India’s mid-cap stocks are in a “bubble” despite the country’s promising economic prospects, according to contrarian fund manager Jonathan Pines. Pines, who runs Federated Hermes’ $3.1 billion Asia ex-Japan fund , believes there is a disconnect between the nation’s growth potential and current stock market valuations. “If you were a top-down investor, India looks amazing because it’s got everything going for it,” Pines said, acknowledging that the country’s pro-business government, strong relationships with the West, large population, and democratic system are working in its favor. He also noted that the government’s support for infrastructure development has contributed to its rising growth rate. India’s economy grew 8.4% in the October to December quarter, blowing past expectations on strong private consumption and manufacturing activity. However, as a bottom-up investor, Pines said he focuses on the share price versus the value in individual stocks, regardless of location or macroeconomic backdrop. “What we found for India is that the stocks have good returns on equities, and there are well run companies, which are generally of good quality. But the prices are far too high,” he explained. Pines added that he’s unable to justify current stock prices, even when accounting for “aggressive assumptions” about future growth in India’s mid-cap stocks. The mid-cap ‘bubble’ Pines revealed that his fund recently held two Indian stocks, one of which was SJVN . SJVN, a mid-cap stock in the hydropower energy sector, has experienced a “vertical price” movement, which Pines attributed to a potential bubble in the Indian mid-cap market. “You know, I think the larger cap is just expensive. But in the mid-cap, you’ve seen a lot of these stocks go vertical,” he said. Shares of SJVN have risen 240% over the past 12 months. However, in February, the company reported an 1.6% decline in revenue and a 40% fall in pre-tax profit for the third quarter from the same quarter a year ago. As a result, Pines and his team decided to sell their position. SJVN-IN 5Y line SJVN says it will grow its power generation capacity to 50 gigawatts by 2040, indicating a long-term compounding growth rate of 20%, according to analysts Rohit Natarajan and Pranav Furia at stock broker Antique Stock Broking. The company currently operates 2.3 gigawatts of power generation. “Even if the target misses by 50%, the long-term growth rate is 15%,” the analysts told clients on Feb. 12. Those assumptions have partly led them to place a bullish price target on the stock, expecting SJVN to rise a further 30% from current levels. But not everyone is convinced. Sudhanshu Bansal, analyst at JM Financial, believes the stock could fall by nearly 50% over the next 12 months. The only ‘reasonable’ Indian stock On the other hand, GAIL India , a natural gas distribution company, remains the sole Indian stock in Pines’ portfolio. The fund manager said that GAIL offers “reasonable” value relative to other Indian equities, benefiting from the government’s infrastructure spending and the growing demand for gas and its products. “It’s probably a net beneficiary of this government infrastructure spend and demand for gas and its product — and the valuation is reasonable,” Pines explained. The Federated Hermes Asia ex-Japan fund has allocated 1.56% of its $3.1 billion worth of assets under management to the stock. GAIL India shares are also traded in the U.S. and U.K. over the counter or depository receipts. But will the fund manager buy the stock now? GAIL-IN 5Y line Pines revealed that his team had already cautioned that the stock was approaching “full valuation” — yet the stock had risen by another 20% since then. “It’s good value, but it’s not fantastic value anymore. But relative to everything else in India, that’s fantastic value,” he added.
