Thought for the day
“We shall not cease from exploration, and the end of all our
exploring will be to arrive where we started and know the place for the first
time.”
-
T. S. Eliot
(American, 1888-1965)
Word for the day
Prevaricator (n)
A person who speaks falsely; liar.
(Source: Dictionary.com)
Teaser for the day
The government need to choose between 6,50,000 smart
villages and 100 smart cities.
If you say we need both – tell me what should happen first?
If you say both should happen together – show me the money.
Make a beginning
The political events in couple of weeks and subsequent up
move in equity stock prices have reignited interest of many savers. Many people
who drastically reduced weight of listed equities in their wealth portfolio are
also showing keen interest in rebalancing of their risk profile by increasing
weight of listed equities. I have received many requests for suggestions as to
what should be the approach for rebalancing the portfolios.
While I have been replying to individual queries, I find it
appropriate to present a general approach for the benefit of broader readership
of this column.
The most common question I get is “What would you do if you
have to invest fresh Rs___ in equity market?”
To this, my answer is usually as follows.
Make a diversified portfolio, which captures the current
environment and likely trend in economic hence business cycle. The portfolio
should be focused and not too diversified. It should largely contain leaders in
terms of market, product, technology, and pricing power. It would however not
be completely inappropriate to include couple of new kids on the block who are
clearly demonstrating the potential to become leaders in their respective
spheres.
The basis of diversification could be as follows:
Basket 1 - Broader
economic growth (25%): This will be a basket of leading corporates of India
which would lead and equally participate in the revival of economic growth in
India and than elsewhere. A focused large cap fund that picks up from top
100-150 stocks will be optimal for this purpose. A passive index fund can also
serve the purpose, but I would prefer an actively managed fund at this stage,
given that the economy is still not likely to get out of woods in next 2-3
quarters at the least and currency could be a major play impacting the
performance of a large number of Nifty constituents.
Basket 2 - Cycle leaders
(25%): As the economy revives, some sectors will do better than the others.
Companies in sectors will obviously give more return than benchmark indices. In
my view, early cycle plays (large operating leverage, faster demand pick up)
with market leadership should be considered for this. A sectoral fund (banking
and power for domestic and IT and Pharma for global) could be a good way to
participate in this segment.
Basket 3 - Growth vs.
value (20%): Being convinced that we
are embarking on a long journey of faster and sustainable growth we need to
identify and invest in few high growth potential companies that have
demonstrated strong potential to become market leaders in future. We could
consider a basket (specialized funds) or not more than 5 direct stocks.
Basket 4 - Secular growth
(30%): About two fifth of our portfolio must be secured in secular
non-cyclical growth stories like consumption and generic pharma. Assuming that
other three buckets will capture some exposure in this segment, I suggest 30%
direct exposure to this segment through quality stocks.
Based on the latest socio-economic vision statement of the
government, as enunciated in the President’s address to
the Parliament on Monday, I find the following investment themes that may be
relevant in the next few years.
Investment themes
Professionalization of PSU. Select PSU’s that are doing well
and are least affected by policy decisions. Nevertheless, the current positive
policy cycle may favor energy and banking.
Railways could be to 2015-2020 what roads were to 2003-2007.
Focus on technology leaders rather than generic stock (wagons and wheels)
suppliers.
Agri productivity as an economic activity will likely enjoy
highest priority for the incumbent administration. Focus should again be on
technology innovators and market leaders rather than generic fertilizer
producers.
Cyclicals. Buy cyclicals and industrials with god balance sheet
and decent operating leverage (cement, capital goods, auto and construction).
Commodities: Buy global commodities which are on the cusp of
reversing demand-supply cycle (Aluminum, Zinc and Lead).
Global businesses (IT, pharma, auto ancillaries) as INR
completes its correction over next 2-3months
Consumers (FMCG, 2wheelers, telecom, pharma, textile, finance,
media) for demand pick up on fiscal and monetary stimulus.
Illustrative list of stocks (Not be considered as
recommendations)
1. Bharat
Forge (Undisputed global leadership, strong B/S, operating leverage, CV cycle
upturn, higher railway and defence demand)
2. Bosch
(Technology leadership, operating leverage, CV cycle upturn)
3. HCL
Tech (Cheaper valuation, better margins, new business traction, management
transition to high degree of professionalism, large size)
4. HDFC
Bank (Undisputed market leadership in retail banking)
5. HUL
(Undisputed leadership, strong product profile, margin bottoming)
6. Idea
(Strong growth in data business, best cost management)
7. Kaveri
Seeds (Strong market leadership in hybrid seeds, strong B/S)
8. L&T
(Undisputed market leadership, operating leverage, cyclical upturn)
9. Mahindra
and Mahindra (Cyclical upturn, diversified)
10. Motherson
Sumi (Technology & product leadership, operating leverage)
11. PVR
(Strong market and brand leadership, high growth, operating leverage, top play
on consumer discretionary, early stage business)
12. Reliance
Industries (Cyclical upturn, strong product leadership and B/S)
13. Sun
Pharma (Strong leadership, consistent premium valuation, high growth and margins)
14. Tata
Motors (Cyclical upturn, Global leadership (JLR)
15. Ultra
Tech Cement (Market leadership, cyclical upturn, operating leverage )
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