For those who might remember, in the previous portfolio review, I had justified why we might buy Infosys, one of the 17 stocks that I have listed for Safe Wealth and 28 Wealth Zoom ideas. But I desisted from buying anything. It's status quo this fortnight as we are in the middle of a quarterly results season. The results are threatening to reverse 10 straight years, or 40 quarters, of year-on-year growth (YoY) in EBITDA (aggregate earnings before interest, taxation, depreciation and amortisation) for the companies that comprise the Sensex.
So what has made me turn bearish on India's battered corporate upper crust? It's not just the poor results in this particular quarter, which are already ‘flagged'. It's the anticipation of more bad news. We will get a frustrating lack of response to the fiscal stimulus packages after the initial thrill. Also, as we enter the election season, there will be a keenly felt absence of government action. And, consequently, no sustained buying by significant institutional investors.
On the results front, margin declines will kick in as the pricing takes a beating in the interest rate-sensitive sectors such as auto, construction, cement and, perhaps, pharmaceuticals. This is also true of commodities, which seems to have caught a long-term cold. So is there a saving grace? Banks, software, capital goods and media might surprise on the upside, especially PSU banks which are the natural recipients of low-cost inflows to their savings/deposit accounts when perceived risks play on the minds of depositors. Also, the fall in interest rates will lead to SLR-portfolio gains for most PSU banks, bolstering the bottom lines further. In short, it's a great time to do absolutely nothing in terms of actual buying or selling in any portfolio. But, I think, we must. Especially for our two models which are sitting on 100% cash piles.
By the end of January, when the results season gets over, we will have differentiated the men from the boys, while the overhang of the economic slowdown and approaching elections will keep the runaway hits of the results season from, well, running away.
The Investment Rationale for Safe Wealth
Infosys has delivered decent third quarter numbers even as Satyam imploded in a scam and Wipro was blacklisted by the World Bank. But the former could not evoke future hope as the management issued a muted guidance for the fourth quarter of the year and indicated a lack of visibility in client IT budgets. Stick to Rs 102 EPS for 2008-9 with no great insight about 2009-10, except that the quality of management continues to inspire.
In the consumer space, telecom giant Bharti Airtel stands miles ahead of the competition. No matter how cheap Reliance Communications and Idea might look, it's Bharti which is the consistent leader in market share, core telecom margins and growth. In this quarter, Bharti might just manage to report a 33% YoY rise in net profits to Rs 2,300 crore, along with a long expected breakout in operating profit margins (OPM) beyond 41%. At this rate the company will cross Rs 8,300 crore net profit for 2008-9, posting a return on networth (RoNW) in excess of 30% and a return on capital employed of almost 25%, with a negligible gearing of under 20%. When you look at the street's growth expectation (22% compounded annual growth rate over 2009-10 and 2010-11) post the realisation of economic slowdown, you realise why this stock is a steal at Rs 600. It's selling for just around 10 times the 2009-10 earnings.
The other consumer giant I had proffered for Safe Wealth was Nestle, which is about twice as costly as Bharti at about 20 times the 2009 estimated earnings. Nestle is not just a leader in dairy-based and other processed foods in agri-rich India, but this a company that's superior to the FMCG emperor Hindustan Unilever. HUL trades for a humongous 26 times the 2008 earnings in almost every core operating metric that you can think of. Nestle is posting 25% sales growth against HUL's 20-odd, and at almost 19%, is a full 600 basis points ahead of HUL in operating profit before interest and taxes (PBIT). The audited 2008 numbers will come out after January, and I expect Nestle to cross Rs 4,300 crore in revenues, and earn about Rs 58 per share. Are you game to grabbing this one below Rs 1,250 (just under 18 times the 2009 earnings of Rs 71-72) on a day of panic?
In the financial space, the State Bank of India was an obvious choice given its size, reach and low-cost deposit franchise. And, of course, its rock steady performance and bargain value. The bank is trading for around the book value, adjusted for subsidiaries. Why shouldn't it figure in Safe Wealth, given its spurt in net interest income, a decent 15% return on equity, above average deposit/loan growth and a safe enough level for non-performing asets? With a rising current accounts, savings accounts (CASA) ratio and bond portfolio appreciation providing further comfort, SBI should comfortably walk into Safe Wealth. Contra idea: REC. Any comments on this one?
We'll continue the idea reviews in the next episode. Meanwhile, keep your ideas flowing in via e-mail or through the MT model portfolio blog.
The worst news on the economic front, globally and from India, is yet to come and is likely to do so between April and September this year. I believe that we should be able to see the initial stages of revival between October 2009 and March 2010. However, the recovery will take place very slowly during 2010.
Stock markets typically recover six to nine months before the economic rally begins and I expect the Indian market to move in this direction from August this year. The second half of 2009 is likely to be volatile. A sustained bull run will begin the next year.
My long-term outlook for the Sensex is that it is likely to go up to 40,000 (minimum 25,000) by September 2013 and 80,000 (minimum 45,000) by 2016. However, before that happens, the Sensex is likely to breach the 10,000 mark too in the next 18 months. For those who can hold on to their stocks for as long as seven years, it would be the best investment.
- Amar Harolikar
My suggestion is to park our money temporarily in safe assets like gold ETFs and gilt funds. The main reason to adopt this approach is that inflation is expected to fall along with the interest rates, and this could lead to a bond rally. Once the correction in the broader market accentuates and the valuations look compelling, we can buy the appropriate stocks. At the moment, the best thing would be not to reinvest the money that we have encashed. Inactivity and patience during tough times are important for investing.
- Hari Subramanian
The important question to consider is: What is the goal for your model portfolios and what is the time frame to achieve it? You can work towards a goal of doubling the NAV in one year.
I think that in each portfolio, first you must buy 10 stocks for long-term investment. After that you can buy the other stocks that can be traded to earn short-term profit. But our focus must be on longer perspective. Churning alone will not give us profits and so it must be limited.
I also suggest that you allow some stocks to run their full course. Let us enjoy the bonuses, rights issues and value unfolding in some shares.
- M.S. Vijayakumar