CLSA - India not overvalued

CLSA, the Asia-brokerage arm of French lender Credit Agricole, said Indian stocks were not overvalued due to strong economic fundamentals and relatively low political risk, especially compared with its neighbours. But slow-paced infrastructure development and possible unstable coalition politics were risks ahead for India, Rob Morrison, chairman and chief executive officer of CLSA, told media in an interview on Thursday.

"India does not look over-valued. It looks very attractive as against the Chinese companies ... When we look at Indian stocks, the prices are much more attractive," he said.

Helped by foreign inflows India's main 30-share BSE index has risen 43.5 per cent this year to Thursday's close, sparking fears stocks were now overvalued.

Foreigners have so far poured in $16.8 billion in 2007, already higher than a record $10.7 billion in 2005. India has a stock price ratio of around 19 times earnings, compared with a ratio of 50-60 times earnings in China.

Morrison said Indian earnings growth in the second quarter was still high at 25-27 percent, and returns on assets were at 25 percent. He said CLSA saw investment opportunities in many sectors in India, including property, power companies and consumer banking.

In October, India's stock market regulator tightened investment rules for unregistered foreigners, clamping down on issuance of indirect investment notes - so-called participatory notes (P-notes) - to stem inflows of anonymous money.

Morrison said he expected the curbs to lower liquidity levels in the short term, but he saw the move as positive in the medium term by making investment in stocks more transparent. CLSA expected to increase private equity investment in Asia to $3 billion in 2008 from $1.8 billion this year.

India currently accounts from some $100 million in CLSA's private equity investments but the company wants that to rise. CLSA plans to renew a two-year contract with the merchant banking arm of leading lender State Bank of India, he said.

Morrison said he feared an asset bubble in Asia and a knock-on effect from a likely US economic downturn, but added India was better placed than many Asian nations to survive these problems because it relied more on domestic demand than exports.

POLITICAL WORRIES?

Indian stocks were briefly hit this year by political uncertainty over a nuclear deal with the United States that was opposed by the government's communist party allies.

The crisis threatened snap elections. Violent protests by poor farmers over industrial development plans, the closure of large retail stores in north India after demonstrations and go slow on the nuclear deal did not mean there was a wider backlash against reforms, he said.

But unstable coalition politics were a risk, especially as India needs infrastructure and education reforms if bottlenecks are not to shackle the booming economy. "I think it (coalition politics) does slow reforms," he said.

But he said India was still stable relative to its neighbours like Thailand and Pakistan. "When a government is elected in India it stays," he said. N Krishnan, head of research for CLSA India said that political uncertainity this year had weakened the government's ability to implement reforms.

"We don't see a dramatic reverse of economic reform but don't want an extended period of political uncertainty," he said. "With infrastructure, there isn't too much room for a delay."