India: Stretching from Stone Age to Silicon Valley

Steve Hamm hits the nail on the head in his book, Bangalore Tiger: "What a country! Part Silicon Valley, part Stone Age". In a nutshell he's captured for me the irony that is India, and from that irony the deduction that India is on an inevitable growth curve as it meanders on a modernisation programme from one state of being to a more modern state. Does inevitable mean that everyone is going to make money in India? "Well that depends on whether you take the short term or the long term view" says Rohit Chothani Director of Padmakshi stockbrokers. Like every investment adviser I meet in India, they all see the medium to long term results as inevitably positive; the only inevitability about the shorter term is volatility.

Bear with me whilst I tread through some Indian ironies and the stone to silicon journey begins to make more sense. Sipping tea on a veranda in Ahmadabad, the ironies are clear. First irony: a huge camel (dwarfing its Arabic cousin) walks past pulling a rickshaw-type cart laden with goods. This in a country where all the media and business headlines are about the progress of the dynamic country they call India Inc. Camel-tractor and stock market dynam-ism, surely ironic? Dynamism they say is justified by another surge in the Sensex index with a YTD performance at around 45 per cent even with another two months of the year left.

"Although", says Chothani, "December 15 marks a psychological cut-off time for Indian markets as investors will start taking profit before the year-end, plus, foreign direct investors will start easing up on investment into the holiday season". In short, don't expect too much more out of 2006, "40 to 50 per cent that's about your lot for the year," says Chothani.

Irony number two: the construction site across the road is staffed with mainly women manual labourers moving mounds of earth via large vessels on their heads. It's not the quickest ground moving equipment those witnessing the UAE's construction boom will have seen. Yet, this is in a country where the economy is clearly on a roll.

Witness the report by Lipper showing that over ten years, Indian Mutual Funds have dominated the world fund management scene. The table copied from the Times of India (right) shows eight of the top ten funds being Indian with two guest appearances from Russia.

The sceptical would say that such results are based on the TOI picking the results they want to highlight, which is true. Indian funds on one year are nowhere to be seen near the top ten. Plus, on three years Korea and Norway dominate.

Corporate growth

Nevertheless, returns of over 30 per cent per annum for ten years (they also dominate at five years) are both consistent and appealing. It may have taken a few centuries to move the big bus called India Inc, but it's now quite hard to stop it. You wonder how they can achieve this by moving small mounds of earth one "headful" at a time. Female ground moving equipment amid dynamic corporate growth, surely ironic?

Irony number three is the reflection that when I was in Mumbai a few days ago I was paying $450-ish for a room night for a hotel which, whilst comfortable, had no ballroom (not that it was my night for lessons); an inadequate tiny gym whether you are a fatso or a fit-so-and-so; and only two restaurants - a poor return for my room rate as I am a world-class eater. What was I paying for?

Business India quote that room nights in places like Agra and Bangalore are more expensive than New York, London and Singapore. The fact is, as pointed out by the hotel limmo-driver the rooms are full, I trust his assertion that Mumbai is drastically short of hotels.

He is driving visiting businessmen around on a 36 hour a day basis.

That's hard work. Ironic that I am paying $450 for a hotel room a few hundred yards away from where hundreds of people are simply sleeping on the street. The few yards that divide us are both thousands of dollars a week apart and a civilisation apart.

Irony number four, a diversified transport system exemplified by a bullock drawn cart (where's the rickshaw gone? Is this progress?), is being used as a local taxi. The cart takes people past buildings that, seemingly, comprise a market in which major real estate fund manager is looking to make a serious play.

According to Cushman and Wakefield, the expected real estate return for the next few years is 25 to 30 per cent per annum. Yields of 8 to 12 per cent and returns on investments (ROI) of 18 to 20 per cent are also forecast against: the yield (7 seven per cent) and ROI (10 per cent) in the Asia Pacific generally.

Foreign acquisition

It's an asset class that has attracted a number of big plays from the likes of JP Morgan, Warburgs, The Blackstone Group, and, of course Emaar, now considered as a global power in the sector.

Foreign companies can only take 100 per cent stakes in start-up or development situations so they are debarred from going "straight in" and acquiring properties with the instant high yields being provided by soaring rent.

So partly Stone Age it might appear, but increasingly, institutional investors are making their position clear: India Inc has started on an irreversible trend towards modernisation.

Chothani proves the point in stating that "some 60 to 70 per cent of India's top stocks are now in the hands of foreign direct investors". They are here because the economy won't stop growing.

With another year of GDP at over 8 per cent; manufacturing growth at over 10 per cent; plus, healthy 2nd quarter corporate earnings results equally impressive - the Centre for Monitoring Indian Economy (CMIE) quoted the top 1,600 companies as having their best quarter in the last six with an overall growth of 31 per cent.

Back to Chothani for the conclusion: "Yes, if you take the medium term view, your money in India is winning money. However, with PE ratios at over 20, current prices are at historic highs. Some might find the premium worth paying if they hold their shares for the medium term, however it does remain a risk if you are playing a speculative 1 or 2 year game". Something to consider as another tea and another camel come along (one hump, not two).

The writer is managing director of Mondial (Dubai).