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A taste of India

Created:

12 June 2009

Updated:

17 June 2009

Written by:

Nick Louth

Investing in India can be as complex and frustrating as dealing with the country's notorious bureaucracy. But, for those with an eye for detail and some patience, there are some excellent share opportunities. With the return of a Congress Party-led government in the recent election and economic growth likely to be second only to China among the BRIC (Brazil, Russia, India & China) economies this year, India has an awful lot going for it. Not least is its large, self-confident middle class, which numbers 200m well-educated consumers. A new study by management consulting firm McKinsey suggests that if India continues its recent growth, average household incomes will triple over the next two decades and it will become the world's fifth-largest consumer economy by 2025.

While the country has numerous large and well-known domestic companies, it isn't easy for UK investors to access them. Firms such as Reliance, Bhati Airtel and Infosys, for example, are listed primarily in Mumbai. Where foreign listings exist, they are more likely to be in New York than in the UK. Those who want a broad exposure to India without doing their own research are probably best advised to take the fund route. However, when it comes to smaller companies, the UK investor does have an advantage in the many Alternative Investment Market (Aim)-traded Indian firms that have flocked to London in the last few years.

There are about 30 such firms, ranging from exciting power-generation ventures such as KSK through to companies such as Eros, UMP and the Indian Film Company, which are harnessed to the growing Bollywood film industry. But the biggest sector is property, with all manner of land and development-related companies, most of which now trade at distressed prices, even though few are actually in trouble. Having said that, many of Aim's Indian companies have the same disadvantages for UK investors: they are tightly held, with only a small free float; and they are often thinly traded, so you have to put up with large bid-offer spreads.

For all their cheapness in PE ratio terms, very few pay any kind of dividend. Above all, there are murky governance issues in many stocks in which news is too infrequently issued, where there are numerous cross-holdings, where related-party transactions can be hard to fathom and where the interests of the small investor might occasionally be forgotten. After all, it's one thing to be a sleeping partner as Aim-based investors are in many of these companies, but you do want to be woken up occasionally and told what is going on.

The biggest Mumbai share index, the Bombay Sensex 30 Index, had its worst annual performance since 1991 last year. However, it has soared 80 per cent so far in 2009, adding almost 20 per cent overnight on the election news. After years of parliamentary logjam, the hope is that an overall majority for the moderate government of Manmohan Singh will lead to the economic reforms and infrastructure development that India so badly needs. So here are 10 interesting companies that we think will benefit.

India's economy

India is turning out to be one of the world's most resilient economies during the downturn. India's GDP growth rebounded to 5.8 per cent in the first quarter, double the government's own target, though still below the heady 9 per cent recorded in the previous fiscal year. While China may grow faster, at 6.3 per cent, India’s expansion will still leave Brazil and Russia well behind. These two countries are expected to suffer a contraction of GDP of 0.3 per cent and 5.6 per cent, respectively, this year. Foreign investors have poured into India since the election result, pushing up the rupee by 4 per cent since then and 13 per cent since the low hit in March.

The biggest worry is government debt which has doubled to 12.2 per cent of GDP since 2006, helped by big pay rises to public servants and government funding of banks’ write-offs of overdue debt owed by small farmers. India is in some ways like France, in hock to special interest groups, such as agriculture, but with the added complications of caste and religious schisms.

However, India is a much more reassuringly familiar territory for the British investor than China. The widespread use of English, the good education system and the sheer hard work of the middle classes are well understood assets.

While export growth has evaporated, domestic demand is still strong, which will allow the country to bounce back into strong growth in 2010. Unlike many other nations, India still has room for further monetary easing if required, and the largely domestic-facing banks have mostly been spared the terror that the world's financial system has endured.