India recently regained its position as the fastest growing economy in the world outshining China. The Indian GDP grew at 7.2% year over year in the October-December 2017 quarter fueled by strong performance in the manufacturing and services sectors. This is the highest quarterly growth recorded since July-September quarter of 2016. It also surpassed the street estimate of 6.9%. Meanwhile, China's GDP grew at 6.8%.
India is likely to become the fifth largest economy in the world in 2018. The country has a massive population of which 70% are below the age of 35 and are highly tech savvy. Consequently, the potential growth prospects of the U.S. tech companies are very high as these command strong presence in India.
Economic Reforms Pay-Off
Prime Minister Narendra Modi's administration has undertaken several administrative reforms in the last four years. Initially, these reforms, especially demonetization and imposition of GST (Goods and Services Tax) resulted in economic fluctuations in last two to three quarters. However, all those reforms have finally started to yield results.
During the December quarter, the gross valued added (GVA) for manufacturing grew at 8.9% compared with 6.9% in the previous quarter. The agricultural sector GVA grew at 4.1% compared with 2.7% in the previous quarter.
The construction sector recorded growth of 6.8% outpacing previous quarter's growth of 2.8%. The services segment including financial services grew at rate of 6.7% from 6.4% in previous quarter. Moreover, infrastructure output grew 6.7% year over year in January 2018.
Momentum Likely to Continue
Notably, in November 2017, the government of India received a shot in the arm, as the country for the first time secured a place in the top 100 of the World Bank's Ease of Doing Business (EDB) global rankings. According to the World Bank, between Jun 2, 2016 and Jun 1, 2017, India improved in nine out of 10 categories in making processes easy for doing business.
According to the World Bank's Global Economic Prospects in January 2018, Indian economy is likely to grow at 7.3% in 2018. The country is going to register higher growth rate than other major emerging market economies over the next decade. The World Bank stated strong private consumption and services are expected to continue to support economic activity.
In February 2018, Moody's Investors Service has projected India's GDP growth rate at 7.6% for 2018 and 7.5% for 2019. In November 2017, Moody's Investors Service upgraded India's sovereign bond rating for the first time in nearly 14 years. The rating agency was optimistic about structural reforms undertaken by the Modi administration is likely to boost growth and reduce the debt burden. Moody's lifted India's rating to Baa2 from Baa3 and changed its rating outlook to stable from positive as "risks to its credit profile were broadly balanced".
Moreover, in its World Economic Outlook Update in October 2017, the IMF (International Monetary Fund) retained India's growth projections at 7.4 per cent for the next financial year (2018-19). Growth is anticipated to moderate gradually in China but will pick up in India, and remain broadly stable in the Asean-5 region.
Why Tech Stocks?
Currently, India is home to a young and tech savvy population which represents strong growth prospects for tech majors. These "millennials" are the key drivers for growth of Internet-based applications, e-commerce and mobile-transaction related software.
Notably, India has a population of 1.234 billion. The millennials have a strong appetite for new technologies. As this group will comprise 75% of the workforce by 2025, India surely emerges as a long-term investment bet for tech giants.
In December 2017, per a report by National Association of Software and Services Companies (NASSCOM), the market size of Internet industry in India is likely to reach $250 billion by 2020, growing to 7.5% per cent of its gross domestic product (GDP). The number of Internet users in India is expected to reach 730 million by 2020, supported by fast adoption of digital technology.
The public cloud services market in India is slated to grow 35.9% to reach $1.3 billion according to IT consultancy, Gartner in February 2017. Increased penetration of Internet (including in rural areas) and rapid emergence of e-commerce are the primary catalysts for continued growth of data center co-location and hosting market in India.
According to Gartner, the Indian Healthcare Information Technology market is valued at $1 billion currently and is expected to grow 1.5 times by 2020. India's business to business (B2B) e-commerce market is expected to reach $700 billion by 2020 while the business to consumer (B2C) e-commerce market is expected to reach $102 billion by 2020.
Strong Telecom Advancement in India
India is currently the second-largest telecommunication market and has the third-highest number of Internet users in the world, according to the Ericsson Mobility Report in November 2017. Data usage on Indian telecom operators' networks doubled in six months to 359 petabytes or 3.7 million gigabytes per month. The share of 4G LTE data usage was 80% at the end of 2017.
According to the Ericsson Mobility Report, smartphone subscriptions in India is expected to increase to 810 million users by 2021, while the total smartphone traffic is anticipated to grow to 4.2 Exabytes per month by the same year.
Indian telecommunication companies will be investing $20 billion over the next two years for expansion of network and operations. The telecom industry has attracted FDI (foreign direct investment) worth $24.033 billion between April 2000 and June 2017, according to the data released by Department of Industrial Policy and Promotion (DIPP).
Our Top Pick
India has exhibited tremendous resilience in times of global uncertainty. Improving current account deficit, a recovery in private investment, introduction of the GST, and a stable monetary policy are major positives for the economy.
Given India's significantly young population and vast scope for expansion in tech related areas, key companies in this domain enjoy strong business prospects. Here we offer four stocks to watch out for from the information technology sector as they have strong business interest in India. Each of these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 (Strong Buy) Rank stocks here .
Microsoft Corp.MSFT : The company has a projected long-term (three-five years) growth potential of 11.88% and dividend yield of 1.81%. The Zacks Consensus Estimate for the current year has improved by 7.7% over the last 60 days. At present more than 90% desktops utilized in India are running on various versions of Windows Operating systems (OS). The Windows Mobile OS is currently has a little less than 20% market share in India.
Intel Corp.INTC : The company has a projected long-term (three-five years) growth potential of 8.42% and dividend yield of 2.45%. The Zacks Consensus Estimate for the current year has improved by 6.7% over the last 60 days. The microprocessors and semiconductor chipset giant has invested $2 billion in India till 2016. It will invest another $0.17 billion to create more than 3,000 jobs in its R&D facilities.
Cisco Systems Inc.CSCO : The company has a projected long-term (three-five years) growth potential of 6.40% and dividend yield of 2.64%. The Zacks Consensus Estimate for the current year has improved by 4.1% over the last 60 days. With more than $1 billion in revenues already, India is poised to become one of the top four markets for Cisco in the next few years on the back of strong growth in government and enterprise business. The company is the market leader in networking router and Ethernet switches in India.
HP Inc.HPQ : The company has a projected long-term (three-five years) growth potential of 5.96% and dividend yield of 2.36%. The Zacks Consensus Estimate for the current year has improved by 100% over the last 60 days. HP is currently the market leader commanding over 32% of India's personal computer market, which includes laptops and desktops.
Is the ball set to roll in favor of India as the country's ties with the United States mature under President Donald Trump? The answer is possibly yes. The relationship between the two countries has witnessed considerable ups and downs over last six decades. However, a tightening of relations with India, which was initiated during the Barack Obama administration, is likely to be cemented under Trump. U.S. tech stocks are likely to benefit the most from the changed landscape.
The Hottest Tech Mega-Trend of All
Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
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