The surge in India’s internet stocks beat bigger Chinese rivals, widening the gap

For Indian digital tech stocks, frothy valuations have been a concern since their debut.

India’s consumer tech stocks are in the lurch this year, narrowly beating their biggest rivals in China and widening the divergence between two of the world’s biggest stock markets.

An equally weighted custom index of India’s top five internet stocks, including Paytm One’s parent company 97 Communications Ltd. and Zomato Ltd., rose more than 20% in 2023, buoyed by companies’ focus on profitability and a buoyant economy. That compares with a lackluster performance among Chinese tech giants, whose stock prices languish below their January highs.

India’s outperformance highlights a broader shift as global money managers seek opportunities outside of China. Though dwarfed in terms of market capitalization and revenues, Indian companies are attracting investors given the nation’s growth potential and favorable ties to the West. That’s because Chinese growth stocks are lagging behind the global tech boom amid geopolitical and regulatory risks.

“Investors are turning to India as it remains one of the best consumer stories in Asia,” according to Rajat Agarwal, Asian equity strategist at Societe Generale SA. India is still an underpenetrated market for digital technology and “there is definitely a long growth trail ahead,” said Agarwal.

India’s consumer tech stocks are recovering after a weak 2022, as Federal Reserve tightening and global recession concerns squeezed the fledgling sector. Given the renewed focus on profitability, One 97 Communications gained nearly 60% in 2023. Food delivery platform Zomato was up 26%.

It’s a bleaker picture for China, where investors see little reason to be optimistic as the reopening boom crackles and tensions with the US remain high. A Hang Seng gauge of Chinese tech stocks are down 6.2% this year through Monday, while JD.com Inc. and Meituan have lost at least a quarter of their market capitalization. More importantly, investors say the heyday of China’s unfettered tech growth is over as policymakers curb private sector expansion.

Indeed, the sharp declines in Chinese equities have made valuations attractive to some investors. Members of the Hang Seng Tech Index are trading at 21.4 times their forward earnings, below their three-year average of 29.2. Hopes for a turnaround remain on bets that the government will roll out fresh stimulus, while a string of stronger-than-expected sales data is also positive.

For Indian digital tech stocks, frothy valuations have been a concern since their debut. On Monday, Macquarie Group downgraded Paytm to neutral, citing regulatory and competition risks.

“In my view, China’s internet sector remains significantly undervalued, despite the improving earnings outlook. I see an opportunity here,” said Jian Shi Cortesi, fund manager at Zurich-based GAM Investment Management.

While the market capitalization of the Indian stock exchange is barely a third of the nearly $10 trillion Chinese stock market, the South Asian economy is riding a boom like never before. Its population is now the largest in the world, equity benchmarks are at record highs, and global companies like Tesla Inc. are mulling investments. All of this keeps Indian stocks continuing to shine, analysts say.

For Sol Ahn, senior investment analyst at Mirae Asset Global Invest HK Ltd., internet companies in both countries offer attractive prospects. However, while the industry growth rate for Chinese technology companies may slow down, Indian companies offer promising prospects. “We have seen several online companies go public in India since 2021 and we expect to see more attractive investment opportunities with more listed companies in the coming years,” she said.

(Except for the title, this story has not been edited by NDTV staff and is published from a syndicated feed.)