India, a seductive investment story? - Views on News from Equitymaster

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India, a seductive investment story?

Jul 23, 2009

Although Indian equities had reached very attractive valuations earlier this year, no one really expected the recovery to be this strong and this quick. However, there are some who prepared for this rally and have reaped rich dividends. One of them is Sanjiv Duggal, who manages about US$ 6 bn in Indian stocks at HSBC Holdings Plc's Halbis Capital Management in London.As per Bloomberg, Duggal's US$ 4.6 bn Indian Equity Fund, which targets overseas investors, rose a whopping 78% this year, the best-performing Indian equity fund with assets of more than US$ 500 m.

He continues to believe that the Indian economy's inherent growth potential remains intact. He expects FY10 results for India Inc. to grow by less than 10% but FY11 to witness a growth of 15% to 20%. These earnings are now made more attractive due to stability the new government will provide. As a result, as he says, "One could argue that India's trading multiple could be higher." In fact, valuations are in line with 10 year averages and lower than 5 year ones.

Also, as Mr. Ajit Dayal, Director at Quantum Advisors Pvt. Ltd. also adds - "India is neither a US (a big borrower and consumer) nor is it a China (a big producer of goods for export that created jobs and boosted China's economic growth). So, while I remain nervous about where the world is, I continue to believe that India has a good chance of being less impacted than most other countries in the world. And while the market has reacted very negatively to the budget (silly, in my opinion) and is nervous about the monsoon (we should be), the trend of India's GDP remains upward."

But despite all these positive vibes that emanate for India, it is pertinent that you do not lose sight of the fact that the world is still a very uncertain place to invest in. And given that, as Ajit says, "India is still hostage to flows of short term money from hedge funds," it is important that you do not give in to the greed that might lead the markets to high levels in the short term.

In such a scenario, what should you do? Invest in companies with strong business models and visionary managements, but only after you have kept aside enough cash for emergencies and to live comfortably.

Is Indian IT looking at better times?
India's four major IT companies - TCS, Infosys, Wipro, and Tech Mahindra - have already announced their June quarter results. And to say the least, the performance has been good, especially given the continued weakness in worldwide technology spending. These companies' combined sales and profits have grown by 9% YoY and 12% YoY respectively during the quarter.

Source: Trend

While the going seems to be good for IT stocks as of now, the fact that these companies' managements have sounded caution for the short to medium term needs to be put into perspective. Most have also indicated that the recovery will not likely happen before the middle of next year. Though, all believe that despite the decreased velocity of business, IT remains a growth industry and they are confident of weathering this temporary slowdown. We also see the dark clouds of slowdown in tech spending to still take some time to recede on the horizon, especially given that the biggest tech spenders in the US and Europe are still reeling under significant financial constraints.

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