It's not every day that a top investor offers to teach you the key to investing in his country. But that's what happened when Global Gains co-advisors Tim Hanson and Nathan Parmelee sat down with India's Nilesh Shah, deputy managing director of ICICI (NYSE:IBN) Prudential Asset Management.
Shah welcomed Tim and Nathan to his offices high above Mumbai's stylish Lower Parel district, and they had a long conversation about India. We were intrigued by Shah's expert investing insights and know you'll be able to put them to use.
India is people
To kick off our discussion, Shah pointed out that human capital is one of India's most compelling global competitive advantages. As we've shared with you in our earlier dispatches, the country is huge, young, and English-speaking. Yes, it needs to improve its educational system, but the foundation for decades of growth through entrepreneurship is here.
In fact, Shah said, if you factor out India's four most underdeveloped provinces, the country has matched China's growth over the past 15 years. And while he acknowledged that it's not realistic to pull the laggards out of any data set, he wanted to show us that even though India's development has been uneven, the country is just as capable as China of torrid growth.
What's more, India achieved this impressive growth despite its atrocious communication, energy, and transportation infrastructure. Yet Shah -- like almost everyone else we've met on this trip -- is optimistic that these issues will be solved and that once they are, India's true potential will be unlocked. For example, Shah thinks manufacturing costs in India could come down 10% to 12% with the establishment of a reliable power grid. This infrastructure would allow factories to run 'round the clock and not depend their own generators and fuel. That cost reduction could make India competitive with China and other manufacturing economies, opening up a sector for job growth and development.
Can it happen?
Something similar has already happened in the telecommunications sector. A decade ago, India's regulated fixed-line provider offered woefully poor service, and customers had to wait years to get a telephone. Now, the deregulated mobile sector provides some of the world's best service at some of the world's lowest prices. Efficient per-second billing allows even cash-strapped Indians to own phones.
The secret of this success was the introduction of competition to the marketplace and the establishment of partnerships between well-capitalized foreign companies, such as Vodafone (NYSE:VOD) and SingTel, with nascent domestic providers that had local knowledge.
It's that combination of foreign capital and local knowledge that Shah thinks can be replicated to drive growth for many years. He's hopeful that it will because foreign capital, despite recent volatility, continues to come to India and because the next generation of Indian entrepreneurs is increasingly staying in India to work rather than moving to the United States or Europe.
"Where will the next Intel (NASDAQ:INTC) and the next Microsoft (NASDAQ:MSFT) come from?" Shah asked rhetorically. "It has to be East Asia." That's because the region is capital-rich and has to innovate to solve basic problems at low cost, he explained.
"Take Tata Motors (NYSE:TTM), for example," he continued. "It's the only carmaker in the world making cars for both $2,000 and $200,000." He also mentioned a recent innovation fair at the Indian Institute of Technology in Mumbai where students showed off robots that delivered 90% of the performance you might get from something made by Sony (NYSE:SNE) but at 10% of the cost.
According to Shah, this combination of capital and the need for low-cost innovation will spark the Indian economy. The country's entrepreneurs -- the future Andy Groves or Bill Gateses, if you will -- will succeed mightily for themselves and for India by bringing quality products to emerging markets at prices that consumers in those markets can actually afford.
The secret to investing in India
After laying all that out, Shah shared his secret to making money in India: Bet on the business, and bet on the people. India is a "rising tide," he said. "Back the right entrepreneur, and you always make money."
Always? We pressed him on this point. He replied that if your Indian investments are in entrepreneurs and companies whose business skills and quality are beyond doubt, then yes, over the long term, you will always make money. "Some will move first and some later," he said, "but all will move." That's the power of investing in an economy with as much potential as India's, and that's the philosophy under which the $20 billion Shah is managing is being put to work.
Where we can find quality companies
Today, Shah is looking hardest at companies in the telecommunications and infrastructure sectors, where he thinks continued growth is inevitable. He's also high on "frugal technologies," his term for low-cost innovations that help computers and appliances gain a foothold in emerging markets.
We agree that those are key growth areas in India, and we're also looking at the financial sector, where Indian consumers are just getting started with savings accounts and other financial products. We're digging into health care, too, a sector in which spending can only increase.
We've lined up meetings with key companies in each of these sectors. You'll be hearing more about their opportunities for investors like us in our next few dispatches.
You can receive Tim and Nathan's free dispatches live from the road in India -- straight to your inbox. You'll also be the first to hear about their No. 1 idea for investing in India when they return. Just tell us where to send the dispatches by clicking here now.
In addition to these dispatches, Global Gains members can access notes from our meetings on our discussion boards. If you're not yet a member, we encourage you to join our international investing community by taking our free 30-day trial.
Intel and Microsoft are Motley Fool Inside Value picks. Motley Fool Options has recommended calls on Intel and diagonal calls on Microsoft. The Fool has a disclosure policy.
