India: Risks and Opportunities to Consider

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According to recent estimates by Citigroup, India is expected to grow at 5.5% in 2013. Moreover Indian economy is third largest in the world by purchasing power parity, which gives an idea of the immense proportions of growth potential in the country. Unlike China, India is a self-driven economy, which means whatever it manufactures is mostly for domestic consumption. It is due to this reason that despite the sovereign debt crisis in Europe and slowdown in the US economy, India was not gravely affected. Here are a few picks that I think every investor should consider before investing in India.

Metals and Mining

Sterlite Industries (NYSE: SSLT) is one of the largest metals and mining company of India. It is one of the largest copper producers in the country and merged with SesaGoa, which is involved primarily in iron ore mining. Due to the mining mess in India, its Supreme Court had imposed a ban on all mining operations in Goa and Karnataka.

Goa has over 200 mines, and was producing around 67.5 million tonnes of iron ore per annum prior to the ban. But after the ban, its annual production capacity has been capped to just 12.5 million tonnes. SesaGoa has a production capacity of 14 mtpa of copper, and due to the ban it was able to produce only 3.7 million tonnes in 2012-13. Its production capacity in Karnataka is over 6 million tonnes per annum, but post ban it has been capped to just 2.3 million tonnes. Altogether, the company produces only 30% of its capacity due to the rulings of the Apex court. This is certainly does not present a bullish case, and analysts estimate its quarterly profit after tax to shrink by 26% (sequentially).

Information Technology

Infosys (NYSE: INFY) and Wipro Technologies (NYSE: WIT) are some prominent names that lead IT outsourcing industry. Taking advantage of the inexpensive work force in India and China while catering to the software needs of the West have attributed to these companies' success.

Infosys is the leading IT company and enjoys higher margins than most of its peers. But the austerity drives around the globe had a negative impact on its sales. This coupled with the lack of innovative solutions and expansion activities magnified its problems, and as a result, its shares have depreciated by over the last 2 years.

But the tables seem to be turning, as the company posted a revenue growth of 6.3% beating the street’s estimates by 3.2%. Its profits came in at 0.72 which beat the street’s estimates by 8.3%, and the street was overwhelmed by its performance. Its management expects FY12 revenue to come around $7.45 billion

<table> <tbody> <tr> <td> <p>Company</p> </td> <td> <p>Forward P/E</p> </td> <td> <p>Net Profit Margin</p> </td> <td> <p>Current Ratio</p> </td> <td> <p>Debt/Equity</p> </td> </tr> <tr> <td> <p>Infosys</p> </td> <td> <p>17.35x</p> </td> <td> <p>24.12%</p> </td> <td> <p>5.49%</p> </td> <td> <p>0%</p> </td> </tr> <tr> <td> <p>Wipro</p> </td> <td> <p>17.66x</p> </td> <td> <p>15.33%</p> </td> <td> <p>2.15x</p> </td> <td> <p>19%</p> </td> </tr> </tbody> </table>

Although both Infosys and Wipro trade at similar valuations, I think Infosys would be a better pick due to its massive profit margin and zero debt. But since, Wipro is not limited to just business consulting, it somewhat hedges its operational risks but reduces its reward potential.

Banking

Due to continued high inflation, the Reserve Bank of India was keeping the interest rates high. But it has been cutting interest rates to revive the Indian growth story. Moreover, the inflation rate recently plunged to its 38 month low and analysts are expecting another round of interest rate cuts. This might be a good time to load on Indian banks, and HDFC Bank (NYSE: HDB) is one of the best banks in business.

The bank recently reported 30% plus profit growth for the 53rd quarter consecutive quarter, and yet its growth momentum is intact. The Bank reported a 22% surge in interest income, and a 29% jump in retail loans with only 1% Non-Performing-Assets (NPAs). This indicates its high level of credit quality. Moreover its total deposits grew by 22% and its Current and Savings Account stands at healthy 45.4%. For the coming quarters, the management expects to gain market share would be looking to reduce its NPAs.

Shares of HDFC Bank trade at a PEG of 0.88x indicating that its shares are still undervalued. According to analyst consensus on finviz, its annual EPS growth could average around 30% for the next 5 years.

Conclusion

Although India offers immense growth potential, its policy reforms also pose serious risks. Needless to say, investors should stay distant from Sterlite Industries despite its short term positive triggers. I think Infosys and HDFC Bank would continue to show rapid growth, and deserve a Buy Rating.


PiyushArora has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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