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STOCKTALK Neeraj Batra, President, Hinduja Finance, explains why he doesn't trade any more. By Roshni Jayakar
A. My instinct is still to trade. But I've tried to change my approach. That has nothing to do with my basic thinking; it's just experience, and the stockmarket's evolution. If you were to evaluate your grandfather's portfolio, you'd find that he didn't time the market when he bought Bajaj Auto. Compare his stationary portfolio with yours--where you got in and out of scrips at peaks and bottoms--and you'd find that he outperformed you like crazy. You see, if you are honest, every time you book profits, 30 per cent of your gains are taken away by the tax-man in this country. So, you are forced into a situation where you have to take a 10-year outlook on a company. So, you have to identify high-quality stocks that you would be comfortable holding in the long run, even through bad times. If you sell a stock after 10 years, because of the indexation benefit, you hardly pay any tax. It's the beauty of compounding that makes you money. If you have a Rs 15-crore portfolio, and it's compounded at 21 per cent, it becomes Rs 3,000 crore after 25 years; at 27 per cent, it becomes Rs 10,000 crore. But are there stocks on which you can take such long-term views? There aren't too many. In fact, there aren't even too many industries on which you can take long-term outlooks in this country. At the end of the day, you come down to five or seven such companies. But if you are a fund manager with Rs 100 crore, you don't need to, and shouldn't, look beyond five or six companies. If you are a fund manager with a Rs 1,000-crore corpus, you could, may be, look at 15 to 20 companies. It's absolutely incorrect to create a diversified portfolio of 30 shares, and have a little bit of a lot. I would buy just five shares, and forget about them. Fair enough. What would you look for before making such a decision? For trading, you look at the technicals rather than the fundamentals, and the rest is instinct. However, for long-term investments, the depth and the integrity of the company's management are important. There are many analytical tools that I can use but, eventually, I am betting on how predictable the business is, what the quality of its management is, and how good the company's product leadership is. Once you are satisfied about these things, you look at the financial strengths. I look for companies that are tax-payers; I don't like zero-tax companies. I have learnt from bitter experience that the only numbers you should believe in balance-sheets are those grossed up for taxes. Then, I look at companies that have a brand equity that would translate into higher price-to-earnings ratios (P-E); companies with a history of High Returns On Net Worth (RONW); companies with good growth rates that they have sustained over the last 10 years I look for companies that have not raised money at a premium too frequently How do you determine the quality of management of a company? When you're making a long-term investment decision, you have to, necessarily, believe that a company is a going concern, that individuals are mortal, and that a company should not be mortgaged to an individual's charisma. Personally, I wouldn't make a long-term call on a company based on one individual. I would have to be convinced that the company has depth of management, individual thinkers, and fairly strong human resources. I don't believe in one-star managements. Why is it that you always regard the liabilities as more important than the assets, even in a balance-sheet? At the end of the day, the only thing true in a balance-sheet is the liabilities side. Share capital is what it is shown to be, reserves--except for revaluation reserves--are what they are shown to be, and loans that you owe to people are what they are shown to be. But the assets side is just for balancing. You put a value to stock-in-trade, but you don't know if it is really worth that much; you put a value to your debtors, but you don't know whether you will be able to realise it They're all there just to balance what is there on the liabilities side They're all accounting numbers. All of which suggests that your picks will be big caps. Isn't that a market call? When I used to follow the trading approach, I did look at turnaround stocks, or stocks that were going at low p-e ratios. But then, I found that P-ES kept sinking, and there were enough companies with P-ES of 1 or 2 that you could print out from a PC But a low p-e company is so because it deserves to be so. You have to respect the aggregate wisdom of the stockmarket. In the last two years, I have necessarily gone in for companies with a market capitalisation of at least Rs 250 crore so that even if I allocate Rs 20 crore to one company, I do not invite the provisions of the Takeover Code. And when would you sell? If I'm happy with a company, and it is performing well, I wouldn't sell just because of its high price. Because, the moment I do that, it's a trading decision. For instance, when Infosys touched Rs 1,600, I was tempted to sell. But the moment you trade out, 30 per cent of your gains get eaten up. Which meant that much of the money would not be available for compounding. As a shareholder, you own a portion of a company's business and your interest, or disinterest, in selling, or buying, a share should be, virtually, the same as that of the owners of the company. You must have as much reason to sell out of a stock when the business is not doing well as the owner during a one-year or a six-month bad period. But, if you believe in the company, you must consider the environment as well. I wouldn't sell a company because of one bad year. I would check out how the company performed vis-à-vis the others during those times. If you call right on the business, you will mint money. Which are the five stocks that you must have in your portfolio today? First, in the FMCG business, Hindustan Lever Ltd (HLL). If I were to bet on the software industry, I would do so on Infosys, which still looks underpriced to me although its price has gone up by 150 per cent in the last five months. I would put a minimum price of Rs 3,000 on Infosys two years from now, which means a 100 per cent return if I invest today. Then, I would look at one pharma major, but a transnational; not an Indian company. There's only one way pharma stocks can go in this country, and their prices can only get better. In the services sector, I would look at financial services. And the one that I like there is the Housing Development & Finance Corporation. This stock has not performed well in the last 18 months but, in this sector, that's the company I would bet on. Its quality standards are high, it has low non-performing assets, it is a leader in its attempt to provide loans for housing, and, despite being in financial services, it has high branding. I'm also keen on one sunrise business: education. It's difficult to imagine education as a commercial enterprise, but we have seen a soft version in the form of the computer education companies. And the company I would choose is NIIT, which has become a brand and has reached the take-off stage. It does not need its own capital; it can franchise so long as its management doesn't lend the brand to anyone and everyone That's five. What's the bet you most enjoyed making last year? The real joy lies in discovering a HLL. It's one of the few shares that has outperformed the 1992 boom; it's 200 per cent up from its 1991 price. A share that everyone says is expensive at Rs 1,550. Which is why not more than 7 per cent of HLL is held by the foreign institutional investors (FIIs). That's crazy. Once it merges with Pond's, HLL and ITC will together account for 36 per cent of the Bombay Stock Exchange Sensitivity Index (Sensex). Which means that, while investing in this country, the FIIs will have little chance of outperforming the Sensex unless they have stakes in HLL and ITC. At HLL, you are backed by the best management, and it is the best in its business. Which is food; the company is talking about branding most food products, and it has a massive distribution base. In the past 10 years, HLL's RONW was 35 per cent; in the past 5 years, 42 per cent; and in the past 3 years, 50 per cent. If I take HLL as a share that merits a p-e of 30--it quotes at a p-e of 60 at present--based on last year's earnings, its share price works out to only Rs 870. However, if I am a fund manager whose target rate of return is 22 per cent per annum, even at its present price of Rs 1,550, it is a grossly underpriced share because we calculate the break-even price for HLL at Rs 2,500. |
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Q. Neeraj, I've always known
you to be a short-term player, with all your fingers on the Street's pulse. But, in the
last two years, you seem to have changed your strategy completely. Why?