Business, Featured Work, The Spectator, India - Thu February 22, 2007

It ain’t half hot in Mumbai

Elliot Wilson explains how to navigate India’s rigid investment rules and buy into a dazzling growth story.

Sweat was pouring off the commodities broker sitting next to me in the sauna of the Taj Mahal Hotel in Mumbai. ‘India is shining,’ he thundered. ‘You must invest in it — everyone in England must. The economy will always go up; it will never come down. We’re on top in information technology, in financial services, in infrastructure.’ Was he just overheating — India’s infrastructure, after all, is indisputably among the worst in Asia — or offering a fair assessment of one of the world’s great emerging economies?

Certainly India’s economy has begun to dazzle: it is on course to grow 9.2 per cent in the year to 31 March, and Goldman Sachs says it could grow by 8 per cent per year until 2020 — a rise as startling as China’s. Mumbai’s Sensex stock market index rose 46.7 per cent last year — compared to the FTSE’s 10.7 per cent — and has returned an average of 22 per cent every year since 1991, almost three times more than the FTSE-100.

But how to invest in this red-hot growth story? India’s capital controls remain rigid. Domestically listed stocks cannot be bought directly by foreign retail investors, so funds remain the best way in. HSBC’s GIF India Equity Fund has gained 151 per cent in the three years to December 2006; UTI’s International IT Fund is up 164 per cent over a similar period. Two JP Morgan funds pit the region’s big emerging economies head-to-head, and India wins: the £390 million India Fund returned 167 per cent over the past three years, while the China Fund returned just 49 per cent.

But if you and a gaggle of trusted friends each have a million quid handy, why not set up your own fund domiciled in Mauritius, India’s tax-friendly version of the Channel Islands? Just set up ten separate £1 million funds, then agglomerate them into a £10 million fund-of-funds and hire a reliable stockbroker. In London, the cognoscenti mention Deepak Lalwani at Astaire & Partners or Jacqueline Aldhous of Forsyth Partners; respected brokers in Mumbai include Rashesh Shah at Edelweiss Capital and Raamdeo Agrawal at Motilal Oswal.

A third option for would-be investors is to delve into your family tree and take advantage of your subcontinental roots. If you’re a non-resident Indian (an NRI) living in Britain or elsewhere, that won’t be difficult. New Delhi classifies anyone with a direct relative born up to two generations ago within the country’s existing borders as being ‘of Indian origin’, giving them the right to open domestic banking and broking accounts. The process is cumbersome, but it does allow those with a suitable gene pool to invest directly in Indian-listed stocks.

If you also have the right City connections, you can plunge your cash into a private equity fund. British financiers have been pooling money to invest in the subcontinent’s natural resources for centuries; now, London provides the perfect platform for NRIs to re-invest in their own country. A good example is Greater Pacific Capital, run by a group of ex-Goldman Sachs bankers. GPC has invested more than £150 million in fast-growing Indian corporates, including a £14.5 million investment in 2005 in Edelweiss Capital, a Mumbai-based merchant bank which has already provided a threefold return for GPC’s investors.

For day-traders, India plc also offers a growing choice of overseas-listed stocks. In London, Deepak Lalwani of Astaire picks out cement firm Gujarat Ambuja, engineering firm Larsen & Toubro and two family-run groups, Reliance Industries and Mahindra & Mahindra. Among New York-listed Indian corporates, he picks drug-maker Dr Reddy, technology giants Infosys and Wipro, ICICI Bank as a consumer play, and Tata Motors. Each stands to benefit from India’s intensifying consumer boom and crying need for better infrastructure — £165 billion of public and private money will (in theory) be invested in improving roads, airports, communications and utilities over the next five years.

Lalwani also offers words of warning. India’s booming markets are trading at a premium of 17 to 18 times forward earnings, compared to 12 to 14 times in most of Asia. ‘India remains an emerging market where stock-market corrections can be more severe than in more developed countries,’ he says. The boom means many stocks are absurdly overpriced: India is a long-term investment story that will be punctuated by freakish highs and lows — but the overriding momentum will be upwards.

Another direct play on the India story comes via that old chestnut, property. In this country of 1.1 billion people, most of whom lack a sturdy roof over their heads, real estate is staggeringly underexplored. There are more hotel rooms in Shanghai than in the whole of India and just one half of 1 per cent of India’s £420 billion stock market capitalisation is comprised of listed real estate corporations.

That is changing: in the past few months five Indian real estate funds have listed on Aim in London. Three — Hirco, Unitech Corporate Parks and Dev Property Development — have been trading below their issue price, having being priced too richly. But they remain one of the few ways to invest in Indian property, and analysts tip them to recover.

A more oblique investment path is via foreign companies with India operations. Unilever takes in $2 billion in annual revenues via a half share in Hindustan Lever; British American Tobacco profits from a 31 per cent stake in ITC. Others that have invested heavily in India include IBM, GE and Wal-Mart, while Tesco and Argos are both bent on entering a market whose 200 million-strong middle class are all potential customers. Then there’s Vodafone, now the fourth-largest mobile telecoms operator in India and aiming for 100 million Indian subscribers within a couple of years. Each of these companies should see its shares rise as India plc’s own stock soars. The country’s rigid laws make it a tough nut for investors to crack, but once in, it’s a strong long-term investment play. Perhaps my sweaty broker friend wasn’t so far wrong after all.

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