Investing in Emerging Markets: India
Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Investor confidence in the Indian growth story may have dwindled over the last year, but the World Bank estimates that India's GDP will grow at around 6.7% during 2013. That’s still a healthy growth rate, especially since most emerging nations, including Brazil, are struggling with their slowing economies. But since its widening trade deficit has sent the Indian rupee plummeting, there are only a few industries that present solid growth prospects.
HDFC Bank (NYSE: HDB) is one of the most resilient and robust financial institutions in the country. It provides a diverse range of banking services in India, Bahrain and Hong Kong and operates with 40% better net margins than the industry. As a result of dipping non-performing assets, improving margins and rising deposits, the bank recently reported its 53rd quarter of 30%-plus growth.
However, that was just hindsight. The Reserve Bank of India has been cutting down interest rates as core inflation is easing. But the depreciating Indian rupee is adding inflationary pressures, so the RBI will most likely refrain from cutting rates further. This has sent a shockwave throughout the Indian banking sector, causing shares of HDFC Bank to plunge by nearly 15% over the last month.
But I believe that this is just a temporary decline. The Indian government recently hiked its import duty on physical gold for the third time, which finally seems to have controlled its rising gold imports. This points towards an appreciating rupee, which in turn points towards declining inflationary pressures and further rate cuts. In my opinion, investors should capitalize on the recent dip in HDFC Banks, and dollar cost average their entries.
The bank has grown at a staggering rate, and is estimated to record EPS growth of 30% over the next five years.
Meanwhile export companies like Infosys (NYSE: INFY) stand to benefit here. The company provides consultancy and software solutions to enterprises across the globe and operates with an international market share of 6.9%. The good thing is that it generates 60% of its revenues from North America, and the weakening Indian rupee expands its cash inflows.
But on the downside, Infosys has been recording a streak of poor financials. Its lack of innovation has left Infosys with a stagnant market share, while its closest peer, Tata Consultancy Services, has managed to capture 10.7% of the international market, an improvement of 140 bps YoY.
As a result, shares of Infosys have plummeted by 48% over the last five years, and analysts estimate its annual EPS to largely remain flat over the next year.
Mining and Metals
Sterlite Industries (NYSE: SSLT) is the largest non-ferrous mining company in India and has been beaten down due to imposed bans on mining operations in Karnataka and Goa. Besides that, the Tamil Nadu government has also imposed a ban on its Tuticorin-based copper smelting plant because of an alleged gas leak. The plant can process up to 400,000 tonnes of copper annually, but came to an absolute standstill after the ruling.
This not only hurt Sterlite Industries, but also strained the domestic copper supply in India. Hence, to ease the supply, the Supreme Court of India recently overruled the decision and allowed its copper smelting plant to be reopened. This is a huge short term positive for the company, as the ruling gives it a chance to stockpile copper before the interim report due in July.
Besides that, its merger with SesaGoa is also awaiting the approval of regulatory authorities. Once the merger is through, it will create SeseSterlite, which will be counted among some of the largest mining and metals companies around the globe. But all that won’t matter if mining operations in Goa and Karnataka remain suspended.
I firmly believe that the Supreme Court of India will overturn its mining bans in Karnataka and Goa. This is because the iron ore shortage is forcing Indian steel producers to import iron ore from China, which in turn is widening its trade gap and causing further rupee depreciation. But until that happens, Stelite Industries will continue to bleed.
Although I have long positions in eight different Indian banks, I am particularly bullish on HDFC Bank. Naturally, with interest rate cuts the RBI will free up liquidity, which will eventually lead to bigger deposits and higher volume-based interest income.
And lastly, I’m bearish on Infosys. It's having managerial setbacks and recently approached its 66 year-old retired CEO, Mr. Narayna Murthy, for direction. In my opinion, Infosys needs young blood to innovate and compete aggressively in order to break its streak of poor financial performance.
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Piyush Arora owns shares of HDFC Bank. 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!