HSBC sees value in battered Indian stocks

Brokers engage in trading on their computer terminals at a stock brokerage firm in Mumbai March 25, 2008.

MUMBAI (Reuters) - Investors should seek buying opportunities in Indian stocks that are now attractively valued after a four-month correction, as economic fundamentals remain strong, a strategist at the local fund unit of HSBC said.

Mihir Vora, who manages 42 billion rupees (500 million pounds) across seven funds as head of fund management-equities for HSBC Asset Management, said India's infrastructure, consumption and outsourcing story was intact and valuations were now not a concern.

"I don't think earnings downgrades are going to be that sharp. So to that extent I would still be a buyer," Vora told Reuters on Friday, adding he is overweight on tech, telecom and FMCG sectors and found infrastructure stocks attractive as well.

India's benchmark stock index .BSESN is down more than 25 percent from its peak, tracking global markets and concern on domestic economy under pressure of spiralling inflation, after recording its strongest growth in four years in 2007.

Stocks across a majority of the sectors have undergone sharp corrections and valuations - at about 15 times one-year forward earnings for the benchmark index, far lower than over 20 times at the end of 2007 - were not a concern, he said.

The economy would still grow by 7-7.5 percent and Indian firms would maintain a return on equity (ROE) of 17 percent and earnings growth of 15 percent in 2008/09, Vora, who holds 15 percent cash in his largest equity fund, said.

"With that kind of ROE, 15 percent growth, I don't think 15-16 is too expensive," Vora said.

"I do not think any asset class can sustain a five-year bull run," he said, referring to the 43 percent annual rise in the benchmark index between 2003 and 2007.

"This year is a period of consolidation," Vora, who is underweight on auto, real estate and utilities sectors said, adding he cut exposure to infrastructure stocks last year but now waiting for clarity on commodity prices before investing again.

INFRASTRUCTURE

HSBC had been overweight on Indian infrastructure since 2005/06, eyeing a potential investment of over $500 billion (250 billion pounds) needed over four to five years to strengthen its transport and power backbone.

But a spurt in stock prices in the fourth quarter of last year stretched the valuations, Vora said, adding he reduced exposure to infrastructure stocks in favour of battered tech stocks towards the end of 2007.

Stocks have corrected since then with infrastructure firms such as Bharat Heavy Electricals (BHEL.BO) and Larsen & Toubro (LART.BO), slumping more than a third so far this year.

"Valuations have become much more attractive," Vora said, adding the fundamentals and visibility of firms operating in the sector remained intact. He will start buying these stocks again once commodity prices stabilised, he said.

"Even if there's cyclicality in the GDP growth infrastructure sector in the next two, three, five years will see a secular growth because there's just shortage of everything," he said, adding rising input costs and pricing issues were keeping him away from cement and auto stocks.

Vora sold all his shares from the two sectors in April, data from fund tracking firm ICRA showed.