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Many people think China is THE growth story in Asia. And sure, China has a lot going for it. But don’t look now, because the high-flying dragon might be overtaken by a “sleepy” elephant - India. Subscribers to TSI’s VIP trading service Renegade Investor already know the good news on India - they’ve received a recommendation on an Indian stock traded on the NYSE with great potential. In this issue, we’ll look at another Indian stock that’s on the launch pad. It’s a leading automaker in what will soon be the world’s most populous nation... it’s exporting to 70 countries and adding more customers... it grew sales by 29% and earnings by 50% in the most recent quarter... and yet it’s selling for relative peanuts. But before I show you why this car manufacturer is shifting into higher gear, let’s look at why you should invest in non-U.S. companies... and why India is the place to put your money to work.  There are a number of good reasons why you should be diversifying outside of U.S. companies. Briefly ... 1. A wealth of opportunities. Many foreign markets are growing faster than the U.S. market, yet at the same time some of their best stocks are undervalued. In just a bit, you’ll see how India is a big “yes” on both counts. 2. Lowering equity risk. If you have all your money invested in the U.S. market, you have all your eggs in one basket. Often, foreign markets can move up when the U.S. moves down. 3. Lowering dollar risk. When the U.S. dollar falls against foreign currencies, you want to be invested in foreign stocks. As the dollar goes down, the relative value of foreign assets can go up. Why India?  Now, if you’re going to invest overseas, here are factors that make India a great place to put your money to work... Enormous potential! India’s economy grew at a red-hot pace of 8.2% in 2004, second only to China. Going forward, India is expected to grow at 7% to 8% a year, and its growth could surpass China’s by 2015, according to Goldman Sachs. What’s more, Goldman believes that India has the potential to deliver the fastest growth of all the world’s economies over the next 50 years. Just compare India’s benchmark Mumbai/Bombay Sensex stock exchange to the action in the S&P 500 in the past three years... You can see that while the S&P 500 has basically been spinning its wheels since 2002, the Mumbai/Bombay 30 Composite (BSE) - a leading index of Indian stocks - has soared. Is it too late to buy in? Hardly! The BSE trades at under 18 times trailing earnings, according to recent Bloomberg data. And remember, India’s economy is growing at an 8% clip compared to 3% to 4% for the U.S.

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India is actively trying to boost economic growth even more. Nearly 40% of India’s people survive on less than a dollar a day. To change that, India not only has to grow its economy, it has to grow it FASTER. So, the Indian government is breaking up state monopolies and generally promoting investment and private enterprise. The goal is to attract US$150 billion of foreign investment and turn India into an economic power.

India has a large and growing trade surplus with China. India’s trade with the U.S., its largest trading partner, is growing at a 23% rate. Not too shabby, until you consider that trade between India and China jumped 79% in 2004 to hit US$13.6 billion, US$3.6 billion more than expected. India-China trade is expected to hit US$17 billion by year’s end. Do you think those estimates will be blown away as well? Bet on it!

In 2004, Indian exports to China grew by 80.5% to reach US$7.68 billion, while India’s imports from China registered a 77.2% year-on-year growth to hit US$5.93 billion. India enjoys a US$1.75 billion trade surplus with China - and rising. Taking it all together, we believe that India has the potential to grow even faster than China.

Now, India does have problems, mostly getting from here to there...

Railroads: At least 14 million people ride each day on 70,000 miles of railroads. Accidents are common, and equipment is outdated.

Roads: Less than 3% of Indian roads are four-lane, a third are two-lane, and 64% are single-lane.
Ports: Indian ports are generally decrepit and bogged down by lack of modernization. 

Electrification: In addition to its transportation problems, the national power grid is woefully inadequate.

However, India’s infrastructure problems are poised to improve, and in a hurry, too. India’s government plans to spend at least US$17 billion to upgrade roads, airports, and ports by 2010. In fact, a massive US$5 billion spending push on roads, ports, airports and other infrastructure started in February and March of this year.

Three Megatrends That Should Make India The Growth Story Of The Next Decade

Now that India is tackling its infrastructure problems head-on, this is becoming a great time to invest there.

Megatrend #1: India’s Population Explosion. Most countries around the world (including China) are getting older. Their populations are aging without enough new kids born to make up the difference. Not India. It has 1.1 billion people now - 17% of the world’s population. By 2050, it will hit 1.57 billion, and pass China as the most populated nation on Earth, according to the United Nations.

According to India’s census bureau, 40% of the populace is below the age of 18, and in the next 10 years, 55% will be under 20. India already has 600 million people in its labor force. Its labor force should be larger than China’s by 2025. This trend is great news for India’s continued economic future.

Megatrend #2: WTO and Economic Reforms. India joined the World Trade Organization in 1995. There are a lot of reasons to dislike the WTO - countries surrendering their economic sovereignty to faceless international bureaucrats tops my list - but WTO membership lowers trade barriers and opens up global markets for exports. India is a low-cost producer, so lower trade barriers give it a chance to grow into an economic superpower.

India’s exports are already red-hot - rising 23% to US$53.5 billion in the nine months to December 31. The open borders of the WTO will only boost sales and profits for Indian companies.

Megatrend #3: The Next Wave of “Offshoring.” India’s economic tiger was born with “offshoring” - outsourcing of back-office functions. Major corporations ship jobs to India every day. There are now one million IT and back-office professionals in India, up from 284,000 in 1999.

Total IT and BPO (business process outsourcing) services sourced from India hit US$17.2 billion in 2004. And it keeps growing! According to market researchers at the Gartner Group, India’s services industry revenue should mushroom from US$2 billion in 2004 to US$13.8 billion by 2007.

India’s services and IT industries face perils and opportunity going forward. Costs are rising: Entry level wages at Indian IT companies have climbed 15% annually in the past two years, while manager salaries are rising at a 30% clip. 

Also, there are the problems of an offshoring backlash here in the United States and the weakening dollar, which fell 5.6% against the Indian rupee in the fourth quarter. Indian IT companies bill their U.S. customers in dollars and pay their employees in rupees - rising costs and falling revenues put a 1-2 squeeze on margins.

But with the U.S. elections over, the heat is off U.S. politicians on offshoring. Also, all the negative publicity focused on offshoring has actually made more U.S. and European companies ask: “If these guys are saving all this money, why aren’t we doing it?” The question for the next few years may not be “why offshore,” but “why not?”

The Best Investment To Ride India’s Megatrends

So, with all this in mind, you should rush out and buy stock in Indian IT companies, right? Not so fast. While these are good stocks, they’re highly valued on both price-to-earnings and price-to-earnings growth ratios. And they’ve all experienced significant rebounds since recent bottoms earlier this year. So, with a little luck, we may also be able to buy them cheaper if we just wait a bit.

Instead, let’s look at another stock that will ride all three megatrends we’ve covered here - from population growth to open trade doors to offshoring. It’s inexpensive (under US$12 a share). And its sales and earnings are in overdrive. 

That stock is automobile manufacturer Tata Motors Limited (NYSE-TTM). This stock only joined the New York Stock Exchange in September, but it’s the third-biggest car maker in India; the fifth-biggest market for automobiles in the world.

That’s a market that’s growing rapidly - India’s automobile sales jumped 18% last year. Its truck and bus industry is growing at a 30% pace. That’s good news for TTM, which has 62% of India’s truck and bus market.

By 2010, India will have 36 times more cars than it did in 1990. That’s part of Megatrend #1 - population growth. India has 1.1 billion people, it’s on its way to 1.7 billion people, and you can bet curry to Krugerrands that they’d all rather drive than walk or ride the bus or train.

Of course, it would help TTM if those people could afford to buy cars. Thanks to megatrends #2 and #3 - the lowering of trade barriers and offshoring - India’s disposable income is exploding. 

The number of Indian families with incomes above US$200,000 a year has more than doubled in the past five years from 20,000 to 53,000, and could triple again in the next five years. And it’s not just the rich getting richer. Remember, as the offshoring trend continues, entry level wages for IT workers in India are rising 15% a year.

Now, let’s look at TTM specifics...

• TTM’s net earnings soared to US$72 million in the most recent quarter—up 50% from a year earlier. That’s far superior to the S&P 500’s net earnings growth of 26.7% and the auto industry’s earnings growth of 24.9%. 
• Earnings were powered higher by sales—up 29% in the most recent quarter compared to a year earlier. Compare that to 10% for the industry and 16.4% for the S&P 500.
• In fact, sales over the trailing 12 months are up 45.9%. That blows away both the industry (8.2%) and the S&P 500 (15.3%).

Sure, the company has its challenges - mainly rising steel and rubber prices. But since it doesn’t sell cars in the U.S. (not yet, anyway), it’s much better insulated from a falling dollar than Indian IT services companies. TTM’s stock may seem richly valued for an automaker - trading at 20.6 times trailing earnings. But any stock that can grow revenues and earnings at a 29% and 50% deserves that kind of valuation - and higher. 

Cyclical factors are also in TTM’s favor. The auto business is always cyclical, and TTM endured some bad years from 2000 to 2002. Now, helped by sales of its Indica hatchback, it’s on the road to recovery. The road’s bumpy, but TTM is bouncing back by inking deals all over the place - like the one with MG Rover to market Indica and other vehicles in Europe. TTM exports its products to Europe, Australia, the Middle East and Africa - 70 countries in all. With the WTO keeping trade barriers low, TTM’s exports will probably ramp up.

The good news continues, with sales climbing 22.5% in January over the year earlier period. And exports are rebounding smartly, up 31%. The company reports earnings around the end of this month. We expect stellar results, so you’d better get onboard before those earnings come out.

My reco: Buy 200 shares of TTM at $12 or lower. If and only if the order is filled, place a protective stop at $9.
The protective stop is just smart trading - it should limit losses in case something weird happens with the stock. Don’t buy above my recommended price. The trading on this stock is a little thin, so it may take you a while to get filled. Just be patient and keep working the order.

As for a price target - a 30% appreciation over the next year is likely. That’s a handsome return, and should far outperform the S&P 500.

I have more Asian tigers in my sights, but I’m not ready to pull the trigger on the others - not yet. So, stay tuned. I’ll send you more updates and recommendations on India’s best stocks in future issues.
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Sean Brodrick has joined The Sovereign Society as editor of TSI, beginning with the April issue. Sean has 25 years experience as a financial analyst and journalist. Most recently, he has served as editorial director for Weiss Research - an independent financial rating firm and publisher of investment publications. Sean backs up every article he writes with in-depth fundamental research and expert technical analysis. He is a strong complement to our Panel of Offshore Asset Protection and Global Investment Advisors. You may send comments to Sean at seanbrod@bellsouth.net.

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