India’s restrictive investment policies under the United Progressive Alliance (UPA) II government have ensured that foreign retail investors would pass it over in favor of better opportunities. But with the landslide victory of Narenda Modi's Bharatiya Janata Party (BJP), many expect India's economy to be unleashed, as efforts to kick-start growth gain momentum.
Over the last several years, information technology, pharmaceuticals and fast-moving consumer goods took center stage in India, while capital goods, oil & gas, infrastructure and banking struggled. The coming times are likely to witness a trend reversal, and would-be investors in India should take note.
Infrastructure will be the point of focus in the coming years, especially with the new government’s proposal that it will be handled by a new ministry. Revival of this sector will stimulate domestic demand and increase productivity. Companies that stand to benefit include Larsen & Toubro Ltd. (LNT), state-owned Bharat Heavy Electrical Ltd. (BHEL), GMR Infrastructure Ltd. (GMRINFRA), Reliance Infrastructure Ltd. (RELINFRA)..
Sluggish infrastructure progress also kept the capital goods sector at bay. Stock pickers should pay attention to value plays here and keep an eye on Thermax Ltd. (THERMAX), BGR Energy Systems Ltd. (BGRENERGY) and Crompton Greaves Ltd. (CROMPTON).
The banking sector also offers good opportunities. Many private sector and large state-sponsored banks offer capital efficiency and a relatively low amount of nonperforming assets. Companies worth a look include ICICI Bank Ltd. (ICICIBANK), Axis Bank Ltd. (AXISBANK), Yes Bank Ltd. (YESBANK), HDFC Bank Ltd. (HDFCBANK) and State Bank of India (SBI).
The fast moving consumer goods sector, which acts as a dampener to volatility, is worth attention. The power and oil & gas sectors also look bright, as India's auto sector could benefit from renewed domestic demand. Some good stocks across these sectors are Jaiprakash Power Ventures Ltd. (JPPOWER), ITC Ltd. (ITC), Bajaj Auto Ltd. (BAJAJAUT), Tata Power Company Ltd. (TATAPOWER), Maruti Suzuki India Ltd. (MARUTI), Mahindra & Mahindra Ltd. (MNM), Adani Ports and Special Economic Zone Ltd. (ADANIPORTS), Reliance Industries Ltd. (RIL), Oil and Natural Gas Corporation Ltd. (ONGC) and Hindustan Unilever Ltd. (HUL).
The Gateway to Indian Markets
American Depositary Receipts (ADRs) offer foreign retail investors a hassle-free way into the Indian market. ADRs are traded on U.S. exchanges and protect investors from currency fluctuations and foreign taxes. Popular Indian company ADRs include ICICI Bank Ltd. (IBN), HDFC Bank Ltd. (HDB), Tata Motors Ltd. (TTM), Dr. Reddy’s Laboratories Ltd. (RDY), Sesa Sterlite Ltd. (SSLT), Sify Technologies Ltd. (SIFY), Infosys Ltd. (INFY) and Wipro Ltd. (WIT).
Exchange-traded funds (ETFs) offer broad-based exposure to Indian stocks. The popular funds are the iShares S&P India Nifty 50 Index Fund (INDY), WisdomTree India Earnings Fund (EPI), Market Vectors India Small-Cap Index ETF (SCIF), PowerShares India Portfolio (PIN), iShares MSCI India ETF (INDA), EGShares India infrastructure ETF (INXX) and the EGShares India Small Cap Exchange Traded Fund (SCIN).
Qualified Foreign Investor
Investors seeking to buy single Indian stocks right now should familiarize themselves with the country's Qualified Foreign Investor (QFI) program. Introduced on Jan. 1, 2013, it allows foreign investors to directly invest in Indian markets via the Bombay Stock Exchange (BSE) and the National Stock Exchange of India (NSE), and also offers eligibility to invest in Indian mutual funds and corporate bonds. Here are more details on the program, which favors longer-term investing and seeks to mute volatility.
Foreign investors should also study India's new Registered Foreign Portfolio Investor plan. When fully adopted, the scheme will replace (and improve on) the QFI program and offer benefits such as higher investment limits, tax advantages, fewer restrictions and simplified processes. More details on the adoption of FPI Regulations can be found here.
Enthusiasm has returned to India, as economists raise their GDP forecasts and investors plot ways to ride an economic revival (though volatility could make that ride a bumpy one). After a period of post-election euphoria, the Indian markets could witness a small correction. Such a dip could amount to a good time to enter the market and start building a long-term position. (Fore more on this topic, see An Introduction To The Indian Stock Market).
At the time of writing, Prableen Bajpai did not own shares in any of the companies mentioned in this article.