A Top Pick for India’s Growth

12/15/2011 9:00 am EST

Focus: GLOBAL

Yiannis Mostrous

Editor, The Capitalist Times

Despite many economic challenges, India is still coming off a red-hot year of growth…and while it may cool down a bit, there’s still plenty that smart companies can profit from, observes Yiannis Mostrous of Global Investment Strategist.

India has been one of the world’s worst-performing markets in 2011. Rising inflation, a series of interest-rate hikes, political scandals, and the slow pace of economic and political reform have started to take their toll on the country’s economy.

But political gridlock is the most troubling of this litany of challenges. India’s political establishment is unable to agree upon or implement policies that will boost investment in the country. Because domestic demand has reached a plateau—and indeed, consumption growth may decelerate—private investment is the only means for India to resume its torrid pace of growth.

The country’s economic growth may fall below 7% in 2012, dragged by a weakened global economy and lower capital inflows. It’s true that 6.5% to 7% growth is still solid, even enviable by most standards. But this pace of growth alone will not allow India to meaningfully improve the life of its citizens.

Sustained, strong economic growth in India will require political and economic reform and a massive upgrade to the country’s infrastructure. Unfortunately, neither seems likely to occur in 2012.

That being said, India still provides significant opportunities for investors, and the long-term investment case for India remains intact. Investors should buy into India on the dips.

HDFC Bank (HDB) remains one of our top Indian stocks. The lender is one of the best-run banks in the country, and boasts the strongest asset quality among its peers. HDFC Bank also has significant exposure to the retail segment, which remains robust for now.

Its corporate business is focused on top-rated companies and shorter-term lending, resulting in a low nonperforming loan ratio of about 1%. In addition, HDFC Bank has minimal exposure to project lending, a segment of the market that’s been hit hard.

HDFC Bank has over 2,000 branches and 15 million retail clients, and the lender’s business continues to expand. Management expects the bank to grow at a faster pace than the overall industry, and believes that its expanding branch network and rising penetration into rural markets will spur growth in deposits.

According to management, the bank’s net interest margin will be between 3.9% and 4.2% in the coming quarters. HDFC Bank also has a strong capital position with a Tier 1 ratio of 11.4%.

The Indian market provides well-run banks with a unique opportunity. India is a demographically young nation with rising incomes and strong domestic demand. The market has a low penetration of banking services with low debt-to-income ratios of about 6%, far lower than the ratios of about 50% that are common in the developed world.

HDFC Bank is one of Asia’s best-run financial institutions and management has a strong track record of producing steady growth without incurring excessive risk. A direct play on rising domestic demand in India, HDFC Bank is a buy up to $37. [The New York-traded ADR closed just above $26 today—Editor.]

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