Dear Reader,

It's nearly July.  The weather and grills are heating up, Jimmy Buffett can be heard crooning about lost pepper and salt, well-tended gardens are bearing fruit and vegetables, the seasonal battle between mower and lawn continues unimpeded, and many EB readers and their families have either already ventured to places near and far or plan to do so over the next few weeks.  It's summertime, enjoy!

In this month's Special Report, courtesy of our friends at The Daily Reckoning, James Borick writes about India.  No, not about how well-paying American jobs are being lost to low-cost overseas competition, but rather about investment potential in the budding land of remote call centers, computer programmers, accountants, radiologists, and more.

Whether a country is known for its bar-b-q, shepherds pie, curry, or chow mein, economic achievement universally depends upon a recipe of competition, value, and growth... something India appears to be successfully preparing to serve to itself... as well as to the world.

We hope you enjoy this month's Special Report.

Bon appétit,

Stan Janusz
Founder and Editor
sjanusz@hbbc.org 

Engaging Business PRESENTS: THE BUFFETT OF BOMBAY
by James Boric

I have to say that meeting Mr. Bharat Shah, CEO and Managing Partner at ASK Raymond James, here in Bombay, was the highlight of my trip to India. Dubbed the "Buffett of Bombay" by [EB guest contributor] Dan Denning and I, Mr. Shah makes his living by scouring the market for true value stocks - companies with both a margin of safety and a growing business model. He has a history of being right. From the moment I walked into his office, I could tell that Mr. Shah was a very successful investor.

Before he became the CEO of ASK Raymond James, Mr. Shah helped run Birla Sun Life - where he managed $1.2 billion in assets. And at ASK R.J., he manages nearly $50 million or - as they say here in India - Rs. 250 crore.

There is no doubt that this man knows what he is doing. And he knows how to spot value in the market. With that in mind, my first question was:

"Do you think the Indian market is overvalued, undervalued or properly priced?"

He told me that, as a whole, he felt the Indian market was slightly undervalued - not much, mind you. But with stocks trading for around 11-times earnings, Indian businesses certainly aren't expensive.

(By the way, as a true value investor, Mr. Shah isn't concerned with the price of a company. He determines value by looking at how well a company manages its capital, how well the managers run the business and how the company is valued based on EBITDA [earnings before interest, taxes, depreciation, and amortization] and cash flow).

Not quite content with his answer, I asked Mr. Shah to be a little bit more specific - and name the areas of the market that he felt were most undervalued. I wanted to know where he was investing his own money. He obliged.

You should be looking at the technology services, business services, pharma and specialty manufacturing industries, he told me. These are the areas that will continue to grow as the Indian economy gets stronger. And as more and more government money is spent on improving India's infrastructure, investors should keep an eye on the telecom and construction sectors, as well as the auto business.

The government is spending money on everything from roads, to ports, rails and social infrastructure (education, health care and drinking water). As evidence of the government's intentions, a one-rupee tax was recently added onto every liter of gasoline sold at the pump - which will be used to build new roads. And trust me, every road built here in India will be a huge help. Not only will it encourage more business (by supplying construction jobs and allowing people to travel further to find work), it will also help transport food to the poorer regions of the country where food is currently in short supply.

The retail sector is one of the last government-run sectors in India. But that's expected to change. Look for the new government to open up the sector to both foreign and domestic competition in the next few years. When it does, goods will get cheaper. More jobs will be created (although mom and pop shops will likely suffer) and consumer spending will skyrocket. Right now, India's savings rate is north of 20% and there are over $150 billion sitting in domestic bank accounts.

With the opening of the retail sector, that money will be tapped - sparking a chain reaction in the Indian economy. But before the retail sector is opened up, something has to be done about the enormous taxation the government levies on retail goods. And it will be done. Open any newspaper, and you'll read about the value-added-tax on goods. The idea is to lower taxes and then apply them consistently across the spectrum of retail items. This should encourage Indian consumers to be more like American consumers in their buying habits. Just keep one thing in mind, there isn't a credit bubble here in India because, at the moment, the only lenders are the banks. Indians, themselves, are net savers.

There's something in the air, here in Mumbai, and it's not just the sweet smell of curry. Indians are optimistic. They know they sit on the cusp of becoming a developed nation. They've simply come too far to slip backwards again.

This was great. But what Mr. Shah said next brought a smile to your faithful editor's face.

"If you really want to find value in India right now," Mr. Shah told me, "you shouldn't look to the large blue chip companies - those trading on the Sensex and Nifty (the equivalent of the Dow and the S&P in the States). Rather, the real gems are hiding in the mid and small-cap markets."

There are many smaller Indian companies with cash, growing businesses and competent managers, which are flying under the radar screen. These are the companies you should be looking at.

At this point, I felt like hugging the man. Finally, someone who was seemingly as passionate about the small-cap market as I am! It was a great moment for me. It seems my hunches were right - both about India and its small-cap market. WHOOO HOOOO!

Ok...back to earth now.

Mr. Shah went on to explain that small-cap Indian stocks provide investors with the best chance to get both value and growth in this market. And he made a point that really resonated with me (as I have said the same thing in Penny Stock Fortunes many times)...

"Value without growth isn't value."

That seems so obvious. But it is SO important. If a company isn't growing its business, it isn't worth owning. It made me think...

Had investors followed this kind of logic in the 90s, no one would have lost a dime in the dot-com blowout.

What a trip.

P.S. It bears noting that no one I have talked to, with the exception of Dan [Denning's] Daily Reckoning friend, Mr. Pinank, thinks the Indian economy is going to be anything but strong over the next decade.