“800 pound gorilla of India’s roaring economy”

By Travis Johnson, Stock Gumshoe, March 16, 2007

To anyone who read this in the first hour it was up — apologies! I read the rest of the investment teaser and changed my mind — this has been edited.

The email solicitation covered here was sent in by an alert reader, so thanks for that. It was a very brief email, at first I didn’t follow the email link to get more of a sell from the investment advisor in question and I made the wrong guess, but here’s the basic premise from the email:

The email is for Nicholas Vardy’s Global Stock Investor, which, as you imagine, is an investment advisory service. I expect they want your money if you’d like to share it with them.

The tease is pretty broad and vague:

“Imagine what it must have been like to be among the first people todiscover gold in 1840s California… or diamonds in 1860s South Africa… or oil in 1930s Texas…

“… now you’ve got some idea of what it feels like to be a stockholder in a certain company in India right now.”

And he goes on to say that the company aims to provide the Indian middle class with mortgages, credit cards, and consumer loans to enable them to improve their quality of life.

The email provides two more fairly vague hints:

This company is expected to “issue more than a billion new mortgages, consumer loans and credit cards in the next decade”

And “its profits leap ahead 35% each year like clockwork

So you can see — not much to go on. Unless you click on the “more info” link in the email, which I belatedly did.

Thankfully, the universe of possible candidates here is tiny:

There are only two US-traded private (non-government owned) Indian banks that issue credit cards and mortgages: ICICI Bank Ltd.(IBN) and HDFC Bank Ltd.(HDB). Both of these are reputable and profitable banks so there’s no reason to go elsewhere for domestic exposure to the Indian consumer finance revolution — if that’s what you want.

I assume that this teaser wouldn’t be for one of the global banks, because none of them have enough exposure to Indian consumer banking to move the needle on their shares significantly. And the ad clearly indicated that this was an easy-to-buy ADR so it’s not one of the banks that only trades in India.

The two Indian banks are similar in some ways, if we are to take the “profits leap ahead 35% each year” as gospel, as I did in my first pass at this then the Stock Gumshoe thinkolator would tell you that the answer is HDFC Bank … but …

after further review …

The Stock Gumshoe Calculatadorometer now clarifies that …

“The Hottest Stock in India’s Booming Economy”


“The 800 Pound Gorilla of India’s Roaring Economy”

(according to
Nicholas Vardy’s Global Stock Investor)

is …

ICICI Bank Ltd.(IBN)

It’s a little strange — HDFC fits on the earnings growth, but not on the rest.

HDFC’s earnings have grown from $72.5 million in 2003 to $103 in 2004, 147 in 2005, and 208 in 2006. That’s within a reasonable margin of error of 35% growth (it’s a little bit better, but not by much).

Wherease ICICI Bank’s earnings over the past few years tally out to a LOSS of $165 million in 2003, then earnings of $113 million in 2004, $190 in 2005 and $526 in 2006. That’s nowhere near 35%, no matter how you slice it — It’s clearly a lot better.

But when I looked into the rest of the investment teaser, not just the initial email, the additional clues turned the tide:

“614 branches and 2,200 ATMs” — that parrots the ICICI bank website.

“operates in 14 countries through branches, representative offices and subsidiaries.” — this is also an exact match for ICICI.

The combination of those two is too precise for HDFC to fit, even if you don’t read into the more detailed financials like “savings deposits grew by 86%” or “retail loans grew by 57%” or “rural credit also grew by 75%” or “PE a little over 22” — all of which also match the ICICI information, if you give a little latitude for when the email might have been written on that PE ratio (it’s nearer 25 today).

So, apologies to anyone who I misled with my first note about this an hour or so ago that assumed it was HDFC … it ain’t.

And interestingly, though I don’t know a lot about either of these banks, HDB is trading at a little bit of a premium to IBN at the moment. Looking at the overall performance of the two, IBN has a higher yield and lower PE ratio to go with its much faster growth, but is also significantly larger (over $16 billion market cap), so I’m not sure why HDB gets a premium, other than the fact that it’s smaller.

Both of these are expensive if compared to US banks, but of course US banks don’t generally sport 35% or better earnings growth either.

I would hesitate to say that anyone would need an investment newsletter to point them to likely beneficiaries of Indian consumer credit growth, but it’s also true that many of the major international banks and some non-US traded banks in India (to say nothing of the government-affiliated State Bank of India) are active in this sector, too, so HDFC and ICICI presumably won’t have the market to themselves.

I don’t know why Vardy believes that HDB is a worse buy than ICICI, but based on just the quick numbers I’ve seen I’d also be hard pressed to justify investing in HDB, the slower-growing, lower-yielding, higher-valued bank, over IBN without significantly more research into the two. So do your own due diligence and, if you feel like it, let me know what you learn.

I currently own shares of INP, the exchange traded note that mimics the Sensex index of large Indian stocks, and the Sensex includes both of these companies, but I don’t have a direct position in either one.


Personal Capital is an advertiser with Stock Gumshoe, but Travis also uses it every day for his personal accounts and finds it invaluable. Here's what he said: "They offer a great (and genuinely FREE) 'second opinion' for your financial plan, but what I love most is their automated financial dashboard -- it will look at all your assets and debts, tally up your asset allocation, project where you'll be at retirement, and suggest ways to manage risk or improve returns. It's free, I think their free tools are great, and I think it's worth checking out -- you can do so here.

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2 Comments on "“800 pound gorilla of India’s roaring economy”"



Thanks for doing such a great job investigating info. on the Vardy Global Newsletter. I was a bit confused also, so I decided to forget the banks and focused on TTM. I think there’s a real future there.

One Guy
One Guy

Tata is certainly interesting, though given the disastrous state of Indian infrastructure any manufacturing company there concerns me a little. Best of luck.