Citi: India Equity Strategy: Is Rising FDI Bad for the Equity Investor?

India Equity Strategy
Is Rising FDI Bad for the Equity Investor?
 FDI is good, but for equity investors? — Rising FDI has been great for India,
bringing in needed capital, lending resilience to the currency and boosting growth.
But going forward, will FDI be good for equity markets/investors? Maybe not,
because FDI/foreign companies are a) capturing a larger part of India’s economic
growth, but are not listed; b) structurally raising competition for Indian companies
– hurting returns; and c) while a few are listed, investors risk ‘other
priority/compulsions’ (including Royalty), a potential investment overhang. FDI is
good but possibly better for the economy than the equity investor.
 FDI, and foreign controlled investments, are now huge — FDI is big: a) $37bn in
FY10 (9x the FY00 level); b) cumulatively, about $166bn (approx. 2x net FII
flows); c) market value wise, we estimate it at about $400b (2x FII holding in
India; and d) Is over 2x money raised from the public markets. FDI’s growth
trajectory should sustain but could well leave less for equity market investors.
 FDI inroads into markets are visible, and rising — India is probably not unique in
this, but FDI-backed market shares are significant; 4-wheelers (85%+ market
share), consumer durables (80%+), & cement (25%+). And rising
project/subsidiary levels (real estate, capital goods), through acquisitions
(mining/metals, pharmaceuticals) and offices/work forces (IT, BPOs). But is there
life/growth without FDI? ‘New private banks’ experience (restricted FDI but strong
growth/valuations) suggests less FDI, more FII, possibly best for equity market.
 Indian businesses/investors will share ‘less’ of India’s growing economic pie: FDI
will grow India’s economic pie, but a) India’s equity market will likely capture less
of it: foreign business will (Mcap/GDP goes down?) b) Offshore forays by Indian
companies should continue as their home turf gets crowded. c) A few foreign cos
with large India investments will be a material way to play the India equity story.