- Investing in India isn’t easy as many Indian investments won’t benefit from Indian growth.
- Indian ETFs won’t benefit either while valuations are a bit high.
- There is a third option.
If you read yesterday’s article on economic growth projections per country, you know that India has an unmatched position in the world. It has a young and more eager population, a huge labor cost advantage, relatively good education, a low starting point, and issues that can be resolved like corruption and a large geography.
The country is growing at around 7% per year and is expected to continue to continue growing at that rate for the next few decades. There will of course be ups and downs, but the long term trend is extremely strong.
As an investor, you’ll want to expose your portfolio to such growth at the lowest possible price. In today’s article, we’ll discuss what the options are to invest in India for the international investor by analyzing Indian ADRs, ETFs, and other indirect ways to expose your portfolio to India.
Indian Stocks Trading On U.S. Exchanges
The simplest way to invest in India is to buy Indian stocks traded on U.S. exchanges. These are American Depository Receipts (ADRs) which represent non-U.S. companies trading on a U.S. stock exchange.
Let me give you a quick introduction to each company to identify what opportunities there are, their risks, and their actual exposure to India.
Azure Power Global Limited (NYSE: AZRE)
The company was listed in October 2016, and is totally focused on bringing solar power generation to India.
Figure 2: AZRE solar plan. Source: AZRE.
As with every other solar development company, the debt load is very high and the company is heavily dependent on the government. An interested investor should calculate the potential for future profitability and assess margins in order to see whether this could be a good investment.
Dr. Reddy’s Laboratories (NYSE: RDY)
RDY is an Indian company, but its exposure to India is mostly from a production standpoint as 80% of revenues come from global generic drug sales. It’s good to point out that not every Indian company is actually all that exposed to what will be going on in India.
As a country grows, banks should be the companies that grow even faster. This is especially true in India as the middle class there is expected to quintuple in the next 15 years. Therefore, a look at Indian banks is a must and may potentially be the best investment from this list.
Figure 3: 50% of people in India don’t have access to financial services – so there’s plenty of room to grow. Source: WeForum.
This group of information technology stocks in the global outsourcing to India business aren’t really exposed to India because just a single digit percentage of revenues comes from the country for each of these companies. As India develops and income levels grow, these companies will see lower margins or will have to evolve.
Figure 4: Wipro’s geographical revenue distribution. Source: Wipro.
Sify Technologies (NASDAQ: SIFY)
SIFY is really a small cap, so additional diligence is required with such companies as the market capitalization is just $141 million.
These two travel operators are both money-losing companies betting on the development of the Indian travel market. That development will definitely happen, but as with all online platforms, you never know which company will succeed and what the level of competition will be. Nevertheless, the Indian online market is very promising when looking at the potential growth.
Figure 5: Indian internet penetration. Source: MMYT.
Tata Motors (NYSE: TTM)
Tata Motors isn’t actually an Indian car maker anymore as it acquired the Jaguar-Land Rover Motor Group making it a completely different business than if it were a mostly Indian-focused company.
Vedanta Limited (NYSE: VEDL)
Vedanta is a predominantly zinc miner that has hugely benefited from zinc prices surging in the last year and a half. As with many of the other companies on this list, the performance of this company won’t be related to India itself but rather to how zinc prices move.
Videocon D2H (NASDAQ: VDTH)
This is a company in the business of digitalizing India’s television, which means it’s definitely exposed to India, but is also under the same risks all other digital service providers are.
This list shows that it isn’t an easy task to invest in India as just because a company is doing business in the country, doesn’t mean it offers exposure to the economic growth or that it is a low risk investment. Let’s look at what Indian ETFs offer.
Most of the companies we have discussed in the list above are included in the ETF and, with the exception of the financial companies, are more under the influence of global factors than they are to the Indian growth story. For example, the second largest ETF holding, Reliance Industries LTD, is mostly dependent on oil prices and not on what’s going on in India.
Figure 6: iShares MSCI India ETF. Source: iShares MSCI India ETF.
To conclude on Indian stocks, not all of them are exposed to India and most of them run specific risks inherent to the business environment they are in. As it’s not that easy to set up an account in India to trade directly on their stock exchanges, a foreigner must be very careful when approaching Indian investments. Fortunately, there are other ways to be exposed to the positive things going on in India.
Indirect Methods Of Exposure
As India is still at a lower level of development but growing fast, it’s expected that it will increase global demand for commodities. Something similar to what happened with China in the 2000s. This should push prices of metals like copper, steel, zinc, and others up significantly over the next two decades.
Apart from commodities, another option is to go for well-established global brands that have a strong position in India and will definitely benefit from Indian economic growth. The most trending global brands in India are the following:
Figure 7: Top global brands in India. Source: Top Trends.
Everything I’ve written in this article shows that investing in India isn’t easy. On top of it all, even if you open an account in India, the valuations are relatively high and don’t offer the cheapness you would expect from an emerging market.
Figure 8: P/E ratio, P/B ratio, and dividend yield of the Indian Nifty 50 index. Source: NSE India.
So to invest properly in India, one has to really understand each specific investment, carefully analyze the exposure to India, and the inherent business risks on top of valuations. Something like that goes beyond the point of this article, but be sure to keep reading Investiv Daily to be notified when we share in depth analyses of specific emerging market investing opportunities that have growth potential with a margin of safety.