Saturday, December 31, 2005

Investing in India

The Indian economy is growing at a brisk pace in the 7-8% range. Though not in the same league as China in terms of growth rate, some consider India as having better prospects than China in the long term. The main reason for the optimism towards India is the presence of a democratic government for fifty+ years.

The situation in China is unpredictable and political uncertainty is not good for investing public. The faking/intellectual property theft problem that exists in China doesnt exist to the same extent in India. It is easier for western companies to set up subsidiaries in India. The legal system is similar to that of Britain/U.S and companies have recourse to a system that is independent of the government.

India also has a robust, well established stock market. The Bombay Stock Exchange located in Dalal Street was established in 1875 and is the oldest stock market in Asia. There are about 3500 stocks listed in the Bombay Stock Exchange. The overall market cap of the Indian Stock Exchange is estimated to be around 260 billion in 2005. The BSE is one of the worlds top five stock exchanges in terms of the number of transactions. Given the low liquidity of the overall market capitalization compared to the U.S stock market, the Indian stock market was susceptible for market manipulations. The S.E.C in the U.S has played a major role in playing the role of regulator and establishing market/trading rules. The absence of such an agency in India led to the market manipulation in the early nineties ( Harshad Mehta scandal ) and the later Ketan Parekh scandal. The Securities and Exchange Board of India ( SEBI ) was established in 1988 and was made an autonomous body in 1992 by the government of India after the Harshad Mehta scandal. The SEBI plays a watchdog and overseer of the market similar to S.E.C. Given the continued economic growth in India and the expected growth in capitalization, liquidity in the Indian Stock market, how should an investor based in the U.S invest in the Indian market?

Although the establishment of SEBI has put in place some rules in place, many stocks are still subject to manipulation. Given this, what are the best ways to invest in India?Some Indian companies are listed in the U.S market ( NYSE and NASDAQ ) and are available in dollar denominated securities, typically at a premium.

The companies listed in NYSE and NASDAQ are:

INFY - Infosys Technologies. INFY trades for about $60 in the Indian market and it trades for about $80 in the U.S market, a premium of about 25%.

SIFY - Sify Limited trading for $10

REDF - for $18

WIT - Wipro Limited trading for $12

HDB - HDFC Bank Limited trading for $51

IBN - ICICI Bank Lmtd trading for $29

VSL - Videsh Sanchar Nigam Limited for $17

MTE - Mahanagar Telephone Nigam Limited for $7

RDY - Doctor Reddy's Labs for $21

TTM - Tata Motors Limited trades for $14

PTI - Patni Computer Systems Ltd trades for $23

MT - Mittal Steel Company, NV trades for $26.33

One can buy these stocks directly or go through some mutual funds. The ones that invest exclusively in Indian mutual funds are IIF, IFN, ETGIX and MINDX.ETGIX is a newly started fund in 2005 and has an expense ratio of 2.77%.MINDX has a lower expense ratio that ETGIX with an expense ratio of 2%. There is a penalty of 2% for redemptions before ninety days.IIF Morgan Stanley India Investment fund has an expense ratio of 1.5% and has the morningstar 5 star rating.IFN India Fund Inc has an expense ratio of 1.6% and morning star 4 star rating.One can also get exposure to Indian market through the ETF EEM ( emerging market index fund ) which invests roughly about 5% of its assets in India.

A word of caution when investing in India. In 2005, Indian stock market has had a runup of nearly 45%. The valuations of many companies have gone up significantly. The growth in the service sector of the Indian economy is strongly correlated to the health of the U.S economy. In the service sector, the Indian market is significantly smaller compared to the world economy. The second factor affecting the Indian economy is monsoons. About 60% of Indian population is dependent on agriculture. Without a good rainy season between May and September, the crops and hence the spending power of large sections of population is severely affected. It is unlikely that the increases of last year are not likely to be repeated in the coming years. is a good resource for studying some of the trends and news from India.

1 comment:

Anonymous said...

Superb write-up. Amazing!