|
|
   
|
STOCK TALK By Roshni Jayakar
Well, I am bullish about the stockmarket -- but purely from a technical point of view. You see, the technical aspects of the market assert themselves only for short periods of time; three to five months, I have observed, in the last three years. Year after year, the macro-economic situation keeps getting worse, but you see swings of 30 to 40 per cent in share-prices every year. So, from a purely technical standpoint, I am bullish: in the next three months, we will see a reasonable bull run take the stockmarket north of 4,500. There's always a brief honeymoon every time a new government takes over and makes some announcements -- the usual ones that politicians worldwide, not just in this country, make -- to rev up the stockmarket. That has a limited impact for a limited period of time. After that, reality takes over. People realise that the government's promises do not match their expectations. How, for instance, can it increase its spending when the fiscal deficit is out of control? And then, there is a sizeable correction. Over the next one year, I am quite bearish about our economy and, therefore, on the stockmarket too. So, I was right! What's your strategy in such a stockmarket? A pure trading strategy. Ours is a trading market, not a trending market. In the latter -- for instance, in the US -- you could have bought at any point of time in the last 18 years and made money. You would have missed the earlier part of the rally had you got in only, say, in 1984, but even then, you would not be badly off despite the Crash of 1987. But that does not hold here. The buy-and-hold philosophy does not work in our stockmarket except in the case of a handful of stocks. A trading strategy would, however, work because the stockmarkets are range-bound, and I don't see the ranges expanding dramatically on the upside. There will be a brief upside: we will cross the last high of 4,643 this time. But I'm not sure it will stay beyond that. So, in the case of a majority of stocks, you have to be a market-timer. You have to be on the ball, and that is the only way to maximise your gains. Because, for every Infosys, you will get a M&M or a TELCO, which has moved 50 per cent either way in the past year. Buy-and-hold would have returned you to exactly where you were three years ago. Do you adopt a sector-peg, as others do, when selecting stocks? My investment philosophy does not allow sector-pegs. I pick individual stocks. For instance, scrips like Kirloskar Cummins and Wartsila Diesel don't look good to me at all, but I like ABB in the capital goods sector. I'm uncomfortable with Hero Honda at today's valuations, but I'm fine with Bajaj Auto and LML in the two-wheelers business. Similarly, I like IPCL, but not Reliance Industries. Let's take another example: Infosys is a well-known story. The company has been delivering on growth but, if it goes in for an issue of American Depository Receipts, I'm not sure the whole story will hang together. You'll see the stock underperform as the returns will get diluted dramatically. I won't hold the stock regardless of what Infosys has delivered in the last five years If I may interrupt, how do you arrive at the right price for a stock? Thats complex. It's not a science, but an art. I would say that the thumb-rule is its price-to-book value. However, in the case of a company like Hindustan Lever Ltd (HLL), you could say that brand values are not captured in the book. Or that intellectual capital is not captured in the book value of, say, Microsoft. But it is a reasonable approximation. We also use measures like cash-flow, and other propriety parameters, to decide what the fair price is for a stock, and at what price a stock is no longer fairly-priced. Take the example of Castrol. Last year, at Rs 430-Rs 440, it was an unbelievably cheap stock in the context of the transnationals' valuations in the market. It was cheap, and remained so for six months. That gave you a window of opportunity for six months to buy Castrol at Rs 440. Since then, Castrol has been going just one way: up. But, at Rs 750, I felt that it had overshot what you could say was the fair price of the stock. And, going by our model portfolio, we sold off Castrol What is this model portfolio? Our model portfolio -- which was originally worth $50 million (Rs 200 crore) -- was created in May, 1997. Since then, it has gone up by 31 per cent whereas the stockmarket indices are up by only between 0 and 10 per cent. And we've never had a single share of ITC and HLL in it. It's a myth that, without those companies, you will never be able to beat the market. On an average, we have 20 stocks in the portfolio. You could have a Bajaj Auto and a Ranbaxy, but there are smallish plays as well. By and large, we remain invested in mid- to large-caps. You have to be patient in the stockmarket. It offers you amazing opportunities provided you are patient. Otherwise, you can play safe, and buy transnational stocks. But I don't think that is the only way to heaven. Do you always sell off a stock the moment its price goes beyond what you think is its fair value? Definitely. You book your gains when a stock has gone beyond its reasonable valuation. If you don't do that, you can lose money in two ways. One, when the stock corrects itself, and the price comes down. And two, if the stock remains in the same range for, say, two years. If Castrol remains at Rs 700 for two years, you are, effectively, down by 35-40 per cent on an opportunity-cost basis, and you're not optimising your returns. Sell-discipline is essential. Which means that you must have a clear idea about when a stock is cheap, and at what point it is over-valued. That, again, is a moving target. I seem to recall that when our stockmarkets were en masse bullish about transnational stocks two years ago, you weren't. Why? As I told you, I am driven by a strategy of paying the right price for a stock. Entering the stockmarket, in a way, is the same as going to the races. You may know that a particular jockey and a particular horse are the best, but you cannot make the maximum money on that bet. It depends on the odds you get. As an analyst, your job is to ensure that the odds are stacked in your favour. I have been concerned about the fact that the stockmarket is over-paying for a lot of transnational stocks. A number of them are fairly mediocre. Let's take the example of Cadbury, a fast-moving consumer goods company that doesn't exhibit any other characteristic that you would want in a branded goods company. Its earnings are cyclical, and are linked to the cocoa cycle. When your earnings are linked to the cycle of a commodity, you can't say you are a branded products company. For every HLL, you have a few others who haven't done well on a point-to-point basis. Nestle, for instance, was Rs 260 four-and-a-half years back; today, it is Rs 450. In my book, I don't see that as an exciting return. I am not comfortable with a stock that less than doubles in four years in the sense that, in a country like ours, any dummy can do 14 to 15 per cent. I have to look for a risk-reward ration of at least twice that: between 25 and 30 per cent. Otherwise, it isn't worth it. Do you look only at large-cap stocks because of your strategy? Or also at medium-caps and small-caps? The trading strategy works more in the case of large-cap stocks. I don't like banking as a business, but the ICICI, at a price half the book, gives you a certain risk-reward equation that ITC does not. Now, the stock is up from Rs 65 to Rs 100; I make 50 per cent, and get out. This strategy works very well in the case of the big-caps. You can look at all varieties, but be careful of small-cap commodity businesses. Large-cap commodity businesses have a reasonable chance of survival. You should not buy India Polyfibres -- a small RPG Group company that makes filament yarn -- but, at a fair price, you could buy Reliance or IPCL. In small companies, the risk of bankruptcy is much higher. In the small-caps segment, you can play with businesses that have reasonably good franchises. Zee Telefilms is a good example: at a price of Rs 110, it was amazingly cheap. Then, Timex Watches, a branded products company with a transnational parent, is another example. At Rs 15, which is close to its book-value, there is not much of a downside to it. I'm sure the stock will go up by three times. But you cannot play this game with many of the b-2 stocks, which have Price-to-Earnings ratios of 1 and 2 times. In such small-cap stocks, a low p-e is indicative of the risk of bankruptcy. If you play with them, you're playing with fire. |
|
 |
 |
Shankar, I have always known you to be a contrarian. Now that we do have a
government at the Centre, which has even won a vote of confidence, and the indices are
starting to climb, are you turning bearish about the stockmarkets? 