A Spicy Asian Play

India's tech sector is looking red-hot

Ullal Bhat, the Indian fund adviser for Jardine Fleming International Management, used to feel ignored. At the company's annual meetings with investors in London, the few clients who sought him out usually stuck to questions about India's poverty, bureaucratic corruption, and its obsession with nuclear weapons. But this January's meeting was different. Bhat's four funds, including the New York Stock Exchange-listed Jardine Fleming India, boasted triple-digit returns last year, and the meeting room was packed. "I never felt more popular," says Bhat, who fielded questions about startup companies and India's infotech boom.

India is gaining more attention for several reasons. Its government under Prime Minister Atal Bihari Vajpayee of the Bharatiya Janata Party has been relatively stable, the economy is expected to expand 7% this year, and the rupee has held firm against the dollar. And unlike much of Asia, India's technology sector includes a hugely profitable, export-oriented software industry that is growing at more than 50% a year. But India can be as volatile as any tech stock. The benchmark Bombay Sensex, an index of 30 of India's major corporations, surged 120% from mid-1998 to February, but has since plunged 22% amid the rout of tech stocks in the U.S. Some of the Bombay bourse's 120 tech stocks are down by half.

Most individual foreign investors can't purchase stocks directly in India--New Delhi bars the door to all but institutions. So most U.S. investors have to be satisfied with India funds and four companies whose shares trade as American depositary receipts (table).

With the recent market setback, the open-end Eaton Vance Fund has declined 21.52% so far this year. The three closed-end funds listed in New York--Jardine Fleming India, India Growth, and India Fund--are down as well, although not as much. Like many closed-end funds, they trade at discounts to net asset value--in their case, 33% to 38%.

HUGE PREMIUMS. The funds have similar portfolios. Top holdings include Infosys, a custom software developer; Satyam Computer Services, parent of Internet portal Satyam Infoway (which trades as an ADR); Hindustan Lever, a Unilever subsidiary in consumer products; and media giant Zee Telefilms. The funds are typically tech-heavy, with 30% to 55% of their assets invested in the sector.

Indian ADRs are a fairly new option for American investors. Infosys' ADR, the country's first, began trading in March, 1999. Some Indian ADRs trade at huge premiums above the prices of their underlying shares in Bombay. Take Infosys' ADR. It closed at $203 on the NYSE on Apr. 28. In India, an equivalent investment in Infosys would cost $93. That's because the number of ADRs is limited, and India maintains curbs on the rupee--which prevents Indian shares from leaving the country.

Another 11 Indian companies, primarily in technology and media industries, plan to list ADRs in the U.S. this year. But investing in the funds, which buy the underlying Indian shares without the ADR premiums, may be a cheaper way to get high-tech and emerging market action in a single package.

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