COLUMN-Patient investors see bargains in India's drugs, media stocks

Fri Sep 13, 2013 8:00am EDT

By Conrad de Aenlle

LONG BEACH, Calif., Sept 13 (Reuters) - India was supposed to be the next country to emerge from poverty and become a global industrial juggernaut.

The sheer human heft of its billion-plus population, along with economic backwardness that left plenty of scope for improvement, made it seem nearly inevitable.

It hasn't worked out that way. Amid large fiscal and current-account deficits and economic growth near a 10-year low, the rupee has dropped by more than one-third in the past three years. Stocks have lost about 40 percent of their dollar value, with most of the damage occurring this year.

Is it time to buy? Maybe, if you've got time to wait.

Managers specializing in emerging markets say there is a lot to like in India for long-term investors, including stable legal and political systems and a young population, including many English speakers.

They see opportunity to pick up stocks at much lower prices, especially stocks of strong, rapidly growing companies that they believe should not have been hit so hard in the first place.

Despite the "short-term mini-crisis," says Michael Kass, manager of the Baron Emerging Markets Fund, "there are still companies that have strong fundamentals and are performing much better than their indexes."

Kass, whose 12-month return ranks among the top 5 percent of emerging-market stock funds, according to Lipper, had 11.2 percent of his $23 million or so of assets invested in India, as of the end of August.

Kass see the best prospects in pharmaceutical and media companies. Indian drugmakers have raised their game, evolving from producers of low-priced generics to become an industry with "great research capacity and scientists," he says.

The trend for him is exemplified by Lupin Ltd, which makes treatments for diabetes and asthma, and Torrent Pharmaceuticals Ltd, whose products are used to treat cardiovascular and central nervous system conditions. Both are undervalued relative to the average global drugmaker, with Torrent especially cheap, trading at about 15 times earnings versus 31 for the industry.

Kass's rosy opinion of media stocks stems from a law enacted last year to speed up the development of broadband communication services and thereby foster the spread of digital pay television.

The change should accelerate growth for content providers like Zee Entertainment Enterprises Ltd, which has 22 channels focusing on sports, music and other fare, and distribution companies like Den Networks Ltd, Dish TV India Ltd and Hathway Cable and Datacom Ltd, whose share prices have been languishing in spite of their potential, Kass notes. (Den and Dish are far closer to their 52-week lows than their highs, while Hathway is slightly above the middle of its range.)

"Their equities are acting like the rest of the market, but they're very investable in the long term," Kass says. The industry "is certainly not immune from the macro effects impacting the rest of the country, and they have to put up capital and invest in digital boxes, but once they do, subscriber revenue goes up four or five times in five years."

Investing in pay-TV companies is a way to bet on spending growth by Indian consumers. Robert Horrocks, chief investment officer of Matthews International Capital Management, a firm that focuses on Asia and has several funds with strong long-term records, wants to make the same bet.

The largest holding in the $409 million Matthews India Fund, for instance, is Emami Ltd, which makes health and beauty products. Other large holdings that would benefit from strong growth in consumer spending include Dabur India Ltd and Bajaj Corp Ltd, makers of hair-care products, and Max India Ltd, which sells health and life insurance, plastic packaging and provides research services to biotech firms.

PLAYING INDIA WITH FUNDS

The sectors that Kass and Horrocks prefer tend to be accessible without difficulty only through stocks listed in India, not on U.S. markets, so American investors interested in India may find it easier to own a fund than individual stocks. The Baron fund gained about 16 percent in the 12 months through Sept. 11, and Matthews India was down 7.2 percent.

Investors who want to take a chance on Indian consumers through a low-cost exchange-traded fund can buy EGShares India Consumer ETF, which rose 5.5 percent during the same period.

Indian stocks with U.S. listings are clustered in sectors that are "directly in the crosshairs of the macro challenges" and best avoided, Kass says. These include large, government-affiliated companies and family conglomerates that have taken on a lot of debt, along with the banks that lend to them. Two of the biggest with U.S. listings are HDFC Bank Ltd and ICICI Bank Ltd.

A Sept. 2 report by HSBC notes that India's ebbing growth has been accompanied by erosions in manufacturing, services, exports and credit.

HSBC sees no imminent improvement. It warns that "the recovery will likely be drawn out, and the outlook for India is still tainted with downside risks given the lingering macroeconomic uncertainties and the possibility that politics could get in the way of meaningful progress on structural reform."

Kass says India may be coming to grips with the challenges that have spooked investors, most notably through measures taken by the newly appointed central bank chief, prompting a modest rebound of the rupee in recent days.

He says he is prepared to wait. "Their problems are solvable, they have the capacity to address them, and the growth potential in India is vast," he says.

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