3 growth favorites in India

While the nation's equities aren't as cheap as they were in 2011, there's still room to run.

By TheStockAdvisors Mar 27, 2012 9:54AM

By Yiannis Mostrous, Personal Finance

India is a global business hub that consistently ranks as one of the world's fastest-growing economies. It also has been one of the world's best-performing stock markets in 2012.

While Indian equities aren't as cheap as they were in late 2011, there's room for upside. Here are three India gems that we recommend buying on any pullbacks: HDFC Bank (HDB), Infosys (INFY) and Tata Motors (TTM).

The Indian economy is oriented toward domestic demand, buttressed by steadily rising incomes and a relatively healthy banking system.

The population is growing rapidly, and the exploding Indian middle class is quickly becoming brand-conscious and purchasing more modern amenities.

India also is home to growing ranks of technology-savvy, collaboration-minded young professionals, combining high levels of education and an excellent command of English.

HDFC Bank is one of India's biggest private banks, with 2,200 branches and 15 million retail clients. It's among the top two or three players in all consumer loan segments except mortgages.

Although HDFC Bank's stock trades at a premium to its peers, the financial institution's strong domestic position and its consistent delivery of solid operating results warrant a higher valuation.

HDFC Bank is a big beneficiary of demographics: India is a nation of young people with rising incomes who are driving consistent domestic demand. The company has substantial room to grow in a financial services market that remains remarkably under-penetrated.

Most of HDFC Bank's new branches are located outside metropolitan regions that are ripe for service by the banking industry.

HDFC Bank and others have turned a regulatory mandate into opportunity, because it has allowed them to attract more accounts from smaller towns. About 62% of the firm's branches are now outside India's nine biggest cities.

HDFC Bank is one of Asia's best-run financial institutions, and management has a strong track record of producing steady growth without incurring excessive risk. A pure play on India's domestic demand story, HDFC Bank's American depositary receipts rate a "buy" up to $37.

Tata Motors is India's leading producer of commercial vehicles, controlling 60% of the domestic market. It's also a leading manufacturer of passenger cars and owns the storied Jaguar Land Rover (JLR) brand of luxury cars and sport-utility vehicles.

Tata Motors acquired JLR from Ford Motor Company in 2008 for about $2.3 billion. At the time of the purchase, JLR was on the threshold of launching several new models.

Tata Motors believed in JLR and funded the last stages of these models' development during a hard time for the global economy. It proved a wise move. The division accounts for about 55% of Tata Motors' revenue and more than 60% of EBITDA.

Margins increased by 20% in the third quarter of this fiscal year, boosted by the popularity of its new lower-priced model, the Evoque SUV.

JLR has also established momentum in the rapidly growing Chinese market, which now contributes 16% of the division's sales volume and remains the focus of JLR's strategy for future growth. The unit doubled its footprint in the country last year by opening 100 new dealerships.

Tata Motors is locked into key markets that will experience continued global growth. Buy Tata Motors' ADR up to $30.

Infosys is sitting on $4 billion in cash that's likely to be deployed for acquisitions, as the IT outsourcing space consolidates.

India-based IT firms enjoyed a run of robust revenue growth from 2004 through 2008, when top lines expanded at about 30% to 35% a year. Since then, growth has slowed to between 15% and 20%, largely because corporations have curtailed spending.

The "commoditization" of basic IT services has weighed on margins. However, U.S. companies appear more eager to spend their IT budgets thus far in 2012.

In the long run, corporations around the world will continue to invest heavily in IT, a secular growth trend that favors Infosys and other outsourcing leaders. Buy Infosys's ADR up to $60.

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