Companies: ERE    HDY    KSK    PTHI    WPR   

While China hogged the headlines for many years as the emerging economy par excellence, more recently the investment community has cottoned on to what the more visionary economists already knew: that not only is the Indian economy going to be a powerhouse but it may even grow faster and longer than any other emerging economy. In part, this reflects the country’s extremely young population, with 50 per cent of its people being under the age of 25, ensuring India will have a significant and growing population of working age for years to come, to see its economic revolution through.
Given the waning economic confidence in the West, there has never been a more apposite time to back Indian businesses. Below, the Growth Company Investor team presents our five current India-focused favourites.

Promethean India – James Crux
Listing: AIM
Ticker: PTHI
Share price: 98p
Market cap: £49 million

An interesting way to tap into the Indian tale is via investment venture Promethean India. Chaired by Sir Peter Burt, the former non-executive chairman of ITV, and with members of the influential and locally connected Burman family closely involved in managing its investments, the fund is adopting a long-term ‘value activist’ investment strategy with regard to both private and public Indian companies.

Back in May, the company, which joined AIM in April 2007 having raised £50 million through a placing of shares and warrants, released interim figures to February. These reflected a quiet period for Promethean, which refused to invest in businesses whose pricing expectations had become unrealistic. With hindsight this proved a canny move, given a subsequent dip in the Indian stock market, which reduced an unrealised investment portfolio gain of £5.3 million (a 31 per cent uplift on cost) at the half-year to only £2.8 million by the end of April.

Nevertheless, Promethean represents a canny play on a number of sectors, including the construction boom, through its investment in Nitco Tiles, and the Indian tourism story through East India Hotels, one of the largest branded hospitality businesses in India.

Moreover, the company has helped California-based mobile payment technology star Obopay to set up and expand in India, and recently invested a further $1 million in the business, as part of a heavily oversubscribed financing round of up to $45 million, completed at 2.7 times the valuation of previous rounds. Significantly, Indian telecommunications giant Essar is a co-investor in Obopay, suggesting there is huge growth and portfolio valuation uplift potential in this one investment alone.
Promethean, which reported half-time net assets of £54 million, equating to 108p per share, offers an astute way of playing the Indian growth story in both the private and public sphere; notwithstanding the performance of the Indian stock market, it should prove a winner.

Hardy Oil & Gas – Robert Tyerman
Listing: Full List
Ticker: HDY
Share price: 746p
Market cap: £464.5 million

As well as its population, India offers investors other natural resources. Discoveries in the Krishna Godavari Basin, and elsewhere offshore from India, for instance, give encouragement to Hardy Oil & Gas, despite a 2007 operating loss. Only a £5.1 million gain on selling shares in Hindustan Oil Exploration, and (reduced) investment income of £700,000, enabled Hardy to turn a £407,000 operating deficit last year into a pre-tax profit of £5.3 million.

As expected, revenues dropped nearly 43 per cent to £6 million, with production falling at the London-headquartered company’s producing asset, Block PY3 in the Cauvery Basin south of Pondicherry. Gross operated production fell nearly 30 per cent to 4,150 barrels a day. But more significant for the future were last year’s discoveries at the CY-OS2 block (Ganesha) in the Cauvery Basin and the GS-01 block in the Gujurat-Saurahtra Basin, off the west coast of India.

Hardy is farming down its present 75 per cent interest in CY-0S2, where testing of the intermediate zone produced an initial gas flow of ten million cubic feet a day, and says it expects to have halved its holding within a month. The company has ten per cent of GS-01, where its frequent partner, India’s giant Reliance combine, has 90 per cent, and where, of two intervals tested, one produced 18.6 million cubic feet of gas a day.

Chief executive Sastry Karra claims that ‘the jewel in the crown’ will be Block D9 in the Krishna Godavari Basin to the north of Cauvery, which is next to blocks where other groups have made ‘important’ oil and gas discoveries. Reliance has 90 per cent of D9, too, as it does of Block D3, where Hardy’s pre-drill resource estimates are many times those of independent consultant Gaffney Clein.

Some investors are concerned at recent moves by the Indian government to end exploration companies’ seven-year tax holiday. Karra insists that the proposals relate to future discoveries and will not be applied retrospectively to existing ones.

Hardy, which also has interesting prospects in Nigeria, raised £20 million in a share placing last June and ended 2007 with £15.6 million cash. Its shares hit 846p in April, but have now slipped to 746p on profit-taking, valuing the company at £464.5 million. With the price of oil rising, Hardy is likely to remain popular for some time yet.

West Pioneer Properties – Oliver Haill
Listing: AIM
Ticker: WPR
Share price: 115p
Market cap: £91.96 million

When McDonald’s made its tilt at the second most populated country in the world, it chose Mumbai native Amit Jatia to run its subcontinental franchise. This has given Jatia considerable insight into the Indian retail and property sectors, and enhanced his contacts with local governments across western and southern India.

He is putting all this to use at West Pioneer Properties, a developer and operator of shopping malls and hotel complexes aiming to capitalise on a predicted quadrupling in Indian consumer spending over the next decade and a half.

West Pioneer has already completed the first phase of its first mall – the 750,000 sq ft ‘Metro Junction’ in Mumbai suburb Kalyan – which opened to the public this April. First revenues are now being generated from ‘anchor’ tenants including McDonald’s and department store chain Big Bazaar.

In order to buy more land for further projects, chairman Jatia floated the business on AIM in December 2006, raising a net $37.5 million (£19 million) with the assistance of house broker Libertas Capital, following this up with a further £6 million funding last July. ‘Tier II’ cities have been targeted for further developments, and purchases have been agreed in million-plus populated Aurangabad and acquired in similarly sized Nashik. Before the Nashik purchase, profitable half-year results to September showed the company still had more than £19 million in the bank.

Jatia’s five-year plan for the business is for it to develop and operate more than four million square feet of malls, from which it will drive capital appreciation and growth in rental income. Moreover, he says West Pioneer’s local management and company structure can reduce the ‘margin leakage’ suffered by rival investment funds. With Libertas estimating a net asset value of 156.9p per share for the business, the current price looks unfairly low.

KSK Power Ventur – James Crux
Listing: AIM
Ticker: KSK
Share price: 484.5p
Market cap: £624.4 million

KSK Power Ventur, the fifth Indian group to float on AIM, back in 2006, has interests in private sector power plants across India and offers exposure to growth arising from the ongoing deregulation of the Indian power sector.

Floated by way of a £30.9 million funding priced at 107p, giving the company a debut market price tag of £138 million, KSK’s valuation has soared as investors have cottoned on to its growth credentials; now 484.5p, the shares have been as high as 636.5p.

Investor excitement reflects awareness of India’s need to reduce its power deficit, an issue at the forefront of the Indian political agenda, since the provision of a dependable and economic power supply to industry is fundamental in ensuring Indian GDP growth targets are met. Significantly, both the federal and the state governments have authority to legislate in this area, and the opening up of the market has been playing into KSK’s hands.

Its experienced management team, developing power projects in India since 1998 and setting KSK up in 2001, has honed the focus on the Indian private sector power development market, where the company develops power stations capable of generating affordable and dependable electrical power for electricity distribution companies, as well as international and Indian businesses. So that it can control costs and the fuel supply to these operations, the company has secured access to coal and lignite assets and resources across India.

KSK’s most recent results, for the half to September, demonstrated just how dramatic current growth rates are, with the top line burgeoning by 430 per cent to US$13.5 million, from which KSK was able to turn losses of $1.1 million into pre-tax profits of $23.5 million. Those stratospheric growth rates explain the strong price performance on AIM to date, and investors with an interest in the Indian power sector should look no further.

Eredene Capital – Oliver Haill
Listing: AIM
Ticker: ERE
Share price: 19.25p
Market cap: £47.1 million

Many of the funds investing in India, even the AIM-listed ones, are relatively large affairs, with £200 million market caps seemingly a minimum. In contrast, Eredene Capital offers investors a niche play on ports and logistics property. This, allied to its best-in-show management team, makes it one to watch.

While the real estate sector is often portrayed as a landscape dominated by over-valued assets and crowded by eager foreign investors, Eredene chief executive Alistair King says, ‘We are often the only ones going for the projects we see.’ Eredene is an expert player in a niche sector where investors are few and far between, having recently and serendipitously been able to hire the former Indian port property team of P&O in the wake of its takeover by Dubai Ports Authority.

This team, led by the erstwhile chairman of P&O in India, Nikhil Naik, knows the industry exceptionally well and has quickly built a reasonably sized portfolio of six investments, three of which are already operational and rent-yielding – the three assets acquired in 2007 were recently independently valued at 21 per cent over book cost.

Yields are high, owing to a relative lack of supply, with the canny team able to use their excellent industry contacts to eke out the deals and get in at early stages. They have built an immediately addressable pipeline that requires equity commitments of up to £200 million.

But with only £41 million of its own cash still not yet committed, Eredene is poised to make a decision about whether to raise more money from an equity issue or to ‘become a fund manager’.

Due to Eredene ’s expertise in this niche, ‘a number of companies and funds’ have approached King to manage a pot of logistics-focused cash for them, with Eredene taking management and performance fees. Either way, given that its shares are trading at a discount to net assets of 24.1p, we think the company offers investors a compelling niche play.