New firm to trade stocks of smaller Indian firms

Attracted by what he calls a highly lucrative market for long-term investors, an Indian American has launched a private investment partnership to trade stocks of small- and medium-sized Indian companies that offer abundant investment opportunities.

Parag Patel, who has worked in securities businesses in New York, launched the India Performance Master Fund last August. He has since filed plans with the Securities and Exchange Commission for raising $20 million for the venture that would invest in undervalued publicly traded mid- and small-cap stocks in India.

"The big growth story today (in India) is more in mid caps and some of the larger small caps. I think this provides a lot of investment opportunities for Americans and I am going to persist for at least the next ten years. Over the next five years or so long-term returns in small-cap and mid-cap stock are going to be much higher in India than in the US markets," Patel told rediff.com in response to a question.

Patel, the managing director and portfolio manager, said most foreign and domestic portfolio investment in the Indian equity markets has been in larger capitalisation stocks. "We believe that a lot of investment opportunities exist and will remain in Indian mid- and small-cap stocks," he said.

India's capital markets, especially the equity markets, have emerged as among the most attractive of the emerging economies thanks to the strength of the country's economy. The markets, according to the Confederation of Indian Industry, have remained buoyant and the stock indices have reached record highs in 2005-2006, reflecting the increased interest of domestic as well as foreign investors, backed by a high-growth outlook.

Patel, 36, who used to work for SEC capital, said his firm generated an excess return of 50 percent a year net until a couple of years ago, but that it had become difficult to generate excess returns in the last few years due to a variety of factors.

But one could generate excess returns if you take risks in developing markets such as India, which have a history of working democratic institutions, a very professional military and a working legal system, he said, adding that, with research and analysis, there could be excess returns.

The BS in economics from New York University said that while poverty, high illiteracy, corruption, inadequate infrastructure and other significant problems in India were matters of concern, there are positive factors driving the venture.

Among those, he noted, are the expectation of the continuing growth of the Indian economy, the continuing globalization of the international economy that sees a high value in competitive wages, a high level of skill and motivation in the large Indian labor force, and a significant increase in infrastructure expenditures on power generation and transmission, urban infrastructure, road, railways and ports by the Indian government.

India's capital markets have received accolades from equity and rating agency experts in recent years for their transparency and good corporate governance. Many experts feel that, in contrast with the debt market, the equity market is one of the better success stories of the Indian reform.

Joydeep Mukherjee, South Asia head at Standard and Poor's told a recent conference attended, among others, by Indian Finance Minister P Chidambaram and Planning Commission Deputy Chairman Montek Singh Ahuluwalia, that India has some of the best companies in the world in terms of corporate governance, although there are some mediocre companies and some terrible ones. "But the good news is the average is shifting in the right direction," Mukherjee said.

Talking about the risk portion of investment in generic Indian companies, Tim Massad, partner, Cravath, Swaine & Moore, said while the offering documents for several large IPOs in India are actually very comprehensive, given that they covered risk factors and detailed disclosures, the problem was one of the quality, rather than the quantity, of disclosures.

Patel agrees. He said in India one actually has an opportunity for excess returns if one does research and analysis. But there was more research required in India, unlike in the US, where companies volunteered a lot of information in public filings, he said, adding that the quality of disclosures was lower in India.

"It is not intentional. I think the companies did not have the mindset earlier because they did not have sophisticated long-term investors," he said.

In response to another question about risk, Patel said he believes he is taking macro risks, ones that he can hedge away.

"The Indian market is today expensive. It is trading up to 19 times this year's earnings, something that never happened before and people are overly excited about the growth prospects of the country," he said.

"I think I am taking less risk because I am buying companies that are growing at least 20 percent, if not 30 percent. When you are buying things at that kind of valuation you have a high margin of safety," he said.

Patel said the partnership is open to high net worth individuals and institutional investors who have a minimum of $500,000 to invest.

Asked if he preferred any particular industry, Patel said he would consider companies catering to both domestic and overseas markets, companies considered globally competitive manufacturers.

Patel, who was born and raised in the US, is moving to Mumbai along with his family in the next few months and will stay there for two years to develop a research team.

"India is going to be a great investment destination," he said, "and you need to be close to the companies that you buy into."