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HDFC Bank Limited (ADR) (HDB), Infosys Ltd ADR (INFY) – Investing in Emerging Markets: India

Investor confidence in the Indian growth story may have dwindled over the last year, but the World Bank estimates that India’s GDP will grow at around 6.7% during 2013. That’s still a healthy growth rate, especially since most emerging nations, including Brazil, are struggling with their slowing economies. But since its widening trade deficit has sent the Indian rupee plummeting, there are only a few industries that present solid growth prospects.

Banking Industry

HDFC Bank Limited (ADR) (NYSE:HDB)
HDFC Bank Limited (ADR) (NYSE:HDB) is one of the most resilient and robust financial institutions in the country. It provides a diverse range of banking services in India, Bahrain and Hong Kong and operates with 40% better net margins than the industry. As a result of dipping non-performing assets, improving margins and rising deposits, the bank recently reported its 53rd quarter of 30%-plus growth.

However, that was just hindsight. The Reserve Bank of India has been cutting down interest rates as core inflation is easing. But the depreciating Indian rupee is adding inflationary pressures, so the RBI will most likely refrain from cutting rates further. This has sent a shockwave throughout the Indian banking sector, causing shares of HDFC Bank Limited (ADR) (NYSE:HDB) to plunge by nearly 15% over the last month.

But I believe that this is just a temporary decline. The Indian government recently hiked its import duty on physical gold for the third time, which finally seems to have controlled its rising gold imports. This points towards an appreciating rupee, which in turn points towards declining inflationary pressures and further rate cuts. In my opinion, investors should capitalize on the recent dip in HDFC Bank Limited (ADR) (NYSE:HDB), and dollar cost average their entries.

The bank has grown at a staggering rate, and is estimated to record EPS growth of 30% over the next five years.

IT Industry

Meanwhile export companies like Infosys Ltd ADR (NYSE:INFY) stand to benefit here. The company provides consultancy and software solutions to enterprises across the globe and operates with an international market share of 6.9%. The good thing is that it generates 60% of its revenues from North America, and the weakening Indian rupee expands its cash inflows.

But on the downside, Infosys Ltd ADR (NYSE:INFY) has been recording a streak of poor financials. Its lack of innovation has left Infosys Ltd ADR (NYSE:INFY) with a stagnant market share, while its closest peer, Tata Consultancy Services Limited (NSE:TCS), has managed to capture 10.7% of the international market, an improvement of 140 bps YoY.

As a result, shares of Infosys Ltd ADR (NYSE:INFY) have plummeted by 48% over the last five years, and analysts estimate its annual EPS to largely remain flat over the next year.

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