That’s the risk you always carry while purchasing a stock. The market doesn’t owe you anything.
Even assuming RoE/RoCE has no correlation to Value, do we know of any other assured strategy that paves way for superior returns? We don’t. Every estimate we do is to figure out what the market gets wrong. But just because you found out a gap in consensus, doesn’t mean it should be filled. It’s just more likely to be filled than not, is all.
A very informative article. Thank you.
Greatly admire the conviction with which you approach the stock picking process @dineshssairam. Two phrases I can use to describe your process - “exceptional clarity” and “unflappable optimism”.
My thinking is that it is the clarity that gives the optimism/confidence and hence striving for clarity would be a good roadmap to move forward.
To be honest, I’m not convinced about all the bets. The prime reason could be that I have definitely not worked to achieve a comfortable level of clarity.
But my guess is that if one can adhere to it with discipline and execute it accordingly, one is bound to succeed.
Quoting from the article… ‘The hard reality is that the net irrigatable land is about 52%. Of this 55 - 60% is Paddy. Paddy income alone is insufficient to service all the liabilities of the farmer.’…I think the writer is writing article after researching some particular part of India’s tractor market, may maynot be true for entire India.
Despite the recent NbFC financing crisis, escorts monthly tractor sales number continue to baffle me…
Thanks to share the article and request to share some more articles on bubble in Indian tractor market please.
Discls-holding escorts
It is true across India. Tractor companies as well as finance companies are luring small farmers to buy tractors with easy credit terms. Now these farmers won’t be able to pay for the same. Farmers distress, loan waivers, farmers suicides across India are enough signals for the situation.
Few comments on your holdings:
What is your investment rationale for DHP India? I see it has good return ratios, margins and all. But do you have good resources for understanding LPG Regulators industry and the competitive landscape in it? Also the company’s profits decreased in 2015 and 2016, do you understand the reason behind it? The industry also seems very fragmented and commoditized to me, which puts a cap on the pricing power. I know its valuations are cheap wrt financials but do you think it is a “great” business with a strong moat?
Kovai Medical Hospital: I too hold this stock given its valuations and also like the management’s enthusiasm towards their medical college project. Do you think it deserves 9.2% of your portfolio? Given the capital intensity required in this industry, I think it can only give “average” results and not multibagger kind of returns. I personally allocate only ~5% to those kind of investments.
Cash: Given the current market scenario and sentiment, don’t you expect better opportunities to come up in the near future? What’s your thought on cutting off average holdings from your portfolio and hold only the top ideas + cash? (I hold 75% cash)
Note: I’m a novice investor who started this journey just an year ago. I like your posts in the forum and want to understand your thought process 
Hi Rahul,
A very good set of questions.
DHP India
In India, there are only about 22 players approved by the Government of India to produce pressure regulators and related components (Owing to the critical nature of the parts). So, the industry isn’t as “fragmented” as you think. I think this is also a passive moat for DHP India. Anyway, out of these, most of them supply locally. DHP India (If I’m not wrong) is the only Indian company that does exports of these parts. This is how the company is able to produce very good return ratios.
However, this doesn’t necessarily make things easier. As noted in their 2015-16 AR, the competitive intensity globally in the industry is high. DHP India largely works by producing cheap in India and supplying to regions of North America, South America, Germany etc., This I think is a more active moat for them, being a Cost Leader. In fact, being a Cost Leader is the most powerful moat to have.
But as rightly noted by you, this is a quasi-commiditized industry. Once the active moat of being a cost leader is breached permanently, DHP India will face headwinds. So, this should be a key tracker.
Kovai Medical Centre and Hospital
It all ultimately comes down to FCFF, the price you are willing to pay for the FCFF and the price the market is quoting for the same. Would you rather buy an asset light business at lofty Valuations or KMCH at discounted Valuations? I’d prefer buying KMCH at discounted Valuations. The “asset heaviness” is already part of the company’s Valuation process. It’s not an independent quality.
Besides, I don’t know a way in which I can determine how much I can make from a purchase. If you have a method of determining whether I’ll make “multi bagger kind of returns” or “average returns”, please let me know. If I knew this method, I’ll always buy stocks with “multi bagger kind of returns” potential.
Cash
Coincidentally, I have Cash coming my way (As mentioned). By the end of March, I’m likely to end up with 50-60% of my PF in Cash. But this doesn’t mean I’ll “wait for better opportunities”. I suggest you scroll back a little and read my response to when someone asked when I will sell Mirza International.
I hope this helped.
Thanks for your response.
I would never buy a business at lofty valuations. What I mean is give higher allocation only for those which are both discounted by market and can grow fast (eg: Shemaroo is my top holding). I agree with the current market conditions, it is difficult to find such ideas. I’ve been searching since a while and stuck with lots of cash. Since I don’t want to stay with 100% cash, I’m allocating only 5% to companies which are discounted and can grow at a “moderate” rate (eg: Kovai).
Haha! I think it is art I’m trying to practice, not science.
After five years, how do you visualize KMCH? The medical college project would be fully functional and operational along with current hospital operations and maybe we can expect an additional satellite center. I don’t expect them to start Chennai project by then. The profits would may be multiply by 1.5x (vague guess alert). How much re-rating do you expect for such a company? Maybe from current ~15 to ~25 (Not to be compared with Apollo as it is a franchise across all India). So, vaguely, I’d expect my investment to multiply by 2x to 2.5x (profit factor multiplied by re-rating factor) in five years. The best part here is downside protection.
Good to see you’ll have 50-60% of cash.
Note: Not a SEBI registered analyst. This is NOT a buy or sell stock recommendation.
Total 76 approved LPG Pressure Regulator Manufacturers are there.
http://peso.gov.in/PDF/List%20of%20Approved%20LPG%20Pressure%20Regulator%20Manufacturers.pdf
First in the list Kosan Ind is a Dharmsi Morarji Group Company which have some Cylinder Vessel Plants in UAE , so quite possible they may be exporting from India.
I checked few other Names from the list and most of them too are exporting.
Coming to DHP , It has a strong balance sheet and good historical numbers with good promoter Hold. The growth was stagnant during March 2014 to March 2017 and picked up in last few quarters. The Company looks interesting but have to understand more about the Industry and Market Size. Do you have any source ? What are the growth drivers for this company and why would sales continue to grow ?
As far as i think , the government Ujjwala Scheme for providing Gas Connections can drive growth in Domestic Market but again there is a focus on Increasing the share of PNG Connections with latest 10th round of CGD which might affect the LPG. Also the product is not something like which needs frequent replacement. Growth should mostly come from New LPG Connections which i feel have a little scope of growth.
The company’s investments in Mutual Funds have increased a lot in past few years which may indicate that it is tough to invest back capital into main business to generate better returns which again indicates limited market size to grow.
Their focus looks on exports but have to understand more about the prospects.
There are some Paid studies where they have done analysis of top key players along with future forecast but there is no mention of DHP India.
https://www.reuters.com/brandfeatures/venture-capital/article?id=76833
Disc: No holdings
Hello all,
My two cents as i am associated with the healthcare/ medical education field…
A private medical college has two aims - a captive source for human resources for hospital at a lower cost (The students will double up as junior doctors even while paying fees) and student fees.
However, one needs to keep in mind changing landscape of medical education before extrapolating the past in to future…
There has been significant government thrust to increase the supply of medical education seats, especially the government sector at lower cost to students…And i think the medical education also follow demand supply rules of any market.
Till date, MCI was the roadblock to seats increase as it was a hotbed of corruption. With the scrapping of MCI and if, government is successful in having a more pliant body, the supple side equation will change.
Due to many loopholes in admission rules governing private medical colleges, they were able to charge exorbitant prices. With streamlining of admission process with single entrance test across country and mandatory government process for fees approval, this pricing power may be at a threat.
Till date, the MCI steadfastly disparaged DNB courses. If MCI itself is at existential threat, it might be forced to grant equivalence. This might again change supply and pricing power as DNB has stringent fee norms while much more relaxed teacher experience/ infrastructure requirements. If you search, most corporate hospitals already have DNB programs.
Regards
I have had several conversations about Growth Vs Valuations. So, I’d rather not start one again. But let me leave a quote by Warren Buffet here:
But how, you will ask, does one decide what’s “attractive?” In answering this question, most analysts feel they must choose between two approaches customarily thought to be in opposition: “value” and “growth.” Indeed, many investment professionals see any mixing of the two terms as a form of intellectual cross-dressing. We view that as fuzzy thinking (in which, it must be confessed, I myself engaged some years ago). In our opinion, the two approaches are joined at the hip: Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive. In addition, we think the very term “value investing” is redundant. What is “investing” if it is not the act of seeking value at least sufficient to justify the amount paid? Consciously paying more for a stock than its calculated value – in the hope that it can soon be sold for a still-higher price – should be labeled speculation (which is neither illegal, immoral nor – in our view – financially fattening). - Chairman’s Letter, 1992.
That makes Valuations so much easier, doesn’t it? Take a Profit target and multiply it with a “re-rated” P/E and boom, you have a Value. Except, it doesn’t explain how the “re-rating” happens or what goes into the “re-rating” or whether the Profit target is justified.
I use a very similar model, but I use it largely to understand the Cost of Capital on my investments. I would personally not use it as a click-of-a-button Valuation and/or market timing tool.
Practical Thought Valuation Model.xlsx (14.8 KB)
You are right. I had posted the same link in the DHP India thread. I have no idea why I said there are only 22 players. My memory fails me. My bad entirely.
Yes, you’re right once again. If you are looking at DHP in the light of opportunity in India, you are looking at the wrong picture. DHP does 85% exports and 15% in domestic sales. The domestic sales contains exclusively scrap material from the production of regulator and other parts (“Other Income”).
The right picture to look at is how the future is for LPG and similar products. In my opinion, it’s bright. You can find several articles by doing simple searches online. Here’s a good one I found:
https://www.wlpga.org/wp-content/uploads/2018/07/Japan-Interview.pdf
The interview is largely lop-sided, talking about the prospects of a specific company (WLPGA), but you can certainly assess the imminent future LPG and similar products have in the world market.
Thank you for the info @novice2014
As I’d already mentioned in this thread, I have zero clue about how KMCH’s college will turn out. I think the CMP offers a good chance at earning a decent return regardless of the college performing extraordinarily.
Hi Dinesh,
How do you see the latest results from DHFL. Also, if you can shed some light on their change in strategy and firefighting efforts to raise liquidity and align business to more retail-centric.
Thanks in advance.
The result is along expected lines. Almost every NBFC got into a tight spot because of the taper tantrum.
But the change in DHFL’s strategy was a little unexpected. But in hindsight, I think it’s a bold move and it is impressive how quickly they are carrying it out. To put it shortly, DHFL is trying to sell off as many non-core assets as possible in order to try and create liquidity. This additional liquidity, along with the decreased D/E Ratio, would make them look healthier in the eyes of the now-scared NBFC lenders (Mutual Funds, Banks, other financial institutions). So, all in all, they are trying to re-start the credit cycle and they’re doing all they can to make the process easier. The expectations going forward will be a few troubled quarters and a reversion back to mean once the lenders are convinced to get in.
In any case, the current valuation, at almost half P/B is a bargain in my eyes. Someone else might say “I’ll wait for the lenders to trust DHFL again and then think about buying the stock”, which is fine. Risk is very personal and I respect that. They just have to make sure that the bargain doesn’t go away when things go back to normal (Which is ideally what’s likely to happen).
To draw a parallel, I would point towards American Express and the Salad Oil Scandal:
If Warren Buffet had waited for American Express “to clear the air”, he would definitely not have gotten the bargain he did at the peak of the aftermath of the crisis. Good news and good valuations seldom occur together.
Are you still buying DHFL at current price 170 odd?
P.S i have few hundred at 650…Dilemma to avg or not
I would, but as a personal rule I don’t want to hold more than 10-15% of a BFSI firm (ANY BFSI firm, not exclusive to DHFL). So to answer your question, I will add DHFL if I add some other stock to a larger extent.
I mentioned this earlier in one of my posts too.
I kind of understand your idea which is you cannot have good news and good price together. It is either this or that in most of the cases.
To put it shortly, DHFL is trying to sell off as many non-core assets as possible in order to try and create liquidity. This additional liquidity, along with the decreased D/E Ratio, would make them look healthier in the eyes of the now-scared NBFC lenders (Mutual Funds, Banks, other financial institutions). So, all in all, they are trying to re-start the credit cycle and they’re doing all they can to make the process easier. The expectations going forward will be a few troubled quarters and a reversion back to mean once the lenders are convinced to get in.
What if they are selling all the non-core assets and selling down the loans only to meet the liabilities that they have to meet over the next 1 year? How does one know if it is towards restarting the credit cycle or meeting the liabilities?
When they sell down, I think any buyer would like to buy high quality loans than low quality loans. Hence don’t you think NPAs are bound to increase? Will that affect their credit rating?
If there is a 50 bps rate cut, rollovers can come back and maybe even growth will be spurred but otherwise with such reduced disbursements that I am hearing about, with fixed costs, wouldn’t the results get worser and worser from here in a negative reinforcing spiral?
