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STOCKTALK Hina Shah, CIO, JM Capital Management, on her stock shopping-list. By Roshni Jayakar
A. It is value-driven. We adopt a top-down approach to asset-allocation, and a bottom-up approach to investing in individual scrips. Our strategy is to invest in large-cap stocks that have a high liquidity at their counters. This makes it easier for us to get in and out of stocks. We look at three types of risk: sector, company, and economy. Not necessarily in that order. In fact, the economy risk comes first: when we decide whether, or not, it is the right time to invest in equities given our macro-view of the economy. After that, we look at the sector risk. If we like the sector, we then move to the company-level. Everyone is into value investing. Aren't there any downsides to it? Even if you are a medium-term player, there is not much of a downside to this strategy. If you are buying a particular stock at less than its intrinsic value--or what it has to offer--you will certainly make money. Sometime or the other, the market has to take cognisance of its value. In the portfolios of the JM Mutual Fund, I notice that there is a preponderance of large-cap stocks. Given the present state of the stockmarket, would you hold on to such stocks? Or would you shift to mid-cap stocks? In this market, the argument for mid-cap stocks will not hold for the simple reason that large-cap stocks are available at attractive valuations. With these stocks, you have all the advantages of mid-cap stocks--with limited risk. Moreover, with large-cap stocks, you have management quality, leadership in their business segments, and so on. In fact, it is because of the market sentiment that they are available at such cheap valuations. Therefore, even in these circumstances, I would opt for large-cap stocks. In the portfolios of most of your schemes, I see that the highest allocation is for oil-refinery stocks... Ever since we launched our open-ended fund in January, 1995, we haven't really seen the equity market pick up in a big way. So, we entered defensive sectors: those not affected by the economic slowdown, the political uncertainty, and interest rate movements. Actually, we have made the maximum money in consumer non-durable and refinery stocks. You have nearly 20 per cent of JM Equity Fund's money invested in Hindustan Petroleum Corporation Ltd (HPCL). And, last year, you purchased some more HPCL. We like HPCL. It has acted like a buffer for our Net Asset Values. Only in the last three months has the stock been hammered down. Otherwise, HPCL has stuck to its guns even in a falling stockmarket. And it is a pretty liquid stock. Even in its peer group, HPCL is, I believe, the best company. It has the same marketing strengths as Bharat Petroleum (BPCL), and a higher refining capacity. We wouldn't mind paying Rs 30 to Rs 40 extra for that scrip. Moreover, the perspective of other investors has also been an important consideration. HPCL is perceived to be better than BPCL, and has outperformed the market. Already, the Government of India's stake in the company is down to 51 per cent unlike BPCL, where there was the threat of a public issue. Hina, what are your favourite investment themes for 1998? Especially since you have chosen to get out of sectors like hotels, power, and auto ancillaries... I am looking for underperformance. That doesn't mean we will enter any sector; there should, of course, be a possibility of that sector doing well. We like Bajaj Auto, TELCO, Punjab Tractors, and M&M. Sheer underperformance, more than working results, and the market leadership that these companies enjoy will provide good returns in the medium term. Ditto for the banking sector. Bank stocks have been punished more than necessary, and they will be the first to rise once the economy picks up. Most of the banks have started declaring their third-quarter results, credit has picked up, Prime Lending Rates are up. I don't think there will be much pressure on spreads Bank stocks make a good story. You just can't avoid the State Bank of India if you want to have an exposure to the banking sector in this country. And two others we really like are Corporation Bank and Bank of Baroda. You seem to have got rid of your cement and steel stocks completely. Not so long ago, 6 per cent of the portfolios of JM Equity and JM Balanced was allocated to such stocks. How do you explain this about-face? I think commodity stocks should be avoided. We have moved out of the cement and steel sectors. We believe that since the rupee has not devalued to the extent that the currencies of the other Asian countries have, there is a possibility of dumping in the Indian market. We already have a situation of overcapacity in most commodity markets, and domestic demand is not enough. Even if investments in the infrastructure sector pick up in the next six months, commodity businesses will take a long time to recover. I'm curious. Apart from the numbers, what else do you look for in a company when you buy its stock? The quality of its management is an important criterion. If we have entered the company and then, we learn about some acts of commission and omission by the management of the company, we move out of it. Even in a bad market, a good management will perform better than a bad management. So, management quality is our main criterion for entering a stock, and staying in it. We also look at the company's cash management, its growth prospects etc.. Along with the industry dynamics, we also evaluate the competitiveness of the company in both the domestic and the international markets. Any stories that went wrong after you took a big bet on a scrip? We had bought KEC International, thinking that it was a good story. Not so much went wrong with the company as it did with the market's perception about the RPG Group. Transmission companies began performing badly, KEC acquired sae India, investors were not comfortable with their balance-sheets... And the foreign institutional investors (FIIs), who had entered the counter at high levels on the presumption that the group would improve KEC's financials, felt that they had been let down. They got out, and the stock underperformed more than it deserved to. However, we took a little time to get out of KEC. Now that Elections 98 are all but over, are you bullish or bearish about the future? I am still bearish. This is, unfortunately, an FII-driven market. Their perceptions about our macro-economic indicators, and about how our market compares with those of the other emerging countries affects the sentiment in the market. Because of the series of devaluations in the other Asian markets, I think that the FIIs find them all-too compelling. Political stability could play a role in pushing up the market, but it is not that important a factor. Moreover, we do not see any signs of an industrial recovery until the third quarter of 1998. If there is even the slightest indication of a recovery, the FIIs will come in. But that is not going to happen soon. We may see some aberrations, but we are not likely to see a bull phase in our stockmarkets for a long time. |
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Q. Hina, describe your
investment strategy for the mutual fund. 