The Biggest Investment Opportunity This Year

You have to see it -- no, experience it -- to believe it, but believe me when I tell you that it's big. In fact, in raw dollar terms, it's the biggest investment opportunity I've discovered for 2010.

But before you can appreciate the specifics of this opportunity, you need a little bit of the background I got on the ground during my recent research trip to India.

The message from Mumbai
We all know that India has been one of the world's fastest-growing economies over the past five years. Its gross domestic product grew more than 9% annually from 2005 to 2007, more than 7% in 2008 as the world entered an economic downturn, and still ended 2009 up over 6%.

Yet the sense in Mumbai -- India's financial capital -- is that the country should be doing much, much better.

Of course, that sounds ridiculous to Americans like us who are overjoyed if our economy can post 2% or 3% annual growth. But India is decades behind the United States when it comes to basics such as roads, pipes, and power lines. It's even, we were told, probably 15 years behind China in these same categories.

Why this matters
Consider, for example, India's 12% power deficit. That means that the people in the country spend about three hours on average each day without power from the main electric grid. What's more, this deficit exists even though 400 million Indians -- more than one-third of the country's population -- have no access to power at all. In other words, the power deficit in India only stands to get worse, and crippling nationwide blackouts are not out of the question.

To compensate, factories, offices, hotels, and residents who have enough money purchase generators and stock their own fuel. Not only is that wasteful, but it makes doing anything in India that requires power much more expensive than it needs to be.

How much more expensive? One analyst we spoke to estimated that Indian manufacturers, given a reliable power supply, could cut costs 10% or so -- making them competitive with China and giving India a whole new way to create jobs and drive economic growth.

In fact, we heard over and over again that India's power problem is the single biggest factor holding back India's economy today. Whereas China has 900,000 megawatts of generating capacity today, India has just 150,000.

And just think: If India can grow 8% to 9% annually without reliable power, just imagine what it could do with it.

Knowing that ...
If you're still with me, then you're starting to appreciate the magnitude of India's power opportunity. And the good news for investors is this: Not only is power a huge need in India, but the new government has made fixing this situation one of its top priorities. Here's what that includes.

  1. Plans to double the country's generating capacity to 300,000 megawatts by 2017.
  2. Approvals for massive thermal, nuclear, and hydroelectric power plants.
  3. Providing electricity to every household in India within five years (again, some 40% today go without).
  4. The total elimination of the power deficit by 2012.
  5. Incentives for private capital to make it all happen.

Put it all together and not only is there an opportunity for hundreds of billions of dollars to be invested in India's power sector, but India is going to let companies and their investors profit from it all. That's why I call this the biggest investment opportunity this year.

Who stands to profit
As you've probably guessed, the big multinationals with expertise in these areas are all champing at the bit to win some of this business. This includes General Electric (NYSE: GE  ) and Areva in the nuclear space, while ABB (NYSE: ABB  ) should profit from efforts to expand India's electric grid and make it more efficient. ABB also recently announced plans to spend $960 million to increase its ownership stake in its Indian subsidiary from 52% to 72%. For a company looking for growth, that's a pretty clear indication of where they think they might find it.

Siemens (NYSE: SI  ) , too, is lining up transmission and distribution work as well as supplying turbines for conventional power plants. Then you have picks-and-shovels plays such as Honeywell (NYSE: HON  ) , which installs industrial security and fire safety systems, as well as IT companies like Hewlett-Packard (NYSE: HPQ  ) , Cisco Systems (Nasdaq: CSCO  ) , and IBM (NYSE: IBM  ) that make sure all of the equipment works together.

And while all of those players will end up being involved (and ABB is one of our picks at Motley Fool Global Gains), there's one more piece of information that smart investors should know: The Indian government is keen on making sure that a good portion of the business it doles out finds its way to domestic Indian companies.

This is why the likes of General Electric and Areva, both of which already have approvals to build huge nuclear power plants in India, expect to use local companies for up to 70% of the work.

And that's your hint
It's as a result of that last insight that I left India knowing that I had to find an Indian company capable of this type of work to invest in if I wanted to make real money from this opportunity. Thankfully, after asking around, meeting with several different companies, and reading hundreds of pages of financials, I think I found my horse.

Not only does this company have the know-how to build coal, gas, and nuclear power plants, but it's seen its backlog for work in this space increase 20-fold over the past two years.

Interested in learning more about this company? Just join Motley Fool Global Gains free for 30 days and download a copy of our special report, "China vs. India: 5 Top Stocks to Profit No Matter Who Wins."

Not only will you read about our power sector pick, but you'll also get our top picks in the health-care, agriculture, financial, and telecommunications sectors. Click here for more information.

This article was first published Jan. 22, 2010. It has been updated.

Tim Hanson is co-advisor of Global Gains and recently returned from a research trip to India. He owns shares of ABB. ABB is a Global Gains recommendation. Danger: The Fool's disclosure policy is high voltage.


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  • Report this Comment On May 23, 2010, at 1:52 PM, SunDevilMBA wrote:

    Interesting article. I think there is a deeper question beneath the surface of why India's infrastructure development is lagging relative to China. The business climate in India has a much more wild west element to it. There are a number of outside forces to contend with when doing business in India. There is the unwieldy political structure, acres of documentation to sign-off and authorize projects, and a system that is still reliant on bribes to access to local officials, permits, and to win contracts. Until these economic hurdles are addressed I still see China as the most efficient place to invest in the next ten years. Problems in India may not continue to be systemic out in the future, but i believe that they preclude some success today.

    I would also like to know if you have seen any improvements in the problem areas that i mentioned during your recent trip? Regards, Steven

  • Report this Comment On June 19, 2010, at 9:17 PM, Polybio wrote:

    While SunDec makes some key points that has been holding back India , however there have been changes in the " bribing" and bureaucracy in the last 3 years, not as much as we would like, but substantial IMHO.

    Though I must having done business over the last 55 years in Asia, Middle East , Europe & USA I have to say the only 2countries I know you can get big projects moving without bribing is Switzerland & Saudi Arabia.

    Sadly in USA "we cannot hold our heads high and say " we are holier than though" when it comes to big business and contracts. True we do not have to grease palms in Goverment in UK or USA for day to day dealings in local or federal departments. But when it comes to contracts in Infrastructure and Turnkey projects, sadly we have to gease palms and fill pockets if not directly with the supplier with the politicians who can exert plenty influence on major projects be they in USofA or India.

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