Forget Password?
  1. Indices
  2. Commodities
  3. Currencies
Straits Times 3,116.17 -8.28 -0.27%
Hang Seng 26,503.93 -17.92 -0.07%
Dow Jones 26,787.36 -29.23 -0.11%
Shanghai Composite 2,991.05 -16.84 -0.56%
Should You Invest In India Now? – Kevin Gin
Aspire, Thought Leaders | 12 February 2015
By: Kevin Gin, CFA
Articles (5) Profile

As one of the last BRIC countries to truly take off economically, should you invest in India now?

I have just returned from visiting six Indian cities meeting bankers, fund managers, insurance companies, brokers, corporate financiers, accountants, corporates, developers, infrastructure players and a media icon/mogul.

Needless to say India has changed, especially since my first visit in 1993 where I went as an analyst to research Garware Polyester and Plastics, the worlds largest thin film manufacturer.

One thing that is noticeable is the change, especially on the infrastructure front and basic amenities. Airports have been upgraded and are now modern, some cities host mass rapid transits, new highways and better quality roads was evident.

But there seems to be a shortage of public toilets in cities such as Hyderabad, Pune and Kolkata. This was noticeable as one travels down streets or boulevards. In contrast, poverty was not as wide spread or obvious as that of the past.

The Modi Effect

India's relatively new Prime Minister, Narendra Modi has instituted a slew of new policies. But is it enough? Or will he be brought down by India's stifling bureaucracy?

Indian Prime Minister Nahendra Modi’s earlier success as Gujarats Chief Minister has given him the confidence to take his vision to the rest of India.

In essence, Modi’s vision can be summed up as: 1. Made in India 2. Clean India 3. Safety for Women. But can he pull it off? Or will critics have their day as George Friedman says “India will be the land of the future, it will always be the land of the future”.

Expectations Outpacing Reality?
A large proportion of my peers believed that the market has run ahead of expectations and that huge obstacles remain within the country and between states.

There is consensus that reforms will be good for the country but it will change the means and livelihood of the incumbents, who will no doubt throw spanners in the wood works. Infrastructure bottle necks could flare up again as the “Made in India” initiative accelerates.

Access to highways and ports are but one of many challenges as are persistent brownouts in certain parts of India. Needless to say, summer has not even started yet.

Financing Modi’s Grand Plan

Building infrastructure in India is one thing, financing them is quite another.

But all grand plans need to be financed. Investors, particularly foreign investors will take the lead in driving manufacturing investment and growth.

India’s cozying up with Japan to increase its domestic auto manufacturing capacity is evident. Modi’s plan for 100 smart cities at an initial budget of US$70 billion will need to be financed. Fortunately the U.S. has agreed to US$4 billion in investments and loans for three (Ajmer, Allahabad and Visakhapatnam) of the 100 cities.

The balance will have to come from the federal budget, and it is fortunate that oil prices has collapsed as India imports an estimated 80 percent of its needs or 3.8 million bbl/day. Any savings can be channeled to the smart cities initiative, infrastructural development and upgrades.

Coupled with the prospects of good monsoons in the 3Q of 2015, India might carry out a hat trick. The risk however is that Modi needs the mandate to carry through these long term projects. Surprises could also come with cost overruns and inflation especially with projects with longer gestation periods.

India’s Corporates Overpriced But Worth The Wait?
Whilst there are reasons for India’s euphoria and optimism, the equity markets as represented by the Nifty 50 (8,526.35) or Sensex Index (28,227.39) are not cheap at 20x, especially in light of recent earnings releases.

Furthermore earnings surprises on the downside is more likely to occur given the structure and challenges faced by Indian companies. Coupled with expectations of further asset sales such as Coal India, stock overhangs will add to downward pressure.

At this juncture there is more risk to the downside, and the current risk return trade off is not appealing. However, India and its companies are on my watch list going forward.

Kevin Gin, CFA focuses on valuation anomalies across certain industries and geographies. Kevin brings with him more than 25 years of investment experience.

Please click here for more information about this author.

Join The Conversation
The Shares Investment editorial team welcomes constructive feedback on our coverage and content. We would also be delighted to answer any questions on the above article. Leave us a comment below, and we'll get back to you shortly!

All Rights Reserved. Pioneers & Leaders (Publishers) Pte Ltd. Best viewed with Mozilla Firefox 3.5 and above.