JF keen on India infrastructure, not commodities

HONG KONG, Feb 14 (Reuters) Investors in India should favour companies helping to improve its creaking infrastructure, including construction and engineering firms, a JF Asset fund manager said on Wednesday.

But they should be underweight the country's cyclical commodity and resource-related stocks, like aluminium, steel and oil producers, said Rajendra Nair, a co-manager of the firm's 1.8 million JF India fund.

''Our ability to predict how commodity prices will behave, or our conviction, so to speak, in global cyclicals is less than that for stocks and sectors benefiting from domestic consumption. I suspect we'll continue to be underweight,'' he told Reuters.

The fund's largest holdings as of Dec. 31 included engineering firm Larsen and Toubro Ltd. , power equipment maker Bharat Heavy Electricals Ltd. and cement maker ACC Ltd. .

Its main holding was in India's top mobile operator Bharti Airtel Ltd. . Nair said cellular services were another sector that would benefit from the growing purchasing power of the Indian consumer.

JF said the fund returned 186.1 percent in the three years to Jan. 31, compared with a 160 percent rise in the MSCI India Net Index <.msnrin> with dividends reinvested.

India's stock market, as measured by the key BSE index <.bsesn> rose 46.7 percent last year, topping gains of 42.3 percent in 2005.

Its shares also carry some of the highest valuations in the region. Nair estimated the Indian market trades at 17 to 18 times 12-month forward earnings.

But the Hong Kong-based portfolio manager said the multiples were at ''fair value'', given that earnings are expected to grow 15 to 20 percent going forward.

''While the P/E (price earnings) multiples might be high, one needs to look at that in the context of the earnings growth that you're getting, which is also very robust,'' he said.

''One of the reasons why this market has done as well as it has, despite the multiples being on the higher side, is the fact earnings momentum has continued to surprise on the upside.'' RISK APPETITE KEY Nair said the key appeal of the Indian market is the country's strong economy, which companies are able to translate into strong earnings growth.

India earlier this month said it expects growth of more then 9 percent this fiscal year, the fastest in almost two decades.

Nair said because of this, the firm's portfolio was geared to companies which are most linked to domestic demand. These include consumer discretionary stocks, select financial services firms and power and power equipment providers.

''There are a lot of companies in India which can grow their earnings at between 15 and 20 percent compounded for the next three to five years,'' he said.

''Clearly there can be air pockets along the way. But notwithstanding those, from a longer term perspective, we are confident.'' Nair noted those air pockets can include a shift in risk appetite by international investors similar to that seen last May and June, when the market sold off more than 30 percent before resuming its upward rise.

The fund manager said the macroeconomic picture would also be critical in setting the market tone.

''The key positive is also the threat, which is growth. Clearly the investment case is predicated on growth. If the growth expectation were to change, then clearly the investment case on India also has to change,'' he said.

REUTERS PKS RN2102