The sharp sell-off in top India stocks surely has caused some investors to feel weak at the knees, but this is no time to panic. In my experience, the only way to avoid unnecessary losses is to do your investment homework. I have looked at the Indian situation from many angles in the past two weeks, and I don’t think that this is anything more than a classic bull-market correction.
The Indian Small-Cap Index ETF (NYSE: SCIF) has now traded below the lowest level seen upon its introduction this summer. None of the long-term bullish trends in India has been interrupted, so this is probably a great opportunity to buy some Indian small-caps on sale.
The other issue in India was a parliamentary near-crisis as the opposition BJP party–the political organization that really got serious about reforms in India in the late 1990s–has been protesting the handling of the investigation of the sale of telecom licenses by a former telecoms minister. Of the 36 bills planned to be passed in November and December, only four were passed by the legislature. There were 22 consecutive days where BJP MPs were interrupting parliamentary proceedings demanding an investigation that the government says has been duly closed.
The issue is that the 2G telecom licenses were sold for $2.7 billion while it is clear that they could have been sold for $36 billion, a staggering difference. Corruption in India is nothing new, but the size of the scandal has been raising eyebrows even there.
With a political scandal and a global inflation spike, we had a necessary correction in some Indian highflyers. In the banking sector, we also had the arrest of the CEO of LIC Housing Finance due to allegations of illegal loan practices. Even though none of the above directly impacts HDFC Bank (NYSE: HDB) in the near term, the stock pulled back from $189 to $152 in only a couple of weeks in December.
I expect new highs for HDFC Bank above $200/share next year as the Indian economy is accelerating to 9% growth. It is impossible to say at present if the low at $152 will be the low for this correction, but that is irrelevant to long-term investors who look for sound bank stocks to buy and hold for the next five years. If the Indian economy grows at 9% to 10% for five years, HDFC Bank can triple from here based on the current rate of loan growth and the fact that it typically has the least amount of bad loans of any Indian bank.
The other stock that had gotten ahead of itself was Tata Motors (NYSE: TTM), India’s largest carmaker. The shares had doubled since June, while the company had been announcing great operating numbers; revenues in the latest quarter grew 36.8%. Tata is a play on the coming infrastructure boom in India as well as a rising middle class.
Oil usage per capita is a reliable indicator for the level of development of any country. India has almost as many people as China, but it uses one-third of the oil per capita. China just became the world’s biggest car market, and that oil usage, as well as car sales, are only going to grow in both countries. It is difficult to see how a leader in the auto industry as Tata–which now owns the prestigious Jaguar and Land Rover brands–won’t do well in such an environment of rising infrastructure spending and increasing consumer demand. The shares trade at 8x next year’s earnings, which makes them a bargain in the auto sector.
It is always difficult to call the exact end of a correction, but a sharp sell-off in the midst of otherwise strong fundamental backdrop is usually a great buying opportunity.
This is exactly what we have in India right now.
