Foreign Investors Await Correction in Valuations

Foreign investors who missed out on the recent rally in Indian equities are waiting in the wings for a correction in valuations, the head of international business at India's Kotak Mahindra Bank Ltd. said.

"A lot of new money hasn't come in. It is basically India-dedicated funds, which were sitting on existing cash, who have come in. The move in the market was so rapid that many investors didn't have time to react," Paul Parambi told Dow Jones Newswires in a recent interview.

India's benchmark Sensitive Index has risen nearly 60% in 2009, after declining by 52% last year, and is among the best performers in Asia. Foreign funds have poured in $5.56 billion in local equities after pulling out nearly $12 billion in the earlier year.

Mr. Parambi, who manages and advises about $1.6 billion of Kotak's offshore funds that invest solely in India, says while valuations are stretched, a very sharp correction is unlikely. "I don't think that any drop will be huge. I don't think we will go back to the earlier lows we saw. At best, levels may stretch back to 12000-12500."

The Sensex is now trading at 15 times its one-year forward earnings as against 10-12 times for the rest of Asia. Mr. Parambi said a decisive mandate for the government has been a huge boost for Indian markets and he is advising investors to look at a three-five year horizon. "India is at an inflection point. Accelerated reforms are possible as this is a mandate no one dreamed of. This is the story we are giving our investors."

Mr. Parambi said foreign investors are planning to invest in infrastructure and mid-cap companies, in addition to blue chips. India is expected to give a big push to infrastructure reforms in the coming budget and the BSE Capital Goods Index has risen nearly 50% since the election outcome on May 16, nearly double the rise in the benchmark Sensex.

The big worry for India remains its fiscal deficit, Mr. Parambi said. "What could be of concern is if the fiscal situation will go out of control. If the government is not seen acting on it, investors could get worried," Mr. Parambi said. India's fiscal deficit is estimated at 5.5% of gross domestic product for the fiscal year that began April 1. But large offbudget subsidies through oil and fertilizer subsidies as well as state government deficit means the fiscal deficit is much higher.