Over the past year, India's benchmark BSE Sensex appreciated 64.6%, much more than the 27.8% and 48.1% increases in the Shanghai SE Composite Index and the Hang Seng Index, respectively.

The Indian equity markets are trading at a relatively attractive price-to-earnings ratio of 16.8 compared with 18.3 of the Shanghai Composite Index. This has triggered a wave of overseas investments into the Indian equity markets, driving the benchmark Sensex to around the 18,000 level for the first time since early 2008.

ADR Stock Picks

India's technology sector is largely leveraged to exports and is therefore dependent --to a large extent -- on a broad-based global economic recovery. On the other hand, sectors such as banking and automotive are driven largely by surging domestic demand and, as a result, are more likely to be the clear winners this year.

We expect HDFC Bank ( HDB), Icici Bank ( IBN), and Tata Motors ( TTM) to outperform other ADRs and their domestically listed sector peers.

Indian Economy on a Roll

According to the Ministry of Statistics and Programme Implementation, India's industrial production grew 16.7% during January 2010 compared to the U.S. industrial production growth of 0.8% in the same month.

The economy may have expanded between 8.25% and 8.75% during the year ended March, says India's Finance Minister Pranab Mukherjee, adding that the country's GDP probably expanded 7.2% last fiscal year, "which is impressive by global standards."

The IMF estimates India's economy to grow by 7.7% in 2010 and 7.8% in 2011, well above the estimated U.S. economy growth of 2.7% and 2.4%, respectively. Moreover, inflation in India is estimated to decrease from 8.4% in 2010 to 4% by 2012. In comparison, China's economy is estimated to grow 10% in 2010 and 9.7% in 2011. However, both China and the U.S. are set to witness an increase in inflation during this period, according to IMF estimates.

Banking Pick: HDFC Bank and Icici Bank

The global crisis led Indian banks to address efficiency factors such as cost management, asset quality improvement, and to build liability franchises. Top banking executives told India's Central Bank last week that credit growth is expected to be around 20% during the current fiscal.

India's mortgage market, at around 9.5% of GDP, is relatively underpenetrated compared to the BRIC (Brazil, Russia, India, China) average penetration of 15%-20% of GDP. Favorable demographics and a demand-supply mismatch are expected to result in 15% home-loan growth over fiscal years 2010-12. Robust growth in home loans over FY10-12 is expected to drive HDFC's loan book at a CAGR of 17.5% over the next two years, higher than the expected overall growth in home-loans.

HDFC Bank is a private banking and financial services company in India operating across three segments: retail banking, wholesale banking and treasury services.

The company's stock increased 17.6% year to date and closed at its 52-week high of $147.87 in trade on April 9. The stock has outperformed the NYSE Composite Index, which increased 6.2% year to date.

At $147.72, HDFC stock is currently trading at a P/E multiple of 32.6. The stock has two buy, one hold and no sell ratings, according to TheStreet's Analyst ratings guide.

Icici Bank is engaged in providing a range of banking products and services to corporate and retail customers through a variety of delivery channels.

The company's stock increased 19.3% year to date and closed at its 52-week high of $45.95 at close of trade on April 6.

At $45, HDFC stock is currently trading at a P/E multiple of 27.1. The stock has one buy, one hold and no sell ratings, according to TheStreet's Analyst ratings guide.

Auto: Tata Motors

India's auto sector is estimated to grow around 18% in FY10 and 10% in FY11, thanks to the improved economic environment. In the long run, relatively low penetration levels, favorable demographics and a fast-improving economic environment along with high per capita income levels will help the sector sustain robust top-line growth.

February domestic passenger car sales in India increased by 5.4% to 153,845 units over January 2010 sales and by 33.2% over January 2009 sales. In comparison, February domestic passenger car sales in China declined by 28.3% to 942,942 units over the January 2010 sales and by increased by 55.3% over January 2009 sales.

Annual sales of Tata Motors for fiscal 2010 reached 642,686 units, the highest ever for the company. Meanwhile, the company's market share of domestic passenger car sales increased from 14.2% in February 2009 to 15.5% in March 2009.

Tata Motors is engaged in the development, design, manufacturing, assembly and sale of vehicles, including financing thereof, as well as sale of related parts and accessories. "The people's car," the Nano, which was launched during early 2009 brought Tata Motors into the limelight of the world.

Tata Motors turned around the Land Rover brand that had reported its best-ever monthly sales in the U.K. market with a sales rise of 67% in March. Meanwhile, Jaguar's total sales increased by a modest 1.1% but the performance was stronger as comparisons were impacted by discontinuation of smallest model, X-type.

Tata Motors' stock increased 14.7% year to date and closed at its 52-week high of $19.48 at close of trade on April 5.

At $19.34, the stock is currently trading at a P/E multiple of 26.5. The stock has three buy, one hold, and no sell ratings, according to TheStreet's Analyst ratings guide.

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