'Good opportunity for value investment'

Franklin Templeton Investment Managers is the sixth largest asset management company in the country with AUM of Rs 26,842.22 crore (as on March 2008) and an investor base of Rs 25 lakh. The fund house essentially follows a bottom-up approach.

Its chief investment officer, Sukumar Rajah is of the view that this is the most opportune time for mutual funds as the stock prices have corrected sharply. Excerpts from an interview with Vandana and Tinesh Bhasin:

What's your take on the Sensex? Can it go below 11,000?

Investors have a tendency to extrapolate. When the Sensex was trading at 20,000, people spoke about the 25,000 levels. But with the Sensex shrinking, people are seeing a downward trend. There is a lot of support at lower levels.

Global investors are buying into the India growth story, along with the domestic institutions. A big part of the volatility is behind us. There is not much downside left for the quality companies. I don't see the Sensex going below 11,000.

FIIs are coming back to the equity markets as net buyers. How do you view this scenario?

FIIs are not a homogenous set of investors. There are endowments and pension funds who take a long-term view on the markets. They stayed away at the peak and are buying at current levels.

However, there was a lot of hedge fund activity in India prior to the market crash. Hedge funds are basically momentum investors and their activity will decline further from here. More value investors will come now as assets are shrinking.

Do you think the valuation froth is over?

The current valuations are reasonable, considering long-term opportunities. The Sensex looks attractive, trading at a PE of 15-16 times forward earnings. There are some very good buying opportunities in telecom and PSU oil companies.

Among the financial services, the environment for banks and particularly commercial banks is not good. We have made some major changes in our portfolio by adding infrastructure and construction.

What's your view on the real estate sector?

We are underweight on this sector. The projections are too optimistic as they are based on land bank valuations. Developers think they can sell a lot of flats at a high value.

What do you make out of the corporate earnings?

I think there is disappointment. Corporate earnings growth would come down substantially. Companies have been punished for seeking short-term profits in forex derivatives. Margins will decline, but from a five-year perspective. The revenues will grow in a 20-22 per cent range.

Will the weakening dollar affect earnings?

The dollar is currently undervalued. It has weakened as much as it has to. It should appreciate in the short and medium term. The rupee will emerge as a better currency in the long term.

How do you find the recently launched stock lending and borrowing mechanism (SLBM) and short selling? When do you see them picking up?

I think the mechanism does not matter much for long-term investors. There has been substantial short-selling in the last few months. There are too many shorts and not many optimists in the market. It will take time for the new mechanism to pick up. Information leakage is another issue.

When you are short on a stock, the leakage of information can squeeze you. So, we need more information security. I think it will take time before the mechanism actually picks up momentum. We as a group will wait for the mechanism to stabilise first.

What are your main challenges this year as a mutual fund house?

Handling investors in this kind of an environment is difficult for the sales department. Many of them are wary of investing after the crash.

As an investment team, we are not doing anything different from last year. We are focussing more on fundamental research. In fact, the current market scenario provides more value investment opportunities. So, it is positive for mutual funds.