Avenue Supermart: a compounding machine?


(Dinesh Sairam) #647

You may decide to put your money in FD. But interest rates in an FD does not correlate with expected returns in the equity market at all. IIRC, FD rates are at 6%, while the markets returns at least 13% on average.

You’re essentially discounting one figure at 6% (CapEx) and discounting another figure at 13% (Market Cap) and trying to compare the two. Anyone with any ounce of knowledge on Corporate Finance will tell you why you can’t do that.

If you’d still like to stand by your answer, then I don’t think we’re having a constructive dialogue at all, with me trying to explain why you’re wrong and you simply repeating what you’ve already said.


(edwardlobo) #648

I invest into a company purely because it gives better return then the next best thing

You take discount rates from textbooks, I like to take them from real life

100k in Fd or 100k in Avenue?


(edwardlobo) #649

“margin of safety” - seth klarman

"Any attempt to value businesses with precision will yield values that are precisely inaccurate. The problem is that it is easy to confuse the capability to make precise forecasts with the ability to make accurate ones.

Anyone with a simple, hand-held calculator can perform net present value (NPV) and internal rate of return (IRR) calculations. The NPV calculation provides a single-point value of an investment by discounting estimates of future cash flow back to the present. IRR, using assumptions of future cash flow and price paid, is a calculation of the rate of return on an investment to as many decimal places as desired.

The seeming precision provided by NPV and IRR calculations can give investors a false sense of certainty for they are really only as accurate as the cash flow assumptions that were used to
derive them. The advent of the computerized spreadsheet has exacerbated this problem, creating the illusion of extensive and thoughtful analysis, even for the most haphazard of efforts.

Typically, investors place a great deal of importance on the output, even though they pay little attention to the assumptions."


(Dinesh Sairam) #650

However, you’re discussing about the Market Cap of the company, which is decided by millions of people based on the average returns in the index.

You’re free to do whatever benchmarking you want. But comparing it with market standards and claiming that the market is incorrect is funny at best.

Banks FDs and Equities do not have the same risk. Actually, if you consider that you only require 6% rate of interest, I’d say go ahead and invest in D Mart. At 6% discounting, DMart’s value is way above its current price.

However, “theory” holds that since NIFTY itself can return more than double that amount, it would be foolish to invest in DMart.


(Bheeshma Sanghani) #651

Yes ofc different opinions form the market. However investors trained or inclined towards a certain valuation style should come up or be able to produce similar if not exact estimates. I am talking about a carefully selected bunch of investors who think in the same way and whose judgements you place value on.

Hypothetically, if the super investors of graham and doddsville were to value a co, the minimum expectation is that their estimates would differ but would be in a narrow range.

If these super astute guys come up with highly different valuations then where is the sanctity of the valuation process is the point i am trying to make.

These views reflect my own experiences. I also think the markets are quite efficient in pricing. Give them time and they will price the security accurately without fail.

Good discussion though!

Best
Bheeshma


(edwardlobo) #652

whose theory

Anyway you accept that the return is better than fd although its not going to be better than other stock or the index as a whole

Thats good enough for me, I dont see the risks of dmart as high as the risk of rice exporters where you are invested. As a family I used to consume 10kg rice a month, today I consume zero due to carbs and diabetes associated with rice. Dmart is relatively less risk free for me as I assume people will always buy groceries


(edwardlobo) #653

@bheeshma, in just one chapter, seth kalrman, who has made millions of dollars for his investors, places the value of Esco anywhere between $4.7 a share to $14.76 a share

This is just one person having a range of value on his analysis of a company

And you are advocating he stick with one value (not a range) and Warren Buffet has to arrive at around the same value +/- 10%

I am rofl


(MD Razi G Haider) #655

In Quality investing the greatest challenges is giving Importance to hard numerical data over subjective analysis.Focus of quality investing on subjective aspects of business presents a challenge in investing culture which is more inclined towards quantification. So much of investing is number/data driven : performance is quantified,accounting is numeric and market moves are stated in percentage terms.Quantitative orientation attracts individuals trained to analyze and trust numbers. While a quantitative background might works good for some days for an individual but the resulting culture often undermine the rationales which is based on qualitative analysis.

"The process of business analysis usually leads to a set of numerical assessments such as growth forecast and valuation measures . While they appear to be rigorous truth, they are riddled with innumerable obscure and subjective judgement,ranging from accounting line items and subjective Judgement . The figures in fact what reveal is suggestive but what they conceal is vital like Building Blocks,Patterns etc. Earning Models are a channel of expression of Biases.For example ,as an important aspect of an investment decision,a model’s earning forecast can be moved by confirmation bias -the desire to interpret information in a way that confirms an existing hypothesis " : Lawrence A.Cunnighum

Despite the charm of quantitative analysis ,we should be aware of their limitations. The more decision maker are involved in an investment process the greater tendency to transform the subjective analysis into figures ,which are easier to circulate ,compare and comment on. Most Investors defend/argue an investment thesis more readily in terms of EPS,PE than by outlining a company’s industrial positioning.It is easier to explain that a stock is cheap than that a company is great.

I don’t know about others but will restrict myself from using Valuation Model during analyzing Dmart,Page,Gruh,Britannia kind of business . I will use excel only to calculating Return on incremental capital,equity as demonstrated by @bheeshma but definitely not more than that.


(Dinesh Sairam) #656

It should not come as a surprise that, even after all this discussion, you’re still trying to cherry-pick your answers.

Mr. Klarman clearly states that $4.7 is a pessimistic estimate and he is simply doing a stress test:

image

He concludes by saying that he did it to prove that, even after such a pessimistic estimate, the Value was still above the Price:

image

I did a similar “stress test” on D-Mart myself:

But of course, like I already mentioned, everything lies in the balance of probability. I wouldn’t mind at all if someone told me D-Mart is Valued at Rs. 4120. All I request are the projections related to that estimate and the justification related to those projections, which is exactly what I’ve been asking you to show from your side (i.e. If you believe D-Mart is not overvalued, tell me why).


(ap_21) #658

Its beyond valuations right now… its the story of a Great Indian Middle Class…

See what happened with the launch of IKEA store in Hyderabad…

Same is the case with DMart everywhere…


(Dinesh Sairam) #659

In case you didn’t notice, the assumptions I’ve used to Value D-Mart are no slouch.

  1. The projection period is 20 years, which talks about management capability. Most companies (Excluding BFSI and FMCG companies) peak at about 10-15 years.
  2. The Sales Growth starts at 35% and slows down to 25% during that period
  3. The Margins start at 7.2%, increase in the middle upto 9% and then fall back to 7.3%
  4. The reinvestments, as I’ve shown, are roughly in line with the CEO’s strategy.

If these numbers do not capture the story of the “the great Indian Middle class”, please help me understand what kind of numbers will and how.

My contention isn’t that DMart is a bad company or it doesn’t have the pedigree to grow according to their strategy. The company can and that’s what my assumptions are in line with that as well. My contention is that (Much like an opposite version of what Mr. Klarman was trying to prove) the resultant Value is still 46% above the Price.

If you’d still prefer to ignore this under the pretense of “Growth Investing” or “Quality Investing”, then I don’t think we should continue this conversation anymore. I kept my end of the bargain to Value DMart, hoping to start a constructive line of enquiry. Clearly that’s not happening, so there’s no point in anyone involved dragging this out.

Ciao.


(edwardlobo) #660

You are not going to find a discount on popular stock
Stocks that are overlooked by the many usually have hidden value
If you read the initial comments on page industries thread you’ll find people found them expensive at 2500 with high Pe


(edwardlobo) #661

Maybe do a same analysis for Apple stock and compare your output to Buffets decision
You are welcome to prove him wrong as his assumption is likely to be very big growth numbers for Apple since he is a “value” investor. As the “herd” as picked and rallied so much into that stock I doubt any other value investor is likely to find value. Maybe he is getting old

I don’t see a point in meaningless challenges, I did this, you do this

I bought into Dmart as I find value at current rate. Your analysis doesn’t show value so you don’t buy. There is no reason to challenge us to prove something on excel sheet.

The only way to confirm who is right is not shouting at this stage. The loudest person only wins here on the thread not necessarily on the market. You have made your point and I have tried making mine so next is just to wait for a few years and see how the story develops


(edwardlobo) #662

What eventually one realises is that if the stock is trading at a bargain on a simple analysis like dcf it becomes more obvious to other investors and the discount doesn’t really last that long.

I believe every other investor is atleast a bit smarter than me

So either of these has to happen
1-you have to dig deeper, work harder to find stocks that have considerable value left on the table
2-understand complex transactions that most have not or don’t want to and enter the stock before value is realised or
3-the entire market has to selloff like in 2008

If a simple analysis shows value there is usually a chance that something is wrong within the books or company or the sector. Applying this outside of stocks say in properly, if you are looking to buy something in Pedder road and the usual rate is 10cr, but you find one property selling at 5cr, you will not put an offer. You will try to find out why it’s trading at such a discount.

If that is not the case and you have ruled out any problems then there is a chance of a huge gain. I am not saying companies with substantial margin don’t exist. They do. I am invested in dhanvarsha finvest and it’s a bit complicated story but it’s making 5pc every trading day. Just that they are impossible to justify on pure dcf analysis.


(phreak) #663

Was reading Howard Marks’ book and came across this section and was reminded of discussion here of buying quality stocks at elevated valuations. Nothing that most of us don’t know of course.

Although am posting in this thread where this has been a point of contention, this is meant for current valuations of other quality companies as well that are around 80-100 P/E like Page Industries, HUL, Britannia or NBFCs like Bajaj Finance trading at nearly 10 times book.


(Peabody) #664

You are right and all of us are uncomfortable at these valuations.But in the fastest growing economy there are very limited choices for good quality companies.Most of them either have management issues or industry headwinds or execution issues. Scarcity premium is driving these valuations as all of us know.Maybe these may go for a long time correction-who knows? At the same time some of these companies are growing very rapidly so once cannot get Mercedes at the cost of a Maruti. If these cos start trading at reasonable valuations, then most the mid and small caps need to trade at low single digit PE. Is it possible-only time will answer.


(MD Razi G Haider) #665

Indian Market gave good success to many of us by just doing opposite what Howard Marks and contrarians says. I will keep buying High Quality and avoid low quality which is just opposite of Howard Marks saying . Thanks for sharing it :pray:. Who knows better than us in recent carnage and earlier cycles of indian market.

Many HM fans may find rudeness in my post, but if advocation of buying High quality stocks and avoiding low quality stocks hurt anyone then let it be . It will be good for new investors. Still i am maintaining my stance that buying High quality at elevated price is far better than buying junk stocks in low price . Atleast for the first one if i wait for 2-3 quarters i will get my capital back and for the second option i could loose my entire capital.Multiple cycles in Indian Market gave me this hard lesson. Lost more money in Low PE stocks than HIGH PE stocks.As Basant says no body lost money due to High Valuation, it is due to bad corporate governance and low quality Buisness. Exeperinced it through hard lessons.


(edwardlobo) #666

value usually is difficult to find
You can find a Low Pe stock but the company will operate in commodities

It’s like searching for a similar size property in central Mumbai with money you get from property you sell in Bhiwandi

Most who search for value assume because Pe is low there is value not realising they might be buying a property in Bhiwandi after comparing properties in central Mumbai.

So you go through thousands of 2 beds in central Mumbai and they are selling for upward of 5 crore. One day you visit Bhiwandi and find a property for 50 lakhs and lo and behold you have found great value

Ofcourse you can buy 10, 2 bed properties in Bhiwandi so you assume you get a bigger value for your money

The problem is when the market crashes

Recent Brexit ongoing property collapse has not touched prime central London properties - the ones that are around Buckingham palace. Those around London and further into suburbs are back to 2008 prices. This is observed everywhere not just uk and Brexit when a market crashes a property with right “location location location” does not fall

Back to Bhiwandi:
Let’s say the government decides to build a direct train link from Bhiwandi to central Mumbai cutting travel time to 30mins with trains every 10 minutes. Now you have value. Even if prices crash you are sure that once the train link is up you will atleast get your capital you put.
Pe will start getting high and if you have done basic research say check schools around the area, local markets, place of religious worship, communal mix (balance sheet) your investment is likely to be safe.
At this stage even if you pay double the Pe it will still have a margin of safety even if everyone says Pe is high.
At some point prices will exceed or be nearer to central Mumbai prices and that is time to sell.

That is margin of safety.
Not the cigar butt margin of safety. Cigar butt margin of safety are extremely difficult to find in a mature market. I think even Graham found it difficult to find these companies towards later part following the recovery after the crash

Most people assume a commodity stock has a chance of 5 pc growth and Pe is low so have found a great value stock not realising there is really no margin of safety


(MD Razi G Haider) #667

Who can forget those golden words from RKD when someone asked why he was buying truckload of HDFC Bank in 1998 quoting at 8 PB instead of SBI, the PSU behemothat quoting at Low PB.

“Dharavi Dharavi hota hai, aur Peddar Road Peddar Road,”


(atul1082) #668

With my experience of almost 30years and seen many cycles, I tend to agree with you