By Rob Carroll
Today we travel to India and explore six firms there that hold potential for investors everywhere. And in a fast-developing nation such as India, potential can be great.
Infosys Technologies Ltd. ADR (INFY): As a leading global provider of IT products and services, Infosys is one of the most recognizable names in the field. Once considered a pioneer in the development of global delivery, the company was able to take advantage of numerous opportunities when outsourcing began in the early 1990's and now offers end-to-end services (from consulting to development) to its 590+ worldwide customers -- an impressive feat that puts it on par with other elite service providers such as Accenture (ACN) and IBM (IBM). With repeat business accounting for more than 97% of Infosys' revenue, the company has held up well despite a decrease in IT spending, and with excellent financial health, the firm is well-equipped to take advantage once that spending returns at a time when companies will be looking to outsourcing to cut costs and ease recovery. Shares currently trade for around $72 and yield 0.76%. The P/E ratio is 28.48.
Wipro Ltd. ADR (WIT): Like Infosys, Wipro is one of the largest IT service providers in the world, a claim the firm proved in 2010 when its IT services segment reported revenue of $1.344 billion, a year-over-year growth of 19.3%. With that said, the firm hopes to increase those numbers now that it offers infrastructure management and testing, two high-growth businesses that other Indian IT service providers have yet to penetrate. The firm also boasts one of the world's largest third-party research and development services (a segment which generates 30% of total revenue) and enjoys recurring revenue from 95% of its client base. In 2007, Wipro acquired U.S. firm, InfoCrossing, and opened a software development center in Atlanta, providing Wipro with a valuable onshore U.S. presence. Currently trading for around $15, shares yield 0.80%. P/E is 32.09.
ICICI Bank Ltd. ADR (IBN): With over $100 billion in assets and more than 2,500 branches, ICICI is India's largest non-government-owned financial institution, and one that can widen its lead over the competition as India continues to develop and the firm's insurance unit begins to turn a profit. Laying claim to 12% of the market, the insurance segment ranks among the leading insurers in India, but not until 2010 did the segment turn a profit. Now that the unit is seeing positive earnings, ICICI can use those earnings to offset credit costs in the banking segments. And with its strong reputation and increased pricing power, the firm will continue to attract more premiums. The banking segment has plenty of room to grow as well, most notably among India's unbanked population, its rising middle class, and the millions living abroad. Currently, the P/E is 26.08, and shares trade for around $49. IBN yields 1.05%.
Tata Motors Ltd. ADR (TTM): In June 2008, Tata Motors, India's largest automobile manufacturer, acquired struggling Jaguar Land Rover from Ford for $2.3 billion. In 2011, Jaguar Land Rover reported a record operating profit of $733 million, generating nearly 32% of the $2.3 billion Tata paid. Now with revenue of $20 billion, Tata has increased revenue nearly 500% during the past five years due in large part to dramatic increases in the sale of commercial vehicles and passenger cars in India. And this may only be the beginning of a quick sales climb. At 8 cars per 1,000 people, India's car penetration is among the lowest in the world, and as the country continues to develop, more people will be in the market for cars. More importantly for investors, Tata has anticipated this rise in Indian automobile ownership and, in response, has developed the Tata Nano, a passenger car with a sticker price of only $2,500. Due to its mass affordability, the Nano has the potential to change the face of the Indian automotive industry and deliver a significant profit for the Indian automaker. Also of note: the current government spending on infrastructure (in India) will benefit Tata and the automotive market. Trading for around $28 at the time of writing, TTM yields 1.14% with a P/E of 27.61.
HDFC Bank Ltd. ADR (HDB): With over $50 billion in assets and 2,000 branches, HDFC isn't quite as big as ICICI, but the firm is still one of India's largest non-government-owned banks, and one that actually has a superior growth rate due to its superior lending standards and higher-income clientele. While other banks like ICICI serve the general population, HDFC has traditionally catered only to India's middle- and upper-income individuals and top firms. This loan practice has kept the firm's nonperforming loans ratio (NPL ratio) at a very low 1.1% (for comparison, ICICI's NPL ratio is 4.9%) even as loan growth continues to average over 40% annually. HDFC has also managed to expand its deposit base at a similar rate, which allows the firm to maintain a low cost of funds and preserve profitability. And with deposits being 1.3 times total loans, the bank has produced net interest margins exceeding 4% for the past ten years. Now, HDFC is set to profit from India's development, considering the bank will continue to supply financial resources to people and firms that will likely have a hand in the nation's growth. And considering that the Reserve Bank of India has tight rules regarding the entry of foreign banks, international competition will likely be kept at bay. HDB currently trades for $172.15 and yields 0.45%. The P/E ratio is 31.88.
Mahanagar Telephone Nigam Limited ADR (MTE): While this provider of wireless and fixed-line telephone services in India and abroad may be more of an uncertainty than previous entries on this list, the firm still has potential for growth due to a developing wireless market in India, and plans to extend operations into the Middle East. With 4 million wireless customers and 3.7 million fixed-line customers in Delhi and Mumbai, MTNL is in talks to obtain a pan-India wireless license, and has plans to build a cable network from India to the Middle East. The wireless license will afford the firm full exposure to a nation where wireless penetration is still low and ripe for growth, and the cable network will help the firm escape competitive pressures at home by expanding into new markets. It is also worth noting that the Indian government owns 56% of shares, and that due to this government financial support, MTNL has zero debt. Shares currently trade for $2.15 and yield 1.97%.