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India’s top stock picker buys consumer companies

bombay stock exchangeIndia’s best-performing equity fund in the past five years is buying consumer companies, lured by revenue growth more than three times faster than the broader market even as rival money managers sell the stocks.

R. Srinivasan, who runs the $200 million SBI Magnum Emerging Businesses Fund (MAGEMBG), owns shares of Page Industries Ltd. (PAG), which sells Jockey International Inc.’s undergarments, Redington (India) Ltd., a distributor of Apple Inc. iPhones, and Westlife Development Ltd. (WLDL), a licensee of McDonald’s Corp., according to data compiled by Bloomberg. The 21 percent sales growth for Indian consumer-discretionary companies last quarter compares with 6 percent for the S&P BSE 500 Index.

While valuations more than twice as high as the benchmark index spurred Indian money managers to cut holdings of consumer stocks for three straight months through December, Srinivasan says shares will climb as incomes in the world’s second-most populous nation rise. India’s middle class, comprising people who earn between $10 to $100 per day, will quadruple to 200 million by 2020, according to Ernst & Young.

“The aspirational and discretionary consumption theme has just begun and will probably last for a long, long time,” Srinivasan, the 43-year-old head of equity at SBI Funds Management Pvt., a unit of India’s biggest lender, said in an interview yesterday. The SBI Magnum Emerging Businesses fund returned an annualized 33 percent in the past five years, the most among about 300 India-based equity funds tracked by Bloomberg.

Profits of consumer discretionary companies almost doubled in the quarter ended December, compared with 14 percent growth for BSE 500 index stocks, data compiled by Bloomberg show. Earnings and sales at consumer companies are climbing even after the nation’s economy slowed to the weakest pace in 10 years and the central bank raised interest rates to cool the fastest inflation among 18 Asian countries tracked by Bloomberg.

Page Industries’ sales for the December quarter jumped 40 percent, the fastest pace in more than two years, while profit surged 36 percent. The Bangalore-based company, which accounted for about 6.9 percent of the SBI Emerging Businesses Fund as of Jan. 31, has soared 79 percent annually in Mumbai trading during the past five years, data compiled by Bloomberg show.

Third-quarter sales at Chennai-based Redington climbed 16 percent, the most in three quarters. Sales at Westlife rose 3.9 percent in the December quarter.

Indian money managers trimmed their holdings of consumer shares in the final three months of 2013, according to data compiled from the regulator’s website. About 8 percent of total assets were in consumer companies at the end of December, the lowest reading since February.

Page Industries trades at 55 times estimated 12-month profits, compared with 12 times for the MSCI Emerging Markets Consumer Discretionary Index and 27.5 times for the S&P BSE Fast-Moving Consumer Goods Index, data compiled by Bloomberg show. Westlife Development is valued at 118 times.

“The fast-moving consumer goods sector is our maximum underweight,” S. Naren, who oversees $13.5 billion as the chief investment officer at ICICI Prudential Asset Management Co., said in an interview with Bloomberg TV India yesterday. Naren said he prefers shares of software exporters and drugmakers, the best performers on the S&P BSE Sensex last year.

Srinivasan’s fund has lagged behind peers in the past year as some “high-risk, high-return” bets soured, he said. Shares of drugmaker Wockhardt Ltd. (WPL) slumped 79 percent during the period after surging almost six-fold in 2012. Jaiprakash Power Ventures Ltd. (JPVL) lost more than half its value.

The Emerging Businesses Fund has declined 5.8 percent in the past year, trailing 97 percent of peer funds tracked by Bloomberg. The 100-member CNX Mid-Cap Index has retreated 2.9 percent in the same period.

Consumer demand for personal-care items and fast food is still rising even as economic growth slows and inflation stays elevated, Srinivasan said. India’s retail sales will probably reach $1.5 trillion in 2017, up from $890 billion last year, the Economist Intelligence Unit said in November.

Westlife, which operates McDonald’s in western and southern India, plans to boost the number of restaurants to 1,000 in the next decade from 183, Vice Chairman Amit Jatia said in an interview yesterday.

“There’s been a step-change in consumer behavior toward aspirational and better-quality products,” said Srinivasan, who’s based in Mumbai. “Inflation is probably a short-term hiccup that needs to be taken in stride.”-Bloomberg