Even before 1994 had begun, Indian Prime Minister P.V. Narasimha Rao gave institutional investors yet another reason to believe it would be a good year.
On Dec. 31, Mr. Rao announced his formal refusal to accept the resignation of Finance Minister Manmohan Singh, architect of India's economic reforms.
By signaling his faith in Mr. Singh, Mr. Rao gave the green light for the Finance Ministry to accelerate the pace of economic liberalizations in the country's budget for the fiscal 1994 year, starting April 1, giving institutional investors the best news of the year.
Investors had received the first piece of good news a few weeks earlier when the centrist Congress party trounced the fundamentalist Bhartiya Janata Party in elections in four key states. The BJP was responsible for communal riots a year ago that spooked the stock markets.
In the new budget, investors can expect further reductions in corporate taxes and tarriffs, lowering the cost of goods, and pushing down inflation and interest rates three or four points, sources say. The budget also is expected to make it easier for foreign companies to increase their interests in Indian affiliates, and reduce the paperwork for institutional investors to directly buy Indian stocks. What's more, the budget is expected to move the country further in the direction of making the rupee fully convertible.
Already, the country's economic liberalization program, begun in 1991, has made it easier for foreign companies to invest in virtually every industry, and take control in Indian subsidiaries, reversing a 13-year policy that limited ownership by foreign companies to 49%. Moreover, inflation is around 7%, down from the high teens in 1991, and interest rates, while still in the double digits, are headed lower.
The new budget could put India on the fast track in catching up with its more advanced South East Asian neighbors - Singapore, Hong Kong, South Korea and Taiwan. While stock markets in those countries showed huge run ups in 1993, institutional investors are now betting it will be India's turn in 1994.
"I look at a lot of markets around the world, and India is poised for a period of sustained growth at a very high rate," said Mark Madden, vice president of Pioneering Management Corp., Boston, the asset management affiliate of the Pioneer Group Inc.
Other institutional investors on the lookout for rapidly growing emerging markets also are taking note.
Already, close to 150 foreign institutions have registered with the Securities and Exchange Board of India, the equivalent of the U.S. Securities and Exchange Commission, to purchase shares in Indian companies directly. And many more are jostling to get in. Foreign institutions have poured in more than $650 million into the Indian market, $250 million in November 1993 alone.
Among those already registered are Morgan Stanley & Co., G.T. Capital Management Inc., Alliance Capital Management L.P., Kemper Corp., Jardine Fleming India Securities Pvt. Ltd. and Pioneer.
Pioneer, which manages $10.5 billion, including $1 billion in international equities, is targeting $20 million to $30 million in Indian equities over the next 12 to 18 months through the Pioneer II and Pioneer International Growth funds.
G.T. Capital, which has $300 million in its GT Emerging Markets Fund, has 9% invested in Indian stocks in the hotel, cement, shipping, utility and cable industries.
Meanwhile, Oppenheimer & Co., which manages more than $35 billion in pension fund money, has just filed for a closed-end mutual fund that will invest in Indian stocks. It hopes to attract pension funds looking for higher returns.
And, International Equity Partners, a Washington-based investment banking boutique that focuses on emerging markets, primarily India, hopes within the next few months to wrap up the first of several private equity offerings to institutional investors: a $31.5 million deal to finance a petrochemical plant in Gujarat, said G. Philip Stephenson, president.
As evidence of growing institutional interest in Indian securities, Mr. Madden, points to the speed with which international offerings by Indian companies of convertible securities have been lapped up.
Recent offerings of convertible securities or global depository receipts by several Indian companies include: a $55 million issue by Jindal Strips Ltd., a steel producer; a $90 million issue by Sterlite Industries, which supplies optic fibers to telecommunication companies; and a $75 million offering by Gujarat Ambuja Cements Ltd.
VSNL, a monopoly long-distance telephone company being sold by the government through a $1 billion initial public offering, also is considered a very attractive stock. The company is expected to sell $500 million of that internationally.
For those who don't know what they're missing, how's this? A 21
Continued from page 18country with a middle-class estimated between 200 million and 300 million, about the size of the United States, or all of Europe. By the next century, India's middle-class is expected to more than double, with spending power to match.
India's saving rate is in excess of 24%, one of the highest in Asia, which bodes well for investments in the stock market. What's more, corporate earnings per share are expected to grow about 40% for the year ended March 1994. Further reductions in excise duties and corporate taxes could hoist profits 15% to 20%, wrote Madhav Dhar, head of the emerging markets mutual funds at Morgan Stanley Asset Management, in a recent report.
Then too, India has 21 stock exchanges, with about 7,000 listed companies, a market capitalization of around $80 billion, and more than 20 million Indian shareholders. The Bombay exchange, with about 3,000 companies listed, is the largest. Plans are under way to set up a fully computerized national stock exchange sometime this year.
Observers say a key area for investment is anything to do with infrastructure spending - cement, steel, plastics and telephone companies, fertilizers, chemicals, power generation and utilities, and transportation. Another area is computer and software producers. Telephone and telecommunications companies, such as Sterlite, are considered particularly attractive.
For example, Alliance Capital, which pitched the "India Liberalisation Fund" last fall to institutional investors in Europe and the Middle East, anticipates infrastructure spending would continue to rise at or above the 26% projected in the country's 1993-1994 fiscal budget ending March 1994.
The larger, blue-chip compa- 22
Continued from page 21nies, selling at price-earnings ratios of 20 to 30 times trailing 1993 earnings, are considered expensive. But smaller and medium-sized high growth companies, selling at 15 to 20 times 1993 earnings with similar earnings growth, are "very attractive," according to Pioneer's Mr. Madden.
Foreign institutional investors do face some problems, including high capital gains taxes on foreign institutional investors - 30% on securities held less than a year, 10% on securities held for more than a year. However, investors have found ways to circumvent these taxes by investing through funds or affiliates registered in tax havens such as Mauritius or the Caribbean islands.
Also, the stock exchanges are not fully computerized, and paper work and settlement can take weeks.
And, brokers are thinly capitalized and lack the liquidity to make large purchases on behalf of institutional clients. But that is changing. Already, four foreign broker-dealers have received government approval and others, including Jardine Fleming, are applying for similar permission.
Research on Indian companies also is limited. Among those with access to it are Pioneer, through its Indian joint venture partner, the brokerage firm Kothari Group of Madras; Morgan Stanley; Alliance; and G.T. Capital
Another disadvantage is that the Securities and Exchange Board of India still is in its formative stages, and not as powerful a regulatory body as the SEC in the United States. For example, the SEBI has been unable to stop Indian managements from attempting to increase their equity stake in their companies by offering new shares to themselves at a steep discount to the market price.
Also, Mr. Madden of Pioneer says companies tend to sell new shares with greater frequency than in the United States. Instead of being viewed as dilutive, the move is considered positive by Indian managements because it increases liquidity. However, it tends to dilute institutional ownership and adversely affect earnings. Moreover, because companies frequently sell new offerings at a discount to market, institutions that have acquired a stake in a company at the current price could end up kicking themselves when new shares become available at the lower price, he said.
But those caveats don't diminish the market's luster.
The Indian economy is projected to grow at a 5.5% clip in fiscal 1994-1995, above the average 4% of the last four years, and a tad higher than the 5% for the year ending in March 1994. But, said Mr. Madden, it could rise to 7% in two or three years. And with the rupee expected to hold its own against the dollar, or at worst lose 5% to 10%, he projects the market could rise 25% to 30% net.