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November 30, 2000

From Our Correspondent: Hirohito and the War
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MARCH 3, 2000 VOL. 26 NO. 8

A Bull on the New India
Watch technology, telecoms, media and drugs


photo
Lim Kok Boon
Manages the Singapore-based Regional India Fund of CMG First State Investments. Among his picks: software companies Infosys and Satyam Computer, telecom giant VSNL, animator Pentamedia and drugmakers Cipla and Sun Pharma
photo: Munshi Ahmed for Asiaweek
 
Until a year ago, India had a real image problem. The fall of three coalition governments in as many years raised questions about political stability. Local companies were regarded as unable to compete with their global counterparts. But a New India is emerging. The current coalition government, which won a majority last October, is looking durable. And the Bombay Stock Exchange is up more than 75% in the past year. The key driver: software companies, which many analysts now consider to be world-class players. Singapore-based Lim Kok Boon has always been a believer. He manages the Regional India Fund of CMG First State Investments, which is up 140% in the past 12 months. Lim spoke with Asiaweek's Assif Shameen.

How do you see India's fundamentals?

The economy is picking up quite nicely. Consumer confidence is coming back. The recent numbers have looked very good: industrial production growth is strong, housing starts are going up. Politics had been a major concern, but the risk is much less now. There is the first stable government in over three years. It is taking steps to address the fiscal deficit and I expect the government to continue with the divestment program. That creates a nice base for the economy to continue growing.

How about the stock market?

It has not been re-rated, though global funds have re-rated the software sector. Overall, the market is selling at about 18 times earnings - corporate earnings growth could be 22% to 23% this year. For the technology sector, earnings growth could be 70% to 80%, even higher for one or two companies. That's why valuations for many companies are still justifiable. The amount of new paper that will come to the market this year will be huge - not just initial public offerings, but also rights issues. But the market can easily absorb all the new paper. The underlying liquidity is very strong. Interest rates are low and still falling.

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What sectors will outperform over the next 12 to 18 months?

There will be three main themes: technology, media and telecommunications, plus the pharmaceutical sector. The consumer, automobile and petrochemical sectors will probably take a back seat, even though they are trading at very attractive multiples. In line with the global trend, media companies will come into focus because they have a huge content library which is very valuable. Going forward, there will be a lot of tie-ups between telecom companies, Internet service providers and content companies.

Aren't the valuations of some of the Internet and software companies too high?

Some of the companies aren't cheap. But a lot of shares have gone up on the back of very strong tie-ups. Indian software companies are gaining recognition globally. India has just 3% of the global software market right now and that market is growing very fast.

What is the driver for pharmaceutical stocks?

What used to drive the pharmaceutical sector was India's ability to do reverse engineering. When a new drug came out, Indian companies were able to break it up and find a new way to manufacture it very cheaply. But because of the recognition of patent rights globally, Indians have turned to research and development. Many Indian companies like Dr. Reddy's Laboratories and Ranbaxy have come out with new drugs that are now undergoing trials. If only a small portion of them are successful and can be marketed globally, there would be a huge upside to Indian pharmaceutical stocks. There will be greater re-rating and better earnings growth from the sector in the next two years.

What about the telecom sector?

There are two big telecom companies, VSNL and MTNL. They are listed but both are majority-owned by the government. VSNL has a monopoly on international calls until 2004. I am more positive on VSNL because it is doing the right things - it is the biggest Internet service provider in India and may list its Internet assets.

What other stocks do you like?


Infosys Technologies and Satyam Computer Services will continue to do well. They are well-managed Indian software companies that are competing globally. Together with WIPRO, these companies have showcased the talent and ability of Indian software engineers. They are able to move from one area to another fairly quickly. They are very adaptable, very mobile and they are not stuck in a particular niche.

I also like Aptech, a very aggressive company which provides software solutions and information-technology training, and Pentamedia Graphics, which does animation work. Pentamedia used to suffer from lack of recognition, but now that Hollywood animation movie producers from Pixar to SKG Dreamworks are losing market share to it, the company is being noticed.I like Zee Telefilms for its content. It is seen as an Internet play. I also favor pharmaceutical companies Cipla and Sun Pharma.


LIM KOK BOON manages the Singapore-based Regional India Fund of CMG First State Investments. Among his picks: software companies Infosys and Satyam Computer, telecom giant VSNL, animator Pentamedia and drugmakers Cipla and Sun Pharma


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