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Morgan Stanley underlines India re-rating triggers

NetScribes/Salil Panchal

Morgan Stanley Dean Witter (MSDW) has identified the triggers that could change the weightage India enjoys on its widely-tracked MSCI EM (Morgan Stanley Composite Index for emerging markets).

MSDW's latest country report on India, published from Singapore, says that the relative RoEs (returns on equity) across key industries have improved and the software sector has grown commendably. What India needs now is greater liquidity and a more proactive privatisation programme to prompt a relook at its standing.

"We think there will be a positive surprise in each of these triggers. Progress in privatisation will be a surprise, given the high level of scepticism on the government's ability and willingness to sell," says Ridham Desai, head of the India Strategy group at MSDW. "Over the next 6-12 months, privatisation will become an important factor in India's valuation story."

According to the report, while the average RoE of the Asia-Pacific emerging markets has been extremely volatile in the past one and a half years, India's RoE has held steady.

The RoE of the Asia-Pacific emerging markets has moved from 3 per cent in March 1999, through -2.5 per cent in June 1999, to 12 per cent in September 2000. In the same period, the MSCI India RoE has remained fairly stable - from 17.5 per cent, through 16.5 per cent, to 18 per cent at present. MSDW reckons that the Indian software industry's growth over the period has contributed to the stability.

The report expects the Indian software industry to grow even faster. It has argued that the "relative insulation" Indian players enjoy can set them apart from overseas players on the earnings front. "With managements expressing confidence about the next few quarters (in terms of aggressive manpower hiring), the sector is poised for growth," it says.

Interestingly, the report points out that the correlation between the Indian software stocks' price performance and the Nasdaq has dipped in recent weeks, and will slide further.

Looking ahead, MSDW expects a re-rating for the country, provided there is strong government action on the privatisation front, continued growth in software and improved liquidity.

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