MARKET COMMENT
How To Invest In India

By David Kuo (TMFDragon)
February 19, 2004

With its economy expected to expand at 8% this year, India is one of Asia's fastest-growing powerhouses. Some even believe that the country could, in time, become the world's third biggest economy behind America and China.

It is little wonder then that billions are being invested into India now. According to Morgan Stanley, foreign direct investors poured over £3b into the country last year. That is equivalent to £3 per head of population, which is significant when average wages in India are running at just £260 a year.

It is, of course, India's low-wage economy that has caught the attention of British and American companies. Businesses process outsourcing is easily one of India's fastest growing industries, and already claims Abbey National (LSE: ANL) and Aviva (LSE: AV.) as just two of its many fans.

Reuters (LSE: RTR) is also making use of India's well-educated professionals. According to the Hindustan Times, Reuters recently hired a small team of journalists, which will report on small and medium sized US companies from its existing base in Bangalore.

However private investors looking to invest directly in the India's stock market may find the going a lot tougher!

In spite of soaring share prices that has seen the Mumbai Sensex 30 index rise 76% in the last twelve months India's stock market is still largely closed to foreign investors. That is unless you are a resident of India, a person of Indian origin or an institution registered with the Reserve Bank of India. Sadly, just being a lover of Indian food, and knowing your madras from your lolo just won't do!

Investing in a specialist fund is one option. There is JP Morgan Fleming Indian Investment Trust (LSE: JII) for example. However, if you're an hands-on investor, you might be interested in the handful of Indian companies that trade as American Depository Receipts (ADR). These include Infosys Technologies (Nasdaq: INFY), which is one of India's largest IT outfits. The company, which commands a weighting of 8% on the Sensex 30 index, recently signed a licencing deal with British Telecom (LSE: BT.A) to develop an Automatic Resource Management System.

Two of India's largest banks are also available as ADRs. These are ICICI Bank (NYSE: IBN), which operates 540 branches throughout India, and Housing Development Finance (NYSE: HDB).

One of India's foremost drug companies, Dr Reddy Laboratories (NYSE: RDY), is also quoted on the US market. Also available as ADRs are the software developer Satyam Computer (NYSE: SAY) and Videsh Sanchar Nigram (NYSE: VSL), India's largest telecom company and Internet Service Provider.

Clearly India is growing and that must be great news for a third of the country's population that still live in poverty. However, investors should note that ADRs of Indian companies can carry as much as a 60% premium to the local shares! That smacks to me of Mumbai madness, and definitely a time to be cautious.

For that reason I prefer to invest in companies that are utilising India's inexpensive labour pool. It may not be as exciting as investing directly in Indian companies but these businesses will nonetheless benefit as reduced wage costs eventually filter down to the bottom line.

The writer owns shares in BT and Reuters.