By Conrad de Aenlle
LONG BEACH, Calif., Sept 13 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
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
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
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
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.