Indian beauties

Yet India has been something of a Cinderella among these four economic powerhouses. While its main stock market index has seen gains in 2009 double those of the FTSE 100 in dollar terms, its 80 per cent uplift pales beside the triple-digit gains in the three other BRIC stock markets. Chinese 'B' shares are up 130 per cent, Brazil up 143 per cent and Russia up 126 per cent on a comparable basis.

So are Indian shares attractive? To answer this requires a brief look at the Indian economy, and at some alternative investment options.

Measured in local purchasing power, India is the fourth largest economy in the world and also believed to be the second fastest growing. A big advantage is that much of this growth is self generated. Only 15 per cent of the GDP comes from export markets, in sharp contrast to China. This provides resilience. In the ultra long term it may allow India to keep growing even if Chinese growth is fading.

Indian GDP was probably up by around 6 per cent in 2009, notwithstanding recession in developed markets. Recently published data showed India's economy growth at a rate of 7.9 per cent in the third quarter of 2009, accelerating away from rather more modest growth in the previous two quarters. Indian banks have been largely unaffected by the credit crunch, thanks to vigilant government policing of the banking sector. In addition mobile phone growth is rocketing, up 52 per cent year on year, while car sales are growing at close to 30 per cent. Building material demand is consistently strong.

India has good demographics for growth. Some 60 per cent of the population is under the age of 30, there is a low reliance on credit, increasing disposable income and high levels of skills and education. Agriculture can be slightly problematic. This year, poor early monsoon rainfall may lead to lower levels of agricultural output and could restrict economic growth a little in 2010.

Nevertheless, aside from temporary factors of this nature, much of India's growth potential lies in the rural sector, to which 70 per cent of the population are linked in some way. Improved salaries for government employees, increased spending on rural infrastructure, new laws guaranteeing rural employment, buoyant commodity prices, and the low penetration of certain consumer goods among the rural population, all augur well.

India is spending heavily on infrastructure. It is, for example, midway through a $500bn five year programme of public spending in this area. This programme lasts until 2012, and focuses on power, roads and bridges, railways, irrigation, water supply, sanitation and port facilities. This, and a continuing focus on outsourcing to India by large companies elsewhere, is likely to benefit the economy for some time to come. While India is well known for IT outsourcing, outsourcing to contract manufacturing is also becoming increasingly common in certain sectors.

In stock market terms India is the third largest market in Asia. It comes behind Japan and China and Hong Kong combined. Of over 1300 listed companies, there are well over 200 with market capitalisations in excess of $500m. Treating the 2007 and 2008 periods as an aberration, driven more by events elsewhere, foreign investment inflows have been healthy for many years. It might be higher but for careful central bank controls on inward investment.

Return on equity for the top 50 listed companies is typically in the region of 20 per cent, a high average by the standards of most western stock markets and, though earnings growth was probably minimal in 2009, it looks set to be well into double digits in the coming two years and possibly beyond.

Over the long term, India's stock market has provided consistently good long term returns. According to figures from Blackrock, which manages a specialist fund via a joint venture in India, the median annual return since 1984 has been close to 18 per cent. On a five year rolling basis, the main stock market index has delivered positive returns 90 per cent of the time, with five year gains averaging in excess of 100 per cent. The recent rise in the Indian market has undoubtedly blunted some of the short term potential, but the long term case remains intact.

One hint of this has been the enthusiasm that many UK investors appear to display for the growing list of Indian firms listed on AIM. There are now around two dozen such entities, half of which are profitable. Accounting firm Grant Thornton keeps a tally of the performance of UK-listed Indian stocks. Its recent research suggests that in the third quarter of 2009, the 26 AIM-listed and four main market listed Indian stocks showed gains of around 35 per cent on average, versus an increase of around 20 per cent for the AIM index, and 18 per cent growth in the Indian stock market index.

With all this in mind, what are the best ways to get exposure to the Indian stock market? The following are a few suggestions. We suggest, however, that UK investors adopt a portfolio approach, getting market exposure through an ETF or broad based investment trust, and only then, if they wish, supplement this with additional investment in some of the individual stocks also suggested below:

Lyxor ETF India (S&P CNX Nifty 50) (LNFT)

There are currently around 17 exchange traded funds offering exposure to the Indian stock market, of which this is the only one denominated in sterling terms. So it is the obvious choice for UK investors for index-tracking exposure, unless an extra layer of currency speculation is required. With this tracker, only the index and the sterling/rupee exchange rate are important.

The S&P CNX Nifty 50 is a market capitalisation weighted index of 50 of the largest companies listed on India’s National Stock Exchange. Together they account for 60 per cent of the capitalisation of the total market. The index encompasses 25 sectors of the market and has been calculated since 1996. To be included in it, companies must have a market capitalisation of at least Rs. 5bn, at least 12 per cent of their shares available for public trading and be a liquid market.

Its largest constituents include the likes of Reliance Industries (an energy firm), NTPC (a utility), Oil & Natural Gas Corporation, Bharti Airtel, State Bank of India, Bharat Heavy Electricals, ITC (tobacco), Infosys (an IT firm), Hindustan Unilever, and ICICI Bank. These 10 stocks represent over 50 per cent of the index’s capitalisation.

The index hit a high of around 7300 in late 2007, and currently stands at around 4000. The historic PE ratio of the Indian market is in the low 20s, but earnings growth in the next couple of years is expected to reduce this sharply. Annual management fees on the fund are a very modest 0.85 per cent and the suggested minimum investment term is five years or more. Buy.

JP Morgan Indian Investment Trust (JII)

This investment trust is the better performing of the two main broad India-focused investment trusts listed in London. Five-year price performance is +173 per cent and NAV growth over the same period is +188 per cent. The trust invests in both Indian and non-Indian companies, provided they have a substantial proportion of their business revenues from India, and in Indian related non-equity securities. It does not invest in other countries in the Indian subcontinent, or in Sri Lanka.

It has a number of portfolio constituents that are heavyweight constituents of the index mentioned previously, including Reliance, Infosys ICICI Bank, ITC, Bharti Airtel and so on. Around 30 per cent of the portfolio is in financials, 16 per cent in energy, and 12 per cent in IT.

Calculation of NAV is complicated by the fact that there are subscription shares outstanding which will be converted into ordinary in January 2010, the call payment on which will provide the trust with additional funds. Adjusting for this gives a diluted NAV of 375p a share and at the time of writing the ordinary shares stood at a small discount to this number. The trust is ungeared. Buy.

Eros International (ERO)

Listed on AIM, Eros is a media and entertainment company involved in Bollywood films and related music and other content, with a split of revenue and profits that takes in television syndication, theatrical releases, and video and home entertainment.

Some 60 per cent of revenues come from India with the remainder split more or less equally between Europe and the rest of the world. Recent developments have included a contract for the development distribution and marketing of the company's musical content for digital download to mobile phones, and a multi-film content licensing deal with a major Asian TV network. In the film production area, an industry-wide producers' dispute with major Indian multiplex chains over box office takings, during which no films were produced, was resolved in mid-2009 and recent major releases have had a very positive reception.

The company's attractions stem from the phenomenon that is the Bollywood film sector, currently growing at around 18 per cent a year in revenue terms, and partly from its financial characteristics. While film production is something of a hit-and-miss affair in terms of profitability, there are substantial revenues in licensing deals, syndication, and related activities, which can be captured by an integrated operator like Eros. Some believe that there may be substantial growth in Bollywood developing animated films to a much greater degree, given the degree of IT expertise available in India.

Eros's profits are expected more or less to stand still in the year to March 2010, but growth should resume in 2011. This should be helped by a better underlying economic background and a recovery from the special factors that affected 2009/10. Interim results were down on the previous year thanks to the commercial dispute with multiplex chains, but look set to recover in the second half. Underlying cash flow is strong and, although the group has spent heavily buying content in recent years, that spending has now peaked. As strong cash flow shows through, net debt is expected to fall.

Earnings per share are likely to be down slightly in the year to March, reflecting adverse exchange rate movements, but the shares sell on a multiple of little more than six times, and at around four times cash flow. The group is considering a partial listing in Mumbai for its Indian subsidiary, a process that should be completed before the end of the current financial year in March 2010, and also a move from AIM to the main market in London. In advance of these developments, and bearing in mind the recovery expected in the second half of the year, the shares look cheap. Buy.

Greenko Group (GKO)

Greenko is a developer and operator of renewable energy power generation assets, with a specific focus on hydro, wind and biomass. At the end of March 2009, the company had 255MW of secured capacity, of which 100MW was operational and a further 155MW under development.

Agreement has also been reached for the acquisition of a 100MW hydro plant in Sikkim, which would increase secured capacity to around 350MW. The company is also expecting to acquire a further 500MW of potential capacity via small hydro station developments in a variety of locations. Secured capacity - either operational or under development - is expected to reach 1000MW by early 2015.

These developments are in line with the company's strategy of aiming for a range of locations to avoid undue dependence on any one area or regulatory regime.

India has a substantial shortfall in power generation. Short term electricity prices have tripled over the last five years and peak time shortages of power are expected to reach around 18 per cent in the current year. A recent McKinsey report suggested that power demand is likely to more than double from its current level over the next eight years, underlined by the current lower level of per capita consumption, around a quarter of the global average.

In the six months to September, the company's operational biomass plants benefited from higher tariffs and three hydro plants were either commissioned or were expected to be commissioned, the full effect of which will be seen in the coming financial year.

Profits are currently relatively small and the company sells on a high price earnings ratio, but this is expected to fall dramatically over the next few years as profitability ramps up, particularly from March 2011 onwards.

While speculative, the company represents one of the more ethical ways of playing the potential rapid growth in the power generation market in India, and the shares look attractive, provided investors are prepared to adopt a medium to long term investment horizon. Speculative buy.

Alpha Tiger Property Trust (ATPT)

Alpha Tiger invests in real estate in India, primarily in business parks and related ancillary developments. Developments currently under way total 2.5m square feet, of which the company's share is approximately 1.2m square feet.

Developments like this have access to tax breaks and a broader range of outside funding than some other Indian companies. This applies particularly to properties inside development areas known as 'special economic zones' (SEZ). Here any investment in new property is treated as developing infrastructure. This includes the group's Galaxia development, where the sublease on land for the development was recently secured.

The company has so far undertaken capital commitments of some £29.6m in respect of three major developments, of which around £8.8m had been drawn as at the September 2009. The Technova development is expected to move towards completion of construction (currently 60 per cent complete with funding secured for the final stage) and subsequent letting in the first half of 2010.

Significantly, perhaps, shareholders recently voted on a significant revision to the investment policy of the group. This allows the trust’s managers to invest in real estate markets elsewhere, including other counties in Asia, and Europe. The announcement noted, however, that by virtue of the developments already under way, 'India is likely to continue to be an area of focus'.

Investing in property assets or service companies offering more immediate generation of income is likely, and the managers acknowledge that the credit crunch and debacle in commercial property in Western markets has opened up opportunities worthy of further investigation. Investing outside India is also held to have benefits in the form of greater diversification and better management of risk.

The principal attraction of the shares is the sizeable discount to assets on which they stand. The share price of 76p (as at 1st December 2009) compares to NAV in the region of 102p, a 26 per cent discount. In light of the discount, and to enhance value for existing shareholders, the company is proposing a tender offer to buy back up to 24.99 per cent of its shares. Speculative buy.

Selected UK listed India stocks