Three issues after suggesting an interactive way to manage the 'Money Today' model portfolios, we are struggling to get ideas from the readers. Given their earlier eagerness to accept, suspect and disapprove of the portfolio stocks, this is a little puzzling. Still, here are some of the readers' suggestions along with my comments. We are at the fag end of the December 2008 quarterly results season, and I will start reconstructing the model portfolios from these ideas (and the ones I have recommended earlier) from mid-to-late February. Keep the ideas flowing.
State Bank of India (CMP: Rs 1,130): One of our readers, SKS, has suggested SBI as a proxy for the Indian economy (whenever it turns around!). Actually, SKS, there are additional reasons to include SBI in our portfolio. Notwithstanding its staggering size, SBI posted a 35% higher net interest income yearon-year (YoY) for the December quarter and upped the operating profit by 45% in spite of 37% higher employee costs. The net profit rose by 37% to Rs 2,478 crore, aided by writebacks to its SLR portfolio. SBI is on a roll. I expect it to close the year with Rs 8,600-odd crore in profit and deliver nearly 15.5% return on net worth. That can take the adjusted book value to close to Rs 800. Give this 1.2 to 1.3 times and add Rs 350 of embedded subsidiary value, and you can see why Rs 1,300-1,400 is an immediate target.
If the bank continues to add about Rs 120 per share in annual profits thereafter, it's easy to figure out why an annual appreciation of nearly 15% can be hoped for. SBI is clearly a long-term pension fund kind of a stock, a proxy for India's economic growth and a safe shelter for bruised portfolio investors. I would target a holding of up to 10% in the Safe Wealth, though not at one go. Can we hope for market cracks between now and, say, September to average our way into this one?
Hindustan Unilever (CMP: Rs 255) : Another one of SKS's ideas, HUL is a terrific business by all means. Unlike the growth stories that we are greedily eyeing, this is almost an 'annuity' business and works with very high return ratios. It is rich in cash, hides intangible/ strategic assets (brand value is one, for sure) and spewed over 135% RoE over 2008. HUL's leadership across a number of FMCG categories is unquestioned, and so is its stake in the future of Indian FMCG consumption. You can't doubt the fact that it's a great business, but are we buying it anywhere near a sensible price? (I have similar feelings about NTPC, especially since its returns are capped, and we should not pay an unreasonable premium over book value for this otherwise great company.) Consider for a minute that HUL quotes for 26 times the earnings, and cannot grow in a sustained manner any faster than it is doing right now, which can be 12%. This, too, will now be aided largely by price falls in its raw material costs (in line with global crude/commodity prices) rather than volume growth in the key segment of detergents. Whether it will be forced to pass on the price drops to consumers in the next few quarters will be a key consideration. If it doesn't, the 26 times multiple will look attractive. Otherwise, the stock will face a sell-off (aided by the near-term outperformance overhang over 2008; HUL rose 20%, while the Sensex fell over 55%!). This is surely a great business, so we will nibble into a 2-3% initial position for Safe Wealth. We'll accumulate up to 6-7% only if it cracks to below Rs 210 or so.
Bharti Airtel (CMP: Rs 640): Enough has been mentioned about Bharti in the two previous portfolio reviews, as also in Boom & Bust on page 22 in this issue. Yes, it will surely figure in Safe Wealth. And assigning a double digit percentage to India's top telecom story can do us no harm. However, will someone please explain to me why incremental profits at Bharti are dominated by contributions from the 'Enterprise Carrier' segment, rather than the 'Mobile Services'?
Reliance Industries (CMP: Rs 1,280) This stock finds mention in almost every set of suggestions that I have received so far. It's not surprising, if you see its sheer scale and the brilliance with which Mukesh Ambani has built this polyester/petchem/refining/oilfield colossus over the past few years. Much like Bharti, this company is changing India. Can you imagine that Reliance Industries has added more refining capacity in the past six years than all the PSU refineries put together have done over the past 20 years? Or that, once the gas starts flowing from its Godavari basin fields, it will double the total gas availability in the country? In other circumstances, I'd put a 20% weightage on RIL in Safe Wealth. But a corporate governance overhang (sibling disputes, rumours of internal power tussles and Reliance's presence in all things political), sliding commodity prices and shrinking refining margins force me to impose a ceiling of 10% to the largest private Indian company. And yes, we'll average out our way in here as well. Aggressively, if the stock tanks to three digits.
Too much is being made of the PSU banks' bond portfolios. These are one-time gains and don't lead to sustainable profits. I don't think these stocks will be re-rated based on the re-pricing of bond portfolios.
PSU banks have always been cheap. It's better to switch to HDFC Bank, which is all set to make use of the branch network at its disposal after its merger with CBoP. Just looking at the book value is not enough. We need to go through the NPAs, NIMs, C/D ratio, etc.
Infosys is not in the market to buy distressed companies. It looks for strategic buys that can fill the gaps in its offerings and have solid business models with enough margins. How do you expect Infosys to buy distressed companies in 2010 when it is refusing to buy a 'failed' Satyam now?
In an article published in your issue dated 20 March 2008, you mentioned that Infosys was not worth holding at about Rs 1,400. When the next few years look much worse than the scenario in March 2008, how can you justify that a 20% reduction in the price of the Infosys stock makes it attractive? I hope you get the facts correct in your justification.
Is Tanla a better bet at Rs 41 or Bartronics at Rs 78 for long-term price appreciation? Also, please start the old method of portfolio management rather than discussions, as it was more exciting.
I request you to first list out our goal and strategy clearly-whether we are investing for short/medium/long term-and then stick to them. By doing so, we can understand where we are headed and what we should do to align ourselves, if there is any deviation from our goal.
Before we begin to invest, I would like to remind you of a quote by Benjamin Graham: "An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative."
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