India's Growth Drivers: Domestic Consumption and Infrastructure Investment

Sukumar Rajah
Director and Chief Investment Officer-Equities
Franklin Templeton India AMC Ltd.

India's economy has exhibited robust growth in recent years, and while this growth has moderated over the past year, the economy has shown a degree of resilience amid the global financial crisis. In our opinion, structural factors such as the economy's high dependence on domestic consumption and investment mean that the economy is capable of generating strong growth in the medium to long term. Therefore, we are finding particularly interesting opportunities in areas that could benefit from domestic consumption and infrastructure investment, including companies in sectors such as consumer goods, telecommunication services and engineering.

We have found a number of Indian consumer and telecom firms that exhibit high top-line growth and reasonable returns on capital. Going forward, we believe they have the potential to sustain growth and deliver robust returns on equity. When evaluating a company's strength, an important measure we use is economic value added (EVA). EVA is a financial performance measure that distinguishes a firm's real profit from paper profit. We believe select companies in the consumer and telecom sectors generate a very healthy EVA. Examples of consumer firms we find attractive include Hindustan Unilever, India's biggest consumer goods maker; Marico, another leading consumer products manufacturer; and United Spirits, the world's third-largest spirits maker. Firms in the telecom sector include leading wireless telecom providers Bharti Airtel and Idea Cellular.

In addition, we believe engineering firms such as Larsen and Toubro and Bharat Heavy Electricals are likely to benefit from the Indian government's focus on infrastructure investment as well as the turn in the country's investment cycle. Although the companies' order books dropped from a peak in 2007 and were almost muted in 2008-when the Indian economy slowed and funding turned scarce-they might pick up over the next few months as the re-elected Congress-led government raises infrastructure spending to revive growth.

For a number of reasons, we are not seeing many opportunities in India's real estate sector at this time. First, we believe many real estate firms are capital guzzlers. Second, many of these companies have poor corporate governance. Third, the recent sharp run-up in share prices of real estate firms seems excessive for the value that we believe they can generate. While concerns regarding many real estate firms have eased following an improved funding environment, we believe the market value for most of these companies is too high to present an attractive value proposition for investors.

Please click here for more information on the FTIF - Franklin India Fund.

Posted: 21 October 2009