Bullish on India: "Asia's Best Market"


26 April 2010. Andrew Gordon is the Editor of Investor's Daily Edge, as well as editor-in-chief of three monthly investment research services.

26 April 2010. Andrew Gordon is the Editor of Investor's Daily Edge, as well as editor-in-chief of three monthly investment research services.

After earning his Masters from the London School of Economics, he embarked on a quarter century of extensive experience in both working with and evaluating companies in emerging markets all over the world.

He's authored six books on global market issue, including China’s Oil and Gas Industry, and The World Coal Market.

Here is an interview with him in which he argues India, rather than China, is the number 1 market in Asia.

We are especially intrigued by his emphasis on the fact that India's growth is centered on "imported" out-sourced jobs, especially in high-technology areas, and domestic demand,

UN-like China, which, as we've pointed out many times, has followed the "export-led" East Asian growth strategy pioneered by Japan after World War II.



  • Are you excited about global growth?

I don’t even know what “global growth” is anymore. Economic growth rates vary so much now, depending on which part of the world you’re looking at.

Global growth has turned into an average devoid of meaning. So I no longer pay any attention to it.

  • So what do you look at?

Growth rates as applied to individual countries.

There are big differences even within a region, and that will get you into trouble if you’re not careful.

Europe, for example, is expected to grow by 1.5-3% this year, but Greece’s economy is expected to shrink by 3-5%.

  • Is there one country or region that stands out?

A few – but I really like India.

  • Why India?

India has the fastest-growing big economy after China’s. For some reason, though, investors aren’t giving India its due these days.

  • What are you seeing that other people aren’t?

I’m seeing a very resilient economy and a market whose growth hasn’t jumped out ahead of what the economy is doing, like it has in the U.S.

  • Explain a little more, please.

Well, the U.S. and the Indian markets went up by about the same amount this past year: 70%.

Difference is, the U.S. did it on falling employment, soft consumer demand, and slow economic growth.

India did it on the back of strong job growth and consumer demand.

Not hard to beat the U.S.’s economic performance. But how is India doing compared to China, for example?

India’s growth story is completely different from China’s. China’s is export- led. India’s is consumer-led. Only 20% of India’s economy is driven by exports.

  • So you like India better than China?

Yes I do.

India didn’t have that huge stimulus spending injection that China had. Since September 2008, India has had only $125 billion in stimulus-related expenditures, a mere pittance compared to China’s.

And while lending in China went crazy last year and the Chinese leaders now have to ratchet down lending, lending in India is just coming off its trough. Lending in India should grow by 20% in its current fiscal year.

  • So India and China are going in opposite directions?

No, I wouldn’t go that far.

But China’s government got hit a lot worse than India’s during the recent global downturn. Hundreds of factories shut down in China. 

Apart from a couple of sectors, India did not go though any of that.

Listen, if the Indian economy succeeded in surviving such a severe test with so little damage, just think how it will do in the future.

There’s every reason to be optimistic. Lending in India is picking up, and although private consumption has been pretty good I expect it to get even better.

For example, Indians have picked up their car buying of late. That shows pent-up demand that will lead to more buying.

  • What other encouraging signs do you see?

Even India’s fuddy-duddy state enterprises are thriving, like the Steel Authority of India. They just doubled profits in the last quarter. India can’t get enough steel for its bridges and electricity grids plus autos.

Hero Honda, the motorcycle manufacturer, is enjoying a banner year. Mobile telephones are another of India’s hot-growth sectors.

Bharti Airtel operates India’s biggest mobile phone networks. Its profits are surging. And Marico, which makes personal care products, is seeing its sales soar.

Just last week, Infosys, India’s number two software services exporter, issued a really strong sales forecast and predicted healthy demand for their outsourcing services.

I can go on and on. I see growth not just for the coming quarters but on a sustained basis for many, many years to come.

  • So why aren’t we hearing more about India in the US ?

India is still that exotic country halfway across the globe. We don’t particularly like their music, and their Bollywood movies are too corny for our taste.

[EW Note: These "pop culture" points are actually not true. Indian music has had a HUGE impact on the ever-more popular electronic music scene.

And even apart from the Oscar won by SLUMDOG MILLIONAIRE, Bollywood is having a tremendous impact on American pop culture, as evidenced, for example, by the extraordinary football game scene in the smash hit tv series GLEE.

But while Andy may be wrong in the particulars, it only underscores his LARGER point about the growing importance of India in EVERY sector ;-) . ]

It’s big and complicated, with 28 states and seven union territories. It’s hard to wrap your arms around all of that.

Then you have to take into account that China gets 98% of the headlines related to the “Asian Growth Story.”

  • So India is ignored by the West?

Well not as much by Western companies. They’re well aware of the growth opportunities for them in India.

Just recently, for example, Walmart announced that it will increase sourcing from India. India will become one of its major suppliers in 4-5 years. Walmart already has a joint venture with a local company to set up shop over there.

[EW: A development on which we've been keeping close track.]

And Carrefour from France, which is the world’s biggest retailer after Walmart, is closing in on a local partner so it can break into the Indian market.

It’s not just retail companies, either. For example, industrial and engineering company Siemens is doubling its investment there.

  • It sounds like investors and companies don’t see eye-to-eye on India.

I have a feeling that investors think the Indian market is not cheap, just like the market is no longer cheap in China or, for that matter, in the U.S.

  • And that’s not true?

Nope. The Mumbai Sensex Index is priced at 21.4 times earnings, below the S&P 500’s 23.5 and below the Shanghai Composite Index’s price-to-earnings ratio (P/E) of 28.

The Sensex Index rose by 70% during the last year – but in terms of P/E, it is only 12% more expensive.

  • How does the future look for India’s stock market?

Let’s do some math.

Profits for Indian-listed companies should rise around 25% this year. Investors are going to be willing to pay a little more for such robust growth.

So let’s assume the Sensex Index’s P/E goes up another 12%, like it did last year. That’s being very conservative, by the way.

It’s extremely likely to go up much higher than a 24 P/E based on a 12% rise. The Sensex has actually exceeded a 60 P/E during the past two decades.

Anyway, getting back to the math... If P/E goes up 12% and earnings go up 25%, then the Indian market will automatically rise 40% this year.

As I said, that’s a pretty conservative number.

  • So where should investors look?

Everybody thinks software and generic drugs when they think of India.

But I like the infrastructure sector. India’s ports and railroads are getting a facelift.

[EW: Again, another story that we've been following ;-) ]

And the government wants to modernize its coal industry.

But most of India’s sectors are showing great growth right now.

Let me read you this from my notes and you’ll see what I mean... this is the profit anticipated for next quarter...

“Sugar companies at 461% profit, real estate at 209%, auto ancillary 126%, automobiles 111%, metals 72%, media and entertainment 45%, pharmaceuticals 55%, and banks 20%.”

Pretty good, huh?

  • Anything else?

I like their auto industry.

Back in 1998, for every 100 cars sold in the United States, only 12 were sold in India. India’s car sales have tripled over the past eight years.

Before 2008, U.S. car sales were routinely hitting 15-16 million a year. If they hit 10 million in 2010, it will be considered a pretty good year for U.S. auto sales.

  • Any particular company you can recommend ?

Tata Motors is a company to keep an eye on. They’re the ones making the $2,000 car.

And now they’re looking for a place to set up manufacturing in Europe so they can sell there.

The Europeans are much more amenable to small cars than Americans are. I think Tata’s car will do well there.

  • What are the risks of investing in India?

Aggressive rate hikes by India’s central bank.

But I don’t see it.

The bank’s anti-inflation mandate is weak, and significant rate hikes would really raise the government’s borrowing costs.

I expect India’s domestic credit to remain loose.

[EW: Once again, a story to which we have paid considerable attention. ]

  • And what if economic growth in the U.S. and Europe is slow to pick up again?

It’ll hurt the other BRIC countries (Russia, Brazil, and China) a lot more than it will hurt India.

India is a lot less vulnerable to bad things happening in the U.S. and Europe because, as I said, their economy is not trade-driven.

  • Where do you see India 20 years from now?

The emergence of a powerful middle class in India will keep the country’s economy on an upswing.

It’s India’s unstoppable growth engine. In a decade, India’s economy will be bigger than the UK’s.

In 20 years, bigger than Japan’s.