Mobius ready to pay premium for India stocks as inflows hit limit

International demand for Indian equities is so strong that foreign-ownership limits have been breached at 17 of the biggest listed companies and the premium paid for those shares is surging.

The bullishness has prompted Indian companies such as Bharti Airtel, the nation's largest mobile-phone carrier, and Zee Entertainment Enterprises, a Mumbai-based broadcaster, to raise investment caps. HDFC Bank, India's biggest bank by market value, and state-run Coal India also plan to take advantage of foreign interest by selling stakes, part of a flood of share sales that CLSA Asia-Pacific Markets estimates will reach $50 billion in the next 24 months.

"Companies that increase foreign limits will be treated positively," Mark Mobius, who oversees more than $40 billion as the executive chairman of Templeton Emerging Markets Group in Singapore, said in a June 30 e-mailed response to questions. "It shows they are open to foreign investment and are willing to adhere to better corporate governance norms."

Without new supply, international investors are hitting a wall in India as their confidence grows in Prime Minister Narendra Modi's ability to revive economic growth after sweeping to power in May in the nation's largest election victory in three decades. Modi's administration will unveil its first federal budget on July 10.

Growing premiums
The 20-day average price gap for shares in the market's foreign segment, where overseas investors trade when holdings reach the limit, versus those available to domestic investors was two per cent as of yesterday, the highest level since January 2013, data compiled by Bloomberg show. Acquiring a stake in HDFC Bank costs an international investor 4.4 per cent more than a local buyer.

Foreign demand helped push up the S&P BSE Sensex index 14 per cent last quarter, the biggest gain in more than four years, and 23 per cent so far in 2014. International investors bought a net $10.7 billion of the nation's shares this year, the most among eight Asian markets tracked by Bloomberg after Taiwan.

At least seven Indian firms have already moved to take advantage of foreign inflows by raising their caps. Those that did advanced an average 13 per cent in Mumbai within the following month, according to data compiled by Bloomberg. Bharti added 0.7 per cent on July 4 after the Reserve Bank of India allowed the company to raise its foreign investment limit to 74 per cent.

Vietnam, China
While India's non-bank companies can set their own limits, the central bank restricts foreign stakes in lenders to 49 per cent. That enables the government to maintain influence over local companies deemed strategic to the economy, said Jan Dehn, the London-based head of research at Ashmore Group Plc.

Asia's fourth-biggest stock market isn't the only nation where foreign stakes are running up against limits. In Vietnam, at least 20 companies had holdings at the nation's 49 per cent ceiling at the end of last year, with investors from Templeton to Dragon Capital Group saying they've been unable to buy as many shares as they want. China has a 30 per cent cap on foreign holdings in mainland-listed shares.

The May 16 victory for 63-year-old Modi, who oversaw annual economic growth of 10 perc ent in India's Gujarat state since 2001, has fueled speculation he will replicate that success at the national level. Under former Prime Minister Manmohan Singh's Congress party, the growth rate fell to a decade-low of 4.5 per cent in the year ended March 2013.

Profit taking
Rising valuations have made it difficult to find large-capitalisation stocks trading at attractive prices in India, said Arnout van Rijn, an Asia Pacific equities fund manager at Robeco Hong Kong, which oversees about $290 billion. The Sensex has a multiple of 15.9 times estimated profit for the next 12 months, the highest level since January 2011 and a 43 per cent premium over the MSCI Emerging Markets Index, according to data compiled by Bloomberg.

HDFC Bank is valued at 4.6 times net assets, versus a ratio of 2.1 for the S&P BSE India Bankex index. Maruti Suzuki India, the New Delhi-based carmaker whose foreign holdings are close to the 24 per cent limit, trades at 22 times estimated profits, a 60 per cent premium versus global peers, according to data compiled by Bloomberg.

"Foreign investors are so exposed in India that they'll probably take profits," van Rijn said in a June 26 interview in Hong Kong.

Faster growth
Overseas money managers' favorite stocks have delivered market-beating gains over the long term. The average annualized return for 16 shares in the foreign segment with at least five years of trading history was about 29 per cent, versus 15 per cent for the Sensex, according to data compiled by Bloomberg.

HDFC Bank, based in Mumbai, has reported profit growth greater than 20 per cent every year since 1998 and analysts predict the firm will maintain that pace through at least March 2017, according to projections compiled by Bloomberg.

Modi's economic policies will probably lead to higher corporate earnings and fewer bad loans at lenders, Ajay Argal, the head of Indian Equities at Baring Asset Management Asia, said in a briefing in London on June 26.

"Foreign investors are bullish on the growth potential of these companies on anticipation they will benefit from the new government's reform measures," Supreeth Shankarghal, the chief executive officer at Quant First Asset Advisors India in Bangalore, which manages about $100 million in options, said in an e-mail interview on June 30.

Target raised
HDFC Bank is among companies that may tap into growing foreign demand for its stock. Shareholders have approved raising as much as 100 billion rupees ($1.7 billion) over the next year, Aditya Puri, a managing director at the lender, said at an annual general meeting in Mumbai on June 25.

India's government is also moving to take advantage of the inflows. Policy makers will raise their asset-sale target by 41 per cent, two ministry officials with direct knowledge of the matter said last month. The government plans to earn more than Rs 80,000 crore by selling stakes in firms including Coal India and Power Finance Corp, higher than the Rs 56,925 crore estimated in the interim budget in February.

The nation's companies will probably raise $25 billion through share sales in the next 12 months, and a further $25 billion over the following year, Mahesh Nandurkar, an equity strategist at CLSA in Mumbai, said by phone on June 30.

New stock may cut premiums for foreign investors, according to Rahul Chadha, the co-chief investment officer at Mirae Asset Global Investments Hong Kong Ltd., which oversees about $60 billion.

"Hopefully these will be eased," Chadha said in a July 2 interview from Hong Kong. "We have significant fundraising lined up."