BlackRock Inc. (BLK), the world’s largest money manager, has emerged as one of the biggest winners from Indian Prime Minister Narendra Modi’s plans to revive the country’s economic expansion.
The DSP BlackRock India T.I.G.E.R. Fund, designed to buy stocks that benefit most from growth-boosting policies, returned 40 percent in the three months through June 18, the best advance among 64 Indian equity funds tracked by Bloomberg. It lost 16 percent during the three years ended Dec. 31, the steepest drop, as policy gridlock under the previous government stalled more than $255 billion of projects.
India’s utilities, banks and builders are leading gains in the $1.5 trillion stock market as investors bet Modi will clear the investment backlog after taking power last month. Rohit Singhania, who has run the BlackRock fund since 2010, says the rally will probably extend as Modi’s policies lead to higher corporate earnings and fewer bad loans at lenders.
“There is a lot of low-hanging fruit that the current Modi government can rectify, and companies will see the benefits,” Singhania, 37, whose fund has about 12.8 billion rupees ($213 million) of assets, said in a June 12 interview. “Valuations are still not expensive.”
The fund’s top holdings at the end of May included ICICI Bank Ltd. (ICICIBC), the nation’s No. 1 non-state lender, and Larsen & Toubro Ltd. (LT), the biggest engineering company. Larsen is the best performer on the benchmark S&P BSE Sensex (SENSEX) this year with a 55 percent rally, while ICICI has climbed 28 percent.
Singhania runs T.I.G.E.R., which stands for The Infrastructure Growth and Economic Reforms fund, for DSP BlackRock Investment Managers Pvt., a joint venture between India’s DSP Group and New York-based BlackRock, which oversees about $4.3 trillion worldwide. The fund’s 44 percent gain this year through June 17 is the best among BlackRock’s 14 India funds and compares with a 0.2 percent return for the U.K.- domiciled BlackRock Emerging Markets fund.
The election victory by Modi’s Bharatiya Janata Party, India’s biggest in three decades, propelled the Sensex to an all-time high this month, as foreign investors bought about $10 billion of shares in 2014 and domestic mutual funds attracted the most inflows in five years in May. The 30-stock gauge fell 0.4 percent to 25,105.51 at the close today, still within 1.9 percent of its record on June 10.
Investors are backing Modi after he oversaw annual economic growth of 10 percent as the head of India’s Gujarat state since 2001. Singhania says he can repeat that success nationwide, where the economic expansion fell to a decade-low of 4.5 percent in the year ended March 2013.
The surge in valuations for companies that benefit most from infrastructure spending and economic growth may limit further gains, according to Dalton Capital Advisors India Pvt.
The S&P BSE India Capital Goods Index trades at 37 times 12-month reported earnings, more than twice as high as the Sensex, according to data compiled by Bloomberg. The S&P BSE Bankex gauge of lenders has a price-to-book ratio of 2.1, the most expensive level since February 2012.
“Investors sitting on profits will be tempted to take some money off the table,” U.R. Bhat, a managing director at Dalton Capital Advisors India, a unit of U.K.-based Dalton Strategic Partnership LLP that has $2 billion of assets, said by phone from Mumbai on June 18.
Factors outside Modi’s control, including energy prices, also pose a risk to the rally, said Singhania. Oil climbed to a nine-month high yesterday and monsoon rainfall is forecast to be below normal this year, threatening to stoke Asia’s second-fastest inflation rate.
Stocks still have room to rise as investors begin to price in the companies’ improving long-term earnings prospects under the new government, Singhania said. Analysts have lifted their Bankex index profit forecasts for the next fiscal year by 6 percent since April while raising their estimates for the following year by about 26 percent, data compiled by Bloomberg show.
“Some stocks have doubled due to euphoria, and some have doubled because they can execute and they can show the kind of earnings down the line,” Singhania said. He anticipates shares of utilities, power-equipment producers, road builders, energy stocks and port companies will outperform the broader market.
Modi’s majority government will lead to a faster approval process for capital spending, according to Singhania. Investment by private companies as a percentage of gross domestic product probably declined to 9.2 percent in the year ended March 2013, the lowest level in at least nine years, the government said.
Reliance Industries Ltd. (RIL), India’s third-biggest company by market value, will spend 1.8 trillion rupees ($30 billion) over three years to expand in its telecommunications, oil and gas businesses, up from a planned 1.5 trillion rupees last year, Chairman Mukesh Ambani said in Mumbai on June 18.
The T.I.G.E.R fund had 2.8 percent of its assets in shares of Reliance as of May 31, data compiled by Bloomberg show. The stock has climbed 16 percent this year.
“Modi knows what needs to be done,” Singhania said. “We need more roads, power capacity, and there is a huge opportunity for these companies over the next 10 years.”
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