As a part of the long-term portfolio diversification strategy, I recommended investing in India in some of my earlier articles. What I understand from reader's comments is that investors are skeptical about India as an attractive investment destination.
This article discusses the reasons for being bullish on India.
Before talking about the positives, I agree that India has several challenges to overcome in order to tread a sustainable growth path. Some issues which deserve mention here are the twin deficits problem and the issue of corruption in the government sector. However, in my opinion, these problems are more short-term in nature.
One of the biggest positives for India is its favourable demographics. By 2025, the proportion of dependent population in India will be 8.3% compared to 13.2% in China, 21.5% in Europe and 18.7% in Latin America. A high proportion of working population coupled with a dynamic private sector largely offsets the concerns related to an inefficient government sector.
Further, 54% of Indians are under the age of 25 and the NACER forecasts that the number of consumers driving growth will swell from 46 million households in 2003 to 124 million households by this year. This makes India a good blend of production, services, agriculture and consumption driven economy. Of course, the consumption story still needs time to take off exponentially.
With the biggest asset in hand (a young, hardworking and ambitious population), India is placed relatively low on development when compared to other emerging markets. This statement encapsulates both the negative and the positive.
On the positive front, relatively low level of development would mean huge impending growth. On the flipside, several years of inefficiency and corruption by the government sector casts doubts on future growth.
The government sector, in my opinion, will gradually move towards being more efficient as the population piles on pressure on the government to eradicate corruption and boost growth. I am referring to the recent anti-corruption movement in India lead by Anna Hazare.
The following charts give an idea of the impending growth in India and the sectors, which stand to benefit the most.
The first chart gives the urban population as a percentage of total population for India and some other countries.
India's urban population is the lowest among the BRIC countries and also below the world average. With an increasingly educated population, growth opportunities will emerge in various industries leading to an influx of population in urban areas. Also, increasing level of urbanization will fuel housing and infrastructure growth.
Talking about the level of infrastructure growth, the paved roads (as a percentage of total roads) in India is significantly below the world average.
India's 12th five year plan (2012-17) envisions $1 trillion investment in the infrastructure sector. The private sector investment in this plan is expected to be $500 billion. The spending will help improve infrastructure, boost GDP growth and benefit the private sector.
The recent massive power breakdown in India, which impacted 600 million people, underscores the challenges in power infrastructure. India's per capita electric power consumption is miserably low at 571 kWh per capita compared to a world average of 2,807 kWh.
India's does have an installed power capacity of 170,000 megawatt. However, this is not sufficient by any means for a population of 1.2 billion people. With an increasing private sector participation in the power sector, the future looks more promising. The 12th five year plan (2012-17) plans to add 90,000 MW of power. The only way to achieve this target would be private sector participation. The future does look bright for companies in the power generation sector.
The banking sector is an integral part of any country's growth. With all the infrastructure sector growth discussed above, banking sector will play an important role in providing credit to government and private companies.
The banking sector penetration in India also points to huge impending growth for the sector.
Further, Indian consumers are among the least leveraged in developing countries. This factor bodes well with the Indian consumption story over the next few decades.
One might feel that I have presented more challenges than opportunities. Challenges always give rise to some of the best opportunities. The only thing that needs to change is the efficiency of the government sector. With people increasingly conscious about this, 2014 can result in a positive change in the government. Therefore, the current scenario, which is relatively bearish, gives investors an opportunity to buy for long-term.
I personally do expect correction in global markets over the next 2-3 months. A meaningful correction will make Indian equities an attractive buy.
iShares S&P India Nifty 50 Index Fund (INDY) - The fund seeks investment results that correspond to the price and yield performance, before fees and expenses, of the S&P CNX Nifty index. The fund is a good way to consider exposure to the largest Indian companies across sectors.
The EGShares India Infrastructure ETF (INXX) - The ETF seeks investment results that correspond to the performance of the Indxx India Infrastructure Index. The index invests in company's representative of India's infrastructure industries. I did talk about the potential of the infrastructure sector in India. The fund is a good option to benefit from the impending infrastructure development.
ICICI Bank (IBN) - For investors betting on the Indian banking sector, IBN is an excellent long-term investment option. IBN is one of the largest private sector banks in India providing a wide array of banking and financial services. The services include commercial banking, retail banking, project and corporate finance, working capital finance, insurance, venture capital and private equity, investment banking, broking and treasury products and services. Besides this, it also provides NRI banking, international banking, rural and agri banking, Internet banking, mobile banking, and phone banking services, as well as dematerialization services. The stock is currently trading at a TTM PE of 14.6 and offers a dividend yield of 1.7%. With growth of the Indian banking sector expected to be robust, the current PE does look attractive.
Tata Motors Limited (TTM) - TTM engages in the manufacture and sale of commercial and passenger vehicles primarily in India. It also markets its commercial and passenger vehicles in Europe, Africa, the Middle East, south East Asia, South Asia, Russia, and South America. The Indian automobile market has immense potential with a burgeoning middle-class. TTM is well positioned in India to capitalize on the growth. The stock currently trades at a very attractive TTM PE of 5.67 and can give investors robust returns in long-term.