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India: Destination next? - Views on News from Equitymaster
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  • Jan 26, 2002

    India: Destination next?

    The last year and a half has been a terrible one for investors, be it institutional, foreign or for the retail investors. It all started with the Wall Street going gung-ho on the software sector. They were highly optimistic of how technology could help in transforming conventional business practices with the help of a series of Eís (e-infrastructure, e-business, e-solutions to name a few). But after the tech meltdown and in the aftermath of the September 11 attacks on the US, globally, uncertainty has increased amongst the investor community.

    ††††Indices at a glance...
    Indices 3-months 6-months
    Dow 4.8% -4.2%
    Nasdaq 12.2% 5.4%
    Japan -7.3% -9.5%
    BSE 9.7% 1.5%
    Brazil 12.3% 3.2%
    China -14.4% -23.5%
    South Korea 39.4% 32.9%
    But before going any further, consider the performance of three of the developed markets and four developing markets post the September 11 attacks. If one were look at the global markets over the last six months, select regional markets have outperformed the benchmark indices (except Nasdaq) by a notable extent. The regional markets, barring China, have shown a positive return when compared with Dow or Nikkei of Japan. Amongst the emerging markets, South Korea seems to be most preferred destination closely followed by Brazil.

    Given the slowdown in three of the major developed economies namely, US, Japan and European Union, the so-called electronic herd has been eyeing for other prospective investment avenues.

    Here is where the emerging markets like Brazil, South Korea and India come into the picture. One of the key reasons for the sharp rise in foreign institutional investment (FII) in the current year could be attributed to the shift in investment activity. Net investment by FIIs in 2001 amounted to Rs 132.9 bn, which is twice the net investment made in 2000. FII investment in India in 2001 accounted for 24% of cumulative investment made by FIIs in India since the early 1990s. This, to a certain extent, it does indicate that we are slowly being reckoned amongst the global investor community (India: Time to invest).

    Though it is commonly agreed that India is one of the fastest growing economies in the world, how diversified are we to attract the foreign investment? The table below throws some light on the industry-wise weightage as a percentage of MSCI indices (as of December 29, 2000). Amongst emerging markets, India and Korea seem to have everything to offer.

    MSCI sector composition for emerging marketsÖ
    Sector Brazil China India South Africa Korea
    Energy 21.7% 4.4% 3.5% 4.4% -
    Materials 13.6% 1.1% 15.8% 32.1% 8.0%
    Capital Goods 2.8% 16.6% 4.8% 6.8% 3.4%
    Commercial services - 2.5% 0.3% - 0.5%
    Transportation - 1.7% 0.3% - 0.7%
    Automobiles - 1.0% 2.8% - 3.2%
    Consumer durables & apparel 0.3% 0.9% 0.4% - 1.4%
    Hotels & leisure - - 0.6% - 0.2%
    Media 0.7% - 1.9% 0.8% 0.2%
    Retail 0.1% - - 3.8% 0.8%
    Food & drug retailing 3.1% - - 1.7% -
    Food, beverage & tobacco 9.1% 0.4% 9.2% 7.5% 1.7%
    Household & personal products 0.3% 0.0% 13.7% - -
    Pharmaceuticals - 0.2% 6.8% - 0.3%
    Banks 19.4% - 3.3% 14.2% 9.8%
    Diversified financials - 0.9% 4.5% 6.0% 4.2%
    Insurance - - - 7.7% 1.3%
    Real estate - 0.3% - - -
    Software & services - 0.5% 22.0% 9.2% 0.6%
    Technology hardware - 5.9% 5.8% 0.4% 28.3%
    Telecommunications 18.4% 61.6% 3.2% 5.5% 22.6%
    Utilities 10.5% 2.1% 1.1% - 12.8%
    Total 100.0% 100.0% 100.0% 100.0% 100.0%
    Source: MSCI (as of December 29, 2000)

    Looking at the MSCIís India index, weightage towards materials (i.e. cement and steel sectors), household product and software is on the higher side when compared with other countries like China, Korea and Brazil. Software had the highest weightage i.e. 22% and understandably so. Indian software firms, though on the evolving stage, have proved their abilities in the international arena. The recognition is vindicated by the fact that companies like Infosys, Wipro and Satyam currently service many Fortune 500 companies. Besides, weightage towards pharmaceutical sector was also higher only in India at 6.8% as compared to just 0.3% for Korea and 0.2% for China.

    If one were to look at MSCIís indices for China and Korea, telecommunication sector accounted for as high as 62% weightage in China and 23% for Korea. China is one of the fastest growing telecom markets in the world with companies like China Mobile and China Telecom dominating the scene. But going forward, growth is expected to accelerate in the Indian telecom sector as well. With the deregulation of the Indian telecom sector combined with the gradual entry of private sector players, cellular base has more than doubled in just one year. It is widely expected that by FY05, cellular subscriber base would touch 50 m mark as compared with to 5 m currently. Slowly, most of the private sector players are also expected to tap the primary market to fund expansion plans. Bharti Teleís IPO is just the tip of an iceberg. Opportunities are similar in other sectors as well.

    Retailing, insurance and real estate are the few sectors where Indian companies are yet to create a mark. Given the fact that India has one of the largest land areas in the world coupled with the renewed thrust that the government has placed on development of the housing sector, prospects seem promising. Retailing is slowly gaining acceptance amongst consumer thanks to the initiatives taken by companies like McDonalds, Shoppers Stop, Crossroads, Music World, Barista, Trent and Crosswords.

    But this is just one aspect. Consider the composition of various indices. Though data for sector weightage in other emerging markets was not readily available, here we have compared sector composition of Sensex and Nifty with S&P Global 1200, S&P 500 (US) and Dow Jones. While manufacturing sector has the maximum weightage in Dow Jones, banking, diversified financial institutions and healthcare account for a key portion of S&P indices.

    Index composition statsÖ
    Sectors S&P 1200* S&P 500* Dow BSE-30** NSE-50**
    Consumer discretionary 12.9% 13.1% 11.9% 7.7% 6.8%
    Consumer staples 7.8% 8.2% 5.2% 19.8% 17.6%
    Energy & Petrochem 6.7% 6.3% 2.7% 20.7% 16.9%
    Financials 21.1% 17.8% 8.7% 5.6% 8.9%
    Healthcare 12.5% 14.4% 8.4% 9.5% 8.6%
    Industrials 9.9% 11.3% 31.5% 9.4% 8.3%
    IT 14.1% 17.6% 16.3% 15.6% 22.2%
    Materials 3.9% 2.6% 2.4% 5.8% 5.2%
    Telecom 7.2% 5.5% 3.8% 2.9% 2.3%
    Utilities 3.8% 3.2% 0.0% 1.1% 1.7%
    Media NA NA 1.5% 1.9% 1.5%
    Retailing NA NA 7.6% - -
    Total 100.0% 100.0% 100.0% 100.0% 100.0%
    *Source: S&P†††**weighted by market capitalisation

    Looking at both the MSCI and sector weightage in each of the indices, the Indian benchmark indices are as diversified as the global indices, if not better.

    But the sad part is that India does not even figure in the Standard & Poorís Global 1200 index. While other emerging markets like Brazil, Mexico and Korea have managed to attract the electronic herd, India has been a laggard. India just has around 1.3% weightage in MSCIís All Country Asia (excluding Japan) index as against 8.3% for China and 14.7% for Korea. Though we have some of the most cost efficient commodity manufacturers in the world, they are still small when compared with global companies. To put things in perspective, the average size of a firm in the S&P 500 is US$ 15.4 bn (Rs 720 bn) and it is US$ 20.9 bn (Rs 1,005 bn) in S&P 500. The smallest company in the S&P 500 index has a turnover of US$ 0.4 bn (Rs 21 bn).

    S&P 500 statsÖ
    Company size (US$ bn) (Rs bn)*
    Average 20.9 1,005
    Largest 397.9 19,099
    Smallest 0.4 21
    Median 8.4 402
    * Rs 48 per US$
    S&P Global 1200 statsÖ
    Company size (US$ bn) (Rs bn)*
    Average 15.4 739
    Largest 397.9 19,099
    Smallest 0.1 7
    Median 6.8 327
    * Rs 48 per US$

    But in India, we had just 23 odd companies with more than US$ 1 bn turnover in FY01. Just to put things in perspective, Petro China, the refinery major in China, has a turnover of US$ 25 bn, which is five times Reliance Petroleumís turnover. Singapore Telecomís turnover in FY01 was US$ 2.7 bn and offers telecom services to a population of just 5 m. The combined turnover of VSNL and MTNL is just US$ 2.6 bn (catering to a population of more than 1 bn). Though one cannot compare MTNL with Singapore Telecom, it just goes to show that we still have a long way to go.

    The reasons are for everyone to see. Though the Indian economy has grown at a CAGR of 6.9% over the last 30 years, we managed to grow at a CAGR of only 5.5% in the last decade. Despite being one of the most diversified markets in the world, due to structural constraints, the country as a whole has not been able to accelerate growth. Companies like Hindalco, Tisco and Indo Gulf are one of the most cost efficient producers of aluminium, steel and copper respectively in the world. However, in terms of capacities, we are yet to achieve capacities on a global scale.

    ††††††GDP growth trend...
    Country CAGR-30 CAGR-20 CAGR-10
    US 7.8% 6.6% 5.2%
    Japan 11.1% 7.7% 3.2%
    China 13.3% 9.1% 6.6%
    India 6.9% 5.1% 5.5%
    Korea 14.0% 10.5% 4.5%
    Brazil 9.9% 7.1% 3.7%
    If we were to attract foreign investment (both portfolio and direct) on a sustained basis, the government has to place maximum thrust on improving governance standards, which consequently would reduce the risk profile of the country. We have to make sure that fiascos like Enron do not happen again. When we met Mr. Mahesh Vyas of the Centre for Monitoring Indian Economy (CMIE), he emphasized the need for Indian companies to become globally competitive. Also he placed increasing importance for independent regulatory authority in each of the sectors like SEBI for stock markets and IRDA for insurance, which could act as a foundation for improving governance standards in the country. Only then will we be able to make a dent in the global markets.



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