The Bull Is Loose in India
Thursday January 27, 10:04 am Eastern Time
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The Bull Is Loose in India
By Peter Marber, Emerging Markets Columnist
Tech opportunities abound, and they're increasingly available to US investors.
Entering the new millennium with strong market momentum and a growing number of Silicon Valley-like technology start-ups coming to market, the bull may be loose in India.
India has always intrigued investors. When the country began opening its economy to the world in 1991, many salivated over its middle class of more than 100 million. Yet for most of the 1990's, the stock market roller-coastered with gut-wrenching volatility. Troubled relations with Pakistan, which continue today, certainly haven't helped.
But investors seemed to shrug off those concerns in 1999: the local Bombay Stock Index finished up 64% for the year. And there now are signs that, regardless of the domestic market's performance, a steady stream of high-tech winners will find fame and funding in the US market.
Global Software Center
India has emerged as a global offshore software development center, capitalizing on its highly skilled, English speaking segment of the population. In 1999 shares in listed software companies increased roughly 230%. The industry has grown 50% per annum since 1995 and analysts see no slowdown in sight.
The moral: if you missed the boat on the US market, this may be an arena to watch for great return potential as Indian tech companies go global.
Last year two software giants debuted on the Nasdaq: Infosys Technologies (Nasdaq:INFY - news) and Satyam Infoway (Nasdaq:SIFY - news). Since then, both have consistently outperformed all US and global indexes. Infosys, listed in March, tripled within days. With strong sales figures announced in September, returns since the IPO are a staggering 550%. The company's market capitalization now stands at about $19.4 billion. Like many nose-bleeding Nasdaq stocks, Infosys trades at 115 times expected earnings.
Satyam Infoway, the Internet service subsidiary of Satyam Computer Services, made its debut in New York on the Nasdaq on October 19. Satyam's decision to move into e-commerce has continued to ratchet its stock upwards. Trading started at $4.50 per share and now stands at $42, giving the company a market capitalization of $3.6 billion.
Two New Players
For IPO watchers, keep an eye on Wipro and NIIT - both Indian software giants expected to list American Depositary Receipts in 2000.
Wipro is a diversified conglomerate, of which 65% of profits are generated through software sales. By market capitalization, Wipro is India's largest software company. However, because some 35% of the company business is non-computer related, analysts say the stock should trade at a discount to pure software companies when it lists in the US. In India, the local shares trade at 97 times earnings.
NIIT may also be worth a look. The company is a leader in education software and leads the field in interactive online learning. Many analysts feel the company's products have strong export potential.
Pricey, but with High Potential
Take note that Indian software companies are not cheap: average local price-earnings ratios are generally higher than for their US counterparts. However, most analysts concur that in the long run, India's companies have greater growth potential and greater comparative advantage in cheaper skilled labor. Remember, by 2050 India should be the world's largest country in population, displacing China.
The Internet is very hot in India, and Satyam's success in 1999 may just be the beginning of a trend. Domestic demand for Internet services in India is poised to expand dramatically with an increasingly wired population. Investors seem ready to believe. Satyam Infoway added $600 million to its market capitalization after it purchased IndiaWorld, an Internet portal, for just $115 million. Like its US counterparts, IndiaWorld has yet to turn a profit.(Mohan:This is not true,IndiaWorld is a profitable company)
Because of the limited offerings, investors interested in India may want to consider the country fund route. India has over 8,000 listed stocks, and country funds essentially get paid to sift through this market and find bargains. Such funds are able to invest in many Indian companies that are not yet listed in the US.
Those who invested in these vehicles had much to cheer about in 1999. The India Growth Fund (NYSE Country Fund:IGF) is a $215 million closed-end fund that trades at a 30% discount. Though it's a broad play on the overall market, computer software represents 30% of the fund's total allocation. The fund ended the year up 93% and continues to outperform the local BSI index. The $155 million Jardine Fleming India Fund (NYSE:JFI - news) similarly finished the year up almost 100%.
Nuclear War, Anyone?
While tech fever may lead investors to India, keep in mind that this is an emerging market with many political risks - some fairly unique. Among the largest is the ongoing conflict with Pakistan that has been elevated dramatically to nuclear possibilities. Over the last two years surprise nuclear testing by both countries alerted the world to this potential nightmare. Few political analysts or academics fully understand this tense, fragile relationship. Clearly if trouble breaks out between the two - nuclear or not - the local markets would sink quickly.
In the meantime, Indian investors seem to be discounting those possibilities, and the high-tech sector is plowing forward. So is the economy. Continued liberalization helped India's GDP expand by 5.9% in 1999 and should push it up past 6.4% in 2000 according to The Economist. Inflation is negligible and the rupee - the local currency - has been fairly stable. As long as tensions with Pakistan don't flare-up, India's markets may be poised for another outperforming year in 2000.
Peter Marber is president of a New York-based asset management firm and is the author of From Third World to First Class: The Future of Emerging Markets in the Global Economy. His weekly column highlights opportunities in emerging markets. .
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