Time to Fish Out India as a Live One?

Often ignored by foreign investors, India is in some ways more appetizing than China.
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When India's latest government fell on April 17 after losing a parliamentary confidence vote, traders panicked and sent stocks down 7% in one day.

Smart investors, familiar with the

Bombay Stock Exchange Sensitive Index's

history of resilience, knew it was a chance to buy. Over the past five years, the BSE has rebounded smartly after political crises shook out weak-hearted investors. The lesson -- which the savvy have learned -- is that companies, not governments, make the stock market.

The reason the market, which finished trading on Friday at 3,707, roars back from India's frequent political squalls is no secret. Unlike China, which gets more attention from global investors even though its big state-run companies often burn through cash, India has plenty of good companies with histories of taking capital and making money.

The reason foreign investors shun India in favor of China is also no mystery. India's murky and contentious democracy scares off many, while China's combination of stability (even if it's Communist) and reform (embodied by the charming

Prime Minister Zhu Rongji

) make for a compelling story. Sprinkle in restrictions on investment by foreign individuals and it is little wonder India sinks into the

Ganges

of most peoples' portfolio strategies.

"India is always so difficult politically," said Peter Hames, a fund manager at

Aberdeen Asia

in Singapore. "But on the other hand, the quality of companies is far superior to the quality of the companies one finds in China."

Among the most popular companies in India is

Hindustan Lever

, a subsidiary of soap and ice cream giant

Lever Brothers

. It has a reach no Chinese company can match, with world-class management and a distribution system that delivers its washing powder into every tiny village in the country. China has no national distribution system, so its billion-plus consumers are always buying different brands.

In addition to delivering deteregent, Hindustan Lever also delivers some stunning performances. In 1998, its return in excess of cost of capital was 35%. Both

Credit Suisse

and

Credit Lyonnais

have buys on the stock, and it is among the former's top buys in the entire country.

At 56 times this year's estimated earnings, Hindustan Lever is without a doubt expensive, and so fund manager Hames is bypassing it. Instead, he continues to hold and recommend

Punjab Tractors

, which trades at a relatively cheap 20 times this year's expected earnings and also had a return of 35% in excess of its capital cost last year.

Jumping into Indian stocks for the foreign retail investor is not easy. Foreign individuals can't buy Indian shares, but can purchase dedicated Indian mutual funds. It's not easy for institutional investors, either, which have to register with the government.

An alternative for individuals is to buy

Global Depository Receipts

. There about 50 from India, and about 20 of these are reasonably liquid.

Asit Shah, an analyst at Credit Suisse recommends GDRs of

ITC Ltd.

, a tobacco company, and

Gujarat Ambujah Cement

. He also likes long-distance phone gatekeeper

VSNL

, which gets money for every call going in or out of the country. Credit Suisse has done VSNL issues in the past, but has "no deals pending" with any Indian company, he said.

While investors in India expose themselves to currency risk -- some forecasts call for the rupee to fall 20% over the next two years -- economic growth is strong. Since 1994, growth has hovered between 5% and 8%.

More importantly, the percentage of household savings invested in stocks, debentures and mutual funds has fallen to 2%.

Imagine what will happen when India, which is forecast to be the world's most populous country in just a few years, rediscovers the stock market, pushing the percentage of household savings back up into the teens.

Philip Segal is a Hong Kong-based freelance reporter who has covered Asian financial and business developments for several years.