The Hindu Business Line : We're going slow on mid-cap space: SBI Mutual Fund

Mr Sanjay Sinha, Head of Equities of SBI Mutual Fund, says that they are going slow on the mid-cap space. SBI Mutual Fund believes that banking and oil and gas stocks are available under book value. They have no concern over growth for real-estate sector. They will start looking at the IT sector as a contra call.

Apart from that, SBI Mutual Fund believes that cement stocks with large capacity expansions are good contra calls.

Excerpts of CNBC-TV18's exclusive interview with him:

Which sectors have you been tanking upon, given the fall, since this is a good opportunity for a contra fund like yours?

If you look at the market today, I think there is a fair amount of pessimism and also a fair amount of uncertainty as to which way we are headed because we have no clue as to the size of the yen carry trade and in what complex manner it has been structured and how it is going to be unwind. But given the scenario and also as to whatever has happened in the US the previous evening, in terms of the prime lending to the housing sector, at the present moment of time, if you have seen our portfolio, we were actually out of the IT sector in the contra fund.

I think it is time for us now to start looking at that sector as a contrarion call because I think too much of pessimism is again being built into the outlook for the sector, which is linked to the PFSI (Primerica Financial Services Inc) exposure in the US.

So that is one call that I think we can take at this point of time. The other contra call is paradoxically after this correction in the market; there are again a lot of stocks and a number of sectors, which are now available at below their book value. Most of these bets would of course be in the banking sector but there are also oil and gas companies, which are now trading below their book value.

The only call that you have to take here is how much of that under-valuation will prevail and for what period of time. In some sectors, I think it will not long for too long, in the others, it might test our patience. So we have to take a blend of both of them when we take a contra call.

In addition to this, in a contra fund, as an annual strategy for the fund, what the fund tries to do is take the advantage of the expectation gap, which is there in the price as reflecting the market sentiments.

What we believe is the fundamental worth of that sector or that stock and in that space is where we want to take an advantage of exploit and build the portfolio. I think that is the relevant event today.

Does cement go into that fund now?

We have a view on cement. At this point of time, because of whatever has happened at a political level, we do not see too much of an upside on the pricing part. But there are companies, which are expanding capacity, volume play story on the cement is something which is still intact. So stocks, where there is expansion in capacity coming on stream very quickly is where we would position in the final.

Have you included anything from the real estate basket after the stiff fall in the contra fund or are you still staying away?

We actually have a very modest exposure. We did not increase our exposure in the fall, whatever we have done is actually very modest. After the bounce back that we have seen over the last few days, you would probably get a feeling that maybe you should have booked in a little earlier.

But I think we still have opportunities to increase our exposure into that space because I think the concern on the real estate sector as far as the growth in demand is concerned, I have no concerns on that. The only concern I had was the valuations of the land banks. I think that has now become reasonably sober after the correction. So we contend that space in contra fund.

You now have IT, banking, cement, OMCs and some commodities - is it less about taking a contrarian call and more about getting a better price point for all these sectors or specific stocks?

If you see what the Indian markets have been passing through over the last three years, it has been a growth phase of the market. To have a contra fund based on value principal in a growth cycle of the market would not have made the fund relevant. So as an ignoring strategy for the fund, what we are adopting as a strategy is that we want to exploit the expectation gap.

So even now, there will be fair amount of sectors. In fact, even if you look at our portfolio now, I have a fair amount of exposure to the engineering sector. In engineering, the call is mixed, while the market is subdued. I don't think there is anything that has gone wrong in terms of the outlook for the engineering sector. My earnings growth expectation for the engineering sector is intact. So if I find that the engineering sector gets battered down too much, I will increase my exposure to that sector rather than to look at some of the other sectors, which I described.

Did you include sugar as a contrarian call?

Not as yet, I still have a cautious stance on sugar but it is one sector, which is right there on the top of my ticker. I keep a very close watch as to how the sugar prices are going to prevail. In my opinion, that should be one weak call for the contra fund at a relevant point of time.

What have you been doing with your money as a fund manager? Are you sitting on a bit more cash these days?

We have fair amount of cash across our funds. At Magnum Global, the cash level is close to 30%. The SBI One India Fund, as of now, has invested only about 35% of the asset, 65% is still in cash or near cash forms. As a fund house, our cash level today is between Rs 2,000- 2,500 crore.

There are two issues here; one is that in the case of the new money that has come in, we are deploying that money very cautiously because we want to get a very clear view as to how the risk appetite contraction is going to play out in terms of liquidity flows.

At the same time, we have a fairly positive stance on the mid-cap segment. But unfortunately, in the mid-cap space, you get to see the prices on the screen but you want to grab quantities, those quantities don't come at those prices. So we are going slow and steady on that space.

Did you buy anything in construction as a sector as a contrarian play because that sector is also contracted by 40-50% or do you stay clear of those stocks?

With specific reference to the Magnum Contra Fund, we are into construction companies in the Magnum Contra Fund.

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