The last 6-9 months have been challenging for PMS managers, what with the market being so narrow. Head of the PMS group at Reliance Capital, Rajesh Bhatia says, the markets stopped going up from mid-December onwards when the first CRR hike took place and starting to fall from mid of February when the second CRR hike took place.

He feels that contrary to the perception that the correction had to do with international events in US, China etc, it had more to do with the domestic market, which stopped going up when the first CRR hike took place in mid-December.

Excerpts from CNBC-TV18's exclusive interview with Rajesh Bhatia:

What are you thoughts on this correction? How far is it done and how are you approaching it at PMS?

I think contrary to our belief that the correction has more to do with international events maybe in China, US etc; I feel the seeds of this correction were in the domestic market. You saw the markets stopped going up from mid-December onwards when the first CRR hike took place and starting to fall from mid of February when the second CRR hike took place.

I think it was more a function of local factors, which has corrected this market. The international factors have only exaggerated the situation, if you look at it simplistically speaking as the cost of capital goes up as interest rates go up PE's contract. We had moved up to a price earnings of 17-18 times for FY08, they have now corrected to 15 times as a cost of capital has gone up by 200-300 bps. I think it's a more function of the domestic conditions being followed up by international conditions that's leading to this fall.

In that case where do you see the market moving in the next few weeks or so? Do you think attractive price points have emerged or do you think you might get better ones?

The best-case scenario suggests that as you move into April-May you will start seeing inflation coming off and therefore the pressure on interest rates will ease off. I think the market at this moment are not discounting whether interest rates affect topline or bottomline growths of companies. So the best-case scenario says that if interest rates move down or soften after April or May.

Lets say when you're looking at the first half end of the next financial year - say about September of next year, most analysts or fund managers would start discounting FY09 and on those valuation basis again the market will start looking attractive. So, there is a possibility that as we end this year you would get positive gains on the Indices but that's the best-case scenario.

What you should worry about is that in case the government is a little more determined on managing inflation even after the April-May, and needs to take more measures to arrest inflation then I think you will have to see whether those measures will actually affect growth or profitability of companies.

How have you approached rate sensitive like real estate at Reliance PMS and what is your take on that sector after the sharp erosion that we have seen in market caps there?

We do not have much exposure. There is very negligible exposure as a percentage of the PMS that we have to the real estate sector; we do not have meaningful exposure to this space. Stocks have corrected meaningfully but at this moment we are not going and buying real estate companies.

You do have some exposure to cement though - what have you done with your holdings there?

We have actually reduced them and moved into technology companies.

So you are worried about what the government is doing with the cement companies?

Certainly government policy does impact sectors and we have seen this in the case of sugar. We have to be cognizant of the uncertainty that has been brought about in cement and we will have to articulate our senior where this problem gets resolved in a manner where stock prices can go back to the levels that we have seen. It seems a little difficult to articulate and therefore our reduction in our exposure in the cement sector.

Do you participate in primary issues as well? Anything that you have subscribed to?

We have very little participation in the IPOs.

What about the banks, the other interest rate sensitive?

Banks have come off sharply and I can see that lot of public sector banks are quoting at one time book value for FY07. We have yet to take a call on whether we need to increase our exposure there but certainly it's an area, which we would want to look at.

At this point in time what do you see as a prudent strategy? Have you increased your cash levels or have you started buying already?

The markets have corrected from a slightly expensive valuation to a fair valuation. We hold some cash in our portfolio and we are looking for stocks to get a little cheaper to deploy that balance cash. If we get stocks which are little cheaper, then we will have greater degree of confidence in the margin of safety that these stocks offer. If we see a situation like that we will increase our equity exposure then.          

Do I hear that you are saying that the market would cool off a bit more offering you better opportunities?

For the kind of cash that we have its better to see how that evolves. Of course if we find an opportunity we are not necessarily going to wait to time the market but in case we are just waiting to see what opportunities emerge from whatever volatility the market is bringing in, honestly we haven't been able to zero in on an opportunity which we see as very compelling and which offers a great degree of margin of safety to actually go ahead and deploy that cash on at this moment.

How are your assets split between large caps and midcaps at this point?

It depends upon the schemes that we run. We run large cap schemes and then we run a combination of those as well. But on a combination of large cap and midcap schemes we would be over 60-65 per cent large caps and say about 30-35 per cent midcaps.