Sixty years on, independent India is booming

60 years of independence next week Sam Mahtani, manager of F&C's top performing Indian Investment Company, believes the structural story underpinning the country's growing prosperity will continue.

India has delivered four successive years of above 8% growth, and is the world's second fastest growing economy after China. Mahtani says India's success story has been the result of a combination of changing perceptions and governmental reforms. Although growth is likely to moderate, the outlook for the Subcontinent is very strong led by growing domestic demand.

"In the decades following independence, growth remained at around 5%. But the government's decision in the 1990's to proactively target growth by aggressively cutting interest rates coupled with the introduction of several key reforms - including the privatisation of major industries such as telecoms and utilities, cutting red tape and improving the mechanisms for foreign direct investment - have improved efficiency in the economy and injected a large dose of liquidity into the Indian financial market. India is now seen on an equal footing to China," he said.

The Indian stock market has grown by 51.8% on an annualised basis for the past three years in US dollar terms. Mahtani says that although earnings are likely to slow to around 15% by the end of 2007, the outlook remains healthy for the long term investor.

"Although company valuations are quite high at 18 times forward earnings, the government's commitment to infrastructure spending and an increase in foreign direct investment should continue to support the economy and the markets. Equally, GDP growth remains healthy although the recent rises in interest rates should see economic growth moderate to 7-8% per annum over the next few years," he said.

The Indian Investment Company – a SICAV fund - is top percentile in the India equity sector over three years. Mahtani, who retook management of the fund in May 2004, said his long-term thematic approach had lent itself well to the fund's robust performance.

"With a governmental commitment of some $300bn to infrastructure spending over the next five years, we have found great opportunities among companies such as BHEL, the monopoly producer of power plants, which stands to benefit from its exposure to this theme.

"Mobile telecoms is another area where we see an explosion of growth. With only a 14% national penetration rate in India, mobile operators such as Reliance Communications and Bharti Airtel have a great chance to grow their customer base," said Mahtani.
According to Mahtani, the industry estimates that some 6 million subscribers are added each month and rural areas, where the penetration rate is even lower at just 2% present the most potential.

"As India's rural populous becomes more affluent, past experience has proved that the one of first items a consumer is likely to purchase is a mobile phone."

Other themes being played in the portfolio are cement, petrochemicals and refining. Demand for cement is likely to rise in line with the increase in infrastructure spending and India's strong growth is boosting demand for energy and petrochemicals as well.

"In the area of cement, we like the largest cement producer in the country, Grasim Industries, which has operations nationwide, and Reliance Industries, which is the largest private sector company in India and is a core holding in our fund and a bell weather for the petrochemicals and refining industry," concluded Mahtani.