Singh’s Win to Boost ‘Seductive’ India, Duggal Says

July 23 (Bloomberg) -- Sanjiv Duggal, who manages the world’s largest India fund, said investors should buy the nation’s stocks as Prime Minister Manmohan Singh’s re-election allows him to push asset sales and ease investment rules.

Stocks will benefit as the government implements policies to lure foreign investment and boost growth in Asia’s third- largest economy, said Duggal, Singapore-based investment director at HSBC Holdings Plc’s Halbis Capital Management.

“India is a seductive investment story,” Duggal, 45, who oversees about $6 billion in Indian equities, said in a phone interview from London. “Given that we have a stable government, one could argue that India’s trading multiple could be higher.”

The Bombay Stock Exchange’s Sensitive Index, or Sensex, has surged 82 percent from this year’s low on March 9, outperforming the BRIC countries that include Brazil, Russia and China. Singh’s election victory in May reduced his dependence on allies such as the communist parties, who opposed asset sales and looser foreign investment policies during his first term.

Duggal’s Luxembourg-based $4.6 billion Indian Equity Fund, which targets overseas investors, rose 78 percent this year, the best-performing Indian equity fund with assets of more than $500 million, data compiled by Bloomberg show.

Duggal predicted in March that stocks would rally from a near three-year low on cheaper valuations and government stimulus plans, allowing him to recoup losses after the fund dropped 70 percent in 2008.

Positioned for Growth

“We positioned ourselves for growth and that showed in our performance,” Duggal said yesterday. “The market had built in a worst-case scenario for election results, which turned out very different and acted as a catalyst for the market rally.”

The fund holds more shares of materials producers and carmakers than represented in its benchmark S&P/IFC Emerging Markets Investable India Index. It also owns more real estate and health-care companies compared with the benchmark, he said.

His top 10 investments include Maruti Suzuki India Ltd., the nation’s largest carmaker, and DLF Ltd., the biggest developer. Duggal added Unitech Ltd. and Indiabulls Real Estate Ltd. among developers as concerns about their ability to repay debt eased after raising funds, he said.

Indiabulls, Unitech

Indiabulls and Unitech led Indian companies in raising 55 billion rupees ($1.1 billion) from the sale of shares to large investors in the second quarter, the most since a record 130 billion rupees was raised in the three months ended Dec. 31, 2007, data compiled by Bloomberg show. His fund is “underweight” on consumer, telecommunications, financial, energy and utility stocks, in contrast to the benchmark index.

Brian Jackson, a senior emerging-markets strategist at Royal Bank of Canada, said this week the rally has made Indian stocks expensive. The Sensex now trades at 17 times reported earnings, twice the 8.8 times in March, data compiled by Bloomberg show.

“Although the election results have improved the prospects for reform to some degree, we believe this positive surprise is now priced into Indian asset valuations and are wary of claims the improved political situation justifies further near-term gains,” Jackson said at a conference in Taipei on July 21.

Indian stocks fell the most in six months on July 6 after the government forecast the widest budget deficit in 16 years, increasing the risk of a cut in sovereign ratings.

‘Realistic’ Budget

The government plans to borrow a record 4.51 trillion rupees to fund spending on roads, power and aid for the poor, while it was expected to raise foreign direct investment limits in banks and insurers, Care Ratings said. The Sensex has since risen 5.7 percent.

“The budget was a more realistic one, though it didn’t touch on things the market was looking for,” says Duggal. “Still, we were fine with the budget, so when markets corrected post the event, we told investors it’s an opportunity to add equities.”

Singh’s government is focused on reviving consumer and investment demand as the nation’s $1.2 trillion economy, pummeled by the global recession, grew 6.7 percent in the year ended March, the weakest pace since 2003.

“If the government can push through reforms, then we would be pretty happy to buy the markets and use dips to increase our exposure,” Duggal said. “The platform is there to deliver a good story.”

Valuations

Valuations of Indian equities are in line with the 10-year average and are lower than those in the past five years, Duggal said. Indian stocks are also trading at half the 36 multiple China’s benchmark Shanghai Composite is valued at, according to data compiled by Bloomberg.

Duggal expects India’s corporate earnings to increase between 15 and 20 percent for the year ending March 2011 even as profit rises less than 10 percent this year, he said. He also expects the rupee to appreciate, without giving a forecast.

“India will remain one of the fastest-growing economies,” Duggal said. “If India does what China has done, then you really have to be invested in India.”