Building a stock portfolio It is an odious task to recommend stocks to invest when stock markets are so turbulent, not only in India but globally. Only uncertainty seems to be certain! What with crude prices holding firm (after shooting through the roof), current account imbalances in the US, inflation looking up, interest rates hardening globally and Chinese economy showing no signs of a slowdown. As if this was not enough, the lack of agility in decision-making by the Congress-led coalition government with the Left interfering in all key decisions is only making matters worse. Against this backdrop, we have a difficult task of recommending an ‘India portfolio’ for Non-Resident Indians (NRIs) like you. Indeed a difficult (t)ask! We are convinced about the ‘India-story’ i.e. steady GDP growth prospects, huge talent pool that is not only cheap but also competitive globally, stronger corporate sector balance sheets, services sector growing at around 8% per annum and visible earnings growth of around 15% to 17% for the top 100 companies in the next three years. We believe that there is merit for NRIs to actively participate in the opportunities available in India. Needless to say, the portfolio should be in according to one’s risk-return profile. However, the key elements of risks for the Indian stock markets are reversal in portfolio inflows by foreign institutional investors, hardening of inflation and interest rates and more importantly, the ruling government’s hibernation, which has stalled key policy initiatives. This could limit growth prospects of GDP and disturb high expectations of investors. Given this background, which stocks should one invest in? This kind of question never seems to get a convincing answer, especially when the Indian stock market (i.e. BSE Sensex) having gone up by 72.9%, 13.1% and 24.2% in the calendar year 2003, 2004 and 2005 YTD respectively. And to our knowledge, no one was expecting the market to rise so dramatically. In this backdrop, here is our India portfolio.
Without dwelling on the individual strengths and weakness of the companies that we have recommended here, we would like to highlight the reason why we have selected them. As mentioned earlier, the Indian services sector is growing in strength with companies moving up the value-chain consistently and the value proposition offered by companies like Infosys is no longer on cost arbitrage basis. Yes, Indian companies are enabling multinationals to save cost by not only undertaking maintenance work but also providing them a cheaper alternative when it comes to drug discovery. Apart from giving a run for the money to global pharma majors in markets like US, Ranbaxy is also partnering with these companies in new drug discoveries. We believe that these are win-win situations and will enable both Infosys and Ranbaxy to build long-term sustainable business models. The rapid growth in the consumer durable industry (we are referring to TV here) means that content-providers will be able to grow faster. And when content-providers have a strong distribution reach, Zee Telefilms being case in point, prospects are promising. In less than ten years, the number of mobile subscribers in India has outpaced fixed-line base and the rate of growth continues to remain robust. We believe that the Indian telecom sector is under-penetrated and a pan-Indian player like Bharti, with a strong management at the helm, is a compelling long-term story for any investor. India is a developing economy and given the investment needs of corporates and retail alike, banks with access to low-cost deposits and those with significant scope to restructure are likely to outperform. We believe that State Bank of India to an extent, is a proxy for the Indian economy and should form part of one’s portfolio. Overall, we are very positive on the Indian services sector and that’s why almost 50% of the stocks we have recommended belong to it. We also believe that there are promising stories in the manufacturing sector as well. Gujarat Ambuja, Bharat Forge and TVS are our preferred plays from a long-term perspective. Each of these companies has a top-class management, a globally competitive model and good prospects. Last but not least is the infrastructure story. L&T has outbid many global majors while bidding for contracts outside India. This company has proved that its business is scalable and is well poised to grow its topline over 20% every year. As a concluding remark, here is an excerpt from our meeting with Mr. Marc Faber in September’03 “India could surprise on the upside. First of all, they are in some attractive sectors going forward for the next ten years. The way Japan in 1960s and 1970s and later on South Korea and in the last ten years, China, eroded the manufacturing base of the US, I think the next big thing to happen in the world is that as a result of new technologies like data transmission, internet and support you have now, essential services that are tradable in the sense could now be outsourced. This trend towards outsourcing of tradable services will grow very dramatically. So, what China did to America, India could do the same to services sector of Western European countries and also to the US. In general, combined with the IT services in India, the pharmaceutical companies could also become very competitive and they are already very competitive in some cases. They could do quite well”.
This article is contributed by Equitymaster.com, an independent research initiative. Equitymaster offers subscription based research services for individuals and institutions.
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