Editor's Note: Our friend and colleague, Karim Rahumtulla, is an expert on investing in India. He's currently leading an investment research trip, taking in the country's hotspots, examining its rapidly emerging market, meeting with companies, and studying its investment potential. Here's his investment travelogue:
After spending the last 29 hours on various airplanes and stuck inside airports, I finally made it to Mumbai, India. It's an ardous trip from the States, but well worth it. Now that we've had several days to meet with Indian officials and businesses, here are some snapshots of opportunities and a few words of caution…
The Bombay Exchange
Let me tell you, it's hot here. And I'm not talking about the weather. The Bombay Stock Exchange recently hit a new all-time high, approaching the 19,000 level. That's almost double where it was this time last year.
Great news, you say. Well, yes and no. Although the country and stock market is flourishing right now, the rapid growth is scaring many investors.
Moreover, the Bombay Exchange is a fairly illiquid market. My good friend and Quantum Fund manager, Ajit Dayal, tells me he will only look at companies that trade at least $1 million in share value per day for a year ($1 million in value, not 1 million shares). Otherwise he considers them a liquidity trap. With 7,000 stocks trading on the Bombay exchange, you wouldn't think that would be much problem. But you might be surprised. Guess how many fit his criteria?
Just 284. Yes, there is money to be made from India. But with odds as low as that, I'm holding tight on any recommendations. The market just can't handle it right now. On the next correction, I'll recommend buying, but not at these levels.
The Lagging Infrastructure
India is a dynamic country. The place is teeming with life and energy. Foreign funds are pumping money into India at a record pace, and certainly an economic miracle is happening here.
But the country is also exploding at the seams. The roads are a mess. The power grid is a mess. Everything is a mess.
I noticed it as soon as I set off for my hotel. The Taj Mahal Hotel in Mumbai is a fabulous place, but despite being just 15 miles from the airport, it took an hour-and-a-half to get there.
The thing is, city officials have talked about finding a new route to the airport for ages. They've talked about a bridge over the bay. Some say this will be an 8-lane monster, making the journey just 20 minutes. I say: "You said the same thing 25 years ago. I don't care if it's 8 lanes or 12 lanes… for heaven's sake, just build it!"
Investing in infrastructure is by far the easiest play in India. The problem is that very few Indian shares trade as ADRs, which means you either have to invest in a fund, or directly in the market in India, which is not easy, due to restrictions for foreigners.
However, if you are determined to take advantage of the opportunities in infrastructure, and are willing to take the short-term risks of being in a toppy market, then the play here is Larson and Toubro Ltd., a medium-sized company that is involved in every level of infrastructure and construction in India. It is publicly traded on the Bombay Exchange.
30% Growth In "Tech Town"
Upon arriving at the Satyam Computer Infoway (SAY) campus, there was only one reaction: Absolutely spectacular. The place is a sprawling oasis for its 18,000 workers. Like a modern company town, many Satyam employees live on-site, enjoying a fantastic lifestyle that clearly helps them with productivity.
For some time now, the IT giant has racked up revenues and earnings growth in excess of 30% per year. And there doesn't seem to be much blocking its path to further growth. Except one trend…
The Party-Crashing Rupee
You would think that a strong Rupee would bode well for India, since it could draw more investment into the country.
Granted, while hefty capital inflows to India are certainly helping the country's growth, some of that is offset when the Rupee is strong against the U.S. dollar – as it is now (along with just about every other currency, it seems).
That's not a good trend for companies like Satyam or fellow technology powerhouse Infosys Technologies Ltd. (INFY), India's second-largest software firm.
While Infosys did report an 18.4% jump in net profits – reaching $280 million – in the last quarter, the fact that it does most of its business (more than 60%) with American companies, or companies in dollar-based economies, means that over the long-term, it doesn't want to see this trend continue.
That's because with each day the dollar weakens, Indian firms like Satyam and Infosys have to offset the loss. And there are a number of ways it can do so:
- Be more productive.
- Use dollar hedges.
- Raise prices.
Right now, Satyam is doing all three, while Infosys says it is "proactively hedging our currency exposures to mitigate this impact."
Right now, the impact of a U.S. dollar/Rupee ratio of 38 or higher should not have a huge impact. But should the Rupee rise another 10% or so (to the mid 30s), there will be pain all around. That will be the opportunity to buy both these companies, which have excellent futures.
So what does the Indian government and central bank make of this?
Policymakers To Get Proactive
Simply put, they're quite concerned about Rupee appreciation. But they have a history of active currency management, which leads me to believe that the current Indian pickle may be a short-term trend – 12-18 months at most before the Rupee will be back over 40-to-1.
We met with representatives of the state and federal government and the bottom line is that policy makers have little choice. They need to export goods and services in order to stay competitive with countries like Malaysia, South Africa and even Egypt and Slovenia – all up-and-coming countries in the same IT sector that is crucial to India's growth.
Real Estate and Banking
The real estate sector is booming with development occurring everywhere. Most of the new properties are located in the suburbs of Mumbai and Delhi – away from the masses and the traffic. But these suburban panaceas are not very practical for those working in the cities, and are mostly inhabited by those who don't need to conduct business in town. [As I mentioned, the 15-mile drive from the airport to city center takes an hour and half on a good day. And the suburbs are all located past the airport].
Banks stocks have, by far, been the stellar performers in India. They are lending money left and right. The most aggressive bank is ICIC Bank Ltd. (IBN) – but it is also the riskiest in terms of the quality of assets.
A better alternative is HDFC Bank Ltd. (HDB), which has much more stringent criteria and a much more conservative lending philosophy. This would be the bank to buy during any dips in the market. Both trade as American Depository Receipts (ADRs) in New York, but neither is cheap at current prices.
Karim Rahemtulla is also the Investment Director and Founder of the Xcelerated Profits Reports and is also the editor of the Smart Profits Report, a free e-letter, which you log onto at www.smartprofitsreport.com.
News and Related Story Links:
Why India Is Losing the Race with China – and What It Can Do to Gain Ground
India Gains Importance as an Economic and Political Epicenter
India Stock Soars with Reliance and Tata Steel Out in Front
India's Outsourcing Capacities are Evolving and Shrinking at the Same Time
Posco Gears Up to Build India's Biggest Blast Furnace
India's Richest Realtor Lobbies For a Rate Decrease Despite Strong Growth