India Investment Options in US (Part1)

I have been asked this question few times now by colleagues and friends, and rather than answering each one individually, I decided to make it a blog post. For those who want to take advantage of the booming Indian markets without having to do the initial research, read on. I would still encourage each of you to thoroughly investigate any particular investment option that interests you. I will present this article in parts, and this is the first part.

Background:
India is and has been an attractive investment option for foreign money for some time now. The average GDP growth in India has been 8% for the last 3 years, and the average salary increase abt 30%. This has brought about a tremendous increase in people's disposable income, and hence the purchasing power. No wonder, all kinds of international companies are clamoring to have an Indian presence. Some of these companies include well known names like Walmart and Starbucks.

Funds:
This is probably the easiest way to invest in India and to take advantage of the booming Indian markets. But you still have to have some appetite for volatility - Indian markets are quite volatile and it wouldnt surprise me if these funds took a hit of more than 5% within a span of few days. The two popular closed end funds include Blackstone group's India Fund (IFN ) and Morgan Stanley's India Investment Fund (IIF), both established in 1993. For those new to closed end funds, a closed end fund is practically similar to a mutual fund, except that it trades on the stock market. A closed end fund may trade at a discount or premium to its Net Asset Value (NAV), whereas you always end up buying or selling a mutual fund at its NAV. For a more detailed discussion on closed end funds, click here. The graphs of both these funds have pretty much mimicked each other since inception. India Fund's annualized returns for the last 3 and 5 years have been 33.20% and 36.66% respectively according to Blackstone Group's website. India Investment Fund's annualized returns have been 34% and 35.99% over the same time. As I write this, both these funds are trading at a slight discount to their NAV, which makes them worth a look. Another fund that deserves a mention here is the Matthews' India Fund (MINDX). This is a regular mutual fund, which benchmarks the BSE 100 index. This fund has been around since 10/31/05 and boasts of a 1-year average annualized returns of 36.48%. Matthews Asian Funds have boasted of a strong performance in various Asian countries and Matthews in general holds a good reputation. Matthews India Fund has also outperformed its counterparts IIF and IFN over the past 6 months. Then theres also the EATON Vance Greater India Fund (ETGIX) established in 1994. This fund invests in India as well as other countries in the Indian sub-continent like Pakistan and Sri-Lanka. This fund has returned 29.92 and 33.43% annualized returns over the past 3 and 5 years respectively. Since we are talking about funds here, one more investment vehicle that deserves mention here is the Barclay's iPath India MSCI Exchange Traded Note (INP). For those unfamiliar with ETNs, heres a quick refresher. In simple terms, an exchange traded note is like a hybrid between bonds and ETFs. This exchange traded was recently started by Barclays in December 2006. Another thing to keep in mind while investing in any of these funds is the expense ratio and other fees associated with it.

Heres a quick summary of the funds and ETN I mentioned above:

India Fund from Blackstone group (IFN): Expense ratio of 1.41% Annual Report
India Investment Fund from Morgan Stanley (IIF): Expense ratio of 1.35% Prospectus
Matthews India Fund (MINDX): Annual operating fee of 1.34% Prospectus
EATON Vance Greater India Fund (ETGIX): Expense ratio of 2.14% Prospectus
Barclay's iPath India MSCI Exchange Traded Note (INP): Yearly fee of 0.89% Prospectus

(to be continued)

The long case for ICICI bank (IBN):

This article can be found on

1. Yahoo finance:
http://biz.yahoo.com/seekingalpha/070305/28674_id.html?.v=1
2. Seekingalpha:
http://india.seekingalpha.com/article/28674


What ICICI does:
Market tanking last week has brought about good opportunities and I am here to make a long case of ICICI bank (IBN). For those who don't know, ICICI is India's largest bank in the private sector. ICICI offers various products and services in India in areas of personal banking, online stock trading, loans (home, auto, personal etc), insurance, foreign exchange trading and mutual funds. It offers services to Non-Resident Indians like money transfer, NRE and NRO savings accounts and certain investment options as well. As of February 15, 2007, ICICI Bank had a network of 670 branches and 2,680 automated teller machines. It also operates in the United Kingdom, Canada, Russia, Hong Kong, Bahrain, Singapore, Sri Lanka, the United States, United Arab Emirates, China, South Africa, and Bangladesh. It closed last Friday at 37.99 from its high of 46.99, about 20% down. The downturn was not only because of the markets tanking, but also because of the recent increase in cash reserve ratio mandated by the Reserve Bank of India in order to curb inflation. You can read more about it here. Current YOY inflation rate in India stands at 6.63%, making it likely that the monetary policy will continue to be tightened.

Why ICICI:
Inspite of all this, the long case on ICICI is compelling. In my opinion, ICICI's earnings will continue thanks to the rising middle class income in India. More and more people now have disposable income on their hands to buy car(s), buy houses, invest or just plain deposit in the savings accounts. I have spoken to a lot of my friends and family back in India, and almost everyone from the younger generation prefers private banks like ICICI or HDFC (More on HDFC later). Younger generation does not like government-owned banks because they do not understand the concept of “customer service”, they treat you like they are doing you a favor by safe-keeping your hard-earned money. Average salary increases in India are currently at 30% and this alone gives people a lot of disposable income at hand.

Last quarter highlights (Source: finance.yahoo.com):
-Margins grew 42% YOY after tax
-Net interest income increased 32% to Rs. 1,709 crore (US$ 386 million) for Q3-2007 from Rs. 1,296 crore (US$ 293 million) for Q3-2006.
-Retail assets increased 50% to Rs. 117,914 crore (US$ 26.6 billion) at December 31, 2006 from Rs. 78,495 crore (US$ 17.7 billion) at December 31, 2005.
-Deposits increased 47% to Rs. 196,893 crore (US$ 44.5 billion) at December 31, 2006 from Rs. 133,881 crore (US$ 30.3 billion) at December 31, 2005.

Analysis:
Inspite of having had a good run-up, its 5-year PEG stands at 0.92. The way India is growing; I would put a conservative estimate on ICICI’s growth at 25% per year for the next five years. The two analysts on yahoo finance project ICICI's growth for the next 5 years at an average of 20% per year. Using the DCF calculator present on Moneychimp and plugging in the EPS of 1.49, growth rate of 20% per year for the next 5 years and a mere 5% thereafter gives a fair value of the stock to be at 47.9. More aggressive growth rate of 25% per year for the next 5 years and 8% after that gives a fair value of 107.94. The discount rate used in both cases is 11%.

Competition and personal experience:
ICICI faces competition primarily from HDFC, which is another growing bank in the private sector, as well as others like Canara bank, State Bank of India and Punjab National Bank. Out of these, only ICICI (IBN) and HDFC (HDB) trade as ADRs in US. HDFC bank at PEG of 0.71 looks cheaper than ICICI, but has an annual dividend yield of 0.6% as opposed to 1.9% for ICICI. Also, after having spoken to friends and family back in India, I got the impression that ICICI was more aggressive in terms of its marketing strategies as well as following-up with potential customers. When I was trying to open up an NRE savings account about a year back, I was exploring options with HDFC as well as ICICI. After having emailed both through their respective company websites, I am still waiting on hearing back from HDFC, whereas ICICI got in touch with me within 48 hours. That kind of gave me the impression that if HDFC did not care about a potential customer, it wouldn’t care much after I actually became their customer - no points for guessing where I finally ended up opening an account.

Summary:
All in all, I think ICICI has a very compelling growth story ahead of it as Indian economy continues to boom. The GDP growth in India has been an average 8% for the last 3 years. Although I think that the market has some more downside left to it, if I were to build a new position in ICICI, I would start buying here on dips maybe in one-thirds or one-fourths. I started building up my position in ICICI in June 06, and just before the market tanked last week, I almost had a bagger (95% profit). I plan on adding to this position sometime soon.

Voluntary Disclosure:
I currently own shares of ICICI as well as have an NRE savings account with them.