Constructing a model Indian equity portfolio is somewhat similar
to electing members for Indian parliament. Investors like electorate have
limited choice.
As suggested
yesterday, there are not more than 100 companies that have demonstrated
capabilities to remain relevant over many business cycles due to their product,
market and technology leadership, strong financial position, lower beta to
macro fundamentals, and proven managerial capabilities. Only 80 odd companies
have given consistent good positive return over past 10years, 5year and 3year
time horizon.
We took three approaches to identifying companies for our model
portfolio.
Firstly we applied a slight variation of the classical
investment approach. We looked at value of various companies and short listed
the companies which have been, still are and will likely remain relevant in
Indian and global economic conditions. However, since there are just a few of
these businesses are available in India, these companies invariably trade at
premium valuation. Hence we had to abandon the “buy at low price” principle.
About 100 listed companies fit the basket.
Secondly, we applied a simple “historical economic value added
(EVA)” rule to all listed companies, and identified companies that have
consistently given positive EVA to shareholders over past 10years at least.
About 80 odd companies fulfilled the criteria selected by us. All these
companies were there in the list constructed using the first approach.
Thirdly, we surveyed some veteran investors, analysts, and
brokers asking for their subjective opinion about the best investible companies
in India. Based on their perception we created a list which contained 58 names.
52 of these 58 names were there in the list constructed using the second
criteria.
We finally selected 25 companies from this list. The key
leanings in the process were that —
(a)
Applying complex valuation criteria for company
selection could be useful for professional investment managers whose mandate is
just to outperform his/her peers over relatively short time frame. However, in
the wealth creation endeavor of households, it may not hold much weight. For
example, many PSU stocks do perform well in some part of a market cycle, but
most of them have not eventually created wealth for investors.
(b)
EVA to the shareholder may be the most useful
investment criteria for household investors.
For example, a company that has given more than 20% EVA over
past more than 20year or 3-4 economic cycles, is more likely to be beneficial
to its stakeholders in the following economic cycles than the companies that
have historically failed in rewarding its stakeholders or have erratic in their
economic and financial performance. Amongst Nifty companies, ITC and JPA are
two good examples to illustrate this point.
(c)
Over 90% of the companies that have created
euphoria or excessive excitement over a small period of time, have eventually
caused tremendous losses to investors.
For example, consider Suzlon and DLF.
…to continue
Thought for the day
“Choose a job you love, and you will never have to work a day in your life.”
— Confucius (Chinese,551-479BC)
Word of the day
Picaro (n)
A rogue or vagabond.
(Source: Dictionary.com)
Shri Nārada Uvāca
Could elevation of Arundhati Bhattachary catalyze a wave of fist generation women entrepreneurs in the country?
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