My colleague Matt Cochrane and I did a two-part podcast on Investing in India last month. So it might seem appropriate that I’m looking at HDFC Bank (NYSE: HDB) as my international opportunity today.

After learning more about India, there were a few higher-level takeaways that I observed:

• Decades ago, visionary entrepreneurs formed the companies that quickly rose to prominence. Today, India’s mega-conglomerates — known as its “Nifty 50” largest companies — account for the vast majority of the country’s business profits.
• It’s very risky investing in smaller Indian companies. Not only due to the competitive pressures of going against the conglomerates. But many of them have questionable accounting practices, and run the risk of discrepancies or outright fraud.
• The country as a whole is quite progressive, with federal-level goals that relate to environmental, economic, and social issues. As examples, it has set an ambitious goal of deploying 100 GW of solar power by 2022 and has a federal health insurance safety net that will fully cover half of its 1.3 billion population.

With special attention to that last point, India also needs to increase its tax base that it will use to fund these ambitious endeavors. Its Prime Minister invalidated its old high-denomination 500 and 1,000 rupee paper currencies in 2016 (approximately $7 and $14 in USD) and has been nudging its population to digital banking.

This is exactly where HDFC comes in. As the country’s largest private bank, HDFC is a prime beneficiary of the country’s digital banking movement. India’s rapidly-growing middle class will be bringing in more deposits, while its outsized GDP growth should provide a flood of commercial loans from the companies who are looking to serve that middle class.

India’s nudge toward digital banking worked: more than 90% of HDFC’s transactions now take place on mobile devices. That gives the bank an incredibly low-cost structure — with no tellers and limited physical presence — and yet access to a huge pool of capital to work with.

A compounding machine, HDB has returned more than 3,000% for investors during the past two decades. The stock has taken a breather this year, down 25% in 2020 as the market shows hesitation after the bank’s founder Aditya Puri stepped down from the helm earlier this year. India’s Federal Reserve Bank mandates that private bank CEOs retire once they turn 70, so this was due to a regulatory formality.

But I believe that HDFC will still turn out to be just as attractive of an investment for the next two decades, and that now could be a great opportunity for patient investors to consider starting a long-term position.

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