* Consumer goods, pharmas seen too expensive-poll
* Investors to increase equity allocations-poll
* Midcaps favoured amid risk-taking mood-poll
By Himank Sharma and Aditya Kalra
MUMBAI/NEW DELHI, Oct 3 (Reuters) - Fund managers have responded quickly to New Delhi's economic reform drive, selling expensive consumer stocks in favour of the construction-related shares they expect to benefit most from new government initiatives to bolster India's sagging infrastructure, a Reuters poll showed.
Fund managers are also increasing their allocations to financial companies on expectations the central bank will lower interest rates after India recently announced fiscal and economic reforms, the survey found.
The portfolio changes occur amid a stock market rally that is encouraging fund managers to increase their exposure to equities in coming months.
"It is of course the valuation, but more importantly it is the renewed belief there will be some more reform measures aimed at fixing India's ailing infrastructure," said Waqar Naqvi, Chief Executive at Taurus Mutual Fund.
The Reuters poll on asset allocation showed the overwhelming majority favored construction or related stocks for the next three months. India has announced plans to award 9,500 kms of road projects in the fiscal year to March 2013, and commission three new airports, among other initiatives.
Recent gains in shares such as cement manufacturer Ambuja Cements to record highs show valuations also favour construction-related sectors, especially against defensive sectors such as consumer goods and pharmaceuticals that had outperformed earlier this year.
Stocks such as cigarette maker ITC had been among the top gainers this year, as they were seen as companies with good earnings prospects and able to withstand the volatility then gripping markets.
However, the wave of fiscal and economic reforms from the government, which have included raising subsidised diesel prices, along with global stimulus measures, are now favouring cyclicals and other sectors, according to fund managers.
In the survey, seven said they would cut their holdings of consumer non-durables and three were neutral on the sector.
The Fast Moving Consumer Goods index at the National Stock Exchange rose 39 percent this year as of Monday's close, and FMCG stocks in India are trading at a multiple of 1.27 to their average intrinsic value according to StarMine data.
That compares to 0.75 for engineering and construction-related shares and 0.53 for banking and finance-related shares, the other big sector benefiting from increased allocation from fund managers.
A multiple of 1 on this valuation ratio implies a sector or a stock is fairly valued.
The financial sector could benefit as the Reserve Bank of India is expected to cut interest rates as early as October, and ease monetary policy further in the months ahead.
"Some major banks have always been part of our portfolio, but now is the time to go after some of the smaller names," said Nandkumar Surti, chief executive of JPMorgan Asset Management India Pvt Ltd said.
Seven of the 11 respondents said they would increase their equity allocation over the next three months and none of those polled were willing to pare their bets on the market, even after $1.21 billion has been withdrawn from such funds in the year to August, according to industry data.
That increased willingness to take on more risk in stock markets is being reflected in the push to mid-caps: nine of the 11 polled were looking to increase allocation in this segment, often at the expense of larger stocks.
"Typically mid-caps are more vulnerable during a bad environment, but they also go up faster than large-caps when markets improve," said Jayesh Shroff, an equity fund manager at SBI Mutual Funds. (Editing by Rafael Nam and Eric Meijer)
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