HSBC'S India fund manager Sanjiv Duggal has climbed down the technology ladder from computer software companies into what he is hoping will prove a really solid investment - cement. Mr Duggal, who runs the best-performing Indian fund this year, has kept ahead of the pack by spotting trends early. By the start of this year he had put 30 per cent of his US$70 million fund into software firms, the most he is allowed to invest in one sector. With the price of some of the stocks in the sector doubling and fears of revenue declines with the end of work on Y2K solutions, Mr Duggal decided it was time to call time on the software party. The sector was cut back to a neutral 8 per cent weighting in the portfolio, with Satyam Computer Services reduced from 10 per cent of the fund to 3.35 per cent. 'The valuations had gone up tremendously in the first quarter of this year. They were factoring in a lot of the good news and none of the concerns about a slowdown due to Y2K,' he said from his office in London. After some detective work on a trip to India in March, Mr Duggal concluded that cement companies were the way to build more gains. Economic growth is expected to creep back up to 6 per cent this year after bottoming out last year at 5 per cent. More importantly, 30 per cent of gross domestic product comes through farming, and the agricultural sector did well last year. Mr Duggal guessed correctly that this would feed though into sharply higher cement demand, with sales 20 per cent higher in the past four months than in the same period a year ago. 'When people have money in rural areas, what they do is shift from a hut to a more permanent structure,' said Mr Duggal, who was born in Britain but grew up in Bangalore. 'Going forward there is going to be a shortage of cement in India. It is uneconomical to import cement into India. 'There is no new capacity coming on for the next 2.5 years, so you are going to get significant kicks in cement company earnings from a rise in cement prices.' Politics is also coming into play to boost cement demand. Mr Duggal said: 'There's some state elections which are due at the end of the year and there are a lot of states which are busy constructing flyovers and roads to keep promises they made to their electorates five years ago.' The top three holdings, making up 22 per cent of the fund, are all involved in the sector: Associated Cement, Larsen & Toubro and Grasim Industries. 'Cement we like to have for the next year or so,' said Mr Duggal. The next move may be back into software if prices come down. Mr Duggal sees more upside from quality management shifting their companies' focus to e-commerce work, often farmed out from US firms. 'We like the sector. From a medium-to-longer-term point of view, we will be overweight,' he said. Another possible move will be to beef up pharmaceutical holdings as Indian companies generate more of their own drugs with the country enforcing chemical process patents to meet World Trade Organisation requirements. 'We are seeing Indian companies generating intellectual property rights,' said Mr Duggal. 'The domestic pharmaceutical companies are shifting their generic R&D skills into basic research. Given that [scientists with] PhDs cost only a tenth of what they do in the US [in wages], this is an industry which has a lot of potential.' One corporate example is Dr Reddy's Laboratories, one of Mr Duggal's holdings, which is linking up with the Danish company Novo Nordisk to pioneer an anti-diabetic drug that only needs to be taken once a day. While the Bombay stock market has zig-zagged up and down since the HSBC fund was launched in 1996, clever stock picking has seen its units rise from US$10 each to $24, according to Mr Duggal. His performance for the year to July 31, according to fund-tracking firm Lipper, is 109.05 per cent, well ahead of nearest rival, the India fund of Dresdner RCM Global Investors, which is up 78.09 per cent over the same period. Both funds have been helped by a strong rise in the Bombay market, up 50.99 per cent this year. But Mr Duggal believes it is not too late to get a piece of the action. He has a laundry list of factors which will push prices still higher from a market price-earnings ratio of 13.9 times prospective earnings over the next 12 months. National elections are coming up next month and in October, with opinion polls suggesting the Bharatiya Janata Party coalition will return to power with a strengthened majority, beating out a badly split Congress Party. That would provide the political stability in which markets can thrive. There are also the benefits of corporate restructuring, which began three years ago. An example, said Mr Duggal, was the huge Birla Group, parent of Grasim Industries. Since taking over the conglomerate in 1995 when his father Aditya died, the youthful Kumar Birla has been turning its focus from market share to return on capital. Unprofitable businesses have been streamlined or sold off. One subsidiary, Indian Rayon, is even planning to buy back 25 per cent of its own shares to boost shareholder value. The Bombay bourse itself has been doing some restructuring to make itself more attractive to investors. It is switching to scripless trading, with 90 per cent of deals expected to be paperless by the end of the year. The old, cumbersome system, which literally needed wheelbarrows of share certificates, was a drag on trading. Including the Indian fund in a portfolio was also a sensible diversification, Mr Duggal said, as the market largely moved to the beat of its own drum, taking little heed of what went on in the rest of Asia or in the US. The country did not rely heavily on export trade and the rupee was not fully convertible. Television footage of Indian troops battling insurgents in Kashmir may make some investors jittery that an all-out fight will break out with Pakistan, a fellow newcomer to the nuclear-bomb club, but Mr Duggal said: 'It's a worry but there is a very low probability of full-scale war.'