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Ajit Dayal of Quantum Advisors says Sensex has given compounded returns of 35% peranum in the last 7 years and one must not expect similar returns but returns of 15-20% over the long-term is possible.

He further told CNBC-TV18 that valuations in India are not cheap but they are not near bubble phase either and so they are not uncomfortable with current valuations. At present at Quantum Advisors they have fairly low cash levels said Dayal.

Excerpts from CNBC-TV18's exclusive interview with Ajit Dayal:

Q: The expectation is that come January there is going to be big dollops of cash and that’s probably going to take the market a bit higher than where it is. Would you go with that theory?

A: We have to go back a bit and look at- if you had put Rs 100 in the BSE 30 Index in January 2001, today that Rs 100 standing in December 2007, seven years later effectively would have been Rs 874. So that’s a profit of Rs 774 over the last 7 years i.e a compounded rate of return of about 35% per annum or about 2.5% per month. I don’t think that people should expect January-February-March-April 2008 to sort of give you that sort of return.

Having said that we are very optimistic on India. We believe that Indian economy is totally in many ways dealing from what's happening in the US. It never has really been coupled to the global economy. India is very much a domestic driven economy. Unfortunately, some mishaps in policy where we have gotP-notes that has made us part of global capital flows in a far more accelerated fashion then probably what we can handle and so if something happens in the US- subprime crisis, if the big groups out there begin to withdraw capital from all their sort of territorial expansion plans and territorial investment plans which includes India and they take capital back home then yes, because of the P-note exposure and linkage that the Indian capital market has you could see a sell off.

So will January 2008 see a sell off because of what's happening in the US or will January 2008 see an increase-We don’t know but one should expect about a 15-20% rate of return in our view from Indian stocks in the long run not the 35% per annum that we have seen since 2001 in last seven years but certainly a 15-20% long-term sustainable number still looks very good us.

Q: How comfortable are you feeling about valuations at this point- the 20,000 plus? Are you feeling okay about the way we are stepping into earnings?

A:We are a value investor and we tend to be in cash when we don’t like the valuations. We actually are in fairly low cash right now. We had taken a bit of profits if you will in the month of October and we looked quite smart because the market fell off when the P-notes thing was announced. We looked very stupid when the market rebounded and we are still sitting in some cash but we have been in fairly low cash levels right now and that’s should indicate to you and to our viewers that we are very comfortable with valuations, we are not saying it is cheap but we don’t think it is anywhere close to bubble environments.

There is always stock selection that’s going on in our processes and within a basket of 20-25 stocks we have a portfolio now, which is in our view still a value portfolio. So yes, there is value; we are not uncomfortable with the valuation at this index level.

Q: How are you feeling about that midcap and smallcaps? Do you think its still a valuation catch up that’s playing out or is it just the money flows, which are being diverted to that part of the market?

A: It is more like money flows. There is always sector rotation in stock market. Many fund managers have got sort of favorite sectors. We are sort of cap insensitive and sector insensitive in many ways when we pick and choose our stocks. But if one looked at what happened in the indices from 2006 May, which sort of bottom in May-June 2006, it’s been really the largecaps, the BSE 30 led stocks and within the BSE 30, 5-6 stocks have accounted for a much of the rise in the Index till about the third quarter this year.

So there is some sort of a leadership change, as you all would talk about it. With regards to DSP Merrill Lynch forecast of estimated 10% GDP growth rate, our numbers and our valuation numbers are based upon a 6.5-7% the rate of growth of GDP, and if the GDP numbers do indeed end up at been 8-9 or 10% that would make the market in our view very cheap. So at 6.5% we are seeing the market to be not expensive, not cheap but if a 10% number did pan out which we don’t believe it will but if it did pan out and in the next few years if we get the infrastructure right then we believe it can, then the market is trading still in our view extremely cheap.

So we will be rushing into buy, if we got new cash and the 10% GDP numbers did sort of pan out.

Q: From the earnings lot though would you include IT in your list this time around or you will still stay away?

A: No we have been buyers of IT. We have been buying IT; we had some IT exposure at the start of the year. We have actually been adding to it over the last few quarters. We don’t believe that currencies, a weak currency is the only reason to buy IT stocks. We believe there are some fabulous companies out there and we hope that we own them in the portfolio and have made the right selection.

We have been buyers of IT. So it has been a nice last one or two weeks for us though not nice one-two quarters for us because we have been sort of buying up the IT as they have been coming down.

Q: Have you had reason to add any agro commodities to your list such as sugar?

A: No, we actually looked at sugar a couple of months ago and we know the share prices have rebounded a bit since then. But we haven’t really had the strength to go in and buy into sugar because that is sort of driven a lot by political influence and by near-term political events. Our job as analyst, as fund managers we believe in the long-haul is to try to sort of analyze things that we can understand and we have little understanding of what makes sugarcane and sugar prices move around given all the political stuff going on around it. So we are not able to guess that and we don’t have it.

We have been certainly watching it, studying it but don’t have the conviction or the strength to put money behind it as yet. One day we will probably but haven’t done so far.

Q: What is the top pick for 2008?

A: We do not disclose names but I recently spoke about IT and we like IT. We haven’t bought IT with a view of three-six months; we do not buy stocks with three-six months views. We invest in them after studying and trying analyze where things could end up on the three-five year view at the very minimum. So our view is that IT as a sector could recover.

We are not believers in a strong rupee. I think we kind of fool ourselves a bit by saying that when we strengthen against US dollar that we are a strong currency. There have been some issues in America and America has had an inherently weak currency. So a basic currency trade is a two way game; if one has a weak dollar it got to be something strong on the opposite side. So we have happened by accident to have a strong rupee against the US dollar.

And our view is that the Indian rupee given the fact that if one looks at the current account deficits or trade flows, you stripe out of the portfolio money that’s coming into India every year and we have had about USD 50 billion of portfolio money in India over the last four years and so if you strip at money out, India is actually running a current account deficit and is been funded by portfolio flows and no one has any control or any understanding of how sustainable these portfolios flows are on a month to month basis, on a quarterly basis or even on annual basis specially given the fact that P-Notes account for half of those flows.

We are not convinced that a weak dollar in that sense a strong Indian rupee is a given and the IT companies that we own in the portfolios we believe can manage the environment around them.

Source: Moneycontrol.com