Biggest India Bull Duggal May Ask Holders to Cash Out

Dec. 6 (Bloomberg) -- India's biggest bull is on the verge of becoming its biggest bear. Sanjiv Duggal, who manages the world's largest holding of Indian equities, may even urge his clients to cash out.

``Investors aren't factoring in earnings and news flows, but valuing people's dreams,'' said Duggal, 43, who oversees about $11 billion in Indian equities as investment director at HSBC Holdings Plc's Halbis Capital Management in Singapore. ``The risk-reward ratio is not favorable.''

Indian equities are valued at an average of 23.6 times estimated earnings, compared with Hong Kong's Hang Seng Index at 20.2 times and Korea's Kospi index at 14.6 times. The Standard & Poor's 500 Index is valued at 15.9 times profit.

Duggal's Luxembourg-based $8.5 billion Indian Equity Fund, which targets overseas investors, has had a total return of 63 percent this year. It is the second-best performance among 15 offshore equity funds with more than $1 billion in assets that invest in India, according to data compiled by Bloomberg.

India's Sensitive Index has fallen 1 percent since passing 20,000 for the first time on Oct. 29, the day Duggal turned pessimistic. It rose 0.3 percent to 19,795.87 today. He has not yet told his investors of his change of heart. The Sensex has doubled in less than two years and is Asia's third-best performer in 2007, after China and Bangladesh.

``The market is pricing in a lot of growth for the next two to three years,'' Duggal said.

Cashing Out

Power equipment manufacturers, for example, are seeing revenue growth of 25 percent to 30 percent a year and their stock prices assume the rate will continue, he said. But government projections of power generation by the year 2020 imply a growth rate of less than 10 percent.

Duggal said he is considering inviting investors to take some of their money out of the fund and seek better-valued equities elsewhere. He expects Indian stocks to decline over the next 18 months to 24 months.

His fund, on the other hand, has to stay invested in the country, so he is looking for the best bargains.

India Equity is going for ``more of a defensive and value bias and a few selective growth stocks, but I don't want to hold stocks where growth is priced in,'' he said.

Duggal's fund holds fewer banks and consumer staple companies than represented in benchmarks, while it's overweight on technology. The Bombay Stock Exchange's 18-stock banking index is valued at 26.5 times future earnings, while the consumer staples index trades at 27.7 times. The technology index has a multiple of 23.4.

Selling Banks

Overall earnings growth will slow to between 10 percent and 15 percent for the next three years to March 31, 2010, Duggal estimates, from about 30 percent in the previous period.

He said his view is also shaped by the rupee's 12 percent gain against the dollar this year. Almost 50 percent of revenue at Indian companies comes from exports, Duggal estimates. The rupee is the second-best performing currency in Asia after the Philippine peso.

Duggal, whose fund holds more of industrial companies Bharat Heavy Electricals Ltd. of New Delhi and Mumbai-based Larsen & Toubro Ltd. than their representation in its benchmark, said he is cutting back.

The fund has reduced holdings in banks to less than the benchmark, the S&P/IFC Emerging Markets Investable India Index. High interest rates will dent demand for loans and the central bank will lift reserve requirements, Duggal said. Telecommunications and utilities are other industries where the fund is underweight.

`Growth Sector'

By contrast, the fund exceeds its benchmark for technology companies for the first time in three years on the view that revenue growth will boost earnings even if the economy slows.

``Technology is one of the fastest growing and cheapest valued growth sectors in India,'' Duggal said. Software stocks are trading at a 20 percent discount to the Sensex, down from a 50 percent premium earlier this year, he said.

His top 10 holdings include Mumbai-based Tata Consultancy Services Ltd., India's largest software developer, and Wipro Ltd. of Bangalore, the third biggest.

It also holds more pharmaceuticals, such as Glenmark Pharmaceuticals Ltd. of Mumbai and Hyderabad-based Dr. Reddy's Laboratories Ltd., than represented in its benchmark. The Bombay Stock Exchange's Healthcare Index gained 5.2 percent this year, trailing the Sensex's 44 percent advance.

Safe Haven

Money manager A.S.T. Rajan says he is more optimistic about the Indian market, given the outlook for economic growth in the world's second-most populous nation. Gross domestic product will expand by almost 9 percent in the fiscal year ending in March, Finance Minister Palaniappan Chidambaram said Nov. 5. GDP has grown an annual average of 8.6 percent since 2004, the fastest pace since independence in 1947.

``One can't ignore markets like India and China,'' said Rajan, who manages $200 million in Indian equities as managing director at Aquarius Investment Advisors in Singapore. ``Given the earnings and economic growth, we are seeing a paradigm shift of funds to safe havens in Asia.''

Rajan likes construction companies and those that rely on domestic demand, such as banks and automakers.

Duggal says he will stick to his bets even if they underperform in the near term. The Indian fund is the best performer over five years among the 15 offshore Indian stock funds managing more than $1 billion that are tracked by Bloomberg, with an annualized return of 57 percent.

This year, the fund, part of HSBC's Global Investment Funds group, has only been beaten in its class by the $1.3 billion PCA India Infrastructure Stock Fund, with a return of 70 percent, according to Bloomberg data. Duggal lags behind the 68 percent return of his benchmark.

`Struggle'

Duggal, who was born in Rugby, England, completed a chartered accountant degree in London in 1988 and began work as an internal auditor at Lloyds TSB Group Plc. Later, he moved to its Hill Samuel unit, switching to portfolio management in 1994.

He joined HSBC's emerging-markets team in London in 1996 and moved to Mumbai in 2002 as chief investment officer to manage Indian equities. In 2006 he moved to Singapore to join Halbis as an investment director.

Duggal put out a ``sell'' call on Indian equities in April 2004 prior to general elections in May because his team was of the view the ruling Bharatiya Janata Party, which oversaw asset sales, would not win a second term. The benchmark plummeted 11 percent on May 17, 2004, when Sonia Gandhi's Congress party ousted the government and had to form a coalition with communist parties for a parliamentary majority.

Duggal again told investors in April 2006 to sell Indian equities on price. The Sensex plunged 26 percent starting in April that year to a low of 8,929.44 on June 14.

``I have a cautious view on India as it's become increasingly difficult to find value,'' says Duggal. ``Markets will struggle to perform over the next year.''