Chapter 6
India: Don't Drink the Tap Water?
“Don't drink the tap water or you'll be dead.”
—Indian fund manager's advice to newly arrived foreigners
Not bad for what Winston Churchill once called a “geographical expression.” In his mind, it was “no more a united nation than the Equator.” After independence in 1947, you would have been hard-pressed to find anybody taking even money bets that India would be around a decade later. That India would survive as a democracy for 60-plus years (and counting) seemed improbable to people at the time.
As the American writer Paul Bowles wrote in 1963:
Obviously, it is a gigantic task to make a nation out of a place like India, what with Hindus, Parsees, Jainists, Jews, Catholics, and Protestants [Bowles forgot Muslims], some of whom may speak the arbitrarily imposed idiom of Hindi, but most of whom are more likely to know Gujarati, Marathi, Bengali, Urdu, Telugu, Tamil, Malayalam, or some other tongue instead. One wonders whether any sort of unifying project can ever be undertaken, or, indeed, whether it is even desirable.
That it would be a place to get rich would have seemed even more improbable. Yet India embarks on the early stages of a massive secular boom. It is a fine place to see our thesis in play.
India has already created some massive fortunes. At one point, analysts at Agora Financial figured out that India minted 47 new millionaires every day. Moreover, there have been some high-profile billionaires, such as Lakshmi Mittal, founder of the world's largest steel company. Another is the head of Reliance Industries, Mukesh Ambani. He built a 570-foot tower in Mumbai for use as a private home. It has 27 floors, a helipad, and 600 servants—as well as six floors of parking for 168 cars. The cost: a cool $1 billion.
Foreigners with patience can also make a fortune here.
The Japanese were the first major group to invest in India, according to Aaron Chaze in his book, India: An Investor's Guide to the Next Economic Superpower. There was a lot of failure in that early group, as you can imagine, but those that stuck it out have reaped great rewards.
Suzuki was one of the winners. Its joint venture, Maruti Suzuki India, produces about half the cars in India and about one-quarter of Suzuki's global profits. Honda Motors was another winner. Its joint venture, Hero Honda, helped make it the world's largest maker of motorcycles.
“Whatever the compulsions that drive future investment trends,” writes Chaze, “the Japanese experience in India shows that the greatest reward to investors comes . . . to those who have decided to hang in there for the long haul.”
It won't be easy as India goes through the sometimes painful birth shifting into a high-gear as an economic powerhouse.
For example, there is the notoriously rickety infrastructure. During my first visit in 2007, I got through customs and out of the airport with no problems. Getting to the hotel was another matter. The Taj Mahal Hotel is only about 12 miles from the airport, yet it took an hour and a half to get there because the traffic was so slow. Cars, motorcycles, and people crowded along Bombay's busy streets, giving me a firsthand taste of the poor infrastructure I had read so much about. The roads were hopelessly outmatched against the flow of traffic they carried. Seldom can you drive faster than 40 miles per hour, even on the highways. Ox carts and bicycles don't help matters. Then there are unpredictable lane changes and traffic laws no one enforces.
That is part of the opportunity. It's part of the catching-up process that is the theme of this book.
That is why India has many road projects in the making. More than one commentator has noted the parallels with America's efforts in the 1950s in building a national highway system. The so-called Golden Quadrilateral was a big step for India. It is a network of four- and six-lane highways, comprising more than 3,600 miles, which runs through 13 states and India's four largest cities: New Delhi, Kolkata (formerly Calcutta), Chennai (formerly Madras) and Mumbai (formerly Bombay). India has the second-largest network of roads in the world after the United States with much in the pipeline.
Roads such as these have a huge impact on development that often escapes the casual observer. India, for instance, actually wastes more fruit and vegetables than it consumes, according to The Economic Times, India's largest financial daily. India is the second-largest producer of fruits and vegetables in the world, but 30 to 40 percent never make it to their destination.
As the Times reports: “Gaps such as poor infrastructure, insufficient cold-storage capacity, unavailability of cold storage in close proximity to farms, and poor transportation infrastructure all are contributing factors.” Routine brownouts and blackouts happen throughout India, often lasting for seven hours or more, which lead to food spoilage.
Somehow, so far, India has managed to overcome many of these obstacles. The economy has grown more than 6 percent annually for a long time. I saw more evidence of this, too when I spent some time going over a cross-section of midcap and small-cap Indian stocks with analysts in India. Many are growing 30–40 percent per year, and have done so for 15 or 20 years.
One of the people I met in India was Jayesh “Jimmy” Seth, who runs KC Securities, a large brokerage firm in Mumbai. I also met his son, Harsh, a then-22-year-old Northwestern graduate who returned home to make it in Mumbai.
Over lunch one day, Jimmy told me the advice he gave Harsh: “When you are in America, take note of all the daily conveniences you enjoy. Write them all down. Then, when you come back to Mumbai, check that list again. Whatever's missing, start a business around that.”
It's a good piece of advice, as India has lots of gaps to fill, such as those basics of infrastructure. Some variation of Jimmy's advice applies to investors, too. Look for the gaps in these emerging markets. Find what they don't have but want or need. Invest in the companies that fill those gaps.
Still, It's Tough to Invest in India
My first swing through India in 2007 was the most ambitious. I started in the bustling port city of Mumbai, home to Asia's oldest stock exchange. Then I moved on to visit high-tech campuses in Bangalore and Hyderabad. The latter is only miles from the ancient city of Golconda, once renowned for its diamonds. From there, I was off to green Kochi (formerly Cochin) on the Malabar Coast, with its many coconut trees, rice paddies, and slow-moving rivers. I wound up the trip in the north, traveling to Jaipur, in hot and dry Rajasthan, then to Agra to see the Taj Mahal, and finally, to the dusty capital city of New Delhi.
In Delhi, I walked through the old market of Chandni Chowk, about which I had read so much. Camel trains came here from Kashgar. Traders carried jasper and sardonyx, cinnamon logs from Madagascar, and much more. Today, it's still a busy market, lined with shops where you can buy just about anything.
Unlike China and the Southeast Asian economies, India's economy does not hinge on exports. The explosive growth in India's economy is mainly a grass-roots-driven trend. About 200 million participating consumers are in India, with tens of millions added annually.
Unfortunately, it's just not an easy place to invest for the armchair investor. This was a common frustration as I traveled in India. The easy way to invest in India is to buy the polite merchandise. That is, the ready-made, off-the-shelf goods on the NYSE, listed Indian companies such as Tata Motors or Sterlite Industries, or even an Indian mutual fund.
Other ways take some digging. I'll give one such idea below. However, I think it is important to keep an eye on opportunities as they emerge. The world has never seen two economies the size of China and India industrialize so quickly.
You see the most immediate effects of this in the commodity pits. You see it in rising prices for all kinds of commodities. Rising prices for energy, food, and basic materials kicked off a major commodity boom in recent years. I think the second ripple effect is one we'll start to deal with soon: the health consequences of such rapid growth.
The father superior stops. Finally, he reads: “Father Miguel . . . instructor of theology beginning Sept. 20, 1884, ordained in 1891, and . . .” The father lifts his face, and his serene eyes look straight at me.
“He died on Oct. 22, 1896.” Silence. “No one lasts very long in this climate, dear sir.”
—Guido Gozzano, Journey Toward the Cradle of Mankind
“Walking in this climate is such gentle agony,” wrote Gozzano to open his book on India.
Gozzano (1883–1916), a distinguished Italian poet, visited India in 1912. He spent six weeks on the subcontinent and wrote letters about his travels. He made many observations about the heat. “Never have I been so glad not to be overweight in this climate,” he wrote. “India is truly infernal for anyone with a few extra pounds.”
Later, he went on to write about how the heat “creates mirages, dissolves in the air, makes it quiver and flutter on the horizon.”
I wonder what Gozzano would make of India today. The first thing to hit me when I visited Mumbai was the pollution. Looking out at the Arabian Sea from my room in the Taj Mahal Hotel, I saw several boats bobbing along in coffee-and-cream-colored waters, but a fog obscured the horizon or, rather, a pollution-created haze.
I had a copy of Roderick Cameron's Time of the Mango Flowers, an account of his travels through India in the 1950s. It's an enjoyable companion to have while traveling India as Cameron has an eye for architectural details and tells interesting historical vignettes along the way. Cameron stayed at the Taj, but it was a different place then. He writes about how “rippling water reflections played over the bedroom ceiling.” The water doesn't reflect much today because the sun doesn't seem to get through all that often.
I'd been warned I'd have a scratchy throat after three days, (I didn't), but this isn't some traveler's irritant. Pollution is a serious health issue for people who live there. According to Edward Luce's In Spite of the Gods: The Strange Rise of Modern India, air pollution causes about one-eighth of premature deaths in India. Hundreds of thousands of children die from exposure to contaminated water.
India is not alone in this. China, the other big rapidly industrializing nation on the stage, has big problems with pollution of all kinds, too. Air quality in China is awful, too, though improving in some areas. I remember the first time I visited China in 2005 and the stink when I opened my suitcase back home. It smelled like I had lived in a bar for three weeks.
Robyn Meredith, in her book on China and India, titled The Elephant and the Dragon: The Rise of China and India and What It Means for All of Us, comments on China's poor air quality. She writes one section from the city of Chongqing, an industrial city of 30 million people. (For perspective, that's about the number of people that live in the whole state of California.) “Sunlight barely reaches the ground, dimmed by thick, gray smog,” she writes. “Skyscrapers just three blocks away are mere outlines because of the air pollution.”
Meredith cites this alarming fact: “All but two of the world's 20 most polluted cities are in India or China.” Writer James Kynge calls the environmental degradation a “concealed debt” that people will have to pay for eventually.
I think you get the idea. The rapid rise of China and India has come with a cost: serious environmental damage, on many levels. The governments know about the problem, and things are starting to change. Delhi was the worst-polluted city in the world in 2004, but the government has since taken steps to clean it up. Today, all buses run on natural gas for example.
Many other issues spin off from environmental degradation. The flip side is that all of this need creates great demand for the basics. Someone will work on the water systems. Someone will build new power plants. This is all unfolding, but it will take time.
India's Real Economy—Not What You Think
When thinking of India's economy, most investors probably associate it with its outsourcing companies, that is, India as the world's back office, with call centers and armies of computer programmers and engineers. But this part of the economy is still tiny, and much of India's strange economy is poor and backward.
The best book I found on India is In Spite of the Gods. The author was the South Asia bureau chief for the Financial Times, living in New Delhi from 2001 to 2006.
It seems Luce traveled everywhere in India, meeting with local officials, business people, journalists, and others. This is the kind of research I put a high value on. You learn things by being in a place that you simply can't from afar.
The portrait that emerges from Luce's work is one of incredible complexity, color, and contradiction. Here, he pokes holes in the image that India is all “outsourcing”: “Fewer than 1 million, that is, less than a quarter of 1 percent of India's total labor pool, are employed in information technology, software, back-office processing, and call centers.”
In fact, he goes on to share that most Indians work in an unorganized and primitive economy: working on farms, running small shops or street stalls, driving rickshaws, working as servants, serving as seasonal laborers, and other tasks.
There is a long way to go in India, which is, oddly enough, part of its great appeal to investors and businesses.
The Indian “middle class,” depending on how it is measured, is between 50–300 million people. That class alone is larger than the populations of entire Western countries. Then there is brisk economic growth, so you can play around with numbers and get all kinds of wild results.
In 2003, for instance, Goldman Sachs made the following predictions about India:
By 2020, its economy will be larger than Great Britain's.
By 2040, it will be the world's third-largest economy.
By 2050, its per capita income will have grown 35 times over.
It seems absurd, but four years after those predictions were issued, India's growth rate has been higher than the study assumed.
For these reasons, a long list of companies continue to try to crack the market. AIG, Citibank, Pepsi, and many others have become market leaders in their segments in India. Many more are trying to gain footholds.
“During my time in India,” Luce reflects, “I have often been amused by the foreign executives I have met who spend years occupying the same hotel rooms while they await the green light for their company to invest in India, so they can set up a permanent office.”
Since his book's publication, a couple of events stand out as interesting landfalls marking India's continued ascent.
India regained investment-grade status after a 15-year hiatus as the big ratings agencies removed the speculative tag from India's debt. This was important, as it lowered the cost of borrowing for many Indian companies.
Then, there was Tata Steel's big acquisition of Corus, its Anglo-Dutch peer, the first large acquisition by an Indian company. It has brought out a certain boldness in India's corporate culture. As one leading Indian commentator put it: “I look forward to the day when ICICI Bank takes over Citibank; when Infosys acquires IBM; when Reliance takes over Exxon; and Tata Motors takes over General Motors.” Will the Tata Steel acquisition be something future historians muse over as a harbinger of a new trend, or will it be but a footnote?
In the short term, there are all kinds of obstacles to work through. Take the tangled and corrupt Indian bureaucracy. Its army of workers is immune to dismissal. Corruption is rampant and accepted in a way strange to Western eyes. This leads to some absurd circumstances. The highway department in India, for instance, employs 1.25 people per mile of road, the highest number in the world. The government pays them more than three times the market rate for such labor. “Many of these employees do not bother showing up for work,” Luce writes “because they cannot be sacked.”
The Indian bureaucracy is as expensive as it is useless. Much of the government's spending is tied up in paying itself. Salaries for its bloated payroll soak up money that could have gone to building better roads, power systems, and water and wastewater plants. All of these government employees have cushy pensions.
The legal system is a mess. Widespread corruption is one issue. It is so open that some judges have a menu of fixed prices. Luce writes: “You pay x thousand rupees to get bail if you are standing trial for a narcotics offense, y thousand for manslaughter . . .” Then there are lots of vacancies and the fact that judges don't work much, maybe from 10 a.m. to 3 p.m., with at least an hour for lunch. “Perhaps the biggest problem,” Luce writes, “is the gigantic backlog of suits in India, which in 2006 amounted to 27 million cases. At the current rate at which India's courts wade through proceedings, it would take more than 300 years to clear the judicial backlog.” By some estimates, 10 percent of the economy's capital is tied up in legal disputes.
Suffice it to say, this is a deep-rooted problem. I can only imagine the frustration of trying to do business there. This quote from the head of Procter & Gamble's India operations sums it up best: “In my 30 years in active business in India, I did not meet a single bureaucrat who really understood my business, yet he had the power to ruin it.”
Plenty of head winds remain with or without government bureaucrats. According to the World Bank, the average Indian manufacturing firm loses 8 percent of sales per year due to power outages. India, like China, is a voracious consumer of energy and raw materials.
The daunting prospect of feeding India's economy bodes well for investors in energy and in all of the components of infrastructure. India currently imports 70 percent of its oil needs, for example, compared with only 30 percent a few years ago.
Rajasthan's Oil Prize and India's Energy Needs
Luckily for India, one of the world's newest and largest onshore oil discoveries is in the hot desert of Rajasthan. I've been to Rajasthan's largest city, Jaipur, sometimes called the Pink City. Rajasthan was once the seat of power for some of India's ancient kings. I visited the Amber Fort and rode an elephant from its base to the top of the hill. From the ramparts, you get an impressive view of the city and the dry, windswept lands around it.
Little did I realize back in 2009 that oil might lie beneath that breathtaking scenery. Later, a story emerged that there was a big oil project out in the desert of Rajasthan.
A company called Cairn India discovered oil in the Thar Desert, near the Pakistan border. Cairn then built an oil processing facility there, the Mangala terminal. It is the size of 200 football fields and processes the oil from Cairn's Rajasthan fields. Cairn estimates production will peak at 175,000 barrels per day.
Here is an example of the kind of backdoor plays you can sometimes find and for which I am always on the lookout. Cairn India lists in Bombay, but Cairn Energy owns 65 percent of it. Cairn Energy trades in London with the ticker CNE. So for a while, you had a neat opportunity to snatch up great assets at a hefty discount.
First, a look at Cairn Energy in Figure 6.1.
The market said Cairn Energy was worth $4.18 billion. Look at its 65 percent-owned interest in Cairn India in Figure 6.2
Cairn Energy's investment stake in Cairn India was worth $4.98 billion on the Bombay exchange, which is $802 million more than the price for which Cairn Energy itself was trading.
So, you could've bought Cairn Energy in London and gotten Cairn India for 20 percent off what it would have cost you to buy it in Bombay. Plus, you get everything else Cairn Energy owns for free.
What else did Cairn Energy own? It owned an exploration company called Capricorn. Capricorn had exploration efforts in Greenland, Tunisia, Bangladesh, and Nepal, among other places. I don't know what any of that was worth. But if it was worth more than zero; it just added to the value proposition here.
I first wrote about this idea in April 2009, and if you had bought Cairn Energy (the London shares) then, you would have enjoyed a 50 percent gain in about a year's time. Plus, the Rajasthan project is exciting. It more than doubled Cairn Energy's production. And there was something like 1.5 billion barrels of oil spread over 20 discoveries in the process of evaluation.
A Financial Times article was the bird dog that got me looking at the idea. (“Cairn Lifts India's Energy Profile” by Joe Leahy.) In that piece, Leahy makes the point that the Indian government is supportive of the project since it will cut India's oil import bill. A big gas project was off the east coast of India. Reliance Industries was about to start production there. These two projects together had a total production of about 30 percent of the Gulf of Mexico.
As Leahy writes: “The Cairn and Reliance projects are the poster children for government efforts to increase domestic oil and gas production in India.”
India has potential as an energy producer, which makes it worth keeping an eye on as an investor in energy projects. For instance, India has vast coal reserves, and India is tapping coal bed methane trapped in those coal reserves.
Meeting the energy demands of its growing economy will be a big challenge. To that end, India is set to become one of the big players in alternative energy. Renewable energy sources represent 11 percent of power capacity, and much more is on the way.
One interesting tidbit on this front: India is the world's fifth-largest producer and consumer of electricity, but if you look at consumption per person, it is still only 30 percent of the global average. This shows you just how much more India's power consumption could grow over time.
Coal currently powers more than half of India's energy needs. Coal India is the state-run near-monopoly in coal. It had an IPO in November of 2010, and within six months, it was up more than 60 percent.
Coal India has the largest coal reserves in the world, at 10.6 billion tons, just edging out Peabody Energy, at 9.3 billion tons. As of May 2011, you could get those tons for about $2 each, compared to a global average of $7.40. It had net cash that was one-sixth of its market cap. Another example of the interesting opportunities such markets can offer.
Still, India will continue to be a net importer of energy, so it is has an ambitious plan for renewable energy. Over the next 10 years, just based on planned investments, this sector will grow 17 percent per year, an astounding rate, and three times faster than China's. See Figure 6.3.
The alternative energy source of choice is wind. India is third in the world by installed wind capacity, and wind is 70 percent of the total renewable energy capacity in India. Anybody who is anybody in wind is there: Vestas Wind Systems, Gamesa, Siemens, and others.
Wind used to matter a lot in the old days. In fact, you could say wind powered Marco Polo's famed explorations to the region in the first place.
When the traveler leaves Ceylon and sails westward for about 60 miles, he arrives in the great province of Malabar. It is indeed the best part of India.
—Marco Polo
The Malabar Coast is on the west coast of India, facing the Arabian Sea. It has been a center of trade for centuries. I spent some time in Kochi, an important port city in the province of Kerala. Marco Polo, too, made his way up the Malabar Coast in the thirteenth century. It's amusing to read his comments today.
“The climate is amazingly hot,” he writes. Polo deduced this was why the people “go naked.” “If it were not for the rain,” Polo adds, “the heat would be so oppressive that no one could stand it.”
The account we have of Marco Polo's journeys comes from Rustichello da Pisa, who wrote down Marco's stories. They were prisoners of war together during the fighting between Genoa and Venice. As you may have guessed, the authenticity of these stories is questionable. Nonetheless, I found it entertaining reading.
Polo comments on the spice trade: “In this kingdom, there is great abundance of pepper and of ginger, besides cinnamon in plenty and other spices and coconuts.” Today, the region is still an important source of spices. Over the years, Chinese, Portuguese, English, and other traders coveted this area for its spices.
Kochi has a worldly feel because of the influence of these other groups. They left their indelible mark. The Chinese; for example, were here in the thirteenth century. You can see their influence in the distinctive architecture of Kerala. I visited a fishing area where the fishermen still use nets created from the original Chinese design.
There are plenty of markers left by other groups as well. I visited various buildings built by the Portuguese centuries ago. You can see tall rain trees, the Brazilian trees they brought with them.
All of this cultural history is fascinating to me. I couldn't help but wonder what it must have been like for, say, a Portuguese trader to gaze out on the lush green landscape of the Malabar Coast. It must've seemed a paradise on earth. Coconut trees are everywhere (Kerala means “land of coconuts”) and so are the distinctive banana trees.
This is the prettiest part of India I've seen yet. I can see why National Geographic Traveler named it one of the “50 Places of a Lifetime.” I took a ride down a canal from Alleppey to Kumarakom on a neat houseboat constructed from coconut wood and teak. On the boat, I had a delicious meal of grilled fish, rice, cabbage cooked in coconut milk, curried chicken, cucumbers, sweet pineapple, and fried bananas. This is a typical meal for this part of the country, or so my guide told me.
In my hotel room in Kumarakom at night, I could hear a hard rain outside and see lightning flash through the window, punctuated by rolling thunder. In Kerala, the monsoon season was still on. Kerala gets plenty of rain.
At this point in my travels, the power had gone off in every hotel I'd stayed in, if only for a moment. It happened briefly in Kumarakom, and my room was dark, save for the light from my battery-powered laptop screen.
When in Kochi, I met with a government official about investment opportunities in the province. It was not helpful, but the meeting had some comical aspects. My favorite answer was to the question “What about corruption?” The official answered: “We are the least-corrupt state in India.” Still corrupt, mind you, just “the least corrupt.”
But he did confirm something else I heard on my trip. When asked what the province's most-pressing need was, in terms of investment dollars, he said, “Hotels. We need rooms.”
It seemed odd he would say that, but when I dug into it more, I could see why. India attracts many visitors, both tourists and business people, every year, more than ever. The better hotels sell out quickly.
Before landing in Kochi, I spent some time in Hyderabad and Bangalore. Both cities are home to significant technology companies. I visited the campuses of Satyam in Hyderabad and Infosys in Bangalore. Satyam and Infosys both maintain their own housing quarters onsite for visiting employees because they cannot rely on the city's existing hotels.
I met with a pair of private equity managers about real estate development opportunities in India. Hotels were at the top of their list, too. They presented a surprising slide (Figure 6.4) that showed how all of India has fewer hotel rooms than the city of Orlando.
I thought that was an interesting observation, something you wouldn't think of if you were drawing up a list of investment opportunities in India. I know it would've taken me a long time to get to hotels.
I stayed at wonderful hotels during my trip, such as the Rambagh Palace in Jaipur, the Oberoi Amarvilas in Agra, and the Taj Mahal Hotel, which I'd recommend anytime you come to Mumbai. (After spending a day in the chaos and noise of the city, its poolside Ionic pillars and palms make for a welcome retreat.) Still, the room rates were so out of whack with everything else. The supply-demand balance was so tight that the average room rates in some cities reached the $400 level. Overall, room rates in India were higher than the current average room rates for New York, London, and Singapore. That $400 can go far in India, which is not true of the dollar in too many places of the world these days.
The hotel situation is one that's not going to get a lot better anytime soon. The number of tourists visiting India will likely increase at a 15 percent or better clip for years, according to the World Travel & Tourism Council. That would make India one of the fastest-growing tourist destinations in the world, to say nothing about the business travelers. Some companies have gone ahead and put up their own hotels on land they own. They run these hotels for employees and business visitors. They can't afford to sit around and wait for government approvals to build new hotels.
Thus investment opportunity number one would be to develop and run hotels in India. Unfortunately, there is no way for you as an investor in publicly traded stocks to do that. I heard a couple of developers talk about hotel and resort projects they have on tap. These were attractive, I thought, promising 30 to 40 percent annual rates of return on modest assumptions for hotel occupancy and room rates.
Mega Money Enters India's Housing Market
One Mumbai morning, after an Indian breakfast of mutter masala and a cup of chai, I set off for a day of meetings at the Cricket Club. The club is a short ride from the Taj Hotel. Lined with large banyan trees, the white-walled Cricket Club proved a nice location for meetings. I had a good day talking with some Indian money managers about the market there.
The real estate market is hot in India all around, and it's attracting some mega money flows. Goldman Sachs calls India “the most exciting real estate market in Asia.” All told, the market could grow from $15 billion to $90 billion by 2015. Kind of mind-boggling, isn't it?
So it's no surprise to me that the money managers saw opportunities in real estate.
One was an Indian mortgage company, HDFC. The Indian market remains far behind the United States in this regard. Mortgages generally run for only 11 years. Borrowers typically put down 35 percent. This makes borrowers naturally debt averse. There remains virtually no secondary market for mortgages. Banks make their loans, and they are stuck with them. This makes them naturally debt averse, too.
DLF, a big property company, had a record IPO in India around 2007 when I was there the first time. There were many more property companies in the pipeline looking to raise billions in the public market. Overseas investors have an especially big appetite for real estate.
As with any market, there are pockets of opportunity as well as danger zones. As far as danger zones go, the Indian property market looked frothy then. In fact, one money manager told me that some public companies changed their names to include the word “property,” even if that had little to do with their actual business. This was eerily reminiscent of the United States tech bubble in the late 1990s, when companies wanted “dot-com” as part of their name. Just that moniker alone sent a stock soaring.
However, one can't argue that demand is being outstripped by supply. There are shortages in play in India, especially clustered around major new employment centers in the big cities.
Bad government policies get in the way here, as they can anywhere else. For example, Mumbai has some great old buildings with wonderful architecture. The shame of it is that many of the buildings appear worn down. I learned later that much of the city is under strict rent control, and the rates tenants pay are well below market value. The rent in some of these buildings is only $100 per month for a 3,000-square-foot apartment in prime real estate.
Therefore, there was no incentive for the owner to pay a lot of money to keep the building in good shape. It's painfully obvious which buildings have rent control and which don't. You'll see a nice building, painted and scrubbed, right next to something that looks as if it's going to fall down any minute.
Apartments in southern Mumbai, the kind without rent control, go for $1,000 per square foot, sometimes $2,000. That means you'd pay $3 million for a 3,000-square-foot apartment, at a minimum. And I hear the quality is not all that great. Nonetheless, real estate is in high demand and short supply in this part of Mumbai.
Our next stop, Hyderabad, is actually the second-fastest growing center for commercial real estate.
Hyderabad is a 400-year-old city of over 6 million people. It's famous for being the home of the wealthy Nizam of Hyderabad, who once ruled this part of India. Today, it's mostly a dirty, bustling, and noisy city.
Hyderabad is home to a number of technology companies. I'm more interested in some of the other stories developing in India—such as the water and infrastructure issues. However, the technology companies are an important part of the growth story. You can learn a lot about doing business in India by listening to them.
For example, as I mentioned before, many of these technology companies have their campuses with schools, hotels, and even their own sources of power. They can't wait for the city of Hyderabad to allow for the construction of another hotel, for instance, so they build their own on land they own. They secure their own sources of water and power.
The strengthening Indian rupee was big news while I was there the first time in 2007. The rupee put in a fresh 9½-year high against the dollar. It has affected the earnings of Indian technology companies as their dollar profits convert to smaller amounts of rupee profits on the voyage home.
So, there is often some commentary in the papers on the dollar and a move to possible alternatives. I read articles about how resource-rich economies will move away from the dollar to protect their earnings as the dollar's slide accelerates. As an example, one writer cited the fact that Iran sells 85 percent of its oil exports in non-U.S. dollar currencies. The same writer speculated that the Russians may soon try pricing commodities in some other currency, possibly rubles.
Whether any of this happens or not is beside the point. More important is how the Indians talk about using currencies other than the dollar, something that you would not have heard 20 years ago. Spreading doubt and worry over the long-term value of the dollar is becoming more and more of an issue.
This brings us, once again, to gold.
On one of my trips to India, I spent some time just working there, mostly out of my publisher's joint venture office in a part of Mumbai known as Churchgate. I got a different perspective simply living there on a day-to-day basis in October 2009. I got a sense for more-mundane things, like the harrowing daily commute. I got a better feel for how the city works. Mumbai looks and feels chaotic and messy, but for millions, it gets the job done.
Some parts of Mumbai are tough to stomach, such as the widespread and seemingly hopeless poverty. While at a stoplight, little kids came up to my car window begging. One was carrying a little baby, barely clothed and dirty.
Great poverty in this city walks beside great wealth. For instance, we visited the oldest gold market in the city. It was part of a larger market that housed a temple to the goddess Mumbadevi, from whom some think the city got its name. This market was packed with people. Cars, including mine, rolled slowly down the narrow streets, honking their horns at indifferent pedestrians.
Old, dilapidated buildings lined the streets with shops selling everything from linens to pineapples. In the gold market, I saw several blocks of merchants selling gold in all its forms. I stopped to visit the largest market maker for gold in the city, with slums towering around it.
I entered a decrepit building and got in a creaky elevator little bigger than a phone booth. An attendant opened and shut the door. The elevator looked about a hundred years old. I got to the right floor and went down a filthy hallway so narrow that you had to turn your shoulders to get by other people in the hall. Finally, I arrived at this gold merchant's office.
When I got inside, we entered a modern-looking office that had clean, wooden floors, air-conditioning, and a wall-mounted TV playing the Indian version of CNBC. You'd never know the squalor and chaos that exists just outside the door.
I was led to a small conference room where I waited. After a short time, the gold broker walked in. He was a big bear of man with gold hanging on his neck, his wrists, and even his eyeglasses were rimmed with gold. He represented the prosperous side of Mumbai.
This man has a great business. He is, as I said, the largest market maker for gold in India. He brings buyers and sellers of gold together. He runs an online trading system. I happened to be here during Diwali, the festival of lights. People buy gold during Diwali, which is considered good luck. The gold markets were busier than normal.
I got his take on the gold market. He's bullish, which you may discount, but remember he's a broker. He makes money on transactions, not on the gold price. He sees India's strong and growing demand for gold. India has long been a net importer of gold, since it makes little gold itself. Yet, it makes up nearly a third of total demand for gold. “People here buy gold routinely, as a store of wealth,” he said. “People from the villages even buy gold and bury it in their backyards.”
As I'm compiling this book, I see that India's gold imports have more than tripled since the prior year. Why? Rajesh Shukla of the Center of Macro Consumer Research puts it simply: “People in India have accepted high inflation as a reality of life.”
It's something I've found often on my trips. People are increasingly buying gold, whether in Dubai or Mumbai. For these cultures, unlike for most Americans, buying gold is a social norm, a rather mainstream place to park your wealth. India, as it continues to grow in wealth, should be a steady buyer of gold for years to come.
Speaking of inflation, I said earlier that commodity prices tell you a lot about the growing Asian economies. The basic things, like crop prices, matter more in emerging economies than they do in the West. I suppose this is no secret, but living in the West, you might start to think that an economy is all about bank loans and retail sales. That seems to be what the mainstream media cover and what our politicians seem to think signifies wealth.
It's different in the emerging markets.
After working in Mumbai, I got a better sense of how basic these kinds of economies still are. This is why, though, the most commodity-intensive phase of their growth is still ahead of them. We have mainly reliable electricity, safe tap water, and (mostly) functioning highways. They don't, not yet.
Every morning, I'd grabbed the Economic Times, India's largest financial newspaper, along with the Times of India. I'd be fascinated by the topics of daily concern that made the business headlines . . . the price of palm oil or the state of the garlic crop . . . the dip in cashew exports or the drop in yellow pea imports from Canada.
Agriculture is a still a sizable part of the economy here, so the monsoon rains make a big difference. About 80 percent of India's precipitation falls between June and September. Much of India still lives off rain-fed farmland. If the monsoon season is light, then Indian farmers get hurt.
Certain popular policies will exacerbate the problems in agriculture. I find it incredible that India would aggressively pursue a biofuels program, given the lack of clean water. But it is. To meet its requirements, India will have to boost its production of sugar cane significantly. The International Water Management Institute released a study in which it warned that India's (and China's) plans to produce more biofuels could cause water shortages.
“Crop production for biofuels in China and India would likely jeopardize sustainable water use,” said the study's lead author, “and thus affect irrigated production of food crops.” These places have growing populations and booming economies, each of which soaks up a lot of water. The last thing you'd want to do is overlay that with biofuel production, which is water intensive.
Plus, large parts of India's population are incredibly poor. Any rise in water or food prices could cause hunger and massive political instability. India has a possible solution in a hardy bush called jatropha, which uses little water and requires no fertilizer.
But a poor monsoon season isn't a bad thing for everybody, and the entire economy isn't all focused around commodities. More days of cloudless skies, for instance, mean that construction projects can continue. Cement companies in India enjoy strong demand, reflecting the construction site nature of many of India's largest cities.
As I met with other analysts, money managers, and business people, a picture of busyness emerged. Construction projects are all over the country, building roads, power plants, power lines, and pipelines for water and wastewater.
In different sessions with analysts of our joint venture partners, I got a look at a mixed grill of companies building and making all kinds of things and growing 30 to 40 percent per year. Some did much better. Srei Infrastructure has enjoyed a sizzling compound annual growth rate of 88 percent for the last three years.
Anybody involved in building out India's demand for food, water, power, and infrastructure is doing well. The opportunities are mind-boggling. As one analyst wrote in his report, “Over 1.6 billion people in the world lack access to electricity, and 25 percent of them live in India.”
That's not only a roadblock to economic growth. It has an effect on the basic “safety of people who are forced to light their homes with kerosene lamps, dung cakes, firewood, and crop residue after sunset.”
Yet India has managed to grow at a high rate for years. While I was in India in late 2009, the most industrial output numbers came in at 10.4 percent for the month of August, this while most of the rest of the world was stuck in a bog of recession. More recently, industrial output numbers hover around 5–6 percent, sluggishness particularly hitting car and textile manufacturing.
India, as you may have guessed, is the second-largest market for cell phones in the world, behind only China. Cell phone rates average about 7/10ths of a U.S. penny per minute. The industry has, like an ice cream truck circling a playground, attracted millions of customers and billions of dollars in investment.
But just to show that macro trends can be tricky, the average revenue per user per month has fallen, and telecom carriers have cut back on investing in India by about 42 percent. Take a look at Figure 6.5, which dates from March 2011.
Figure 6.5 Losing Ground
Source: Bharti Airtel, Vodafone, Reliance Communications, and Idea Cellular.
The trend may have changed by the time you read this, but it doesn't matter. It stands as a case study of how local policies and super-competitive markets can make for a poor investment, even if the big-picture story is compelling.
The next big thing might be the Internet. Though India has more than 500 million cell phone users, it has only 40–50 million Internet users. The existing telecom network can't handle the data-intensive nature of the web.
That's changing, too. You may have heard of Ajit Balakrishnan, the founder of Rediff.com, an Indian social media site. Well, more than a third of India's Internet users visit Rediff every day, mostly for email. “The sheer size of the market is mind-boggling once it gets going,” Balakrishnan said in a Financial Times piece (“How I made it: Ajit Balakrishnan” by Stephen Wilmot).
Or take Zee Network, a media company. My Mumbai sources emphasized that India is the largest “manufacturer” of films in the world, cranking out some 1,000 films per year. Only 53 percent of Indians have a television, so the room for growth here is ample.
In some ways, I think of India as the United States rolled back about 100 years. For instance, most of the wealthy are industrialists. Names such as Tata, Agarwal, and Mittal own large interests in manufacturing, metal, and steel companies. It's not unlike early twentieth-century America, when names such as Carnegie, Rockefeller, and Morgan dominated American business. India has the added twist of having a bevy of technology and service companies that boost its growth profile.
As in early twentieth-century America, the stock market is still finding its sea legs. I asked a local analyst who the Warren Buffetts and Peter Lynches of India are. He said there really aren't any. The leading stock market speculators are men of ill repute. They have shady reputations for manipulating markets, just as early U.S. speculators did.
And numerous speculators exist. In this, it's the same as the early U.S. “bucket shops” famously written about by Edwin Lefèvre and others, where the working Joe would gamble on stocks, hoping to get rich.
Few companies pay any significant dividend in the Indian stock market. A 4 percent yield is a lot. It makes sense, though, given that India is a rapidly growing market. Reinvesting the money is often a better choice than paying a dividend.
India is a giant country, and I can't hope to do more than just paint a small corner of an enormous canvas. Every country has its own complexities, its own ever-changing story. I have just snapped a few pictures to give you an idea of how the world is changing and what part India will play in it.
Five Key Takeaways
Though a number of Indian mutual funds exist, I like the Quantum Mutual Fund family. I know the chairman, Ajit Dayal, and trust him and his process. His team has delivered good results over the years and will get you exposure to India you will find hard to get otherwise. (Note: There are restrictions to the Quantum Funds. Check to see if you qualify.) More on Quantum here: www.quantumamc.com/.
Check out Equitymaster, one of the few sources for independent research on Indian companies. Again, I know this team as well, including Rahul Goel, who heads up the group. There is a wealth of resources here: www.equitymaster.com/.
There are several Indian companies that trade on U.S. exchanges: Tata, Sterlite, ICICI Bank, and Infosys, for example. I'm not as fond of this investment option as I am the two above, but you could probably create a decent homegrown mini-portfolio around owning these India names.
Lazier options include the Wisdom Tree India Earnings Fund (EPI), which invests in Indian funds that have at least $5 million in earnings and meet certain liquidity requirements. The PowerShares India Portfolio (PIN) is another relatively easy way to gain exposure to Indian equities.
I'd recommend Edward Luce's readable In Spite of the Gods. An older travelogue worth hunting down if you are going to India is Roderick Cameron's Time of the Mango Flowers.