A key tenet of many great investment strategies is diversification, both across asset classes and internationally. Many investors are subject to a “home bias” in which they invest almost their entire portfolio in their home country's stocks. This is especially true with U.S. investors. Now although the U.S. has been a fantastic market over the prior decades, diversifying investments into other countries, especially emerging economies, can offer greater growth potential.
India is a huge emerging market opportunity as it has the second-largest population in the world with a staggering 1.4 billion people. To put things into perspective, this is over four times the population of the U.S. India’s middle-class population has also grown from just 14% in 2004 to 31% by 2021/2022, according to a survey quoted in the Times of India. This means one out of every three Indians are now middle class, which means they likely have excess income that will spur new business opportunities.
In addition, a recent study by the World Bank reported that India is better positioned to navigate economic headwinds than other major emerging economies. The World Bank has increased its GDP growth forecast for India to 6.9%, up from 6.5% predicted previously.
Therefore, in this article, I will outline my top two favorite stocks based in India; let’s dive in.
1. Zomato Ltd
Zomato Ltd (BOM:543320, Financial) is India’s largest food delivery company. The company was founded in 2010 but didn’t go public until July 2021. Zomato has 207,000 active monthly restaurants on its platform which supply food across the country. This food is delivered by its network of 285,000 monthly active delivery riders. In the fiscal year of 2022, Zomato enabled over half a billion food deliveries and has 17.5 million average monthly transacting users on its platform. Given India’s vast population of over 1 billion and growing middle class, one would expect huge growth potential in the food delivery industry.
Zomato also offers an online reservations platform similar to OpenTable. In addition, the business has continued to scale its B2B “Hyperpure” service, which offers ingredients delivery to restaurants. A major challenge with running a restaurant is optimizing inventory, getting fresh food and obtaining good prices. Restaurants often buy in bulk to save on cost, but then can end up with food waste. Thus, Zomato’s Hyperpure business offers a “farm to fork” model which effectively aims to solve this problem with its next-day delivery of fresh ingredients. The platform is currently operating in 10 cities across India, but given the country has approximately 3.5 million restaurants it has a huge opportunity. Zomato already has existing relationships with a number of restaurants, and thus this service acts as an upsell opportunity.
The company recently acquired delivery startup Blinkit for $568 million, which looks to be part of Zomato’s strategy to also other grocery delivery to consumers.
Financials
The company reported strong financials for the second quarter of its fiscal year 2023. Adjusted revenue was 21.07 billion Indian Rupees ($1.05 billion). This increased by a rapid 48% year over year and 16% sequentially.
This was driven by solid growth of 26.7% in its core delivery business, which increased to ₹15.81 billion. In addition, the company reported solid growth in its B2B Hyperpure business, which increased by a staggering 198% year over year to ₹3.34 billion.
Quick commerce also contributed ₹1.42 billion, as the acquisition of Blinkit closed in August 2022.
Source: Zomato earnings report
All key operating metrics have also reported positive increases. Average monthly transacting customers increased by 12.9% to 17.5 million. Monthly active restaurants also increased by 19.6% to 207,000, which was a strong positive.
Source: Zomato earnings report
Zomato is still struggling with profitability as the company is reinvesting aggressively for growth. The company reported positive adjusted Ebitda of ₹20 million for its core Food Delivery business. This was a vast improvement over the ₹2.29 billion loss reported in the same quarter last year. However, its total losses increased for its B2B Hyperscale business, from ₹300 million to ₹520 million. The positive is that overall adjusted Ebitda has improved from a loss of ₹3.10 billion to a loss of just ₹600 million.
Valuation
Valuing this company is fairly challenging given the lack of earnings. However, according to a valuation model by New York University, the stock had a fair value estimate of ₹34 per share in an average case scenario. In the best case scenario, New York University estimates the stock could have a fair value of ₹89 per share. This doesn’t include the most recent quarterly earnings or the acquisition. The stock is trading at ₹60 per share at the time of writing, making it undervalued given New York University's best case but overvalued based on its average case.
2. Tata Motors Ltd
Tata Motors Ltd (BOM:500570, Financial)(TTM, Financial) is an Indian automotive company that has operations globally - in fact, it's even big enough to have a U.S. listing. The company is part of India’s “Tata Group,” which is one of the largest industrial conglomerates in the country. Its cars include the tiny “Tata Nano,” which was launched in 2008 and sold for just $2,000, making it accessible to almost everyone in India. In 2019, the company launched the Tata Altroz, which is a surprisingly good-looking luxury hatchback.
Tata Motors also owns the iconic British brand Jaguar Land Rover, which it acquired from Ford (F, Financial) in 2008. This brand produces popular vehicles such as the Jaguar XF and the popular Range Rover Sport.
Financials
Tata Motors trades on the New York stock exchange, and thus there is more readily available data in U.S. dollars for the business, which makes for an easier analysis.
For its second quarter of fiscal year 2023, Tata Motors reported $1.84 billion in consolidated revenue, which missed analyst estimates but increased by a solid 16% year over year.
The company reported a solid improvement in operating income. This metric increased from an operating loss of $162 million in the September quarter of 2022 to operating income of $164 million in the most recent quarter.
Tata Motors has $5.948 billion in cash and short term investments on its balance sheet, which is great. However, it should be noted the company does have fairly high total debt of $17.7 billion. About $5.1 billion is current debt due within the next two years. It is not uncommon for automotive manufacturers to have fairly high debt levels, and these are also highly cyclial stocks.
Valuation
Tata Motors trades at a price-sales ratio of 0.5, which is over 95% cheaper than its five-year average.
Guru investors Jim Simons (Trades, Portfolio) of Renaissance Technologies and Sarah Ketterer (Trades, Portfolio) added to their holdings in this stock in the third quarter of 2022, based on their 13F filings. The average price of the stock during the quarter was around $28. This is slightly higher than the $23 per share price at the time of writing.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
Final thoughts
Zomato and Tata Motors are two of the most headline-worthy stocks in India. Zomato is more of a “growth stock” as it has a huge market opportunity but still a long way to go to achieve profitability. Meanwhile, Tata Motors is an established automotive player which owns leading brands and is fine-tuned for the Indian market. I believe both of these stocks are strong ways to play the growth in India’s economy.
