India's High-Tech Stocks Draw Global Investment

By MIRIAM JORDAN
THE WALL STREET JOURNAL - March 16, 2000

BOMBAY, India -- President Clinton plans to hail India's information industries during a visit next week. News Corp. Chairman Rupert Murdoch is in town scouting for dot-com investments. They are just the latest foreigners following the money to India.

Global investors are pumping unprecedented sums into India's high-technology stocks. Last month, overseas-fund managers invested a monthly record $707 million in Indian shares. That compares with about $1.6 billion in foreign institutional investment for all of last year.

"India dovetails perfectly with the global infatuation with technology, media and telecommunications," says Ted Pulling, who manages four India-dedicated funds at Jardine Fleming Investment Management in Hong Kong.

Recent pressure on technology-oriented stocks, however, took its toll on Bombay Thursday, leaving the Bombay Sensitive Index down 2.8% to 5102.41. Other Asian markets were mixed: Japan and Taiwan rebounded, but Hong Kong stocks fell sharply. European shares closed mostly higher, led by consumer and financial stocks.

Heavy buying by foreign funds drove the blue-chip Sensitive Index to 5933 points in early February, a record. Overseas investors are attracted by the growth prospects of Indian companies specializing in everything from software development and telecommunications equipment to computer animation and back-office services. India's recent political stability has also helped foreign sentiment.

Still, the Indian market has seen ups and downs recently. Bombay shares took a fall after Indian Finance Minister Yashwant Sinha presented a colorless budget Feb. 29. The document was short on measures to rein in the government deficit and jump-start foreign direct investment in sorely needed areas such as infrastructure. The budget did, however, offer a tonic for overseas funds: It raised the limit of foreign holdings in local companies to 40% from 30%.

Overall, the budget didn't change the longer-term view on India, some fund managers say. "India's information-technology sector has long-term, sustainable potential," says Zaheer Sitabkhan, a fund manager at Lloyd George Management in Hong Kong, which manages Asian funds with total assets of $2.5 billion. India accounts for about 40% of holdings in the $100 million Lloyd George Asia Small Company Fund.

The international success of a handful of companies has spotlighted India's promise. Infosys Technologies, a software services-company, and Satyam Infoway, an Internet-access provider, were listed on the Nasdaq Stock Market last year. The American depositary receipts of Infosys are trading at a 150% premium to the Bombay price because in India shares are allowed to rise or fall no more than 8% a day.

After years of disappointment, followers of emerging markets are attracted by the high return on equity of Indian companies. According to a Morgan Stanley Dean Witter report of March 1, India offers the highest return on equity of any market in the Asian-Pacific region, 16.6%, followed by Indonesia at 13.2%.

But India is no bargain these days. The Bombay market's average price-to-earnings multiple is 18.2 times projected earnings for 2000, according to Morgan Stanley Dean Witter. It puts India in the same range as Singapore and Australia, with prospective P/E multiples of 18.6 and 17.9, respectively. But it is pricey compared with South Korea's 11.3 and the Philippines' 15.8.

Mr. Pulling, whose India funds have a total of $1 billion in assets, is a big admirer of high-tech stocks. However, he points out that there is still a lot of value to be found in India's brick-and-mortar companies. He likes Larsen & Toubro, an engineering company, and Hero Honda, an Indo-Japanese motorcycle maker, for example.

Sam Mahtani, portfolio manager of the $180 million Foreign & Colonial India Fund in London, says he believes auto makers and aluminum manufacturers will benefit from a strengthening economy that will boost consumer spending and construction. Mr. Sinha, the finance minister, predicts the economy will grow 7% to 8% in the year ending March 31, 2001.

In addition, well-managed, lean-technology companies such as Infosys have indirectly pressured old industrial companies to restructure, improving the earnings prospects of these more-established companies. Lastly, the Indian market is benefiting from political stability, since Prime Minister Atal Bihari Vajpayee returned to power in October 1999 with a secure majority in Parliament.