Shankar Sharma’s Stock Portfolio Picks

Shankar Sharma fills us with a bit of trepidation. On the one hand, we are fascinated by his undoubted brilliance and razor-sharp intellect and his easy eloquence on all matters relating to the stock market. He also has a compelling screen presence. At the same time, we can’t shake it out of our mind that he and his firm First Global have been found guilty by SEBI & SAT of “market manipulation” a heinous offence indeed in which Shankar Sharma is accused of taking advantage of the naivety of hapless investors. How to trust such a person is the dilemma.

Be that as it may, just as you cannot swim in the pond and ignore the crocodile, so also you cannot be in the stock market and ignore Shankar Sharma. Of course, you have to watch your back carefully.

By all counts, Shankar Sharma is on the road of reform. In the past, it was his (and that of his partner-in-crime Devina Mehra’s) favourite past-time to paint worst-case & dooms-day scenarios. Not a day went by without the two modern-day Cassandras predicting the end of the world. Such was their influence and it became so fashionable to be a dooms-day sayer that even master stock-picker Ramesh Damani – who otherwise keeps a level head over his shoulders – caught the dooms-day bug and went crazy propounding wild end-of-the-world theories.

Well, the stock market never brooks non-sense from dooms-day sayers like Shankar Sharma or Devina Mehra or even Ramesh Damani and punished them severely with two consequtive circuit break-outs (See History on the Stock Exchanges!!).

Since then, Shankar Sharma kept a low profile for quite some time rightly petrified of the hostile reaction that he would have been greeted with from investors who may have followed his advice.

Now, Shankar Sharma has severely toned down his rhetoric though old habits do die hard. Instead, he is on the defensive “I was deliberately being over-pessimistic so that your expectations were low and you were not disappointed“. Yeah, Right. We believe you Shankar Sharma!

Anyway, we are quite prepared to forgive Shankar Sharma his propensity for making dubious dooms-day prophesies if only he would use his brilliant mind to give a couple of stock tips and recommendations to fill our coffers with a bit of gold.

Well, we are happy to see that he has indeed been doing that.

Tata Motors, Shankar Sharma‘s first stock pick, has given block buster returns. He first went public with his stock recommendation of Tata Motors in May 2010. At that time, Tata Motors was qouting at Rs. 750 while Tata Motors DVR was quoting at Rs. 480. Today, in Mid-August 2010, Tata Motors is quoting Rs. 1015 while Tata Motors DVR is quoting Rs. 745. While Tata Motors has given a return of about 35%, Tata Motors DVR has given a return of nearly 55%. Not bad at all for a few months’ investment!

Shankar Sharma got his second stock recommendation, Bajaj Auto, right as well. Bajaj Auto which was quoting at Rs. 2135 at the time he gave the buy call has spurted to Rs. 2,795 in August 2010, a spectacular return of 30%.

There is strong logic behind Shankar Sharma‘s picks of Tata Motors & Bajaj Auto.

Tata Motors recorded an outstanding performance for Q1 FY2011. Tata Motors‘ Net profit soared to Rs. 1,979 crores as against a net loss of Rs. 334crores in Q1 FY2010. The improvement in performance came on account of enhanced operational performance at JLR and its other subsidiaries. Further, favorable currency movement and restructuring efforts at JLR boosted margins at consolidated levels. The best thing about Tata Motors is that based on the FY 2010 EPS of Rs. 88, it is quoting at a low PE of 12. If the EPS for FY 2011 is about Rs. 125 (as expected) the PE will be a compelling 8!

Bajaj Auto was no laggard either. In Q1 FY 2011 Bajaj Auto recorded an impressive growth of 66% YOY in net sales to Rs. 3,890 crores as compared to Rs. 2,338 crores in Q1 FY2010. Bajaj Auto was aided by new offerings on the Discover and Pulsar models of two-wheelers. Bajaj Auto‘s Net profit doubled 101% YOY to Rs. 590 crores.

Shankar Sharma explains that both Tata Motors & Bajaj Auto are generating huge amounts of cash profits and that these will be sufficient to meet their expnasion plans without having to resort to dilution of equity. He emphasizes that both Tata Motors & Bajaj Auto have top quality professional management. Their products, cars and two-wheelers, are in great demand. The result: Increased profits with no dilution of equity have to translate to increased share price.

Interestingly, Shankar Sharma was once very critical of Tata Motors‘ foray into buying Jaguar & Land Rover (JLR). Its’ plans of taking up huge debt to fund the acquisition did not go down well with Shankar Sharma. But that’s okay. He did have cogent reasons for his criticism of Tata Motors at that time and a stock-picker is certainly entitled to change his view on a stock.

So, does this mean Shankar Sharma has redeemed himself? Well, these are early days yet and it is too soon to give him a clean chit. But He is certainly on the right path. Shankar Sharma & Devina Mehra need to apply their brilliant minds to where it really counts – looking after the interests of their vast legions of investor-followers and not indulge in unsavory acts of “market manipulation”. It is only then that they will once again gain the respect and gratitude of the masses like Rakesh Jhunjhunwala & Ramesh Damani have gained!