Perception to earnings – a gradually transforming India in 2010

Having spent a lot of time investing and doing business in India about fifteen years ago, I have been in touch with various investors over the years.  Many of them have now become extremely successful.

By and large, as in all markets, the Indian market or “Share Bazaar” is dominated by speculative types, trading the large names.  There used to be a huge degree of manipulation of stock prices, as people “ramped up” share prices.  I particularly remember this during the 1995 IPO on the Bombay Stock Exchange (BSE) of Gemstone Investments Ltd, of which I was a director.

India has really cleaned up the regulation of stock markets over the years since liberalisation.  I remember the days when we would still have to take physical delivery of stock certificates and literally apply stamps and sign every single share certificate.  They had begun to introduce the idea of custody and central depositories.  There were regional stock exchanges and, to an extent, one could still even “arbitrage” between the same stock on these different exchanges.

Today’s Indian markets are the picture of modernity, especially the National Stock Exchange (NSE).  Moreover, it is widely agreed that the Reserve Bank of India has managed the banking system very prudently, cleaning up the balance sheets of banks, and reining in any excesses.   This is stark contrast to the US Federal Reserve which seems to have encourages a great deal of irrational exuberance.  One must recognise the prudence of the regulators of India’s vast financial system.

Having said this, India’s fiscal and general macroeconomic management are paralysed by the indecisive and vacillating political system.  Coalition government has meant that many difficult decisions have simply not been made.  India is one of the few fast emerging economies with a trade deficit.  The fiscal imbalances also need to be corrected.  At the same time anecdotal evidence is suggesting that inflation is creeping into the system.

When we consider the financial, technology and mobile sectors, India is certainly “shining.”  However, this is largely an urban phenomenon.  Gandhiji said “The true India is to be found not in its few cities, but in its seven hundred thousand villages. If the villages perish, India will perish too.”  India has developed a great deal since those days, but the farmer, agriculture and the village play a central role in the economy and their fate is often ignored when India is analysed or Indian success is hailed.  Poverty, illiteracy and many backward practices are still rife in this nation of intelligent and literate elites, technological prowess and business acumen.

I am neither a politician nor development economist, but simply an analyst.  From that perspective, India’s dynamic entrepreneurs, mature and reasonably well regulated markets suggest that a value investor should be able to find a great deal.  One of the most interesting things which I find is simply the huge number of companies listed on the exchanges.  While the large companies are generally well followed, there are a great number of well run businesses which have not really been picked up by brokerage analysts.  It is this area which I believe holds the greatest promise.  However, it requires a presence on the ground to conduct the appropriate scuttlebutt, for which I do not have the capacity.  I have identified a number of local managers who I believe are successfully identifying such companies.

My general impression is that the Indian market as a whole is not cheap.  One of my friends unwittingly characterised this overvaluation by tell me not to worry about price to earnings, but to focus on perception to earnings!