Set for action, awaiting reaction

As Dipen Sheth spells out his choice for Safe Wealth and leaves the floor open for debate, the readers gradually open up to the new style of managing portfolios.

Dipen Sheth | Print Edition: January 22, 2009

Over the past two issues, I have introduced a new, interactive process for managing Safe Wealth and Wealth Zoom. Some of you have offered mild encouragement, while others have noted with dismay that I am abdicating my responsibility as a fund manager. To all the readers who are not clear about my motives, here's what I have to say:

I am not (repeat, not) avoiding or shirking responsibility.

The final call on what to buy, when to buy and how much to buy (or sell, for that matter) remains entirely mine.

Yes, it's kind of funny that after having run both the portfolios for 17 months, I should liquidate them and start all over again. But keep in mind that this is, after all, a shadow exercise which can teach all of us, myself included, a thing or two on how to invest in stocks.

So relax, Messrs Ganesh Malpani and M.S. Vijaykumar (both are readers who have expressed surprise that I should let others run the portfolios), I continue to retain the fund manager's position. Only, now I have to do it in a demonstrably superior and transparent way, whether I choose my own ideas or yours. Vinay Shetty's kind words of encouragement sum it up: "Good idea, Dipen. All suggestions to buy or not to buy, sell or hold should come with a reason. If possible, let's track the suggestions from readers."

Since I have hardly received any new stock ideas from readers, I will take the liberty of elaborating on my own stock picks from the previous issue.

In the technology pack, an obvious pick for the Safe Wealth portfolio seems to be Infosys Technologies at Rs 1,100 a share. Potential alternatives: TCS, Wipro, Satyam, Tech Mahindra and Mphasis. But none of these come within a mile of Infosys if you are looking to build an investment portfolio that represents all that's rock solid about corporate India. That's what Safe Wealth is supposed to be all about.

If I had to pick a stock based only on the quality of management and governance, Infosys would walk into this portfolio blindfolded. For almost two decades now, N.R. Narayana Murthy's dream team has delivered a consistent year-on-year growth in revenues and profits, while becoming the original poster boys of the Indian IT outsourcing saga and also retaining squeaky clean management practices.

Even as Satyam flounders in the wake of its failed Maytas deal and TCS suffers from promoter selling pressure (remember, the Tatas may need large dollops of money to invest in their leveraged operations in Tata Steel, Tata Motors, Indian Hotels, Tata Power and Tata Chemicals), Infosys comes across as the only IT major that trades heavy volumes (unlike Wipro) and has no corporate overhang.

The chief downside, and the best reason to postpone buying is that the software sector is riding into strong headwinds. The company has clearly indicated a 'degradation in demand environment' as it battles a neverbefore economic slowdown in its largest geography—the United States. Europe and other developed markets are no different.

Order pipelines are stalling, volume growth threatens to level off and pricing pressure will bite off whatever little boost rupee depreciation promises to provide. The worst of the slowdown will probably play out over the next two or three quarters as this (arguably the best) fighter among the frontline IT companies tightens its already efficient operations, reduces variable wage outflows and attempts to resist pricing pressure.

The numbers can be quite interesting as 2008-9 will probably see a high watermark of over Rs 21,500 crore in revenues and above Rs 6,000 crore in post-tax profits. This will take EPS to over Rs 102 a share, some 25% higher year-on-year and provide an apparently cheap PE multiple of only 11 if we decide to buy it. Not surprising, if you factor in the possibility that the company might actually post a slight absolute drop in profits in 2009-10, given the tough conditions.

But here's my real reason to buy Infosys: by March 2009, Infosys might add Rs 1,500 crore to its cash pile of over Rs 8,000 crore that it had as on September 2008. And this might swell to over Rs 12,000 crore by March 2010. Think of all the distressed technology companies around the world that might be up for grabs by then.

The next India proxy suggested by yours truly for the Safe Wealth portfolio is from an industry where, unlike Infosys, the 'demand environment' is still strong. You guessed it: telecom. At over 300 million subscribers (of whom more than 80 million are Bharti Airtel's), the telecom market in India simply cannot be ignored.

Whether it will create value for investors from now onwards is not crystal clear, given the uncertainty regarding falling average revenues per user (ARPUs), front-loaded cash outflows to get 3G revenues and incremental capex likely to increase as rural rollouts commence. But at less than 30% penetration, an industry that is growing at 9-10% per quarter cannot but find some mention in any portfolio that attempts to ride the best of economic and investing opportunities in India over the next few years.

But more on Bharti versus Reliance Communication versus Idea and the rest in the next fortnight. Till then, keep your own suggestions coming and tell me whether to refrain from including Infosys in Safe Wealth or if you think we should add another company to the list.

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