I am not a research analyst registered with Sebi. This is a theme note, which merely highlights the attractiveness of India as an investment destination. This note is not investment advice, or a recommendation to buy or sell any of the stocks mentioned herein. Readers are requested to apply their own judgment and discretion, in order to arrive at their investment decisions.
Theme: Indian Stocks v. U.S. Stocks
As U.S. investors, you may have invested in, or considered investing in companies such as Colgate-Palmolive ($CL), Procter & Gamble ($PG), Kraft Heinz Co. ($KHC), Johnson & Johnson ($JNJ), Nestlé S.A. ($NSRGY), Unilever ($UL), Domino’s Pizza ($DPZ), among others.
Now, consider investing in the Indian subsidiaries /associates /licensees /peers /competitors of these and other U.S. listed companies. We have only considered five Indian subsidiaries/associates of U.S companies, so as to make a meaningful comparison with U.S. companies.
You might wonder – “I can invest in about any emerging market, why India?”
Well, India is not just any emerging market. It’s a country of 1.25bn people, with a functional democracy and judiciary, and relatively low government controls on business. India is at least as good as any other market among the BRIC countries (Brazil, Russia, India, China).
India’s demographics alone would make any overseas investor consider it. 1.25bn population, of that, around 40% or 500mn would be middle class, with rising purchasing power. Growing urbanization means people have aspirations to buy the latest products.
Macros in favor of India
The Indian economy has been growing at a healthy clip, far in excess of the GDP growth in the U.S.
Going forward too, India’s GDP growth rate is expected to be maintained well above 6% p.a.
The Indian market for most goods and services is not as highly penetrated as the ones in the U.S. This leaves tremendous scope for growth. For instance, India has just ~20 passenger cars per 1,000 population in 2011, v. ~797 in the U.S.
The government of India has been investing heavily in building up India’s infrastructure comprising of roads, railroads, ports and airports. This leads to improved logistics which in turn makes it possible to distribute products across the length and breadth of the country, to the remotest corners of the country.
Rapid urbanization, spread of education, a high proportion of the working population in the age group of 15-64, and finally a sizeable middle class population leads to huge domestic demand for various products and services.
Rapid increase in the TV, mobile and smartphone population, and use of internet leads to better marketing opportunities for companies.
In many product categories, the organized sector is taking market share from the unorganized sector, leading to great potential for Indian companies.
Unlike their U.S. counterparts, Indian companies continue to report double digit or higher single digit revenue growth rates, year after year, and likely to do so in the foreseeable future too.
By virtue of their brand strength, Indian companies continue to enjoy healthy margins.
How do Indian Companies Stack Up v. U.S. Companies?
We compared the growth rates of revenue and earnings, of five large US/European companies, as below, with their Indian subsidiaries / licensees.
Revenue Growth y-o-y
As can be seen in table above, most of these Indian sample companies reported healthy growth in topline, over the last three years.
Net Earnings Growth y-o-y
Bottomline growth in these Indian sample companies has been decent.
Valuations: India vis-à-vis U.S.
Finally, a comparison of the trailing 12-months (TTM) p/e.
* market cap as of March 27/28, p/e sourced from Yahoo Finance or company financials
The p/e multiple of most of the Indian companies is higher than that of their US parent companies/ associates. However, the higher multiple can be attributed to expectations of higher earnings growth rates for Indian companies v. their U.S. counterparts.
Can Foreign Individual Investors invest in Indian Equities?
Yes, indeed. Sebi, India’s stock market regulator, introduced regulations permitting Qualified Foreign Individuals (QFIs) which are foreign individuals, groups or associations, to invest in India’s stock markets.
Limits on Investments by QFIs
The total shareholding by a QFI cannot exceed 5% of the paid up equity capital of any company at any point of time. Further, the aggregate shareholding of all QFIs shall not exceed 10% of the paid up equity capital of the company at any point of time.