In March, April 2018 Gruh is going to complete its Rs 400 cr profits annually. It will continue to grow 20%+ for very long period. In next 10-12 years it will cross Rs 4000 cr profits annually. Company making Rs 4000cr annual profits is 24th in Indian listed companies presently. So it is a story from small cap to mid cap and mid cap to large cap. Why I am so confident because it is a “Great Company” in finance sector with wide and deep moat. It lends to a sector where everybody has scope to grow if he has efficiency to do business in this category. Presently no one has ability to do business in this category. It is proven again when Ramdeo Aggarwal yesterday told that Home finance business contributes nothing in profit of Motilal Oswal Financial…
Now take a simple math, in next 10-12 years its market cap will be 4000*32 = Rs 128000cr. Now consider cost of capital 15 % including margin of safety i.e.the long term BSE growth. Re 1 invested at 15 % CAGR will become Rs 5.35 in 12 years. The present value of Rs 128000 cr comes to 128000/5.35 = 23925. Present fair value comes 23925/36 = Rs 664 as total number of shares are 36 cr. Now add dividend to it one going to receive in next 12 years. I consider Rs 3.5 for March 18. Now grow it at 20% CAGR and discount the receivables at the rate of 15%. Total dividend to be received today comes Rs 59 so the Fair Value comes around 664 + 59 = Rs 723.
Some thoughts
- Most annoying thing for many fellows here is Exit multiple 32 what I understand with so long discussion in this thread on high valuation of this cheapest Gem of HDFC Group. I have my own rationale here, many may not agree so we have to agree to disagree.
- Gruh ROE is 30 % + so it can grow at 30%+ without taking help from shareholders/ market just it has to do one thing - stop increasing dividend. Not bad if we do not take dividend and grow the money at high CAGR like relaxo. This ROE is highest in Finance sector and sustainable.
- Suppose Gruh stops growing today, the payout ratio will become 90% immediately from 30%+ because company does not require money to grow. It will still retain 10 % to beat inflation and will grow at above inflation rate. Dividend will become Rs 10.5 and yeild 1.75%. Here I consider Rs 3.5 dividend on 1st April 2018 and payout 30%+. So 3.5*3 = Rs10.5.
- Once this company stops growing and growing just above inflation rate only PE will come down to 32 or 30 so it is one third of present PE. So the dividend yeild will become 1.75*3 = 5.25%. This figure is near about bond rate, not bad, still growing to beat inflation.
- So I think this way to consider exit PE 32 is well calibrated and rational as per my thinking. Here the main assumption is the sustainability of ROE i.e. 30%+. It would help if anyone has counter thoughts for its sustainability.
- Sanjay Bakshi says that Great Company charges genuine price to sell its product and brand is the guarantee for genuine price. Here Gruh charges very reasonable interest rate 1-2 % above others and give 30%+ ROE. This way it skips the help of stock market i.e. Equity dilution to grow at reasonable rate. Here main point to be noted is Gold loan, Micro finance etc charge heavily but they are not able to achieve this ROE/ ROA. Other new entrants Repco, Motilal, Manappuram etc charge more than Gruh but could not make business model yet. This is the Moat what Gruh has. इसे हिलाएगा कौन ? कोई नहीं.
- As the GDP grows, finance sector will grow double of it. So the opportunity size for
Gruh is no issue. It can grow for infinite period. - Here I have taken the base case of 10 times of profit only, if discounts for 20 years growth, fair value will increase too much. If one considers COC below 15 %, it will go more high. I dont want to indulge here.
Risk
- Major risk is if HDFC loses its Midas Touch. So we have to track whole group efficiency i.e. how they resolve their conflicts, issues, their management policies/ systems etc.
- Second risk is - once company grows too large how efficient they are to manage it like today. It will be their test as I think this business is difficult to manage in comparison to Bank/ AMC/ Insurance etc.
- Third risk and main risk is India story. We dont know when this “Globalization, Liberalization” can create 1997 Asian crisis in India like high inflation, high interest rate, high devaluation of currency i.e. total chaos. This the eficiency of our government and certain global conditions, no one knows so no need to discuss.
When to sell -
Great company giving ROE more than its high growth rate is never to sell, its a great compounder. Its always in a rerating mode till the the ROE is intact i.e. Moat. Fair value of these companies is continuously on rise.
Reasonable profit growth >15%+ high payout >20%+ high ROE > 25 % = wealth builder
High growth + high payout+ sustainable high ROE = continuous re-rating till large cap.