Pines Sells SJVN Amid 'Bubble' Warning, Sees GAIL as Solid

Investor labels Indian mid-cap stocks as 'bubble,' sells SJVN after 240% surge, sees GAIL India as sole 'reasonable' investment.

By Barry Stearns

5/15, 19:45 EDT

Key Takeaway

  • Jonathan Pines warns of a "bubble" in Indian mid-cap stocks, despite India's strong economic growth.
  • Pines' fund sold SJVN after a 240% surge, citing misalignment between stock prices and company value.
  • GAIL India stands out as a "reasonable" investment amid high valuations, benefiting from government spending and gas demand.

Market Valuation Concerns

Jonathan Pines, a contrarian fund manager at Federated Hermes, overseeing the $3.1 billion Asia ex-Japan fund, has raised concerns over the valuation of India's mid-cap stocks, suggesting they are in a "bubble." Despite India's strong economic growth, with an 8.4% increase in the October to December quarter fueled by private consumption and manufacturing, Pines believes there is a significant disconnect between the country's growth potential and the current valuations in the stock market. He acknowledges India's advantages, such as a pro-business government and strong international relations, but maintains a cautious stance on stock prices.

The Mid-Cap 'Bubble'

Pines' skepticism is particularly directed towards the Indian mid-cap sector, where he observes "vertical price" movements that do not align with the underlying value of the companies. This perspective led his fund to divest from SJVN, a mid-cap hydropower energy firm, after its shares surged 240% over the past year, despite a reported 1.6% decline in revenue and a 40% drop in pre-tax profit for the third quarter year-on-year. Analysts at Antique Stock Broking, Rohit Natarajan and Pranav Furia, remain bullish on SJVN, citing a long-term growth target that could justify further price increases. However, Sudhanshu Bansal from JM Financial predicts a nearly 50% decline in the stock over the next 12 months, highlighting the divided opinions on the stock's future.

GAIL India: A Lone 'Reasonable' Investment

Amidst his critique of Indian mid-cap valuations, Pines identifies GAIL India, a natural gas distribution company, as the only "reasonable" investment opportunity in the region. He attributes this to the company's potential benefits from government infrastructure spending and increasing demand for gas. GAIL India constitutes 1.56% of the Federated Hermes Asia ex-Japan fund's assets under management. Despite recent gains that pushed the stock towards "full valuation," Pines views it as offering "fantastic value" relative to other Indian equities, underscoring the selective approach his fund takes towards investments in the country.

Street Views

  • Jonathan Pines, Federated Hermes (Bearish on India's mid-cap stocks):

    "If you were a top-down investor, India looks amazing because it’s got everything going for it... 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." "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."

  • Rohit Natarajan and Pranav Furia, Antique Stock Broking (Bullish on SJVN):

    "SJVN says it will grow its power generation capacity to 50 gigawatts by 2040... Even if the target misses by 50%, the long-term growth rate is 15%."

  • Sudhanshu Bansal, JM Financial (Bearish on SJVN):

    "[Believes] the stock could fall by nearly 50% over the next 12 months."