July 1 (Bloomberg) -- R. Srinivasan, whose SBI Magnum Emerging Businesses Fund has beaten 99 percent of peers in 2011, is buying more shares of Indian consumer goods companies and drugmakers on optimism their earnings will be sheltered from rising borrowing costs.
Srinivasan, whose company is a unit of India’s largest bank, in May raised holdings in Page Industries Ltd., which sells Jockey International Inc.’s undergarments, Jubilant FoodWorks Ltd., a licensee of Domino’s Pizza Inc., and Divi’s Laboratories Ltd., according to Value Research Ltd. His 3.5 billion rupee ($78 million) fund rose 19 percent in the year to yesterday, beating the Bombay Stock Exchange Sensitive Index’s 6.5 percent gain, data compiled by Bloomberg show.
Rising interest rates have dragged the Sensitive Index down 8.1 percent this year. Srinivasan favors consumer goods makers even with valuations at about an 80 percent premium to the stock gauge. Rising salaries may make the nation of 1.2 billion people the fifth-largest consumer market by 2025, Deloitte Touche Tohmatsu said in January.
“Consumer companies have pricing power,” Srinivasan, 40, said in an interview in his Mumbai office. “Valuations are already at a premium to their historical averages for a lot of stocks in the consumer space. Quality, even at a higher price, has outperformed and that is something we’re holding on to.”
Srinivasan’s company, SBI Funds Management Pvt. is a State Bank of India unit that had 417 billion rupees in assets on March 31, making it the nation’s sixth-biggest money manager.
Indian stocks have declined after the central bank raised rates four times this year to tackle rising consumer and food prices. The $1.4 trillion economy expanded 7.8 percent in the three months through March 31, the weakest pace in five quarters.
The Reserve Bank of India Governor Duvvuri Subbarao June 16 said he’s willing to risk a slowdown in growth to curb inflation running at more than twice the rate in the U.S. and almost four times Germany’s. About 33 percent of the companies in the Sensex reported profits that missed analysts’ forecasts in the three months ended in March, compared with less than a quarter that did so a year ago, data compiled by Bloomberg show.
“You’ll see more earnings downgrades,” Srinivasan said. “Inflation is a serious concern but the monetary stance is also tightening in a way that is bound to affect growth. Since the end of last year, most of my portfolios have been defensive and that view continues into the second half as well.”
Indian stocks will underperform in coming months amid uncertainties over policy tightening and the impact on demand, BNP Paribas said June 20. BNP pared its end-2011 estimate for the Sensex to 20,500 from 23,600. The index closed at 18,845.87 yesterday.
The central bank expects the South Asian country to expand at “around 8 percent” in the year through March from 8.5 percent in the previous 12 months. That pace is still the fastest after China among Asia’s biggest economies. The U.S. will grow 2.6 percent in 2011 and the euro region will expand 1.7 percent, according to World Bank estimates.
Retailers of branded foods and clothes, auto-part makers and providers of financial and health-care services are among businesses benefiting from a boom in spending, said Srinivasan.
The Bombay Stock Exchange Fast-Moving Consumer Goods Index of 10 companies trades for 27 times earnings, compared with 15 times for the Sensex. The Bombay Stock Exchange Consumer Durables Index is valued at 19 times.
“While accepting that the consumer sector has very good potential, the question is price,” Sunil Singhania, head of equities at Reliance Capital Asset Management Ltd., India’s biggest money manager with $23 billion in assets, said in an interview at his office in Mumbai on June 27. “Valuations have meant that we don’t have much exposure to that sector.”
Consumer goods and appliances companies accounted for 26 percent of the Emerging Businesses Fund on May 31, followed by finance companies. Among the top holdings, Page has doubled in the past year, Jubilant FoodWorks has more than tripled, Agro Tech Foods Ltd., a producer of branded foods, has climbed 18 percent and Hawkins Cookers Ltd., a maker of kitchen appliances, has rallied 43 percent.
Manappuram General Finance & Leasing Ltd., which provides loan against gold, has rallied 50 percent in the period.
Bharti Airtel Ltd., India’s biggest phone company, is among the biggest three holdings in two other equity funds managed by Srinivasan. The stock has surged 50 percent in the past year.
The fund manager said he’s “underweight” on infrastructure firms, energy companies and developers. The 25-member CNX Infrastructure Index has lost 9.8 percent this year to yesterday, after falling 4 percent in 2010.
“Infrastructure companies are trading at very attractive valuations, but a lot of them have never generated a reasonable return on capital consistently,” he said. “You want to be in decent and quality companies, especially when you are cautious on the markets and don’t see a crazy bull run.”
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