‘Sensex can trade at 20x or more’

R Rajagopal recently took over as the chief investment officer of DBS Chola Asset Management Company, having joined the fund house in December 2006 as the head, equities.

Since then, the AMC has launched two new funds — DBS Chola Hedged Equity and DBS Chola Infrastructure. Two more — a small cap fund and a dynamic fund - are in the pipeline. Once they go on stream, Rajagopal will be single-handedly managing 10 mutual fund schemes, one of the highest in the industry.

Each scheme has a different investment philosophy. How do you get your thought process to handle so many different schemes?

One has to have different thought processes going on. Each scheme has a different investment mandate and everything is clearly laid out in the offer document. The portfolio calls are taken in accordance with this.

Do you think valuations are still attractive?

Sometime ago, when we launched the infrastructure fund, I had said in the presentation that FY08 earnings of Sensex companies was Rs 840 and the Sensex was trading at 18 times.

We had said then that Sensex can trade at 20 times. Nothing has really changed fundamentally between then and now. Some time from now, the market will start discounting FY09 earnings. Going by advance tax numbers for the second quarter, corporates are continuing to grow at a good pace.

We predict the Sensex earnings to be in the range of Rs 970-975 for FY09. Therefore, we still believe the market can trade at 20 times or even more.

But is the market running too fast, considering it travelled from 16k to 17k in just five sessions?

I feel the market will scale newer milestones if the liquidity support continues. When you say we have had the fastest 1,000, you must understand this has come on a higher base. As a percentage rise, this would not be too high.

How long do you think this liquidity support will continue?

As a fund manager, one needs to look at both liquidity and fundamentals. For the fundamentals, the smallest period for which data is available is a quarter. Hence, nothing changes fundamentally within this period. Liquidity is what drives the market.

But how do I predict liquidity?
There is no scientific method to predict the investor behaviour in terms of how much money they are going to bring in. A regression analysis can throw some light.

How do you see the mid-cap action?

FIIs are pumping in money into equity in the secondary market. Money flow typically happens in large-caps. Till that is saturated, you won’t see them getting into mid-caps. It’s simple.

I’m just telling you what I would do if I’m allowed to invest abroad. I would first get into the well-researched large-caps before going for smaller caps. Mid-caps are normally picked up by the domestic institutions who have a fairly good understanding of their business models and businesses.

In a secular bull market, will the contra theme work?

Contra bets are always there. Markets work because at any given point there are two different views.

People say there is selling pressure/ buying pressure. It can never be one way. How can there be buying if no one is ready to sell and vice versa?

Contra theme is a must in every portfolio.

Is the IT sector a contra bet?

IT is a very good contra pick since nobody seems to be liking them. But while picking the contra bets, one needs to have the conviction and patience. One cannot be sure when these picks pay off.

It may pay off in three months or it may take more. The IT stocks are now trading at a PE multiple, which is reflective of their growth potential.

Earlier, they were seen as a sunrise industry and were commanding a huge premium. Now for the first time, they are being looked at as value picks or contra picks.

What is your view on interest rates?

We can fairly conclude that northward movement of interest rates is over. We believe rates will come down. Once the benchmark rates come down, risk appetite will increase and money will start coming to equities.