Finding Value in Indian Stocks

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One of the big moves in the foreign exchange market this year has been the devaluation of the Rupee, which fell to an all-time low of 68.85 against the U.S. dollar in August. Currency devaluation is not necessarily a bad thing, as we have seen in the case of Japan. The Indian stock market also seems to be benefiting from a weak Rupee, touching record highs this week. Despite the rally, many Indian stocks still seem to be trading at a reasonable valuation, including Tata Motors (NYSE: TTM  ) and Infosys (NYSE: INFY  ) .

Politics and economy
A key factor in India's currency and stock markets over the last year has been the country's political situation, which is closely tied to its macroeconomic backdrop. India's GDP growth figures have been choppy, slowing to around 4.4% for the June quarter after hitting a peak of 9.3% in 2011. This summer was a period of turmoil for the country's markets, with the Rupee falling around 25% against the dollar. Needless to say, investors were worried.

Things seem to be looking up a bit, though, as the country's new IMF-trained finance minister's tough fiscal measures seem to be paying off. The latest GDP figures showed the Indian economy gaining pace, rising to 4.8% and beating expectations. Finance Minister Palaniappan Chidambaram stated that the country's economy will grow by 5% in the fiscal year ending March 2014, with many experts agreeing that the economy is bouncing back from a two-year slowdown.

The most recent political development to have influenced the markets was the defeat of the Congress party in state elections over the weekend. Investors are hoping that a new government, potentially led by the Hindu nationalist party's Narendra Modi, would usher in a new era of economic growth in the subcontinent. A KPMG India analyst was quoted as saying (registration may be required) that a stable and decisive government would put the country on track for 8% growth.

Stocks to watch
One of India's biggest companies is Tata Motors, which produces such drivable gems as the Indica and the Indigo, as well as the world's cheapest car. The company's stock has trailed that of U.S. carmakers year to date, rising a meager 1.4%. This owes to the fact that the business hasn't been performing as well: Its latest report showed a hefty 39% drop in November car sales. Still, the company's net profit margin for the year is quite a bit higher than those of its U.S. counterparts, and it's trading at only 10.5 times trailing earnings.

Another Indian heavyweight is Infosys, a large player in India's famous IT-service outsourcing industry. While the company's latest earnings report missed on earnings, the stock rallied more than 6% on solid revenue growth and better-than-expected guidance. Management now expects revenue growth for fiscal 2014 to be around 9% to 10%. Trading at a discount to its major competitors, the stock is priced at 19 times trailing earnings, which is fairly cheap for such a large IT company.

For investors looking for broader market exposure in India, the WisdomTree India Earnings Fund (NYSEMKT: EPI  ) would probably be a good bet. By far the largest U.S. ETF tracking Indian companies, the fund has some $917 million in assets under management. Financial services make up the largest portion of the fund's holdings at around 25%, although energy is also well-represented at around 20%.

Infosys and Tata Motors make up 6.3% and 4.7% of the fund's holdings, respectively. The ETF is down about 16.6% this year, which is slightly worse than some of its counterparts, but with an expense ratio of 0.83% and a middling P/E of 12 times trailing earnings, it's not an expensive ETF.

The bottom line
The Indian economy seems to have turned a corner, as GDP figures are growing again. While it may be too soon to call, investors seem confident about the country's ability to return to solid growth. With a new government in power and massive potential in terms of labor, India may return to high-single-digit growth sooner than expected.

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