Global Investing Focus: India

July 9, 2006

Investors are eager to take part in the economic boom going on in India. Find out how you can get in.

India has caught the attention of many investors as it becomes a budding epicenter for entrepreneurship and technology.  In 2005, India’s GDP growth was 7.6% with every region of the economy experiencing dramatic growth.  The equivalent of the Dow Jones Industrial Average in India is the Sensex, which is composed of 30 of the largest and most actively traded stocks on the Bombay Stock Exchange. 

The Sensex has fallen dramatically since hitting an all-time high of over 12,000 in May.  After bottoming out at 9,000 mid June, it is currently trading at 10,500.  Emerging markets around the globe were all hit sharply during this time.  The steep correction was brought on by concerns about rising interest rates and slowing economic growth.

Many traders were happy taking money off the table and locking in huge profits from the steady run that global markets had.  Numerous individuals in India’s rising middle class have started investing their savings in blue-chip stocks, even using margin loans to leverage themselves to buy more.  The sell-off has wiped out most of their life savings.  The forced selling by brokers due to margin calls and generally panicked selling has made many companies unusually cheaper than ever.

India is estimated to have roughly 50 million internet users, and this figure is rapidly rising.  Internet users’ share of the total population of 1.1 billion is a measly 4.5%, almost half of its closest counterpart China, which has a penetration of 8.5%.  Two companies that stand out in the quest to monetize the growing net traffic are Sify Limited (SIFY) and Rediff.com India Limited (REDF).  Both issues trade on the Nasdaq as American Depository Receipts; foreign stocks trading in U.S. dollars as opposed to India’s domestic currency, the Rupee.

Sify serves as a premier internet portal and service provider.  Its outfits include browsing centers, where if offers computers with internet access for an hourly fee.  The Sify.com homepage is very similar to early AOL and Yahoo outfits, offering a search function, top news stories, entertainment features, and advertisements.  Sify’s strong presence in delivering affordable internet access to the masses makes it well positioned for continued growth.

Rediff.com is similar to Sify in that its main feature is its internet portal, although it doesn’t act as an ISP.  Its sales over the past year were just $12.6 million compared to Sify’s $105.3 million, but Rediff.com is able to make up with its faster 5 year estimated annual growth rate of 50%.  Shares of both companies have traded roughly in line with each other over the past year, although Rediff.com outperformed often due to its smaller size and faster growth. 

While Baidu.com (BIDU) is sporting a market cap of $2.9 billion, Sify and Rediff.com are both valued at just $400 million apiece.  The buzz of Baidu.com hasn’t reached either of these outfits, but once it does, the frenzied buying like Baidu.com first few days as a publicly traded company may emerge again.

Financial services is another hot sector in India.  The ICICI Bank Limited (IBN) has a strong presence in banking, financing, insurance, and investment banking.  The current valuation sets its market cap at 8.4 billion and an estimated forward P/E of 16.7.  Like many American banks, ICICI pays dividends which yield 3.0% annually.

The automotive sector is booming in India as more consumers purchase personal vehicles and infrastructure improves.  Tata Motors Limited (TTM) posted sales of $4.5 billion on 450,000 units sold in its fiscal 2006.  The forward P/E on Tata Motors is 17.3, larger than the 15.1 on Toyota Motor (TM).  Tata should be able to quickly bridge the gap due to its small market cap of just $6 billion to Toyota’s $170 billion.  Asian automakers are flourishing while American manufacturers deal with eroding market share and pension costs.  Tata Motors brand name and expansion opportunities give it the lead in the Indian automotive market.

Information technology and the outsourcing of technical jobs helped India in its early stages of development.  Two companies that are seeking to capitalize on this growing trend are Infosys Technologies Limited (INFY) and Satyam Computer (SAY).  Both companies provide IT services and business solutions at discounted rates.  The more established company Infosys, has seen its stock move very modestly over the course of one year, resulting in no net change.  Satyam has about quarter the market capitalization as Infosys and a P/E ratio of just 22.1, making it much cheaper than Infosys’s 38.4.

Sify, Rediff.com, ICICI Bank, Tata Motors, Infosys Technologies, and Satyam Computer represent a few of the pure plays on Indian stocks.  Indian investing has many exciting opportunities for growth.  The smaller scale of each company leaves the door open for the next Microsoft or Google to blossom.  Investing in India will undoubtedly be volatile as the recent correction shows, but it remains a hotspot for breakneck growth and expansion with limitless bounds.

At the time of publication, Dhinesh Ganapathiappan did not own or control shares of any companies mentioned in this article.