Cashing In on India

The world economy is expected to grow 3% this year, according to the IMF. The developed world is expected to shrink 3.5% this year before growing a paltry 1.9% in 2010. And then there's India. India is expected to grow 6% to 7% this year -- and that's below its average 8.5% real GDP growth over the past five years.

As India heats back up after the global recession, the high growth is expected to return. This is according to Punita Kumar-Sinha, chief investment officer of The India Fund (NYSE: IFN  ) and the Asia Tigers Fund and senior managing director of The Blackstone Group (NYSE: BX  ) . According to Blackstone, the India Fund's NAV is up 82% year-to-date. The price during the same period is up 68%, and a whopping 133% from the March lows. As such, investors with a long-term horizon should look to cash in on the growth ahead of the emerging market's development.

The trend has already begun in the business world, as American and international companies alike see the potential the Indian market holds. Wal-Mart (NYSE: WMT  ) and Harley-Davidson (NYSE: HOG  ) have recently set up shop alongside longtime Indian players like Citigroup (NYSE: C  ) , Daimler AG (NYSE: DAI  ) and Vodafone (NYSE: VOD  ) .

Kumar-Sinha says that if you examine different parameters -- for example, consumption of food, steel, cement, telecom, or power -- India's growth is still far below Asia's average. For example, India has 7% penetration in broadband, versus 18% in Asia. Only 17% of households have computers, compared to 65% in China. "India is still far from being a developed economy, because the penetration of a number of different items versus global averages is still very low," Kumar-Sinha says. "So that means there's potential to grow that, which means the real GDP growth could continue for a while because of the story."

Kumar-Sinha says we can expect at least 10 years of high GDP growth ahead in India, given the potential for investment in infrastructure and high demand. "The growth drivers in India make India an attractive destination for long-term investment," she says.

A top-down view
India has favorable demographics. The country has a young population and a growing middle class. Fifty-nine percent of India's population is below 30 years of age. Kumar-Sinha says those demographics bode well for an increase in consumption and penetration of goods.

Investors with a time horizon of 10 years or longer can cash in on India's favorable secular trends. One of those is infrastructure. "India has very poor infrastructure right now," Kumar-Sinha says. "So I think there will be a lot of investment in those categories."

According to Kumar-Sinha, infrastructure, rural spending, and rural consumption have been a major focus for the Indian government. She says the government has plans to invest roughly $440 billion in various infrastructure projects ranging from power to roads, rail, and irrigation. The largest percentage of investment (32%) will be directed toward power, with roads the second largest (15%).

Kumar-Sinha says other sectors, such as ports and airports, should also benefit from that investment cycle. "So I think infrastructure-related companies will continue to see demand," she says.

Within rural consumption, Kumar-Sinha says the government has instituted pay raises across the public sector to all employees, while also boosting rural employment by 140% compared with last year. The expert says these investments in the country's workers will most likely act to boost consumption.

"The Indian economy will benefit not just from investment in infrastructure, but also from strong consumption due to favorable demographics and rising incomes," Kumar-Sinha says. "I think a number of sectors will benefit over the next five years -- not just infrastructure, but sectors like real estate, financials, and media as well."

Hurdles for the Indian economy
Like any economy, India has its own set of challenges. According to Kumar-Sinha, India's fiscal situation has always been a challenge, and she foresees this continuing to affect the economy and the country's currency. Kumar-Sinha also cites India's high dependence on imported oil. "If oil prices go up, the fiscal situation gets worse," Kumar-Sinha says. "So India is trying to spend on E&P for oil and gas within India to create its own internal energy sources, instead of depending on imported oil."

Kumar-Sinha also notes that while the plans for investment in infrastructure are good, any delays in execution could create bottlenecks for India's growth.

The market
Clearly, positive trends in India are in place for investors. But how will the equity market perform? Kumar-Sinha says the Indian stock market is trading at a slight premium to other Asian markets on average, but notes that it has always traded at a premium. However, the premium can be justified, because the consensus growth rates for corporate earnings this fiscal year are around 8% to 9%, while the consensus for next fiscal year is for 20% earnings growth. "[It] is good compared to other economies," Kumar-Sinha says.

Right now, she says India is trading at a forward multiple of 16.5: "It's not that expensive, but it's not that cheap. It's trading right in the middle." Kumar-Sinha says the highest multiple India has traded at is 29 times price-to-earnings, and the lowest is around 7.

Going forward, Kumar-Sinha says she thinks the Indian market is going to be driven by global factors, as well as the inherent earnings of its own companies. But in the long term, Kumar-Sinha says, "if these secular drivers continue, then we think over the long term, this will be a great market to be invested in."

Interested in investment opportunities in India? Our Global Gains research team is traveling there at the end of the month to meet with the country's top companies and investors. You can get all of their special dispatches from the field delivered right to your inbox free of charge -- just by entering your email address in the box below.

Fool contributor Jennifer Schonberger does not own shares of any of the companies mentioned in this article. Wal-Mart is a Motley Fool Inside Value selection. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 27, 2009, at 11:01 AM, Alexamall wrote:

    but now days liqidity is driving the market.

    And don't to forget very low equity participation from retail investor.

    Savings are good and incresing, as long as liquidity is very high in market, it is difficult to come down the market.

    So global factor will not affect market as in past.

  • Report this Comment On November 28, 2009, at 10:15 AM, gds1234 wrote:

    For Tim Hanson. Concerning your India trip, you may want to read "Some Indians Find It Tough to Go Home Again" in the NYT Saturday, November 28, page B2

  • Report this Comment On January 04, 2011, at 6:35 PM, veryst wrote:

    dont tell me about large companies. give me some perspective small caps companies baby.

    tx.

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