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Aarati Krishnan

We would like to play on opportunities that are India-oriented and on sectors that can capitalise on the boom in the domestic economy.

STOCKS are no longer severely undervalued; but they could offer reasonable returns because the domestic growth story is intact, feels Mr P. V. K. Mohan, who, as Portfolio Manager, oversees the portfolio management operations of DSP Merrill Lynch Fund Managers. Apart from managing the investments on behalf of high net worth clients, DSP's portfolio management division also advises insurance companies such as Allianz Bajaj on unit-linked insurance plans.

Excerpts from the interview:

Are you now holding more cash now in your investors' portfolio, because the market seems to be entering a more risky phase?

Not really. The view for a year is still very attractive. In the near term, you are entering a consolidation phase. After the fourth quarter results for this year and the first quarter for FY-06, we will see a clearer trend. Oil prices, which were a concern, have cooled off slightly. If they stay low, that will help.

The domestic growth story is still strong. Our view is that the consumption boom and the infrastructure thrust will fuel growth at 7-8 per cent. This growth is sustainable. We would like to play on opportunities that are India-oriented and on sectors that can capitalise on the boom in the domestic economy — automobiles, banks, engineering and cement. The other set of opportunities is in the huge outsourcing space. In pharma, auto-components and even engineering, companies are making their Indian operations a sourcing base and this throws up investment opportunities.

How do you explain the recent meltdown in the market? Will the liquidity continue to come in?

Analysing portfolio inflows (from foreign investors), we see two different trends. The profile of investors is changing for the better, with more mature players entering the market. The level of commitment from the existing players has also become bigger. There is considerable potential for players such as CalPERS or Fidelity to scale up. Is there a threat of pullout? That will depend on the perception of this country. If people believe that we can deliver a 7-8 per cent GDP growth, with many companies delivering a 15 per cent CAGR, we will continue to attract inflows. Especially in the context of a slowing global economy.

In the near term, I think there could have been a sell-off from hedge funds which were leveraged. For somebody who is leveraged and has benefited so far from the depreciation of the dollar, recent events would have been quite upsetting. You saw interest rates rising globally and also the dollar appreciating, resulting in a double impact on leveraged positions. This probably resulted in a cutback in some positions. Our own view is that the dollar will tend to rule softer. This will help flows into countries where domestic growth is high. But to benefit from this, you have to live through periods of correction.

Two years ago, we had a severely undervalued market. The initial surge that happens when valuations are re-rated is what delivers the highest returns. But now we are in a stage where stocks are reasonably valued on a FY-05 basis. You now have to take a call on FY-06. For the current pace of growth to continue, you need the domestic consumption story and the infrastructure thrust to continue.

In several sectors, companies want to expand, but there seems to be a raw material constraint. Commodity prices are also biting into profit margins... .

I do see a raw material constraint to the capacity expansion plans. Commodities have been an issue, in terms of prices and availability. The feedback I receive from companies is that the availability part is now being addressed. As to the price, last year was a period of shock when prices spiralled, when nobody was expecting them to. So companies were ill-prepared for that. Now companies are adjusted to the situation and are taking steps to handle the price rise. I also see commodity prices entering a more stable phase going forward.

In terms of infrastructure, there is a real constraint. For instance, textile exporters are pointing out that port capacity is holding back big orders. What could be a Rs 500-crore order is only Rs 100 crore because of the constraints. For the first time, you are seeing the lack of infrastructure holding back business. When business interests are impacted, I think the problems will get addressed. If infrastructure constraints are not addressed, growth will suffer.

Are the markets becoming less tolerant to any disappointment on the earnings front?

That's happening. There's no room for disappointment. But this is a healthy phase because it helps set expectations to more realistic levels. It is one thing to look at potential, say 3-5 years hence, and another to look at the performance quarter by quarter. But my own feeling is that this phase will continue. Stocks that outperform expectations will get rewarded disproportionately and those that don't will suffer.

Is there a slowdown in global IT spend?

No. Some company-specific problems have arisen in this particular quarter. From a macro-perspective, the (IT) companies in India have just scratched the surface and have plenty of room to ramp up. Unless you see a period of a very sharp slowdown in the US, IT spends may not be materially impacted. If the US growth rates slow from say 3.5 per cent to 3 per cent, that may not have any material impact on the IT spend. So I see this (the slowdown in growth for some IT companies) as a short-term phenomenon.

Some of the recent IPOs have listed below offer price. Is the primary market becoming less attractive?

I think you have seen stiffer pricing on IPOs. Two years ago, IPOs were grossly under-priced and the stocks rose four- or five-fold in a year or two. That is not good pricing either. Now you have the other end of the spectrum. I don't subscribe to the view that the spate of IPOs has sucked out liquidity from the market. When the sentiment is positive, IPOs help infuse new liquidity into the market. So even now, if there is a quality offer, it will be lapped up because the domestic liquidity is substantial.

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