What’s Next for India?

10/30/2008 12:01 am EST


Pratik Sharma

Principal, Atyant Capital Management Ltd.

The Indian stock market remains attractive, says Pratik Sharma, principal at Atyant Capital Partners.

Q. Pratik, the Indian stock market had incredible momentum, reaching 20,000+ at the beginning of this year, but has suffered substantially with the global economic crisis, and now is trading around the 10,000 mark. Where does it go from here?

A. Many sectors of the Indian market are currently being priced as if there is a systemic crisis in India. That is not the case at all. Indian banks are healthy, and domestic savings is north of 30+%, providing a stable and solid deposit base for banks.

Where the market goes from here is anyone’s guess, but I’m seeing one of the best risk/reward scenarios I’ve ever seen. This is not across the board, but in select areas that are not included in the main indices.
I like those companies that serve a domestic market where the supply/demand dynamic is [favorable]. In this environment, taking a top-down sector approach may not be as good as taking a company-specific approach. Companies that have zero debt, solid balance sheets, and have lots of free cash flow are appealing. History has shown that [companies that] come out of periods like this with assets unimpaired will do really well.

Q. What indicators would tell investors it is time to get back into the Indian markets?

A. Nobody rings a bell at the top or at the bottom. Investors need to focus on valuations and determine what the impact is on [future] earnings. Some companies are available at below cash on books, and others have valuations that are more indicative of bankruptcy when the company is nowhere near bankruptcy. In essence, these companies are free. When there is free money available, investors with the intelligence, courage, and capital will pick that money up.

Q. The Indian stock market has not been easily accessible for individual American investors, and although institutions have been big buyers, their investments have been checked by India’s limitations on foreign investment. However, there are a few mutual funds, a couple of exchange traded funds (ETFs), including WisdomTree India Earnings (NYSE: EPI) and PowerShares India (NYSE: PIN), and an exchange traded note (ETN), iShares MSCI India Index ETN (NYSE: INP) now, and Standard & Poor’s just launched the S&P India Select Index, which covers 60 blue chip Indian companies. This index excludes stocks that have reached their foreign investment limits. What is the significance of that?

A. The market in India has been powered by a very narrow group of companies over the past few years. Financials have been part of that group, and those are where foreign ownership [is] at or near [its] limit.

Q. What makes the Indian stock market attractive to investors?

A. Choice (6,000+ stocks), good accounting, solid balance sheets, and generally a lot less leverage in the system compared to developed markets

Q. Hasn’t corporate governance been a problem in India?

A. The real question is, “Does the management team act in the best interests of minority shareholders?” Preferred dividends, sweetheart loans, excessive executive compensation are not very shareholder-friendly. Investors will be better served by focusing on management teams that protect the best interests of minority shareholders.

Q. Inflation in India reached 13%, a 16-year high, before recently falling back to 11%. Won’t that slow the market’s growth?

A. Inflation in India is calculated by the WPI (wholesale price index—Editor). This index is very heavily weighted towards commodities and foodstuffs. It is not a very good gauge of actual inflation. The government is moving away from using this index as a measure of inflation over the medium term. The fact remains is that estimates (which have been revised downward) for real GDP growth are still above 6.5%.

Q. Won’t India be hit particularly hard by the global credit crunch/recession since it does not have the kind of low-price manufactured goods that China makes and that strapped consumers tend to buy in hard times?

A. India is not an export-driven economy. 85% of GDP is domestic demand oriented, while exports comprise only 15% of GDP. India is in the midst of a cyclical slowdown, but is not in a deep recession.

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