Hitesh portfolio


(Peabody) #3203

Hello Bheeshma,

Can you please elaborate on the implied growth rate strategy-will be very useful to understand. Being LT investor, one has to go thru this pain of 20+ correction in the portfolio.


(barathmukhi) #3204

Hitesh bhai - At 7 times book, doesn’t Bajaj Finance look too pricey? I know it is one company which has delivered consistently time and again, but valuation wise I still can’t get myself to even consider it. Just wanted to understand what gives you the conviction to buy at these levels? :slight_smile:


(Bheeshma Sanghani, PhD) #3205

The idea is to look at the price of the stock and reverse calculate the growth rate that is required to justify that price.

The second step is to look at the capital invested in the business and compare it with the addressable market size. If the capital invested is small compared to the size, then there is scope for continued growth by investing more capital.

If the current growth rate is greater than implied growth rate then there is a case for considering it as an investment candidate.

There are many resources on the internet that you can Google to get info on how to arrive at implied growth rate. The key is to not to second guess but wait patiently for the co to produce earnings growth and then if the stock price is not pricing in that growth you have a good chance of upside. You would be surprised at how often market doesn’t price in growth as quickly as it should.

This is a general framework and one can tweak it here and there to suit the palate. The downside to this framework is that if you are wrong about the growth assessment it will be painful, hence the stop loss post averaging down a few times.


(thecroc) #3206

Just something to add to prespective - go to ratestar.in and look at P/B and P/E chart over last 10 years of the overpriced stocks in the market. It will look like a game of cat and mouse , where there will be steep cuts when growth is factored in every year , but the P/B or P/E starts to tend higher again with price moving. P/E , P/B can contract or expand but growing above 20% for 7-10 years is going to give 5-10 bagger in 7-10 years even when stock is bought at high P/B. Also once you enter a stock at a cheap P/B , you can’t keep selling and buying again every-time P/B becomes insane and sane.


(ValueInvstr) #3207

Hi Hiteshji,

I haven’t seen you commenting on the casino industry and online gaming market in India so far. I just wanted to know your views on the industry in general and Delta Corp in particular.

Thanks.


(Amit) #3208

hello,

Hitesh bhai can answer better.

2 cents into how I think Banks/NBFC should be valued.

Below is what Buffet says:

"P/B is the wrong model to value Financials. This is where P/B of 7 is misleading.

You need to look at the yields banks earning on an implied growth. Banks earn on assets but the ratio of assets to equity, the leverage they have determines what they earn on equity. A good ROE determines management quality. The raw material in banks is money and the NBFC or bank which gets money at lowest cost would end up having bigger spreads. This differentiates Bajaj finance from other NBFC.

Book value is not key to valuing banks. Earnings are key to valuing banks. Now, it translates to book value to some extent because you’re required to hold a certain amount of tangible equity compared to the assets you have."

Bajaj Fin has High return on assets and that ensures high P/BV. Only looking at P/BV is misleading.

Kotak Bank has 5 years ROA at 2.10% and P/BV at 4.19 and ROE at 13.74% (avg 5 years)
HDFC Bank has 5 years ROA at 1.98% and P/BV at 4.96 and ROE at 18.60% (avg 5 years)
Bajaj Finance has 5 years ROA at 3.47% and P/BV at 7.21 and ROE at 20.70% (avg 5 years)

Because Bajaj Finance Generates higher ROA than most of other NBFC and even banks and convert that into better ROE (good mgmt quality) it has higher P/BV. Kotak has lower ROE at 13.74% and lower ROA than Bajaj finance therefore has lower P/BV than Bajaj Finance. HDFC bank with a lower ROA than Kotak but better ROE (again Mgmt Quality) has a higher P/BV assigned by markets. In the longer run, cost of funds, NPA situations, ROE and Higher yields matter. This is where Bajaj finance is the leader. Do not look at P/BV in isolation. Wrong valuation model and so is P/E.

Disc: Not invested in Bajaj Finance and any of other names mentioned above.


(Batterinram) #3209

Agree with most of the things that you have said. Just wanted to point out that for Banks/NBFCs ROE is also a function of leverage. When 2 banks have similar ROAs the one with higher leverage will have a higher RoE. Among the stocks that you have mentioned Bajaj Finance has the highest RoE with the lowest leverage which is impressive although they cater to different category of customers


(Amit) #3210

IBHF has RoE of over 30% but P/B is much lower compared to bajaj finance and kotak. P/B is like beauty eyes in the eye of the beholder.

Mkt does not look at only ROE to come up with higher P/b it also looks at risks in the book, quality of lending, ALM, nature of business, management past records and decisions before assigning higher p/b. IBHF management is shareholder friendly with such ROE but mkt sees risk in nature of lending and such high growth which could make npa look optically smaller. Higher growth in real estate is much riskier than higher growth in retail or corporate credit. As you mentioned banking is a leveraged business. How much risk adjusted returns I get on a comparable leverage between 2 similar banks makes a better shareholder returns in long term.


#3211

@hitesh2710, Have you invested / Do you know about investing in shares of unlisted companies?


(Hitesh Patel) #3212

@barathmukhi

price to book and price to earnings in isolation dont mean much. We have to take into context

ROA and ROE of the company.

The quality of portfolio. Kind of asset quality over the years

Opportunity size and competition for the company. Will the company be able to have a really long runway for growth.

Management quality and promoter pedigree.

Demonstrated track record.

For a company which has compounded its topline and bottomline over last 10 years at a scorching pace and all the above boxes ticked, one cannot value it on conventional parameters.

I would suggest you to listen to a recent interview of Mr Bharat Shah talking about long term investing. It should be available on youtube. Interview taken by sourabh mukherjee (ambit fame). There he talks about paying up for franchises like gruh with explanation.


(Hitesh Patel) #3213

@ValueInvstr

I dont know much about delta corp or about the gaming industry in general. I see govt interference as a big risk in this business and hence keeping away.

@newone I have never invested in unlisted space. You can go through @Anant presentation on the subject which he made in first VP meet at Goa.


(David philips) #3214

Can you please post the youtube link hiteshji. not able to find.


(Hitesh Patel) #3215

(KrishnaA) #3217

Hiteshji, For Gruh ROE , Growth, Sustainability, Quality is understandable. How to add “No dilution” aspect to arrive at a value?


(Hitesh Patel) #3218

@KrishnaA

Here no dliution has to be looked at in an inverted way. What if gruh dilutes at such a high price to book.? The obvious thing is that book value post dilution would go up drastically and the price to book ratio would come down. So for financial companies not diluting frequently there’s a premium attached to valuations provided performance has been good and consistent.


(Radiozammy) #3219

Hi @hitesh2710 - I just read the Mark Minervini book ( thanks to the mention by you) and planning to experiment with his method. Question for you - If you implement his process, how do you go about selecting companies ? Look for technicals first ( 52 weeks highs, 50 day ema above 150 above 200, etc) and then narrow down into potential candidates and look into each ones’ fundamentals… or screen fundamentals ( wrt earnings, sales and margin growths, management quality) and then shortlist candidates for technical analysis of stage 2 etc…

Please share your thoughts.


(Hitesh Patel) #3220

@Radiozammy

The ideal thing to do is to first prepare a list of fundamentally good cos with strong business momentum. And then wait for the technical picture to play out and take a call.


(shyamutty) #3221

Hi Hiteshji,
What is your view on KarnatakaBank? With asset cleanup and recent crash to Rs 100, the stock is available for a Price to Book of 0.56
Also kindly let me know your views on EquitasHoldings? They recently did some changes so that there is less exposure to microfinance.


(bharat19) #3222

Sir , do you track apcotex industry. Looks a good company with good numbers and good management


(Anupam) #3223

Hitesh Sir,

Want your views on utility of PEG ratio. Its a very simple ratio, not very complex. IMO, it captures Price vs Growth in a good way. If we use additional filters for good efficiency ratios then screener throws up some interesting names, for further research. Especially in such times of market correction, we can pick some good names with future growth story intact. Whats your view on the below portfolio.

Query
Price to Earning >25 AND
PEG Ratio <1.5 AND
PEG Ratio >0 AND
Market Capitalization >5000 AND
Average return on equity 3Years >20

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