Whenever I speak to investors, I generally spend a lot of time talking about China. A consequence of that focus is that I am inevitably asked one simple question during any follow-on Q&A: "What about India?"
It's a good question, too. India's GDP growth over the past five years has only slightly lagged that of China, and with a population of more than 1 billion, Indian demand for infrastructure, commodities, and consumer goods stands to ultimately approximate that of China. Further, many investors feel more comfortable investing in India given that it's a democracy.
There are, however, important differences between the two countries with significant implications for investors. Among them is that China's infrastructure -- be it information, transportation, or utility -- is vastly superior to that of India's. What that means is that companies that rely on good infrastructure to make money are already good investments in China, but not yet good investments in India.
Some of the biggest winners in China over the past five have been Internet plays such as search engine Baidu.com (Nasdaq: BIDU ) and portal SINA.com (Nasdaq: SINA ) , up 1,300% and 166%, respectively. Contrast that performance with that of Indian Internet portal Rediff.com (Nasdaq: REDF ) , which is down 77% over the same time period. Why the discrepancy?
When I met with Rediff founder Ajit Balakrishnan in Bombay in 2007, he explained the biggest challenge facing his company was simply staying in business while they waited for the government to get more Indians connected to the Internet (Rediff was founded way back in 1996). And while the government has embraced private sector involvement and made good progress since then, India remains largely offline. It's estimated that just 81 million Indians are Internet users today, or a measly 7% of the population, with just 5.2 million having broadband access. That compares to 420 million Internet users and 364 million broadband users in China. This is one reason why Rediff, despite having grown revenues from $2 million to $20 million over the past decade, has so disappointed investors.
As an aside, consider this a cautionary tale before investing in travel website and recent Indian IPO MakeMyTrip Limited (Nasdaq: MMYT ) . The currently profitless company is selling for more than eight times sales on the hypothesis that it has a huge market opportunity. And while that's no doubt true, it may take many years for that opportunity to materialize given how difficult it has been to get India connected to the Internet.
What you should be buying in India
Investing in India, in other words, should stick to the basics. That's one reason why, last January, I called India's efforts to close its power deficit the biggest investment opportunity of 2010. The reason is that the Indian government had laid out clear goals in its 11th five-year plan (spanning 2007 to 2012) to address the country's near 10% nationwide energy shortage by adding more than 78,000 megawatts of power generating capacity and connecting every rural household in India to the grid. What's more, electricity was expected to be the biggest beneficiary of India's infrastructure investment, with India's planning commission estimating that more than $165 billion, or 32% of all infrastructure spending, would be spent to electrify the country.
Since then, our top pick to profit from that opportunity, Indian industrial firm Larsen & Toubro (Other OTC: LTOUF.PK) is up more than 40%. Orders are up 41% over the past year on the back of strong domestic demand, with 47% of all those incoming orders related to power projects in India.
Yet despite this spending and growth, the opportunity in the Indian electrical sector remains enormous. Not only does per capita power consumption continue to grow at almost 5% annually, but the most recent monthly data from India's Central Electricity Authority shows that the country has added just 32% of the more than 21,000 megawatts it expects to add by the end of 2011 and is generating just 56% of the electricity it expects to generate by the end of 2011. Furthermore, 15% of rural households still need to be connected to the grid, and the country is still running a power deficit of more than 9%.
This is why I don't expect that order momentum in India's power sector to subside anytime soon -- a reality that was confirmed again this week when India and France signed a $9.3 billion deal for French industrial giant Areva to build two new nuclear reactors in India, with French President Nicolas Sarkozy adding that there was "no limit" to the extent the countries may cooperate to bring more and more nuclear power generating capacity to India.
The global view
While I acknowledged in January that multinationals such as Areva and General Electric (NYSE: GE ) would get a piece of this action, I continue to believe that the biggest beneficiaries will be domestic Indian firms. The Indian government is focused on creating more jobs in India for Indians, and as BusinessWeek pointed out in reporting the Areva story, the company "will work with Indian companies to prepare for the construction of the two reactors." In other words, many of the parts and labor for these massive engineering projects will be sourced locally.
That's why L&T remains a buy and your best bet to profit from this enormous opportunity.
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