Well, I couldn’t resist a little foray into the mysteries of the 401(r) Royalty investment teaser yesterday … but today, as promised, I’ll return to Dalal Street Insider to uncover some more interesting Indian investments for you. Dalal St., by the way, is similar to Wall Street, it’s the address of the Bombay Stock Exchange in Mumbai and a generic term for the Indian financial services sector..
India remains a hot topic in international investing — the debate continues to roll about whether there’s more opportunity in India’s domestic economy, or China’s export-driven employment machine, or Brazil’s resource extraction, and I don’t know which of these three emerging giants will end up outdoing the others in terms of investment returns … but I do know that something in the wind has caused newsletter publishers to turn their heads toward India again.
In addition to this new India-focused newsletter from the Sovereign Society, I’ve also noticed that the Motley Fool Global Gains folks are embarking on a “boots on the ground” trip to India again (including a visit to Dr. Reddy’s, the stock we looked at on Monday), and many of the resource letters and gold bugs are talking up India’s gold ambitions (they bought a big ‘ol stockpile from the IMF, helping to drive up prices recently, and they want more). This is as much India excitement as I’ve seen since the spasm over the launch of the first India ETFs and the enthusiasm for the introduction of Tata’s Nano a year or two ago … it may, of course, come to naught, but let’s see what other stocks Dalal Street Insider is tempting us with now.
Here are the clues for the first one:
“’The One Bank Worth Owning – And How You Can Grab Shares At A Substantial Discount!’
“This financial stock is NOT the kind you have come to despise throughout the last year.
“While American banks burned through taxpayer bailout money like it was a bonfire in 2008, this Indian bank was growing its assets and making profits – and did it all without government bail-outs or stimulus programs.
“Just for starters, this bank has…
“…Market capitalization over $15 billion. (Yes, that’s good.)
“…Total assets over $75 billion. (…this is too!)
“…And a net profit of over $740 million for its last fiscal year. (…and this is even better!)
“This conservative and strategically managed Indian bank is one you want to own shares in – lots of them.
“It grew its top line revenue by 12% last year with net profits up by 10% at a time when most banks throughout the world (especially in the US) were begging for government bailouts.
“When you own shares in this bank, you can share in those profits.
“And if you like fixed income investments, this Indian bank has maintained its regular dividend payouts while banks in the west have been slashing or (even worse) eliminating theirs!”
Tasty, eh? Well, it’s almost impossible for Americans to invest directly in India, so we can probably assume that this is one of the major Indian banks that has a US listing. Of which there are really just two. Kind of takes some of the work away for the Gumshoe, no? The two banks are HDFC (HDB) and ICICI (IBN), both of which trade as ADRs — but for those clues, this really would have to be ICICI Bank (IBN).
IBN does have over $75 billion in assets — $76.7 billion as of the last quarter, according to Morningstar (HDB is roughly half IBN’s size by that measure), and it did have a profit of “over $740 million” last year (in calendar year 2008 it was $766 million, though they’re on an April fiscal year). Most of the performance measures fell a little bit in the 2009 FY compared to 2008, at least in terms of Rupees, but they are certainly still growing, and you can make the double digit earnings and revenues growth numbers fit depending on the dates you use (and the currency). Their asset base has been falling considerably over the last year or two, as with most banks that have seen their portfolios suffer, but it has certainly held up better than most of the US banks making the headlines, and it was growing dramatically before that.
ICICI is the second largest bank in India, and the biggest private one — it has a massive branch network that is expanding incredibly rapidly (it has doubled in just a couple years, and will be increasing by a third again during the current fiscal year), they do a big business in retail banking and small business lending, as well as mortgages (which is HDB’s specialty), credit cards, auto loans and the like, and they also do investment banking and private equity deals, and they have subsidiary joint ventures for insurance, asset management, and other financial services. They also have a significant international presence with overseas branches and offices, and they seem to use those branches primarily to raise more deposits for investing at home in India.
Both IBN and HDB are remarkable growth stories, serving the exploding Indian financial services market as more Indians start to use debt, buy cars, buy homes, and, for the fortunate ones, accumulate assets. I’ve often heard it said that if you want to invest in emerging markets you can probably assume off the bat that the dominant companies in those markets will be a big bank or two, a big telecom, and, depending on the country, a large industrial conglomerate or natural resources company — that’s probably true of India, too, and if you think India’s middle class will be one of the world’s growth engines, you’d probably do well with either of the big private banks.
Unfortunately, thanks to the renewed interest in India, the perception that they are “safer” because they’re not export-dependent, and the growing feeling that economic liberalization will finally really take off in India, the banks are dang expensive — both HDB and IBN trade at pretty high forward PE ratios right now (25 and 20, respectively), with very small dividend yields at these prices, and, in the case of IBN at least, a pretty elevated multiple of book value — it seems to me that HDFC Bank has been a bit steadier than ICICI Bank, but they have both ridden the tide of global financial services stocks, and of Indian stocks in general, in more or less the same direction, huge outperformance in the early-mid 2000s, then a big crash last year that wiped out all those gains, and a wickedly fast recovery this year.
I like the story of serving Indian financial services customers over the coming decades, but if you’re not one who thinks in decades it can be tough to buy the stocks after the huge rebound this year, it’s hard to believe that they won’t again be pressured to trade at more moderate valuations — but then again, they are growing, and despite the big bounceback this year analysts think they’re growing fast enough to justify those valuations. Both banks trade at a forward Price/estimated earnings/estimated future growth ratio (the PEG ratio) of just about 1, just like our friendly pharmaceutical company from yesterday, and numbers that low, for those who follow Peter Lynch’s strategies, tend to indicate a reasonable price.
Now, how about that telecom company? One never knows what to think of emerging market telecoms — most of them have to face hyper-competitive markets and slash prices for their low-income customers, but they’ve also been growing like crazy as the global consensus has emerged that every soul on our spinning blue orb must own at least one cell phone. Here’s what Ashish at Dalal Street Insider tells us about the Indian telco he’s picking …
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“A Telecommunications Conglomerate Positioned To ‘Double In Value In The Next 12-18 Months.’
“This company is perfectly positioned to benefit from the coming boom in the Indian cell phone market because of its numerous mergers and acquisitions – forming one of the world’s leading telecommunications conglomerates.
“In 2000, there were only 4 million cell phone subscribers out of a population of over 1 billion people in India.
“Yet today, just nine years later – there are over 330 million cell phone subscribers in India!
“To put that into perspective – that’s like EVERY man, woman, and child (infants too) in the United States being a paying cell phone subscriber!
“Experts project that number of Indian cell phone subscribers to more than double by 2015. That is more than a million new subscribers a week for the next six years.
“That’s not all, because of this company’s sheer size and influence – it has the Indian cell phone market cornered.
“Imagine having a few hundred or a few thousand shares of this company during this period of expansion. In fact, if you hurry – you can still get in on this company for under $16/share (an absolute bargain), positioning you perfectly for the expected spike in stock price.
“Here’s what smart investors find even more impressive about this company…
“…It currently has annual sales of $2.2 billion – more than double of just three years ago.
“…Its total market capitalization is at $5.9 billion and growing.
“…Its net income after taxes so far in 2009 is at $70 million – and these profit numbers have also doubled in the past three years.”
Now, this one’s a little tougher — for an odd reason. There is a good match for those sales, market cap and income numbers — but it’s for Tata Communications (TCL), which is not a mobile phone company. It is a telecom conglomerate, and it does serve the mobile phone industry, but it serves it as a wholesaler, providing international and long distance telephony. Tata Communications took over the old state-owned monopoly on international long distance and has evolved, through competitive necessity, to be a big data backbone provider for telephone networks in and near India. They’d probably like to essentially be what MCI was in the evolution of the Indian telecom market, a direct-to-consumer long distance provider, but that choice isn’t currently available to customers in the Indian system. The primary competition for Tata Communications that I’m aware of is Mahanagar Telephone Nigam (MTE), another fixed-line Indian telecom.
But could this possibly be the match? Their business will grow as the number of lines in India grows, I imagine, but they aren’t necessarily particularly levered to mobile phone subscriptions, most of which, just as elsewhere in the world, are probably used primarily for local communication.
Who are the big mobile telecom operators in India? It’s actually a very competitive and crowded market in many areas, but the biggest ones are Bharti Airtel, Reliance Communications, Vodafone Essar, BSNL, Idea Cellular, and Tata Teleservices, in order by number of subscribers. Unfortunately, there’s no direct way for a US investor to easily buy shares in any of those companies. Bharti Airtel trades only in Mumbai; Reliance likewise trades in Mumbai and I’m not sure if they are still partly owned by the old Reliance parent holding company; Vodafone Essar you can get a piece of by buying Vodafone shares, but you get all the rest of Vodafone’s global businesses, too, in a massive package (they bought Essar from Hutchison a couple years ago); BSNL (Bharat Sanchar Nigam Ltd) is state-owned; Idea Cellular, I’m pretty sure, is privately held; and Tata Teleservices, while like all things Tata controlled by that massive conglomerate, is only partly owned by Tata Communications.
So TCL as a straight mobile phone operator is a pretty weak investment — that exposure comes primarily through their small investment in their sister company Tata Teleservices, which itself is the sixth-largest company in the market and has probably about 10% market share. I’ll go ahead and guess, based on the close match for my clues, that this is teasing Tata Communications, and give the benefit of the doubt that they’re assuming that TCL will remain a powerful wholesale long distance company serving the growing numbers of mobile phone users, or that they believe TCL will emerge as a direct-to-consumer long distance powerhouse if and when India’s infrastructure allows that kind of customer choice.
It’s not a bad company, from what little I know of them — they are pretty stable now and are growing as a global telecom backbone company, even making a deal to build additional capacity in the region with some Middle Eastern partners, but it’s hard for me to consider this a great play specifically on Indian mobile phone usage, which is what the ad implies. TCL has been a serial acquirer in recent years as it tries to recover from the loss of its monopoly earlier in the decade, but they are profitable and have been growing reasonably well — the shares took a big hit after their last earnings release in late October, which is why they’re now trading for around $16 instead of $20+, but there aren’t many US analysts so I’m not really sure what to expect for these guys as a baseline. Morningstar, for one, pegs them at a forward PE of 28. The analysts in their survey hate the stock, with 6 sells, 4 underperforms, and one hold … which might actually be a reason for the shares to have some firepower, since improvement in the business could lead to a bunch of upgrades. Assuming, of course, that the financials get a spark for the better, and I have no idea whether or not that will happen.
If I were trying to get an indirect play on Indian mobile telecom, I’d probably choose SingTel instead of Tata Communications, but that’s just me — SingTel (SGAPY is the pink sheets ticker for the ADR, it actually trades quite a bit) is another of the big conglomerates, they own about 30% of Bharti Airtel and significant stakes in telecom firms in the mature Australia and Singapore markets as well as in some of the growing markets in the region like Pakistan, Bangladesh, Indonesia and Thailand. That’s not to say SingTel will be fabulous, of course, I haven’t looked at them closely in a while and I don’t own any companies in this sector.
If it’s just the booming Indian economy that you want, there are a lot more options than you would have had five years ago for getting diversified India exposure in an exchange-traded investment — I find the fundamental indexes from WisdomTree very interesting, and one of their first offerings was the WisdomTree India Earnings fund (EPI), which weights the index based on the earnings of the underlying companies (instead of the traditional weighting by market capitalization, or size). I think that’s still the most liquid India ETF, and it usually trades right around the NAV and has an expense ratio under 1% — the biggest holdings include Reliance Industries, ICICI Bank, the State Bank and Infosys, among others. It’s only fair to say that while their weighting given to earnings should help them outperform a market cap index over the long term, it hasn’t made much of a difference recently, the shares pretty well track the index, as do all of these other funds, most of the time.
Powershares also has an India ETF, PIN, which is a more traditional “biggest companies” index ETF, and you can get a similar exposure to the broad India market through the Barclays iPath India ETN (INP), which is a note that tracks the overall index performance but doesn’t own the stocks directly for you like an ETF does. The newest entry to the ETF stable is the iShares Nifty 50 India Trust (INDY), which just started trading recently and tracks the Nifty 50, which is essentially India’s version of an S&P 500, the index of their major companies.
For direct India exposure there are also two major closed-end funds, both of which made a lot more sense before the ETFs were available — The India Fund (IFN) has similar top-five holdings (the three big banks, Reliance, and Infosys) to the others but trades at a small discount (3.5% right now) and charges a higher expense ratio; and Morgan Stanley India Investment (IIF), which throws in some more heavy industry apart from Reliance, and prefers HDFC to ICICI, but otherwise has similar discount and expense ratio numbers to IFN (along with very similar overall long-term results).
So what do you think? Getting the India bug, or are you worried about all those stocks that have doubled and tripled off the bottom this year? Prefer one of the relatively few easily-bought stocks, or do you like ETFs or funds for India exposure? Let us know with a comment below. Personally, I’ve owned several of these funds and HDFC Bank in the past, but don’t currently have any direct India investments or shares in any of the companies mentione (and won’t invest in anything mentioned here for at least three days, per my rules).
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