Less than a year after India pulled in the worst performance among Asian emerging markets, institutional investors are calling it "outstanding."
The reasons are not surprising.
India's stock markets have engineered a remarkable turnaround, climbing 96% for the year ended June.
In the first eight months of 1994, the Bombay Stock Exchange Sensitive Index, the broad market benchmark, had climbed 39.8% to 4,145.05 from 2,965.4 at the end of 1993, and Jardine Fleming India Securities Pvt. Ltd., Bombay, anticipates it could rise to 4,800 by March 1995.
Meanwhile, the IFC Investible Index for India has shot up 23.3% so far this year, according to Ziad Maalouf, an analyst at the International Finance Corp., Washington, which tracks emerging markets. The IFC Investible Index has not risen as much as the BSE Sensex, because it takes into account market accessibility limits on foreign investors.
Last year, the Bombay stock market rose only 17% in dollar terms on the IFC Global Price Index, and 24% on the IFC Investible, the poorest performance among Asian markets tracked by the IFC.
In the second quarter of this year, India overtook South Korea as the fourth favorite emerging market among 37 international money managers surveyed by Micropal Emerging Market Fund Monitor, Glen Allen, Va. These emerging market managers pumped more than $100 million into Indian stocks in the second quarter, raising their Indian investments to $1.2 billion of their total $23.2 billion holdings in these markets, said Ian M. Wilson, editor. And that's without counting money flowing into pure India plays.
Institutional investors are expected to pour in as much as $5 billion into Indian stocks during the current fiscal year, ending next March.
"The fundamentals are incredible, probably the best in the world," said Vinod Sethi, a principal and portfolio manager at Morgan Stanley & Co., who heads the firm's Indian money management business in Bombay.
The big Wall Street firm's Indian investments total $2.2 billion - the single largest allocation to any country in its $7 billion emerging markets portfolio, Mr. Sethi said.
Alliance Capital Management L.P., New York, which raised $200 million in January through the India Liberalization Fund, is so bullish on the country it is looking to raise additional money from investors in Europe, Latin America and the United States. The investment advisory firm is setting up a domestic money management operation in Bombay soon and plans to launch a domestic mutual fund to capitalize on Indians' high saving rate, about 22% of gross domestic product.
And Sundaresan Naganath, portfolio manager for India at G.T. Management (Asia) Ltd., Hong Kong, has upwards of 9% of a $250 million emerging markets' portfolio invested there.
India's rally was sparked in part by a strong monsoon season, boosting agricultural production - about 30% of the Indian economy. Because agriculture employs more than 70% of the Indian population, a good crop puts more money into the hands of consumers, fueling corporate profits. Indeed, some investors expect stellar corporate earnings for the year ending March 31, 1995, on top of the already good showing for fiscal 1994, when corporate earnings leapt 80%, Mr. Sethi said.
"When you look at earnings, the Indian market multiple is at or below average," said David Tribble, chief investment officer of the Pioneer Group of Funds, Boston. "We look at companies with (prices) at 45 to 50 times multiples of trailing earnings. But if you think earnings will go up 50 to 100 times, then two or three years out that's cheap." Pioneer has about $30 million of its approximately $1.5 billion international portfolio invested in India, but expects to increase its exposure over the long term, he said.
The Sensex, a basket of 30 stocks traded on the Bombay Stock Exchange, is trading at more than 40 times trailing earnings.
Then too, India's economic growth is expected to outpace that of the United States and other mature economies. After all, India's roads, many originally built by the Mughal emperors hundreds of years ago, are badly in need of repair and expansion. The country's rapidly growing population, estimated to cross 1 billion before the end of the decade, has led to acute shortages of housing, electricity, telephones and just about every other basic amenity. Investments by Indian and foreign companies in each of these areas virtually guarantee the country's gross national product will grow at least 4.5% in the year ending March 31, 1995.
"The current consensus for the economy is far too low," said Adrian Mowat, fund manager of the Asia division at Martin Currie Investment Management Ltd., Edinburgh, Scotland, who manages the $277 million Indian Opportunities Fund.
"The evidence we see when we visit companies is far stronger," he said, reckoning the Indian economy will grow a robust 5% to 6% in the current fiscal year. And certain sectors of the Indian economy could easily grow twice as fast in the foreseeable future.
Pharmaceuticals is one such area, said Rupa Bose, vice president of equity research at Merrill Lynch International Bank Ltd., Singapore.
Because India does not recognize foreign patents on products, only on processes, Indian pharmaceutical companies can break down popular Western drugs whose patents are expiring, reconstitute them through alternative processes, and then sell them in India under a local patent.
Then, when the Western patents on those products expire, the Indian pharmaceutical companies can sell their locally produced versions as low-cost generic drugs worldwide, Ms. Bose said.
She likes Ranbaxy Laboratories Ltd., India's largest domestic pharmaceutical company, which is positioning itself as a generic drug supplier.
Moreover, Indian pharmaceutical companies are developing original research capabilities that could allow them to produce drugs at a fraction of what it costs companies in the West. Then, leveraging off joint ventures or foreign affiliates, these companies hope to break into the U.S. and other overseas markets. Ranbaxy, for example, has a joint venture with Eli Lilly & Co., and recently has set up subsidiaries in China and the Netherlands, she said. "No one can guarantee they can pull it off, but they have a fighting chance" she said.
Ranbaxy's sales have grown an average of 31% annually in the past decade, and after-tax profits at 43% a year. Ms. Bose expects the company's earnings (including its investments in affiliates) to grow at 25% to 26% annually over the next five years.
Mr. Mowat and others also point out India offers institutional investors an excellent opportunity for diversification. For one thing, the Indian stock market has very little correlation to other stock markets and is not influenced by economic trends and events outside the country. For another, the vast array of Indian stocks, about 8,000 by Mr. Mowat's reckoning, offers investors a bigger selection than any other emerging market in the world.
"You can say the economy is doing this, and I want to get exposure to this part of the economy and I can go to this company and get that exposure," Mr. Mowat says.
To be sure, India's capital markets are far from well oiled.
The Bombay stock exchange is not computerized, and settlement of trades can take weeks. The practice of small lot sizes leads to paperwork snafus. And custodians continue to be scarce, although the entry of a number of foreign banks should ease things.
What's more, Indian corporations' fuzzy concept of share ownership and corporate practices make investing there somewhat of a guessing game.
Then too, Indian accounting rules do not require corporations to consolidate earnings for wholly owned subsidiaries. Nor are Indian companies required to report their semi-annual earnings results to the stock market. All they need to do is publish them in a newspaper.
"The question is, which newspaper?" Mr. Mowat said. "It could be the newspaper in Bangalore, or Pune, or Madras," he said in exasperation.
On top of that, Prime Minister P.V. Narasimha's coalition government has slowed the pace of economic reforms in anticipation of November's elections in key southern states and national elections in 1996.
Privatizations of bloated state-run enterprises are well behind schedule, and the government has done nothing to update antiquated labor laws that make it difficult for companies to lay off excess workers.
Although the opposition party, the Bhartiya Janata Party, is unlikely to gain power, a change in the political balance could further slow economic reforms.
Even while acknowledging all these problems, Morgan Stanley's Mr. Sethi notes investors who stay on the sidelines may be missing the biggest show in town.
"You make money on rates of change," he pointed out.
"Political risk, etc., are issues. They will sort themselves out."