Mumbai: 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 (Rs43,450 crore) in Indian equities as investment director at HSBC Holdings Plc.’s Halbis Capital Management in Singapore. “The risk-reward ratio is not favourable."

Sanjiv Duggal, investment director for HSBC Holdings Plc.’s Halbis Capital Management in Singapore

Duggal’s Luxembourg-based $8.5 billion Indian Equity Fund, which targets overseas investors, has had a total return of 63% this year. It is the second best performer 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 2.7% since reaching a record of 20,000 on 29 October, the day Duggal turned pessimistic. 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 25-30% a year and their stock prices assume the rate will continue, he said. But government projections of power generation by 2020 imply a growth rate of less than 10%. 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 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 21.7 times future earnings, while the consumer staples index trades at 25.4 times. The technology index has a multiple of 19.9.

Selling banks

Overall, earnings growth will slow to between 10% and 15% for the next three years to 31 March 2010, Duggal estimates, from about 30% in the previous period. He said his view is also shaped by the rupee’s 12% gain against the dollar this year. Almost 50% 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 firms Bharat Heavy Electricals Ltd and 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 firms 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% discount to the Sensex, down from a 50% premium earlier this year, he said. His top 10 holdings include India’s largest software developer Tata Consultancy Services Ltd and Wipro Ltd, the third biggest. It also holds more pharmaceuticals, such as Glenmark Pharmaceuticals Ltd and Dr Reddy’s Laboratories Ltd, than represented in its benchmark. The Bombay Stock Exchange’s Healthcare Index gained 2.4% this year, trailing the Sensex’s 42% 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 (GDP) will grow by almost 9% in the fiscal ending March, finance minister P. Chidambaram said on 5 November. GDP has grown an annual average of 8.6% since 2004, the fastest pace since independence in 1947.

“One can’t ignore markets such as 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 auto makers.

Duggal says he will stick to his bets even if they underperform in the near term. The Indian fund, with an annualized return of 57% is part of HSBC’s Global Investment Funds group, and has only been beaten in its class by the $1.3 billion PCA India Infrastructure Stock Fund, with a return of 70%.


Duggal, who was born in Rugby, England, completed a chartered accountancy 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% on 17 May 2004, when sonia Gandhi’s Congress party ousted the government.

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