Last issue we explained the rationale for choosing the 17 stocks that comprise Safe Wealth, one of the two model stock portfolios we created jointly with Dipen Sheth of Wealth Management Advisory Services. Sheth explains the 22 stocks that consist of Wealth Zoom, the more aggresive of the two portfolios.
How did we select the Wealth Zoom portfolio’s first version? I’d think it was purely as an attempt to look smarter than Safe Wealth, by taking a few calculated gambles. As a result, the portfolio moves more towards mid-caps and growth stocks, quite clearly with some additional risk. This fits in with the philosophy of Wealth Zoom, as explained a couple of issues ago.
However, some things don’t change whether you choose solid or aggressive stocks. In terms of sectoral choice, we remain focused on capital goods, finance, technology and construction weighing in at 8% and above. Bringing up the rear are the laggards (metals, auto, logistics etc) with each sector at the 3% level. In the middle are health care and energy with a shade over 5% each, while we have reposed some more faith in the consumer sector at 6.9%.
We have spotted a goof-up in our sectoral allocation: the “power” allocation is actually for two “capital goods” companies (Areva and Suzlon) dedicated to the power sector. This takes the capital goods allocation to over 17%, a chunk of good luck that we may rectify before the markets turn away from their current fancy for the capital goods sector.
Although the performance of Wealth Zoom till date has been positive, we’ll begin with the losers. It’s difficult to lose money in today’s buoyant markets, but some stocks in our Wealth Zoom portfolio are doing precisely that. At 4.5 % of the portfolio, NIIT Tech seems to be suffering from the rupee appreciation overhang that threatens to rock the valuations of tech stocks. This means trouble, but only for now. Global Vectra, an intrepid operator of helicopters for offshore oilfields, reported disappointing numbers for the year to March 2007. We wonder why, considering it’s a high-margin business with considerable franchise.
While we admit to a mark-to-market loss on this item, we promise to investigate whether to hold or sell. Shasun, Shringar Cinemas, Bombay Rayon and Bharat Electronics are roughly at the same level compared to when we bought them about a month ago. For Shasun, we believe there are clear margin levers in the Rhodia operations (a large acquisition that gives them critical mass, capabilities and market access) and changing product mix that will drive the bottomline and hence valuations.
In the case of Shringar, we are essentially betting on the chances that it is the cheapest stock in its industry and is poised to deliver the best percentage growth in the rapidly expanding multiplex industry. We must also admit to the presence of a strong contender for this position: Pyramid Saimira. For now, we’ll choose to hold Shringar, purely because we know more about it.
Bombay Rayon, our lone bet in textiles, is a fully integrated manufacturer of fashion apparel growing at thrice the industry rate and is available at under 12 times estimated earnings for 2007-8. Bharat Electronics, cash rich, high ROI, government-owned behemoth, automatically lands opportunities arising from growting defence spending.
Our only common stock with the Safe Wealth portfolio is Areva, a French MNC, which is a global leader in the T&D equipment space. After two new factories in the last two months, this capital goods maker is poised to ramp up operations in sync with the opportunities that ABB, Siemens and Crompton are already encashing in the Indian market. At over 25 times 2007 earnings, this may still be a cheap stock to buy.
Ditto for Suzlon which, after the RE Power acquisition, looks like a world beater. Consider that the acquisition brings it offshore windmill capability, adding to the earlier gearbox integration story in the Hansen acquisition. A slightly debtheavy balance sheet should not worry Tulsi Tanti as he sets sail to conquer the two most exciting markets for wind energy in the future: China and the United States.
Both Crompton Greaves and Welspun Gujarat are homegrown companies that have doggedly created globally viable businesses across continents. Crompton has acquired languishing capacity in Belgium and Czechoslovakia, which serves as a business acquisition launchpad while funnelling competitive Indian skills and products to Europe. Welspun Gujarat, on the other hand, is setting up new capacities in the US to service the oil pipes industry in that country. It’s also putting together a difficult-to-operate plate mill that promises to fatten its margins in the fast-growing SAW pipes business into the 20% plus zone.
“Audacious, but can be done,” say the fund managers who have continuously bought Welspun, taking it from Rs 90 to over Rs 230 in less than a year. Wealth Zoom grabbed Welspun Gujarat just before it crossed Rs 200. Valecha Engineering and Punj Lloyd are both construction players with different levels of scepticism on their managements. Valecha is seen as too small to grow in an industry being increasingly dominated by size. What many don’t know is that it is acquiring Koon Holdings, a Singapore-based company with deep experience and credentials, and also foraying into the West Asia.
Coincidentally enough, it was the acquisition of Singapore-based Sembawang that led to the initial scepticism about Punj Lloyd. A globally proven specialisation in petroleum and energy construction, a rapidly evolving order book in civil construction and promising opportunities in Saudi Arabia will make Punj Lloyd grow faster than many (if not most) players for the next three to four years at least.
For space reasons, we’ll skip the reasons why we picked Apollo Tyres, SAIL, Mcleod Russel, IDBI, Yes Bank, Dishman, Northgate and Petronet. Tell us why you would not include them in your portfolio, and we’ll respond with our defence in our next issue. Till then, ride our Wealth Zoom portfolio into the sunset.
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