Raamdeo Agrawal Stock Portfolio Picks

On Banks

 
Raamdeo Agrawal has always been bullish about banks in general and PSU banks in particular. In the past, he has come clean on why he prefers banks as an investment theme. His two favourite stock picks are South Indian Bank and Central Bank of India.

Raamdeo Agrawal gives strong logic to support his choice of banks as a favourite investment theme. He points out that the banks operating in India have enjoyed a virtual monopoly for the past several years. Even though the Indian economy has grown eight times and gone up from quarter trillion dollars at turn of the century to two trillion dollars now, no new banking licenses have been given. Even if banking licenses were to be given out now, the competitive edge that the existing banks retain will not be impacted for the next 5-10 years.
 

Within the banking sector, Raamdeo Agrawal‘s favourites are the PSU banks because they are quoting at a cheap valutation of about 1 time book value. The downside in buying PSU banks is minimal thanks to their low valuations, he emphasizes. Raamdeo Agrawal also notes that the profits of the PSU Banks have been very good, operations have been very good, asset levels have been clean even though the dynamism of private sector is somewhat missing in public sector banks. Also, he emphasizes that banking is very simple, the PSU Banks have tremendous franchise, they have network, branches running through pan India, they have unwritten free sovereign guarantee. “When you walk into any bank, you get sovereign guarantee without paying anything for that, which is very valuable. You walk into smallest possible banks like Dena Bank, Punjab and Sind Bank, Vijaya Bank or to large banks like SBI your deposit per se is safe. They have limited competition with 70-72% market share and banking licenses have not been given for the last 10-15 years“. Raamdeo Agrawal is not averse to investing in growth stocks like HDFC Bank which are quoting at expensive valuations of several times book value though he gives a different logic for investing in growth stocks like HDFC Bank as opposed to investing in value stocks like PSU Banks. Buying into stocks like HDFC or HDFC Bank is like buying into a franchise with a literally unlimited horizon explains Raamdeo Agrawal. But because the purchase price is high, one has to give it time he says.

On Real Estate Stocks

 
Raamdeo Agrawal is also a contra investor when the situations gives an opportunity. He said that the beleagured real estate sector could be such an opportunity. He selected DLF as an excellent contra idea given that its CMP is at a steep discount of 40% of its IPO price. He explained that in the years to come, there would be a large demand for registered high quality construction and that DLF, being a company with true potential, brand equity and execution skills and cheap valuations was an ideal stock pick. Raamdeo Agrawal hastened to add that he would want DLF‘s stock price to come down to Rs 200-210 to become attractively priced. (See Also Infra Stocks: A Time To Buy?)

On OMCs

 
Raamdeo Agrawal is also optimistic about the Oil Marketing Companies (OMC) like IOC, BPCL and HPCL even though the decontrol hasn’t quite panned out the way he had expected. He advised investors to bear in mind that what they have bought is a franchise and 40%-50% market share. The business is growing at about 6%, 7%, 8% in terms of volume, whatever the petroleum consumption rate. On top of it your dollar price is going to $110-$120 from $60-$70 average. The underlying nominal value of the business is just growing. He said he liked the business in principle because it is a simple business – refine fuel and sell it.

On Nestle

 
Raamdeo Agrawal, contrary to public belief, is not way of investing in high PE companies. One of his stock picks is Nestle which, at the expected PE of about Rs 103 in FY 2011, the Nestle stock was quoting at about 38-39 times.

Raamdeo Agrawal gave impressive logic to support his stock pick of Nestle. He explained that while Nestle looked very expensive measured in terms of current earnings, it was not so in not in terms of underlying growth potential, quality of growth and the monopolistic condition they have in processed milk products in India. Nestle is doing about a dollar per person per year in India. They do about $15 per person all over the world. They do about $1900 billion for 6 billion population, so one dollar is pretty low. Can Nestle do about $10 billion in 10 years time and make a profit of about $1.5-$2 billion was the question that investors had to ask said Raamdeo Agrawal.

On Hero Honda

 
Raamdeo Agrawal is still bullish on Hero Honda despite the troubles it has faced on account of the seperation from Honda. He gave strong logic to support his stock pick and explained that Hero Honda was the number one company catering to personal transport segment that has only 2.5 player or 3 player competition and the penetration level was less than 10% in this country. He said that in next 5 to 10 years, maximum penetration will happen and on top of it there was the global opportunity. Raamdeo Agrawal emphasized that once you get brand equity scale and lower cost, it becomes an invincible situation even for the global majors to enter into successfully. Shankar Sharma, another master stock-picker has recommended Bajaj Auto (see Bajaj Auto: Shankar Sharma’s “Extremely Cheap” Stock Pick)

On high PE stocks

 
Raamdeo Agrawal on consumption stocks like Jubilant Foods, TTK Prestige, Lovable Lingerie and Page Industries.

Raamdeo Agrawal was apprehensive of the Indian consumption story which has been excessively marketed and there is over- optimism there. He cautioned investors against buying stocks quoting at such high PEs and pointed out that if you buy stocks at 30-40 PE multiple and it comes down to 20, you will be at the same place after 3-4-5 years even if earnings double. So, investors have got to be careful buying at those 30-40 PE multiples, he said.

On timing the market

 
Raamdeo Agrawal was very critical of investors who obsess about timing the market. “If you want to be true investor, just get onto it if you have long term money to spare. Get into the market slowly, buy things which you understand. If you do not understand these stocks, then take professional help by well managed mutual funds but do not try to time the market. The biggest cancer of the market is timing the market“, emphasized Raamdeo Agrawal. (See also: Rakesh Jhunjhunwala, Ramesh Damani & Raamdeo Agrawal’s Investment Tips & Techniques)