Stock investing: It's a great time to do absolutely nothing

For those who might remember, in the previous portfolio review, I had justified why we might buy Infosys, one of the 17 Stocks that I have listed for Safe Wealth and 28 Wealth Zoom ideas. But I desisted from buying anything.

It's status quo this fortnight as we are in the middle of a quarterly results season. The results are threatening to reverse 10 straight years, or 40 quarters, of year-on-year growth (YoY) in EBITDA (aggregate earnings before interest, taxation, depreciation and amortisation) for the companies that comprise the Sensex.

So what has made me turn bearish on India's battered corporate upper crust? It's not just the poor results in this particular quarter, which are already 'flagged'. It's the anticipation of more bad news. We will get a frustrating lack of respoNSE to the fiscal stimulus packages after the initial thrill. Also, as we enter the election season, there will be a keenly felt absence of Government action. And, consequently, no sustained buying by significant institutional investors.

On the results front, margin declines will kick in as the pricing takes a beating in the interest rate-sensitive sectors such as auto, construction, cement and, perhaps, pharmaceuticals. This is also true of commodities, which seems to have caught a long-term cold.

So is there a saving grace? Banks, software, capital goods and media might surprise on the upside, especially PSU banks which are the natural recipients of low-cost inflows to their savings/deposit accounts when perceived risks play on the minds of depositors. Also, the fall in interest rates will lead to SLR-portfolio gains for most PSU banks, bolstering the bottom lines further.

In short, it's a great time to do absolutely nothing in terms of actual buying or selling in any portfolio. But, I think, we must. Especially for our two models which are sitting on 100% cash piles.

By the end of January, when the results season gets over, we will have differentiated the men from the boys, while the overhang of the economic slowdown and approaching elections will keep the runaway hits of the results season from, well, running away.

The Investment Rationale for Safe Wealth

Infosys has delivered decent third quarter numbers even as Satyam imploded in a scam and Wipro was blacklisted by the World Bank. But the former could not evoke future hope as the management issued a muted guidance for the fourth quarter of the year and indicated a lack of visibility in client IT budgets. Stick to Rs 102 EPS for 2008-9 with no great insight about 2009-10, except that the quality of management continues to inspire.

In the consumer space, telecom giant Bharti Airtel stands miles ahead of the competition. No matter how cheap Reliance Communications and Idea might look, it's Bharti which is the consistent leader in Market share, core telecom margins and growth. In this quarter, Bharti might just manage to report a 33% YoY rise in net profits to Rs 2,300 crore, along with a long expected breakout in operating profit margins (OPM) beyond 41%.

At this rate the company will cross Rs 8,300 crore net profit for 2008-9, posting a return on networth (RoNW) in excess of 30% and a return on capital employed of almost 25%, with a negligible gearing of under 20%.

When you look at the street's growth expectation (22% compounded annual growth rate over 2009-10 and 2010-11) post the realisation of economic slowdown, you realise why this stock is a steal at Rs 600. It's selling for just around 10 times the 2009-10 earnings.

The other consumer giant I had proffered for Safe Wealth was Nestle, which is about twice as costly as Bharti at about 20 times the 2009 estimated earnings. Nestle is not just a leader in dairy-based and other processed foods in agri-rich India, but this a company that's superior to the FMCG emperor Hindustan Unilever.

HUL trades for a humongous 26 times the 2008 earnings in almost every core operating metric that you can think of. Nestle is posting 25% sales growth against HUL's 20-odd, and at almost 19%, is a full 600 basis points ahead of HUL in operating profit before interest and taxes (PBIT).

The audited 2008 numbers will come out after January, and I expect Nestle to cross Rs 4,300 crore in revenues, and earn about Rs 58 per share. Are you game to grabbing this one below Rs 1,250 (just under 18 times the 2009 earnings of Rs 71-72) on a day of panic?

In the financial space, the State Bank of India was an obvious choice given its size, reach and low-cost deposit franchise. And, of course, its rock steady performance and bargain value.

The bank is trading for around the book value, adjusted for subsidiaries. Why shouldn't it figure in Safe Wealth, given its spurt in net interest income, a decent 15% return on equity, above average deposit/loan growth and a safe enough level for non-performing asets?

With a rising current accounts, savings accounts (CASA) ratio and bond portfolio appreciation providing further comfort, SBI should comfortably walk into Safe వేఅల్త్.