Satish Ramanathan, whose Indian mid-cap fund has beaten 90 percent of its peers in the past three years, is adding shares of consumer-goods makers, drug companies and software exporters on optimism their earnings will be better shielded from rising interest rates and the global slowdown.
“You go to businesses that have a regular cash flow and the business predictability is higher as they protect you from the macro environment,” Ramanathan, director and head of equities at Sundaram Mutual Fund, said in a telephone interview from Chennai yesterday. He declined to name stocks.
The Reserve Bank of India last week signaled it is nearing the end of its most aggressive credit-tightening cycle after it lifted rates for the 13th time since March 2010. The central bank may not be done raising borrowing costs for the year ending March 31, Deepak Parekh, chairman of Housing Development Finance Corp., the biggest mortgage lender, said yesterday.
“We don’t think inflation is going to come down in a hurry; it will be a recurring theme for the next few years,” said Ramanathan. “We are better off buying defensive names than buying infrastructure and growth companies.”
His 21 billion rupee ($427 million) Sundaram Select Midcap Fund has returned 33 percent annually in the past three years, according to Bloomberg data. The BSE Mid-Cap Index has climbed 27 percent a year in the period, the data show.
The BSE India Sensitive Index has slumped 15 percent this year on concern rising interest rates may combine with Europe’s debt crisis to erode earnings. Food costs in India reached a nine-month high in the week ended Oct. 22, trade ministry data released today show. The benchmark inflation rate has remained above 9 percent since the start of December. Consumer prices in September rose 7.3 percent in Brazil and 6.1 percent in China.
Ramanathan favors producers of consumer staples even with valuations at an 87 percent premium to the Sensex. The BSE India Healthcare Index trades at a 32 percent premium to the stock gauge. Companies in the BSE Fast-Moving Consumer Goods Index are valued at 27.8 times estimated profits, compared with 14.9 times for the Sensex. The healthcare gauge trades at 19.6 times future earnings, the data show.
The premium “will continue until the risk-taking ability comes through, which will take fairly long,” Ramanathan said.
Hindustan Unilever Ltd., India’s largest household products maker, is the best-performing Sensex stock this year. Its profit has beaten analysts’ estimates for three straight quarters. Infosys Ltd., the second-biggest software maker, last month reported second-quarter earnings that topped forecasts.
Sundaram Mutual Fund, which has $3.1 billion in stocks and bonds, held 3.64 million Hindustan Unilever shares on Sept. 30, or 0.17 percent of the company’s equity capital, in its equity funds, according to Bloomberg data. The money manager held 446,783 Infosys shares, the data show.
While the International Monetary Fund in September cut its 2011 economic growth forecast for India to 7.8 percent from 8.2 percent, the pace is still the fastest after China among major Asian economies. Rising incomes may make India the fifth-largest consumer market by 2025, Deloitte Touche Tohmatsu said in January. The nation’s pharmaceuticals industry may expand to $55 billion by 2020, from $12 billion, McKinsey & Co. said in October 2010.
Five out of 16, or 31 percent, of Sensex companies that posted earnings for the September quarter have lagged behind analyst estimates, down from 47 percent in the three months ended June and 33 percent in the March quarter, the data show.
“India Inc. is not doing too badly,” Sandesh Kirkire, chief executive officer at Kotak Mahindra Asset Management Co. told Bloomberg UTV. “We’re not seeing a significant slowdown despite the global turmoil. Consumption is holding up.”
Still, it will take an acceleration in foreign fund flows to lift shares, said Ramanathan.
“If the stock market has to go up, it needs global money,” he said. “If there’s a problem globally then there’s a problem in getting the money.”
Overseas funds invested a net $508 million in October in local equities, helping the Sensex to its first monthly gain since June, Bloomberg data show. They pulled out a net $2.4 billion in August, the most since October 2008, causing the stock gauge to decline 8.4 percent that month.
While overseas investors own 7 percent of India’s $1.3 trillion market, their investments are concentrated in a few stocks, leaving the market vulnerable to reversals in flows, Arun Kejriwal, a director at Kejriwal Research & Investment Services Pvt. in Mumbai, said by phone.
“Even a small buy or sell has a disproportionate impact on the market because of the concentration,” he said.
Ramanathan said his funds hold about 12 percent of their assets in cash.
“One will put the money to work at 4,500 Nifty and one would be uncomfortable at 5,500,” he said, referring to the S&P CNX Nifty Index on the National Stock Exchange of India Ltd.
The Nifty fell 0.4 percent to 5,238.9 at 2:28 p.m.