India's Kotak Mahindra wary on IT firms

By Nishant Kumar and Jeffrey Hodgson

SINGAPORE (Reuters) - The fund arm of India's Kotak Mahindra (KTKM.BO: Quote, Profile, Research, Stock Buzz) is looking to cut cash and go overweight on battered bank and infrastructure stocks, which it sees coming back into favor as inflation moderates.

But the money manager might cut its holding in the country's high-profile information technology outsourcing firms given the negative impact of the global financial crisis on the spending power of their big Western clients, said one of the firm's top fund managers.

"We are already underweight and we would use any significant bounce in the sector just now to go further underweight," Nitin Jain, principal fund manager at Kotak's Singapore unit, told the Reuters Wealth Management Summit.

He added that any rebound in the strength of the rupee could also hurt the prospects for Indian IT outsourcing firms.

The credit crunch tormenting the global financial sector will have less impact on Indian banks, which stand to benefit from easing inflation on sharp falls in commodity prices, said Jain, who manages about $400 million.

"If you look at adequacy ratios, capital adequacy is significantly good. If you look at non-performing assets they are very, very low," said Jain, who has State Bank of India (SBI.BO: Quote, Profile, Research, Stock Buzz) and ICICI Bank (ICBK.BO: Quote, Profile, Research, Stock Buzz), India's two largest lenders, among his top holdings.

Jain said a sharp drop in oil prices would ease inflation which could drop to 8-9 percent by March next year, allowing the central bank to cut interest rates and help financial stocks, which now trade at just 1-1.5 times their price to book value.

India's wholesale price index rose 11.80 percent in the 12 months to September 27, down from the previous week's annual rise of 11.99 percent, government data showed this month.

The fund manager said easing inflation pressures should also lower borrowing costs for infrastructure firms, which still offer earnings visibility. Jain's fund holds shares in Bharat Heavy Electricals (BHEL.BO: Quote, Profile, Research, Stock Buzz) and Larsen & Toubro Ltd (LART.BO: Quote, Profile, Research, Stock Buzz).

The drop of more than 60 percent in these shares have made them attractive given their robust order books for the next three years and the estimated $500 billion in spending expected over the next half decade to strengthen the country's transport and power backbone, he added.

"From the valuation perspective we believe infrastructure stocks have come off significantly," said Jain.

The money manager, who previously worked with the fund management joint venture of State Bank of India (SBI.BO: Quote, Profile, Research, Stock Buzz) and Societe Generale (SOGN.PA: Quote, Profile, Research, Stock Buzz), said the recent sharp declines in Indian stock valuations suggested they were close to their bottom.

Indian stocks now trade at 11.8 times 12-month forward earnings, well down from over 20 times at the start of this year, according to Thomson Reuters data.

After rising a stunning 500 percent in the last five calendar years, India's benchmark index .BSESN has plunged 43 percent so far this year on foreign portfolio outflows and monetary tightening triggered by double-digit inflation.

"Valuations have come to a level where a lot of these sellers would probably not sell or you could see new buyers," Jain added.

(Editing by Jon Loades-Carter)