Why India’s companies will stay the course and prosper

by Dave

Traders at the Mumbai Stock Exchange

India’s economic growth, unlike China’s top-down state-sector driven model, is bottom-up and entrepreneur driven.

via FT.com

While India produces little in the way of commodities and has lagged China in attracting foreign investment, it is not a disaster. Rather, its companies embrace a variety of sectors, from IT, pharmaceuticals and general manufacturing to banks and property. No other emerging market has such breadth. Many of these companies are engaged primarily in selling to the large domestic market, where rising spending has enabled reinvestment.

Throughout the boom, companies consistently reported results ahead of consensus expectations. This was not a case of downplaying prospects so much as being sensible with costs. Most Indian enterprises have been around longer than recent economic achievements, and have learnt to confront and navigate a full business cycle. The best ones are naturally conservative. Maintaining cash flow and keeping debts low is second nature.

Granted, unlike some of its Asian cousins, India will remain a frustrating place for investors, as sensible policies one week are followed by emotional, knee-jerk decisions the next. But India has never really been a top down story, and anyway, the corporate world has learnt to deal with such vacillation.

Investors should focus on areas that are not dependent on reforms to come but those that have benefited from achievements attained. In essence, these are the general embrace of capitalism over the past 15 years and the state’s change of focus, from monopolising wealth creation to a focus on its redistribution.

Indian companies have on the whole risen above the meanderings of government, and in so doing have provided a platform for their shares to do likewise.