India is seeing a multidecade growth surge. Here's how you can invest in it.

By Philip van Doorn

Three money managers name their favorite stocks in India

If you would like to have investment exposure to a tremendous emerging market with good prospects for rapid growth over coming decades, you should look at India.

There are many exchange-traded funds available offering different types of exposure to India. Some are listed below. For investors looking to hold individual stocks, three portfolio managers named favorite companies during interviews with MarketWatch.

Over recent decades, China has dominated discussions of emerging markets, for good reason. But when you factor in an aging and shrinking population, slowing economic growth, the difficulties in obtaining information about local companies and continuing geopolitical tension, it is time for investors to expand their search to other developing countries, and India is the next largest among that group.

India is the fifth-largest economy, according to the World Bank. Here are the largest 10 economies by estimated gross domestic product in 2022:

   Country                    Estimated 2022 GDP (millions)  Estimated 2022 GDP growth rate  Estimated 2022 population 
   U.S.                                         $25,462,700                            2.1%                333,287,557 
   China                                        $17,963,171                            3.0%              1,412,175,000 
   Japan                                         $4,231,141                            1.0%                125,124,989 
   Germany                                       $4,072,192                            1.8%                 84,079,811 
   India                                         $3,385,090                            7.0%              1,417,173,173 
   U.K.                                          $3,070,668                            4.1%                 66,971,411 
   France                                        $2,782,905                            2.6%                 67,935,660 
   Russian Federation                            $2,240,422                           -2.1%                143,555,736 
   Canada                                        $2,139,840                            3.4%                 38,929,902 
   Italy                                         $2,010,432                            3.7%                 58,856,847 
                                                                                               Data source: World Bank 

Leaving the 10 largest economies in the same order, here are the projected compound annual growth rates for populations for various periods, based on World Bank projections:

   Country                    Projected population CAGR, 2022-2030  Projected population CAGR, 2030-2040  Projected population CAGR, 2040-2050  Projected population CAGR, 2022-2050 
   U.S.                                                       0.5%                                  0.4%                                  0.2%                                  0.4% 
   China                                                     -0.1%                                 -0.3%                                 -0.5%                                 -0.3% 
   Japan                                                     -0.6%                                 -0.7%                                 -0.6%                                 -0.6% 
   Germany                                                   -0.1%                                 -0.2%                                 -0.3%                                 -0.2% 
   India                                                      0.8%                                  0.6%                                  0.4%                                  0.6% 
   U.K.                                                       0.3%                                  0.2%                                  0.1%                                  0.2% 
   France                                                     0.1%                                  0.0%                                 -0.1%                                  0.0% 
   Russian Federation                                        -0.3%                                 -0.3%                                 -0.3%                                 -0.3% 
   Canada                                                     0.8%                                  0.6%                                  0.4%                                  0.6% 
   Italy                                                     -0.3%                                 -0.4%                                 -0.6%                                 -0.5% 
                                                                                                                                                             Data source: World Bank 

In 2022, among the largest 10 economies, India's grew most quickly. And based on the World Bank's population projections, it is tied with Canada for expected population CAGR for the four periods.

India stands out as an emerging market for the size of its economy, its economic growth rate and its projected population growth. Through 2050, five of the 10 largest economies are expected to see their populations decline.

Three professional investors weigh in

Priyanka Agnihotri is based in London and manages the Brown Advisory Sustainable International Leaders Fund BISLX, which holds two Indian stocks: Tata Consultancy Services Ltd. (IN:532540) and HDFC Bank Ltd. (HDB). The ticker for Tata is for the company's shares listed in India on the BSE. The ticker for HDFC is for its American depositary receipts.

"Some of the Indian IT-services companies have executed very well," Agnihotri said, including Tata, which competes with Accenture PLC (ACN) and Cognizant Technology Solutions Corp. (CTSH).

According to Mauricio Abadia of Brandes Investment Partners in San Diego, "market demand for the largest IT companies in India is in the U.S. and Europe. They are not driven by domestic events."

In any emerging market, it is important for investors to get a feel for the quality of a company's management team, Agnihotri said. "The governance piece is very important in emerging markets. The Tata group has a high reputation for being ethical," she said.

HDFC is India's largest private bank, which makes it a growth stock as consumers and businesses move from less efficient government banks. Agnihotri said HDFC had "executed very well" in building its consumer business and had remained "disciplined through multiple credit cycles."

She warned that prices for producers of consumer goods in India were high and said HDFC would be a better way to invest in the country's rising standard of living.

Abhinav Rathee, the lead portfolio manager for C WorldWide's India strategy in Copenhagen, agrees that the country's consumer stocks, as well as Indian-listed subsidiaries of European companies operating there, are expensive. He also favors banks as a play on the strength of consumers and mentioned ICICI Bank Ltd. (IBN) as "a very well run" private bank in India.

Abadia described Indian private banks as "a way to indirectly participate in economic growth at valuations that look favorable." In addition to HDFC, he holds IndusInd Bank Ltd. (IN:532187) within the Brandes Emerging Markets Value Fund BEMIX.

Rathee underscored how important the banking sector is as India modernizes its financial infrastructure. The India Stack is a term used to describe tools that consumers and businesses can use to facilitate banking and borrowing. He described it as "a trinity of bank accounts for everyone, verifiable biometric digital identity and mobile connectivity" that is feeding the country's rapid growth. "By 2017, 1.35 billion Indians had been signed up," he said.

So India's financial structure has leapfrogged even the rapid buildout of its physical infrastructure. "Highway length in India has tripled in 13 years," Rathee said.

Back to IT, Rathee listed companies he favors that "largely cater to Western customers," including Infosys Ltd. (INFY), Wipro (WIT) and Genpact Ltd. (G).

Another area for value in India, Abadia said, is electric utilities. He named NTPC Ltd. (IN:532555) as a way to "get access to a company that is growing, but at value multiples," referring to typically lower price-to-earnings valuations for slower-growing mature companies.

"We think a utility such as this tends to benefit from the energy transition and will continue to participate in economic growth by providing energy around the clock. They will continue to invest to make their plants environmentally friendly," Abadia said.

Growth estimates for the stocks

"A well-run business in India can easily produce [earnings per share compound annual growth rates] of 15% to 17% over time," Rathee said. He also said that because of the trend for efficient deployment of capital by companies in India, its stocks typically trade at higher valuations than those in other emerging markets.

With the India-based companies in the order listed above, here are forward price-to-earnings ratios and projected CAGR for sales and EPS through calendar 2025, based on consensus estimates among analysts polled by FactSet. For reference, weighted growth projections are at the bottom of the table for the iShares MSCI India exchange-traded fund INDA (the largest U.S. exchange-traded fund focused on India, tracking the MSCI India Index XX:935600) and the SPDR S&P 500 ETF Trust SPY.

   Company                           Ticker     Forward P/E  Two-year estimated sales per share CAGR through 2025  Two-year estimated EPS CAGR through 2025 
   Tata Consultancy Services Ltd.   IN:532540          24.9                                                  9.0%                                     11.1% 
   HDFC Bank Ltd. ADR                  HDB             16.9                                                 20.9%                                     17.2% 

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