Investing in India – ADRs

This article also appeared at The Motley Fool.

In part 1 of this series, I covered ETFs that invest exclusively in India. In part 2, I covered CEFs and mutual funds. In this article, I’ll look at ADRs’ premiums or discounts vs. their underlying securities, and talk about Indian technology ADRs.

Lets start with a list of all ADRs and their relation to the underlying stock.

Company Stock Quote (INR) ADR Quote (USD) ADR Premium/Discount %*
Dr. Reddys Labs 1800.55 33.88 2.21
HDFC Bank 675.30 39.84 6.43
ICICI Bank 1121.70 43.17 4.38
Infosys 2776.55 51.40 0.61
Rediff N/A 2.94 0.00
Sify N/A 2.03 0.00
Tata Motors 305.80 27.86 -0.98
Sterlite Industries 101.00 7.39 -0.59
TCL 233.45 8.11 -5.93
Wipro 402.10 9.20 19.58
WNS N/A 14.39 0.00

*As of Friday, Feb. 15.

As you can see, most Indian ADRs are trading at a premium to their underlying stock in India, with the largest premium belonging to Wipro. Four of the 11 companies are technology companies: Infosys (NYSE: INFY), Rediff (NASDAQ: REDF), Sify (NASDAQ: SIFY) and Wipro (NYSE: WIT). Let’s look at these in more detail.

 

Only Wipro and Infosys seem to be consistently growing revenues.

 

EPS trends paint a similar picture of consistent growth only by Wipro and Infosys. The data for Sify was missing at YCharts, but the company posted a loss in its fiscal year ending 2012, albeit a smaller one than it recorded in 2011.

 

The stock prices of both Wipro and Infosys have not kept up with either their EPS or revenue growth, which currently reflects of the Indian stock market as a whole. So 2013 is a good year to invest in India, in spite of its slowing economic growth.

The valuations of stocks, especially of those like Infosys and Wipro are likely to catch up with their growth rates. But is Wipro worth the premium over the underlying stock when compared to Infosys? The current P/E of Wipro is around 18, and Infosys around 16.

I would say no. Among the Indian technology ADRs, I recommend Infosys, which is currently undervalued compared to its five-year average P/E of 20.

Stay tuned for coverage of the rest of the Indian ADRs.

Investing in India – CEFs and Mutual Funds

This article also appeared at The Motley Fool.

In the first part of this series, I covered investing in India via ETFs. In this section, I will cover CEFs and mutual funds.

There are two CEFs (closed-end funds – essentially, managed funds that trade as stocks) that invest exclusively in India.

Fund Adjusted Expense Ratio Discount to NAV
The India Fund (NYSE: IFN) 1.01% 11%
Morgan Stanley India Investment Fund (NYSE: IIF) 1.38% 12%

Both funds are very comparable. Their holdings are similar, except that The India Fund has a higher concentration of large caps than Morgan Stanley’s fund. Their returns are very similar, with The India Fund having a slight edge in long-term annualized returns.

In the last few years, returns of the Indian market have trailed those of the US market:

 

Whenever this happens, the discount of the Indian CEFs steepens. So the six-month average discount for both funds is a lot higher than the three-year average discount.

Fund 6 Month Average Discount 3 Year Average Discount
IFN -11.63 -8.09
IIF -11.66 -8.42

This discount to NAV makes now a great time to buy into either of the CEFs.

There are three mutual funds that invest in India:

Matthews India Fund – MINDX – This is a very good fund to invest in India with. It has a low expense ratio of 1.18%. It is a no load fund with a minimum investment of $500 for IRAs and $2500 for regular accounts. It is rated 4-star by Morningstar and its performance has been better than both the CEFs.

Eaton Vance Greater India Fund Class A – ETGIX- This on the other hand is pretty poor. It has a front end load of up to 5.75%, expense ratio of nearly 2% and poor past performance compared to MINDX and deserves the 1-star from Morningstar that it gets.

Eaton Vance Greater India Fund Class B – EMGIX – This is closed to new investors, but is similar to ETGIX except that the load is a back end load instead of a front end load.

In conclusion, among the options to invest in India we’ve covered so far, you have good choices in ETFs, CEFs and mutual funds, depending on your preference. But as of now, these closed-end funds present a good opportunity to get in while they’re trading at significant discounts.

Disclosure: Long IFN

Investing In India – ETFs

This article also appeared at The Motley Fool.

India is one of the major emerging market economies. The Indian stock market is well established and the roots of the Bombay Stock Exchange (BSE) go all the way back to the mid 1800s, making it the oldest in Asia. It is the 10th largest stock exchange in the world by market cap, and the No. 1 in the world based on number of listed companies – around 5,000. The other large Indian Exchange, the National Stock Exchange (NSE) is the 11th largest in the world by market cap.

And even though the Indian indexes are correlated with emerging market indexes, they are not significantly correlated with American indexes. India presents a good way to diversify your portfolio by investing in a major emerging market with well-established exchanges in a democratic government.

Until recently, there were not many options to invest in India. However, in the last few years, investors in the U.S. have gained several ways to invest in India: ETFs, CEFs, one ETN, regular old mutual funds, and individual ADRs. For this first article, I’ll focus on broad market index ETFs that focus on India, and ignore the specialized and leveraged ones. That list boils down to…

EPI WisdomTree India Earnings Fund
PIN PowerShares India Portfolio
INDY iShares S&P India Nifty 50 Index Fund
INDA MSCI India Index Fund

Let’s look at these in more detail.

ETF Morningstar Rating CAPS Rating Expense Ratio Index Tracked
WisdomTree India Earnings Fund (NYSEMKT: EPI) *
0.83% WisdomTree India Earnings Index
PowerShares India Portfolio (NYSEMKT: PIN) *
0.79% Indus India Index
iShares S&P India Nifty 50 Index Fund (NASDAQ: INDY) ***
0.92% S&P CNX Nifty
MSCI India Index Fund (NYSEMKT: INDA) n/a n/a 0.67% MSCI India Index

How the indexes work

The Wisdom Tree index is an earnings-weighted index adjusted by availability of shares to foreign investors. It consists of 220 companies, all of which are profitable.

The Indus India index is a proprietary index with 50 components chosen from a universe of the 200 largest companies by market cap on the BSE and NSE.

The Nifty is a market cap-weighted index of Indian equities, consisting of 50 Indian large caps covering all market sectors. These 50 companies comprise two-thirds of the market cap of all stocks listed on the NSE.

The MSCI India Index consists of 73 components and covers 85% of “the indian equity universe”.

Essentially even though their numbers of components are different, all these indexes represent a similar collection of large-cap Indian stocks.

INDY and INDA are relatively new, so it is difficult to do a comparison with charts. However, we can substitute the iPath MSCI India Index ETN for INDA, because they track the same Index. For the purposes of this article, the differences between ETFs and ETNs can be ignored, except for one: The ETN tracks the total returns of the index and doesn’t pay a dividend, so it is relatively tax-advantaged.

ETF Morningstar Rating CAPS Rating Expense Ratio Index Tracked
iPath MSCI India Index ETN (NYSEMKT: INP) *
0.89% MSCI India Index

Now we can do some comparison.

 

I’m not exaclty sure why Morningstar has decided to give INDY a three-star rating, while the rest get a one-star rating because if you look at the “Funds in Category” total, Morningstar says 4. So among the four very similar ETFs that it ranks, Morningstar has decided that one is three-star, and the rest are one-star. In this case, however, the choice is simple: Just ignore Morningstar.

Here is what to do. If you don’t care about paying taxes on dividends or getting them paid as cash, pick the lowest expense ratio fund. Otherwise, pick INP.

Disclosure: Long INP

Bombay aka Mumbai after 4 years

I recently was in Bombay for a month. After 4 years Bombay is a totally different place. There is even more construction everywhere – the airport is being expanded, new flyovers, new metro under construction, new skyscrapers advertising everywhere, fancy highways and more giant malls than one can possibly imagine. 4 years ago there already seemed to be enough malls and no more space left for anything else but somehow the space existed. All good but this has caused Bombay to be significantly more polluted and congested. But pollution and congestion aside, you can see economic growth happening right in front of you. 4 years ago the airport was as bad a mess as a local train in Bombay and now it was a breeze getting through immigration.

It’s no wonder my investments in India were amongst the better performing in the last few years. I could see no signs of recession any more. There is still extreme poverty and it is even more visible when right next to a fancy glass mall and I don’t expect that to go away anytime soon. But more people can afford more things and I saw more fat people that I have ever seen in India – a definite sign of prosperity.

In fact I found a lot of things in India very expensive when compared to the US but that didn’t seem to stop people from buying things. No wonder so many multinationals want to be in the Indian market. Just major metros are giant markets and there is the whole rural market to grow into.

For those of you looking to Invest in India now you have at least four easy ways – IFN, IIF, INP and EPI.