FUND VIEW - HSBC bets on Indian auto, property shares

Labourers work at a construction site on the outskirts of Hyderabad in this May 5, 2009 file photo.

LONDON (Reuters) - Automobile and property stocks are set to benefit from India's stimulus measures aimed at returning the country to 8 percent plus growth, a top fund manager said.

Having gained 60 percent year-to-date, Indian stocks have another 10-15 percent upside before valuations look expensive again, said Sanjiv Duggal, who runs the world's biggest India fund, managing over $4 billion at HSBC.

He said valuations are now around the 10-year average and well-below the five year average.

He said the $100 billion -- representing 10 percent of GDP -- that the government had pumped into the economy via public sector pay rises, tax cuts and rural job schemes in the 2008-2009 fiscal year had made an impact.

"Demand for things like cars have picked up from rural areas, real estate sales are picking up, and interest rates are low," he said. "And the government is still spending -- last year they had to subsidise oil imports, but this year they have been spending to support growth."

Duggal revised his previous "sell" call on Indian stocks -- issued in December 2007 -- in March this year just before the market started its rebound off three-year lows.

The fund's biggest overweight sector, at 12 percent, is residential real estate stocks, including DLF, Unitech and IndiaBulls. Duggal also likes automobiles including carmaker Maruti Suzuki, which has reported a net 25 percent rise in second-quarter profits.

Indian home prices fell an average 30 percent last year, but Duggal said the firms' cash flow was good and they had acquired enough land for the next three years.

India Bulls and DLF also recently raised over $1.2 billion via share sales to institutional investors, he noted.

"We like it that these companies have changed their focus to low and mid-income housing," he said, noting the acute housing shortage in India for this income segment.

Duggal said some of his optimism on Indian growth stemmed from the 2009 budget, which last month dismayed some investors with higher spending plans and a 6.8 percent fiscal deficit.

"People were disappointed there were no big-bang reforms but the budget focused on delivery and implementation, something that has been disappointing in the past in India," Duggal said.

He also said the budget's focus on infrastructure and education spending, particularly for rural India, could help counter the effects of this year's poor monsoon.

"We think we will see growth from the Indian economy of 6 to 9 percent a year for the next 10-15 years, and that should take us to the level where China is today," he added.

The Indian economy grew 6.7 percent in the year ended March 2009, the slowest pace in six years. Economists say growth rates of at least 8 percent are needed to make a dent in poverty.

The Indian stock market has rebounded from its budget-linked disappointment and is just off 13-month highs after a slew of better-than-expected results from Indian companies.

Duggal's fund is up 80 percent in 2009, outperforming its benchmark S&P IFC Emerging markets Investable India Index by 25 percent and the MSCI emerging index by 30 percent.