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R. Balakrishnan, president, Dil Vikas Finance, on his picks--and discards. By Roshni Jayakar
The stockmarket has gone through a major rally. In January, 1998, we saw the Sensex (Bombay Stock Exchange Sensitivity Index) at the 3,000-odd level. From there, it has moved up 1,200-odd points, and, the first half of the year is not over yet. With the nuclear blasts and the US sanctions -- and the consequent uncertainty -- there will be steep correction in the Sensex, providing buying opportunities. If you were to look at how the stockmarket has changed in the last two to three years, you would notice a polarisation of stocks. There would be the big versus the small. For big companies, the worst is behind them, most of them being single-business companies. But the diversified companies are still struggling to find their way. Probably there is value in them, but one does not know what kind of restructuring is in the offing. By and large, however, I would stay away from the small- and medium-capitalisation companies because there is no guarantee that they will be in business over the long course. As for my investment strategy, about three-fourths of my portfolio would be in liquid large-cap stocks, and the rest I would divide between small-cap stocks and those that would be a gamble. The latter could include cyclical stocks on the upturn, or a turnaround company for instance, stocks like Maharaja or Intron, which are international brands, and are available cheap. These stocks would perform in the next three to five years if the companies do well. But even otherwise, I don't lose much. Isn't there a downside to restricting your investments to large-cap stocks, and not looking at the small-caps? Yes, the downside of this strategy is that you miss a couple of multiple baggers How would you select your stocks? I am a value investor, and I like to look at stocks with a three-year time-frame. This market has not exhibited a secular trend since 1992. If you look at the markets, there have been continuous ups and down. From 1978 to 1992, there was a steady uptrend. But the high of 1992 is yet to be breached, and the market still does not have a direction. In such a situation, you'd do better to stick to quality. The most important criteria I use are Return On Equity (ROE) along with Return On Capital Employed (ROCE). Of course, management integrity and competence are important when one is considering track-record and shareholder returns. Also, you correlate the stock price for the last five years with the roe. If you look at Hindustan Lever Ltd (HLL), with a roe of 45 per cent and improvement year after year, the stock price has performed. Which sectors would be your favourites in this market? I would stick to consumer non-durables, oil refining, and utility stocks. In textiles, there are a number of good stocks, including Mahavir Spinning and Vardhaman Spinning. But most of them are illiquid. Commodity stocks offer trading opportunities. You buy them at the bottom of the price-cycle, and you wait for the cycle to turn up. But with steel, for instance, one is not sure that the sector will recover in the next two years. In the case of paper, however, I might take a view and put some money in it -- itc Bhadrachalam and Tamilnadu Newsprint. Then, cement is an interesting sector to look at. What is the cement argument? Cement is one sector I would like to put my money in. Although people are talking about the economy not showing any signs of an upturn, there are signals of growth coming from states like Andhra Pradesh and Maharashtra. These states are out to privatise with a vengeance, and things are happening in the infrastructure sector, whether they be flyovers or highway projects Even in 1997-98, you saw a 9 per cent volume growth in cement. True, the margin has come down because of the spurt in capacity, but if this kind of volume growth continues, there is reason to believe it will continue at a higher rate. There are good as well as bad stories in cement. If you take Madras Cement, for instance, it's a great value-stock. In the South, there is a balance between the demand and the supply, and these producers are able to do well. However, I may not pick up a Larsen & Toubro, ACC, or Indian Rayon. Would you look at possible takeover targets in cement, given the fact that there are chances of consolidation in this sector? In cement, I do not subscribe to the consolidation theory. By taking over 10 different small plants, you do not consolidate. The plant itself should be sufficiently large. If India Cements takes over Raasi Cement, it's not exciting to me. Whereas, if India Cements puts up a plant and its capacity doubles, it would be more exciting for me. You mentioned that you would put a fourth of your portfolio in trading stocks? What strategy would you follow there? In trading, the best strategy is to stick to the most liquid stocks, follow a good technical analyst, and get in and out of the stocks. The most crucial thing here is to have a stop-loss rule. If I were an institutional investor, I would be a very aggressive trader, and the returns would show in the performance. A stock like MTNL, or Reliance Industries, will provide an opportunity at least twice a year to get in at a low price, and get out high. Last month, technical analysts had suggested Wartsila Diesel at Rs 226. Three weeks later, the stock was quoting at Rs 290. At this point, one could have sold off one's entire holding of the scrip, and notched up an extraordinary return of Rs 70 per share in one month. But for trading, you have to be an active investor. Software stocks have been the favourites in the market for quite some time now. How do you view investment in these stocks? In software stocks, there has been growth. But looking at the valuations, I wouldn't invest in them. Take Infosys, for instance. It has an equity capital of Rs 16 crore and a market price of Rs 2,400 per share. This means you are valuing the company at Rs 3,800 crore. But the company's turnover is Rs 300 crore. It's a risky proposition. Infosys may be the flavour of India, but, to me, it is high risk. I don't see value at these prices. Moreover, I don't understand the software sector. And something I don't understand, I don't invest in it. Could you list out the stocks that are your favourites? My favourite stock is Cummins. It is not a much-talked about story. Cummins makes a wide range of diesel engines, and is highly indigenised. It has a roe of 25 per cent, and it is launching a new range of engines for which India would be a base. Besides diesel engines, the spares also generate business. Today, the company sells 10,000-odd engines, but, in two years, the figure will double. Then there will be exports And all that is going to happen without any equity dilution. I would say it provides fantastic value. The stock is not liquid, and if you go to pick up 10,000 shares, the price moves up. So, for the moment, I will keep nibbling at it. Hindustan Powerplus is a similar story, but it's a longer wait because its installed base of engines is small. In the pharmaceuticals sector, there are a number of Indian companies that offer value. But my choice scrips in this sector are Glaxo and Novartis. In the consumer non-durables sector, I like Cadbury, Britannia, and Nestl . If the market behaves irrationally, and everything gets beaten up, I have a wish-list This list has telco, Sundram Fasteners, Hero Honda Or, if the results are so bad that the prices fall, I would get an opportunity to buy them. Then there is also Bata. It has turned around, and the company is looking at the Indian middle-class market. In the case of Raymond, it would be a 50:50 decision. Raymond is not doing well in cement. In fact, the company is losing money. But if it sells off its cement business, and sticks to making and selling fabrics, its profitability will be much higher. After all, it is one of the strongest brands in fabrics. At present, the stock has moved up; so, if there is a correction, look at it. How many stocks would you have in your portfolio, and what kind of returns do you expect? I would have not more than 10 stocks. And, for me, the ideal time-frame for investment would be three years. But with the freedom to trade, I would target a return of 30 per cent -- and book my profits. Even if I loved a particular stock, I would sell it if the target return of 30 per cent was reached -- and buy it later. That is, except for stocks like HLL where the free-float is small. That's a stock you should not sell. If you are looking at a portfolio for the next generation, you will have to have HLL. |
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Bala, how do you see the markets
moving over the next month or so? And what would your investment strategy be in the market
that you foresee? 