ETF Teardown: India's Top Stocks

Noted for simplicity and their other advantages over mutual funds, exchange-traded funds are a popular investing tool.

ETFs hold a collection of stocks that share certain elements. For example, if investors want to capitalize on the rapidly developing economy in India, they can turn to recently launched ETFs such as PowerShares India Portfolio (NYSE: PIN) or WisdomTree's India Earnings Fund (NYSE: EPI). But since each of these ETF's diversify in several stocks, the upside is also limited.

Fear not, Fool -- in today's "ETF Teardown," we'll use some nifty tools to drill into the best investments India has to offer. To help, we'll use Motley Fool CAPS, our tool for screening and ranking stocks and stock pickers.

The power of tags
To help investors locate great stocks quickly, CAPS-rated stocks are tagged with descriptors that group the company with others in the same category -- "Jewelry," for example, or "Manufactured Housing."

Selecting the "India" label in CAPS gives us a list of 27 investments that are tied to the Indian market but that trade on U.S. exchanges. This collection has dropped 4.1% in the past year but has still outpaced the S&P 500, which has ticked down by 6%.

To gauge which companies the CAPS community thinks offer good opportunities in this region, we'll sort these businesses by their CAPS star rank, from one star to the maximum five. We'll then examine a couple of the companies to find out who -- from Wall Street to Main Street -- is bullish or bearish on the business, and why.

Down to the nitty-gritty
Here are some India-tagged stocks I've pulled from CAPS today:

Indian banking revisited
Almost a year ago, CAPS investors who rated the top Indian financial institutions HDFC Bank and ICICI Bank gave both the highest-possible five stars, despite the pricy valuation of both. Since then, stock in ICICI Bank has returned to its starting point even after a 60% rise, and HDFC sits more than 40% higher today after nearly doubling. 

Like nearly all banking stocks around the globe, both ICICI and HDFC have fallen victim to the negative sentiment surrounding financial institutions, even though neither one holds significant exposure to bad debt or subprime mortgages. After falling dramatically in the past month, however, many investors jumped at the rare opportunity to get these fast-growing Indian banks at a more reasonable valuation.

With many CAPS investors holding a very long-term view -- like 15 or 20 years -- in the emerging Indian market, established banks are still viewed favorably even considering negative near-term sentiment. I tend to agree with most of the 97% of investors rating both ICICI and HDFC positively -- the recent drop in shares of these companies gives investors a good opportunity to buy into the long-term growth of the Indian economy.

Outsourcing success
Even after years of India being painted as the outsourcing capital of the world, investors still see a mix of opportunity and risk in the sector. But intense competition and razor-thin margins cause many investors to hesitate about companies that provide outsourced services.

Business process outsourcing (BPO) companies such as WNS Holdings get extra points for focusing on a range of business functions -- and not only IT management -- but in general CAPS investors still hold a negative view of them.

WNS took a significant hit on its earnings in 2007 when major customers such as mortgage firm First Magnus Financial and lender IndyMac withered under subprime debt. But WNS claimed its exposure to mortgage and banking customers is now minimal and boosted its outlook for net income growth in 2008.

A forward earnings multiple of 21.3 after a 45% drop in the stock in the past year has some CAPS investors bullish on the stock's future. But nearly one-fifth of the 26 CAPS All-Stars rating the company are still voting for it to underperform the S&P going forward. WNS Holdings only musters two-star support from the CAPS community.

Here, horse -- water ...
Plucking individual stocks from the Indian market is, of course, a high-risk endeavor. Investors should always perform their own due diligence on companies.

So, do you agree there's long-term value in Indian banks? Or has outsourcing been given the bum rush unfairly? Give your opinion in Motley Fool CAPS.