5 Favorite Indian Stocks of Hedge Funds

The Indian economy appears as a bright spot in a world where all major economies such as Europe, USA, Japan and China are facing serious issues. It is the only major economy where GDP is growing at 7+ percent and this has a good chance to accelerate further. The government has passed some major structural reforms and policies such as the Goods and Service Tax Reforms (GST) and JAM (Jan Dhan Yojana, Aadhar and Mobile). The government is also making serious efforts to reduce red tape and improve the ease in doing business through “Make in India” initiative. Foreign investors such as Rosneft, Softbank etc. are becoming increasingly confident about India and making large multi billion dollar investments. Here are few Indian stocks that are hedge funds’ favorite. Investors can look at buying these stocks to take advantage of the growing Indian economy.

Imitating hedge funds and other institutional investors can help identify some of the most profitable stocks on the market. However, our extensive research that covered the period between 1999 and 2012, showed that the best approach is to follow these investors into their small-cap stocks. Our backtests showed that the 15 most popular small-cap stocks among hedge funds managed to generate a monthly alpha of 81 basis points, versus an alpha of 0.7 percentage points posted by their top 50 large-cap picks (see more details).

Let’s start with HDFC Bank Limited (ADR) (NYSE:HDB), in which the number of funds from our database long its stock increase to 23 from 21 during the second quarter, while the total value of their holdings went up by 6% to $1.61 billion. HDFC, which is the second largest private bank in India, is considered to be one of the safest bets in the Indian market due to the high quality of its management, stellar track record and leading position in the financial sector. Even as most banks in India have been hurt due to the rising NPAs, HDFC Bank Limited (ADR) (NYSE:HDB) has maintained its pristine balance sheet due to prudent lending practices. The stock has returned more than 13.90% year-to-date, outperforming the S&P 500 index which has gained around 3.80%.

Infosys Ltd ADR (NYSE:INFY), which is India’s second-largest software services company, saw 23 funds tracked by Insider Monkey holding shares at the end of June, up by two over the quarter. The company has shown a turnaround in the last couple of years under new CEO Vishal Sikka and has started to show faster growth by focusing more on digital services. However, the stock has lost almost 8% in the last three months due to poor quarterly results. Though revenue in the first quarter of fiscal 2017 increased 17% year-on-year to $2.5 billion, Infosys Ltd ADR (NYSE:INFY) disappointed investors by reducing full-year revenue growth guidance to 10.5%-12%.

 

MakeMyTrip Limited (NASDAQ:MMYT) is among the largest online travel agencies in India today. During the second quarter, the number of funds from our database bullish on the company inched down by one to 13 funds that held roughly 20% of the company’s stock at the end of June. MakeMyTrip is set to benefit from the rising per capita income, smartphone penetration and a fast-growing tourism market in India. The stock is currently trading at 14% below its 52-week high price of more than $23, though it has gained more than 20% over the last year. The company has a market value of just $861 million when compared to Priceline’s (NASDAQ:PCLN) market value of $71 billion, which is quite insignificant considering India’s strong growth story. Its attractive valuation makes it an investment case, as is evident from Cleartrip’srecent investment in MMT. MakeMyTrip Limited (NASDAQ:MMYT) achieved more than 450% annual transaction growth in their online hotels business. The company generated revenues of $121 million in the quarter ended June 2016, which was an increase of more than 29% over the year. Most analyst have rated the stock as a ‘Hold’.

 

ICICI Bank Ltd (ADR) (NYSE:IBN)’s stock performance has recently improved with the stock returning over 9% in the last six months. ICICI Bank Ltd (ADR) (NYSE:IBN)’s credit profile and financial performance metrics are getting better, with the advancement of the Indian economy. It is growing not only by increasing its physical distribution network but also through online channels. Though IBN’s NPA levels rose this quarter, it remains far below the levels shown by other public sector banks in India. Both the value of holdings and the number of fund houses we track having a position in IBN went down during the second quarter of 2016. Banking will be one of the key sectors to benefit from India’s higher GDP growth and ICICI Bank Ltd (ADR) (NYSE:IBN) is well positioned to leverage from this growth, due to its leadership in this sector. The bank has seen its stock price decline by more than 23% in the last two years due to deteriorating asset quality (the gross NPA ratio rose to 5.21% in fiscal 2016 from 2.56% in fiscal 2014) and stock valuation is not cheap, with a P/E of 23x. A total of 20 funds from our database held shares of the company at the end of June, down from 22 funds a quarter earlier, while the aggregate value of their holdings declined by 13% on the quarter to $332 million.

 

Videocon d2h Ltd – ADR (NASDAQ:VDTH) provides direct to home services (D2H) to subscribers in India. It was the first Indian media company to list on the NASDAQ, in April 2016. Videocon d2h Ltd – ADR (NASDAQ:VDTH) is the fastest growing DTH service provider in India and should benefit from the long term secular growth of the Indian market, as new regulations makes digitization of TV services mandatory in the country. The company’s revenues from operations has also improved over the years. In its most recent quarter, the company reported a subscriber base of 12.3 million, which is up more by more than 140% from 5.0 million in 2012. In the first quarter of fiscal 2017, its average revenue per subscriber also increased by 3.7% to INR 226 ($3.39) sequentially. The company is in talks to merge with Dish TV, which is India’s largest D2H player, with a market share of 26%. This transaction could consolidate the D2H segment leading to better margins for the entire industry. At the end of June, approximately 28% of Videocon’s total outstanding stock was held by 14 funds we track at Insider Monkey.

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