private equity that year and in 2008. Results in May show it still has a large cash pile of £28m, which accounts for the majority of its £48m market capitalisation. Of the big investments already made, Elephant has made a loss on slump-hit car firm Mahindra, although a 3 per cent stake in Obopay looks more enticing. Obopay is a California-based company specialising in mobile-phone payment technology which Elephant hopes to bring to India. Obopay has deals in place with Mastercard, Fidelity and Bancorp. With opportunities more reasonably priced in 2009, and plenty of financial firepower, the fund is well-placed to find the out-of-favour sectors and distressed situations it is looking for. The shares are thinly traded, but may have speculative appeal. Good value.

Greenko

Renewable energy producer Greenko is sitting pretty. With India short of generating capacity, the company has almost 100 MW of hydro-electric and biomass generating capacity onstream and another 146 MW under development towards its 400 MW target. To do this, Greenko has secured an Indian interstate trading licence which will allow it to sell electricity on the open market at a better premium. Ultimately, the company plans to develop from an owner operator to a developer of projects. News earlier this month that Greenko has managed dramatically higher tariffs at several plants, and will meet expectations for the year, has powered the shares, but there is more to go. Good value.

India Capital Growth

The year 2008 was an awful one for domestically-orientated closed-end fund India Capital Growth. Net assets shrank from £123m to £32m, a staggering fall which reflects the company's holdings of small- and medium-sized companies. The fund underperformed the main BSE Sensex, which halved in value, by a further 23 points, having made the fateful decision to remain almost fully invested throughout.

However, the performance pretty much matched the Bombay small-cap index and there is potential for a substantial rebound in 2009 and 2010, some of which is already under way following the post-election rally. The average PE ratio of the fund's holdings was only five at the year-end, so for those who want a cheap play on recovery among individual stocks too small to research or not listed in the UK, this might be worth a closer look. Good value.

Hirco

Property developer Hirco is a peculiar beast. It is an investment vehicle for India's largest residential/commercial developer builder, Hiranandani, in a series of self-contained middle-class enclaves being constructed around major cities in the subcontinent. Staged construction and gradual payments means that Hirco has net cash rather than debt.

However, like most such ventures, Hirco trades at a drastic discount of 85 per cent to NAV of 672p at 31 March, despite good property sales so far by Hiranandani, whose controlling family holds a substantial minority in Hirco itself. A half-year loss of £30.88m, which was driven by a 5.7 per cent NAV write-down, compares with profits of £52.5m a year ago. While activist investor Laxey Partners was rebuffed in an attempt to turf out three directors and appoint a chairman independent of the Hiranandani family, the good news for investors is that a maiden dividend is due this year. Good value.

Trikona Trinity Capital

Activist investor QVT triggered a break-up of Trikona Trinity in March, which will lead to the sale of its property assets and a return of cash to investors, through either a tender or share buy-back. Although the motion was passed against the wishes of management, the shares continue to trade at a 40 per cent discount to the stated NAV of 138p. Assuming this figure can be relied upon to be reflected at liquidation, the fact that the shares still trade below 60p represents a huge potential value for those prepared to delve into the intricacies of the Indian governance system. Speculative good value.

Eros

An Investor Chronicle 2009 Tip of the Year, Eros represents one of the two best plays on the burgeoning Bollywood film industry, especially now that the price is far below the 138p it stood at in January. A profit warning in March included a two-month delay to four films, partly prompted by the Mumbai terrorist siege, plus a currency hit.

This resulted from the weakness of the rupee, in which most sales are made, against the dollar in which results are reported. At that time the shares plumbed a low of 40p, which put them on an absurdly low PE ratio of less than one, both historically and prospectively. This was something of an overreaction given the company's long film release schedule, the strong partnership deals with Sony and Lionsgate, the large film back catalogue and TV activities, and its previously good record of beating analysts' expectations. The company has now bounced back with three strongly received films launched at Cannes. Buy.

UMP Group

Another Indian film company, this time with good links with Hollywood, where Disney has a 32 per cent stake in UMP's parent company UTV Group. UMP was formerly UTV Motion Pictures, and has a long release history plus a significant distribution presence in the US. It has connections with some high-profile US-based Indians, including writer Jhumpa Lahiri, and directors Miar Nair and M Night Shyamalan.

However, it is currently in dispute with Indian cinemas over commercial release terms and is holding back its film. There are also some hard-to-fathom intra-company transactions and confirmation of takeover talks with 75 per cent parent UTV Software. For those that can live with such typically Indian complexities, the company does look to offer some excellent growth opportunities at a low cost. Speculative good value.

Eredene Capital

Not all Indian property ventures are in trouble. Eredene Capital has ploughed £51m into Indian ports, logistics and distribution warehouses. Its facilities are aimed at improving Indian infrastructure and taking advantage of the improved internal transport network, with an exit target of five to 10 years.

The company is in the process of raising an additional $400m (£250m) and, although this is taking some time given the current market conditions, the fact that Eredene has cash on its balance sheet along with well-known international investors such as Caledonia and Henderson should give confidence that it will continue to get the backing it needs. Buy.

Top 10 Indian plays