By Premo Sewnunan
India is the fourth largest economy in the world and is poised to overtake third-place Japan at the end of next year.
While the U.S. and European economies flounder, India is plowing ahead. The country recently announced that the economy is on track to grow 8.2 percent this year, while the “developed” economies are limping along or stalled.
The middle class population has exploded from 65 million in 1980 to over 365 million today. Listed below are companies whose stocks are undervalued and are major players in their industries:
Wipro Ltd (WIT): Wipro is a global IT services company serving a diverse range of industries ranging from aerospace to telecoms. The company partners with firms such as Microsoft (MSFT), Oracle (ORCL) and Cisco (CSCO) amongst others.
The stock trades around $9, not far above its 52 week low of $8.96 due to current market volatility. The company is valued at $23.3 billion or roughly four times its fiscal 2011 revenues. Over the past seven years, revenues and net income have grown at an annual compounded rate of 27%. The trailing twelve month price/earnings multiple is 20, which is expensive compared to competitor Infosys Technologies (INFY), at 18.25, but cheaper than counterpart Cognizant Technology (CTSH), at 23.3.
Wipro operates in an industry where competition is intense. Competitors range from its home turf rivals to multinational companies setting up operations in India. Many outsiders are taking advantage of India's highly educated, low cost workforce. Labor costs have been rising recently, and, in the coming years, should pressure margins.
Firms such as Wipro tend to have steady earnings as a result of long term contracts with major clients. As of June 30th, Wipro had over 150 Fortune 500 companies as clients. The balance sheet is healthy. As of March 2011, Wipro had over $1.3 billion in cash and other liquid investments which should help it pursue acquisitions and raise its dividend.
Tata Communications Limited (TCL): Tata Communications sells a variety of telecommunication and IT services to businesses and individuals. Services range from VoIP to VPNs and internet access.
The stock trades around $8.50, above its 52 week low of $8.08. The company has a market value of $1.27 billion, and is selling at just 1.7 times its fiscal 2012 first quarter revenues of $728 million.
Revenues were up 15% to $728 million while net losses narrowed by 22% over the same period last year. Growth drivers were the Global Data Solutions segment and Neotel, its South African telecom network operator subsidiary, which grew its revenue by 31%.
As the economically active population increases in India, Tata is taking advantage of the explosive growth in the Indian banking and financial services arena. It manages over 5,000 ATMs, 7,600 point of sale terminals and 114 private sector and co-operative banks.
Tata Motors (TTM): Tata is India’s largest automotive maker and the world’s second largest medium- and heavy-bus manufacturer. There are two business segments - automotive (which accounts for 99% of sales), and other operations. Other operations include IT services, construction equipment, automation and investments.
The stock price has dropped over 30% since July, mostly due to the market crash. The company has a market cap of $10 billion. The stock price hovered 7% above its 52 week low with the price/earnings ratio at 5.3 (trailing twelve months) – almost on par with Ford (F), at 5.96, but pricier than General Motors (GM), at 4.73.
Runaway inflation in India has negatively impacted car sales in its home market. August car sales slumped almost 40% while its light and heavy vehicle segments also recorded strong growth.
This trend should continue for the remainder of the year. Tata also faces rising domestic and foreign competition. On the other hand, healthy demand for its commercial vehicles and an increase in exports should help in bolstering the bottom line for fiscal 2012.
Growth in emerging markets is the key growth driver in the next three to five years. The company’s established position in these countries should help it prosper as these economies grow.
Sify Technologies (SIFY): Sify provides a range of IT services to businesses and consumers including internet connectivity, corporate network services, and e-commerce applications.
The stock is volatile, with a 52 week low of $1.49 and high of $8.54. The stock trades around $4.3, valuing the company at $800 million.
The company should be in the black come the third quarter of fiscal 2012. First quarter fiscal 2012 results were solid as Sify narrowed its loss from $4.05 million to $1.91 million.
All its divisions recorded growth with its IT services segment the star performer. IT services recorded 67.4% growth after it made major alliances with industry leaders and won several large government contracts.
The Indian government intends to level the playing field. It recently announced its intention to classify the proposed fiber optic network as a national resource and to make it available to all operators on equal terms. Management at Sify believes it is are ideally positioned to ride the IT wave.
Dr. Reddy’s Laboratories (RDY): This firm manufactures and sells generic drugs and active drug ingredients.
The stock trades about 2% off its 52 week low of 30.24, valuing the company at $5.45 billion with a price/earnings ratio of 21.
The company is one of the strongest players in the global generic drug marketplace. It has improved its emerging market presence where growth trends are strong. One of the risks facing generic drug makers is litigation, as witnessed with the recent settlement with Pfizer (PFE).
Nonetheless, litigation risk is offset by the company’s diverse geographic operations and its low cost advantages. Forming alliances with major drug companies is another growth avenue, as seen with the recent deal with GlaxoSmithKline (GSK). Another recent joint venture with Fujifilm (FUJIY.PK) to develop, manufacture and sell generic drugs in Japan bodes well for future earnings, as Japan is the world’s second largest pharmaceutical market.
Another angle investors should consider is a takeover by a major drug company. Companies falling under the “Big Pharma” umbrella face major revenue declines in the next three to five years, as patent protection for blockbuster drugs expire. It makes sense for major drug companies to go on the acquisition drive and buy out generic drug makers like Dr Reddy’s in order to buffer the effects of impending patent cliffs.