Stock picking is inherently easier than constructing a portfolio. It’s always simpler to present one argument than it is to develop a bunch of related and coherent stories. One involves a single story, the other is all about creating a balanced allocation across sectors, themes, stocks and stories. Here’s my personal (and mostly qualitative) take on the stocks we have picked for the Safe Wealth portfolio.
Capital goods, technology, energy, consumer and power are the sectors that form a whopping 43% of your Safe Wealth. No big news here, it’s pretty obvious. These are all macroeconomic themes that are currently playing out in India.
These are also the sectors that are accounting for a bulk of the incremental fund flows into the capital market. Our capital goods bunch gets the top sectoral allocation of 10%, and entirely comprises power sector equipment makers—a tilt towards Siemens.
While both Siemens and Areva might seem expensive in absolute valuations, one needs to look at the fact that there is at least five years of clear year-on-year growth in the power sector in India. Both companies have global size, green pedigreed parents that are at least an order of magnitude larger than the India operations and who see the Indian babies as growth stories.
On the other hand, Bhel is a true-blue Indian power equipment manufacturer who dominates the generation equipment space with over 70% market share. It promises to continue the story as it announces capacity expansion, three-shift working and crucial global tie-ups on super-critical technology.
The technology space is a bit tired right now, what with currency and wage cost pressures; yet the long-term viability and growth potential seems intact. What better stock to pick from here than the long-term bellwether, Infosys? The best-known and most-respectable tech company will surely be the first to ride any resurgence and gets pride of place with a 9% allocation. If it is Infosys in IT, then it has to be Reliance in the oil and energy space. In fact, if you are a believer in Indian stock markets, in Indian oil and gas, in Indian retail and, indeed, in India then look no further than Reliance. The next few years should see Reliance roll out mega plans in oil, gas, refining, retail and more. We have chosen to invest in Mukesh Ambani’s dreams.
In the consumer sector, we have picked two contrasting stocks: Reliance Communications and Hindustan Unilever (HUL). RCom is figuring out how to manage fast growth, while HUL is figuring out where growth has gone. Together they form our top picks for the consumer sector with 8% allocation. For sheer category spread, distribution efficiency, brand equity, market leadership and product quality there is no FMCG company to beat HUL. We feel Lever is too good on pedigree and will soon bounce back. Our bet on RCom is based on two triggers: value unlock -ing in its towers business and better than anticipated growth in its telecom business.
There’s nothing to beat NTPC for safety. The only PSU to consistently figure among the most desir -able employers is also the top power generator in the country, and generates enough surplus on current operations to add 2,500 MW consistently every year. Most efficient, highest capacity utilisation, multi-fuel capability, coal mining ventures and assured returns are only some of the reasons why NTPC is the only power company in Safe Wealth and gets a clean 8% weight.
The new found vigour in the Indian infrastructure and construc -tion space is best represented by GMR Infrastructure, a company devoted to the development of airports, tollways and power plants. At 3% allocation, this is an ultra longterm bet, with sweeteners in its business model visible in the form of real estate development rights at Delhi and Hyderabad airports.
Notwithstanding the controversy over pricing and the concerns of overcapacity in the cement sector, we have put a shade under 3% on Grasim as our bet on the long-term prospects of this basic building material. Grasim is ahead of other cement players due to its size, dispersed presence, working efficiencies, confirmed growth plans and happens to be much cheaper per tonne than the other leader in cement: the Gujarat Ambuja-ACC (Holcim) combine.
Another 3+3% allocation goes to two high-quality players in the finance sector: Power Finance and HDFC Bank. Both are high pedigree companies with HDFC Bank having proved its mettle in terms of near zero NPAs, excellent operating parameters, consumer franchise and service quality. While ICICI Bank does seem to be achieving more, I prefer HDFC Bank at over five times adjusted book value per share for safety and sustainable growth. The question that settled this was rather simple: all other things remaining the same, would we prefer an aggressive or a conservative moneylender?
On the other hand, Power Finance at a shade under two times adjusted book value has yet to prove itself. However, the sheer size and quality of the government mandated spend in the power sector in the next two Five Year Plans will take the loan books of PFC beyond what many think possible. It’s the Power Ministry’s promoted vehicle for lending to the power sector. PFC has no problems raising loans; banks queue up to give it money, as they do not have to assign a risk weight to the amounts lent to PFC. The health-care sector has been plagued by underperformance for the past year or so. As fund manager for Safe Wealth, I had the choice of ignoring it. I chose to go with a single pick at 5% weight: the ever consistent, growing and highly capable pharma company that has made Dilip Shanghvi the darling of investors—Sun Pharma.
The metals and mining sector is huge, but gets discounted at commodity valuations. The challenge was to find a couple of managements who have the qualities that make for long-term success in the sector rather than aggressive upstarts. If the first family of steel (Tata) finds mention, can the second one (Jindal) be far behind?
Finally, our picks for the auto and logistics sectors are no-brainers, really. After so many years of competition, Maruti still dominates the Indian car mart. Its new SX4 promises to upstage the Honda City, while the Swift is already a brilliant success in its class. By the way, do you know that Maruti accounts for a disproportionate share of Suzuki’s global profits?
And no matter what the management of Shipping Corp claims, Great Eastern Shipping (after the Great Offshore spin-off) is India’s highest pedigreed shipping argument. Tell us what you feel about our portfolios, we will listen patient -ly. Who knows, we might even pick a leaf of your investing book!