Opportunity among Contradictions

12/01/2008 11:15 am EST

Focus: GLOBAL

Timothy Lutts

Publisher, Cabot Heritage Corporation

Timothy Lutts, publisher of Cabot Wealth Advisory, discusses India’s challenges and potential.

My wife and I just returned from India. The experience was absolutely marvelous, rich in warmth and beauty, yet at the same time colored by the substantial economic challenges that face the country of 1.1 billion people. 

Delhi has the worst traffic I've ever encountered, with roads clogged by cars, bicycles, scooters, pedestrians, cows, pigs, dogs, camels, buses—and the ubiquitous three-wheeled auto-rickshaws.

The national railway system—which we used three times to transit between cities—moves 14 million passengers per day. Only eight people per thousand in India are rich enough to own a car. And the roads are terrible. 

Bureaucracy is the norm. A friend in Delhi told us it takes three months to get the permits required to install a gas stove in an apartment. As a result, corruption is rampant. The word “baksheesh”, with meanings ranging from charity to tipping to bribery, is Persian in origin and the Indians have mastered it.

India is improving fast; it's the second-fastest growing large economy in the world (after China). GDP grew at 9.1% in 2008. But poverty is widespread, and basic sanitation is still a dream for millions. A fourth of the population earns less than the government-specified poverty threshold of 40 cents per day.

One thing the government does for these people is keep prices of commodities low, so basics like rice, wheat, and gasoline are affordable. [But] it puts high tariffs on imports, so that you see scarcely few imported cars in India, and imported alcohol is notoriously expensive.   

Education rates are improving. Schooling is free—even compulsory. But access in rural areas is difficult, and when children can be used productively in the fields, it's hard to keep them in school. The literacy rate is just 68%—and substantially worse for women than for men. India is the largest democracy in the world. If you can't read, how do you vote?

While there are major challenges to be surmounted, India has enormous growth opportunities. Even if its growth slows a bit, the opportunities will continue to be substantial. (Last week’s horrific terrorist attack in financial capital Mumbai exposed weaknesses in India’s security forces and have increased tensions with rival Pakistan, but the Bombay Sensex actually rallied Friday—Editor.)

Here are three of my favorite Indian stocks.

HDFC Bank (NYSE: HDB) has a network of 1,412 branches and 2,890 automated teller machines in 528 Indian towns and cities. Every year of the past decade has brought growth of both revenues and earnings, and that trend is expected to continue. The stock is off 63% from its 2007, which looks like a bargain.

Infosys Technologies (Nasdaq: INFY) is the biggest provider of information technology services in India, with revenues of $4.5 billion. Here, too, revenues and earnings have grown in every year of the past decade, and the trend is expected to continue. With the stock off 62% from its 2007 high, the potential for a rebound is big.

Satyam Computer Services (NYSE: SAY) is the other big information technology company in India. It’s only half the size of Infosys, and it’s growing faster. Furthermore, while 36% of Infosys’s revenue came from the financial services industry last year, for Satyam, the number was 22%. Both companies, by the way, received roughly 60% of their revenues from US companies. Today the stock is off 60% from its 2007 high.

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