Indian Economy

Indian Economy: Bombay Mix
by James Boric

“…What a day I had yesterday. After meeting with Mr. Ranjit Pandit, the managing director of McKinsey&Company (India), Mr. Amitabh Khanna, the CFO of a major Indian telecom company, and Kakesh Jhunjhunwala – one of India’s most successful proprietary investors – I have confirmed many of my original thoughts. India is a place worth investing in for the long haul. I’ll explain by taking you through each of my three meetings yesterday…”


The day started off at 9:30 a.m. – when Dan Denning and I got into the taxicab. (By the way, the driving skills, here in Mumbai, are something else. Ten percent of all worldwide traffic deaths happen on India’s roads. Trust me, I believe it. I came inches away from death on many occasions.) We were dropped off at McKinsey&Company, where we met Mr. Ranjit Pandit – the managing director for all of India. He was a great guy – very intelligent and kind.

After offering Dan and I coffee, tea and munchies, Mr. Pandit started the hour-long meeting by telling us, “India is never as it seems.” And what he meant by that was simple.

Indian Economy: The Truth About India

In the news (especially in the United States) we hear about India’s new leftist government and how it is plotting to reclaim many of India’s private businesses – with the intent of reverting back to a State-run system. But that is about as far from the truth as you could get.

Mr. Pandit told us not to judge India based on what we watch on the news. Watch and see what this government does for yourself – not what the media says it might do. And he thinks the government will do some great things for the economy – like opening the retail industry to foreign competition, lowering the consumption taxes and improving India’s infrastructure.

The net result will be an increase in productivity and consumption. And that will lead to a more prosperous Indian economy. We’ll see if what Mr. Pandit says is right. I think it is.

As for individual sectors, India’s outsourcing industry has probably received the greatest press attention in the West.

Indian Economy: The Outsourcing Industry

I asked Mr. Pandit if he thought outsourcing was in a bubble – or if it still had legs. He responded very quickly by saying, “You’ve only seen the tip of the iceberg. The outsourcing industry is still gaining momentum. It will double in three or four years.” He went on to say that supply in the outsourcing industry is so great, that prices will remain low. This should encourage more foreign activity here in India.

According to a recent quote, by the end of 2004, 40% of all Fortune 500 companies will be outsourcing to India.

I don’t doubt that.

Not only is it cheaper – in terms of wages – for U.S. and European companies to look at India…but they also get a very skilled group of hard-working laborers on their payrolls.

Mr. Pandit told Dan and I a story that gave proof to that claim.

British Airways decided to outsource some of their operations to India recently. They were looking to make savings on labor costs. As an unexpected bonus, the Indians ended up finding a problem in the airline’s ticketing system. It turned out to be a $100 million mistake. Let me explain…

If a passenger books a flight from London to New York and onto Cincinnati and then back to New York and London again…British Airways will sell you a ticket from London to New York. But because they don’t fly to Cincinnati, they may have to schedule a Delta flight for you. When they do, it has to pay Delta a fee.

Well, it turns out, British Airways was over paying the other affiliate airlines – like Delta – for these connecting flights. As a result, it was losing about $100 million a year in earnings. That’s a lot of money. And it was the Indian outsourcing company that figured this out – not the corporate bigwigs in London.

Now that’s what I call a “value-added” service. You hope to save on labor costs by outsourcing to India (and you do). But you also get an extra $100 million bonus by fixing your ticketing problem. Not a bad deal. It just goes to show…

The Indian outsourcing model is strong. The people speak English (which is one reason the U.S. is so quick to send business their way). They are educated (so they can help spot inefficiencies in your business, a la British Airways). And the supply of workers here is incredible.

Indian Economy: A Major Asset

India has the largest, youngest and best-educated middle-class in the world. And as more and more jobs become available, it will soon become apparent that India’s population is a major asset – not a liability like it has been in the past. Of course, it won’t happen over night. But it will happen.

My next stop was about 30 minutes outside the Mumbai. I was on my way to Videsh Sanchar Nigam Limited headquarters – where I was scheduled to meet with the company’s CFO, Mr. Amitabh Khanna.

What an experience that was.

First of all, I was very grateful that Mr. Khanna agreed to even meet me. (I managed to get his number after calling the company several times and being repeatedly shot down. It pays to be a pain in the ass!) He is a busy man. After all, running Videsh is no small chore. It is an $883 million company, and the largest long distance provider in India.

(I wonder if the CEO of AT&T would have granted me an interview.)

Videsh Sanchar Nigam Limited:

Anyway, my meeting with Mr. Khanna was fantastic. We started with a brief history of Videsh…

After being the only long distance provider in India for 13 years (it was a state-owned monopoly), the government decided to open the telecom industry up to competition in 1999. And by 2002, Videsh (and its newly created competitors) were open to investors.

As you might imagine, since 2002, Videsh has lost quite a bit of ground in terms of sales and net income – simply because it is no longer the only game in town. But it is still the dominant long-distance carrier. Right now, the company has a 55% share of the long-distance market. Mr. Khanna seemed to be very optimistic that Videsh would continue to grow by becoming “the carrier’s carrier.”

Here’s what he means…

Right now, Videsh owns millions of miles of cable under the ground. It has more than a dozen switching stations in India. And it is getting ready to lay cable from India to Singapore. Videsh is like the AT&T of the United States. It owns most of the underground assets. Every time a local carrier needs to use the cable, it has to pay Videsh a fee. Well, Videsh seems content to rake in those fees. And if it gets its way, there won’t be another mile of new cable ever laid in India again – the new carriers will simply pay Videsh to use the existing cable. Hence the name “the carrier’s carrier.”

We’ll see if Videsh gets its wish. But if it does, there could be some terrific upside in the years to come.

Right now, India only has 6 phone lines for every 100 people. That’s nothing. China, for instance, has about 17 or 18 lines per 100 people. So as India continues its upward trend, there is tremendous room for growth in the telecom industry. In fact, the last thing Mr. Khanna said as I headed out of his office was:

“Things can only go up from here.”

I tend to agree.

Now it was onto my third meeting of the day – at 151 Nariman Point – to visit the Daily Reckoning reader, Mr. Ravi Dharamshi.

Mr. Dharamshi works for a company called Rare Enterprises – a private investment firm owned by Rakesh Jhunjhunwala. Let me tell you, these guys were great.

After introducing himself, Mr. Jhunjhunwala asked me a question…

“What do you think of the Indian women?”

I felt myself blush. My face undoubtedly turned from white to bright red. He definitely took me by surprise. But I responded by saying they were quite beautiful. He grinned and I immediately felt at ease. Now we could talk business.

Mr. Jhunjhunwala is very rich man. I don’t know how rich. But by the looks of his office and the size of his staff, he is doing quite well for himself. After all, his entire staff manages HIS money. He is a self-made businessman. And his life is the market.

Sayings from the world’s great investors and economists hang all over his office – John Templeton, Warren Buffett, Phil Fisher, John Maynard Keyes and others. I got the sense Mr. Jhunjhunwala was a bit of a historian. He studied the ways that others had made their fortunes – and he took the best parts from each to use in his own investing. One thing I liked about him was he had a long-term approach to the markets. He’s not the kind of guy who will panic and pull his money out of the market just because he’s down 20% on a stock. He will stay invested for 5, 10 or 15 years – like Templeton and Buffett did.

Obviously it is paying off for him.

Mr. Jhunjhunwala started off working alone. Now he has a staff of probably 15 or more. I didn’t count…but there were at least 6 or 7 other people in the room meeting with me.

While I sat and talked with the Rare Enterprise men, they gave me charts, tables and books – all showing me that the Indian markets were a great place to be right now. For instance…

The average PE ratio for Indian companies is a paltry 12.5 right now. Based on historical valuations, that is cheap. Not long ago, stocks were trading for more than 30 times earnings. And if you use forward-looking earnings, Indian stocks are even cheaper at just 10-times earnings.

But what about the low volume, I asked them? Since I’ve been here the average volume for the Sensex (the major Indian stock index) has been between 77 million shares a day and 140 million. Why aren’t more people buying?

His answer was straightforward.

For one, people are still scared of the markets. They have been burned before. And they don’t want to be burned again. It will take some time to regain their confidence. But he thinks it will happen. And when it does, look out.

Right now only about 2% of India’s household savings are invested in stocks. With $150 billion sitting in the banks, there is plenty of firepower still to come.

My next question for Mr. Jhunjhunwala was, “Why should investors look to India right now versus China?”

His answer was threefold…

1)      India follows strict accounting rules – probably more so that anyone in the world, including the U.S. So India has safeguards that China simply doesn’t have. While it isn’t risk-free, you can at least feel good that India’s legal and accounting systems are transparent – the same cannot be said of China.

2)      China’s industries are so fragmented. There are 500 Chinese cement manufacturers. Even if you owned the top two companies, you’d only have a 1% or 2% share of the market. In India, the top two companies may have a 60% market share. So you get more bang for your buck (or Rupee).

3)      The Indian markets are still miles behind China’s in terms of popular acceptance. That means less downside risk and far more upside potential. So, as long as you are willing to take a longer-term approach (say 5 years or more), the upside is spectacular.

Plus, I might add, India has a young middle-class and they are well educated. They can perform skilled manufacturing and service jobs that the Chinese might not be able to do – at least not competitively.

Finally, Mr. Jhunjhunwala told me the people in India are confident. (And this is certainly the sentiment I have gotten every where I’ve traveled.) They aren’t afraid to think big. They aren’t afraid to take risks.

In the end, I think this confidence will pay off for anyone who is prepared to accept the risks invests in India (foreign or domestic).

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