Investing Basics - Feel free to ask the most basic questions


(Donald Francis) #1

Hi Guys,

One of our biggest failures has been in not being able to encourage newbies/learners to ask questions freely. Infact many have openly told us ValuePickr Forums are too intimidating!! Given the level of discussions, we don’t feel like asking basic doubts/questions:(

Thanks to Vinod, who just took the initiative to ask some basic question on P&L statement in a different thread, I realised we can keep one single thread -ONLY for the BASICS doubts/queries - that may encourage everyone to ask & contribute back??

Please fire away - your questions here - anything to do with Investing Basics or Stock Market Basics. By the way, ValuePickr has a few excellent guides and articles on these basics. click on the links above and also explore them, for better understanding of jargons, concepts, and their practical use.

Rgds

Donald


Can Someone Please Guide Newbie's Like Me
(Administrator) #2

There is a dedicated forum now for Basics questions.Consequently earlier posts have been moved toInvesting Basics Q&A.

Please post your queries at theInvesting Basics Q&Athread only.


(Mohammed Rehan) #3

Dear All

I want to get BSE Index since 1980 and also different indexes like Bse Auto , BSE Capital Good, etc for different sector.

I am getting some data from 1991 and others from 1999.

Any one has any idea what would be the best source to get the oldest data??


(Prabeesh) #4

A general list of ratio and other terms (PAT,EBDITA) their implications in simple words will be great help for newbies to go through the Account statement.


(SAMIR SHAH) #5

I would like to get ideas on how to do the valuation of two different companies, currently being viewed very differently by the stock market. I would like to get feedback on how to look at the valuation (in terms of the method), and consequently, which of the two stocks represents good value at the moment, and therefore is the better buy.

I am deliberately not giving the names of the two stocks, so as not to colour anyone’s mind with the names. I would just like a pure valuation exercise. Rest assured, both are real companies, and the figures I am giving are all real, if not accurate to the last decimal. And of course, experienced stock pickers can probably guess which companies I am talking about.

Company A is a consumer product company, subsidiary of a MNC. Its brand is one of the best in the business, worldwide. Its annual sales are more than 3000 Crores, and its Market Cap is in excess of 15000 Crores. It hardly does any manufacturing itself, preferring to outsource all the manufacturing. It spends a huge amount of its turnover on advertising and marketing. As a result, it is almost synonymous with its product category. It goes steadily from year to year, with its turnover having increased 3 times in the last 10 years, and its PAT having increased 5 times in the last 10 years, a CAGR in profit growth of nearly 19%. The company has been in the country since several decades, and its parent is more than 100 years old.

Because it does not need much money for investment, it is debt free, and it also distributes nearly 80% of its profits as dividend and dividend tax every year. The balance is added to equity. Here is the kicker- the company has managed to maintain 100% ROE or thereabouts for all of the last 10 years.

The company is, like all consumer facing FMCG/Pharma companies in the current market, valued at around 30 PE. Its price to book ratio is 35.

The second company, say company B, is also the subsidiary of a large MNC. Its turnover is also similar, with annual sales in excess of 4000 Crores, and market cap which exceeds 10000 Crores. It is not consumer facing, but is squarely in the industrial sector. Within the industrial sector however, it has a very high reputation for reliability, and has also a technological edge in its products, given the very strong parentage. The Indian arm is also used by the parent as a manufacturing base of some lower cost items for its worldwide distribution. The company has been in India since several decades, and its parent is a very old, very reputed MNC.

The company has seen excellent growth in the last 10 years, though growth has been relatively muted in the last year or two, given the industrial situation. The company has grown sales by 4 times in the last 10 years, and the profits by nearly 7 times in the last 10 years, a CAGR growth in excess of 23 percent. This profit growth has been relatively smooth over the years, though the growth has tapered off to around 16% in the last 3 years, given that the industrial economy has worsened.

The company has invested a lot in Capex over the years. Still, it distributes 40-50% of its profit as dividend every year (including taxes). It is also debt free. Its ROE is 30-35% since the last 10 years.

The company is currently available at around 15 PE, and around 4 times Price to Book.

The question is, if you were Rip Van Winkle, and if you were to wake up after 10 years, so you are not really bothered about what happens in between, which stock would you rather buy today before you go to sleep?

This is a real exercise for me, not just an academic one. And I appreciate the efforts of anyone reading through this, and better still, replying to it. If you need more information, just ask.

Regards

Samir


(Akbar Khan) #6

Since you have not mentioned anything about future prospects of the two firms, that is the main question one would need to answer.

Given the fact that you have provided some historical figures and assuming the next 10 years play out as the past 10 it is quite an easy decision. Just check the historical returns and decide. On this basis Company A would be a better option.


(SAMIR SHAH) #7

In terms of historical returns, both companies have risen in Market cap by 10 times over 10 years. This is not factoring dividends received. Dividend Yield in both scrips is similar.

While Company B has definitely grown slower in the last 3 years relative to company A, it has historically shown a somewhat better growth in revenue and profits over 10 years. In the case of both companies the growth rates are relatively smooth, so base year effects are not very significant.

Company A has a very niche product category, but in this product category it is by far the leader. Company B is more diversified, and exports constitute about 20-25% of sales. However, within each of its product sectors, it is a leader.

Regards

Samir


(Govindarajan) #8

you are trying to compare companies in two different sector like Colgate -> Apple ; Cummins-> Orange.

I will buy both for 10 years :wink:


(SAMIR SHAH) #9

Why? Why would you not like to put all your eggs in the one basket that is likely to give you the best returns? What difference does the sector make?

And can companies justify 30-32 PE? If so, can you please elaborate with some calculation, and what assumptions you would have for this calculation?

Regards

Samir


(Gautham U) #10

As we all know, PE is not a function of growth rate alone. Historically it has traded in high 20s only. I think it has grown roughly around 18%. Obviously for such business we cant expect to buy at a peg <= 1 . If one has 10 year view, i think buying at 30 P/E is not bad.

(After P&G entered tooth paste in india, they have become very aggressive. I see a huge space for colgate in retail outlets. Also a lot of innovation in packaging, flavor etc. I wanted to try how good p&g’s oral b is. But till now I couldn’t find it in any store. I heard it tastes very bad. I don’t see them creating any dent)


(Hitesh Patel) #11

Interesting queries samir shah.

I feel since we are at the lower end of industrial cycle and in all likelihood it is likely to reverse direction in next 1-2-3 years, I would prefer the company in industrial space…Cummins. Its almost ready with expansion with higher unutilised capacities… when these are put to use optimally, company should provide decent returns.

The FMCG business-Colgate would be a great business to own but not at sky high valuations.

Personally I would try and look at next 2-3 years and not take a 10 year view if I were to look at Cummins. For Colgate and other similar companies, taking a ten year view would eb okay.


(Donald Francis) #12

Samir.

Nice poser. First some long-term data that establishes - there can't be two views on this subject;).

COLGATE

DELTA NETWORTH

DELTA MKTCAP

IMPACT*

10 YR

245

15364

62.64

7 YR

209

12149

58.11

5 YR

273

11737

42.95

3 YR

106

6160

58.37

1 YR

54

3864

71.29

* IMPACT â Every Rupee retained added xx.yy in incremental market value

CUMMINS

DELTA NETWORTH

DELTA MKTCAP

IMPACT*

10 YR

1735

11403

6.57

7 YR

1457

8484

5.82

5 YR

992

8295

8.36

3 YR

580

-190

-0.33

1 YR

344

1056

3.07

COGATE

SALES

EBIT

PAT

DIVIDEND

NETWORTH

TOTAL RETURNS

10 YR CAGR

14.45%

17.74%

18.48%

18.67%

8.03%

27.38%

5 YR CAGR

15.91%

17.26%

14.38%

16.89%

22.66%

32.39%

3 YR CAGR

17.61%

12.69%

11.08%

12.82%

12.91%

24.36%

1 YR

17.55%

12.57%

11.26%

12.00%

12.45%

28.38%

CUMMINS INDIA LTD.

SALES

EBIT

PAT

DIVIDEND

NETWORTH

TOTAL RETURNS

10 YR CAGR

19.22%

24.68%

24.12%

18.33%

15.52%

24.64%

5 YR CAGR

8.38%

15.29%

15.21%

19.25%

14.38%

27.84%

3 YR CAGR

7.01%

11.40%

13.71%

10.15%

14.95%

-0.46%

1 YR

11.47%

34.86%

29.23%

18.18%

16.82%

8.93%


(Donald Francis) #13

Observations:

1). Industrial brands cannot be compared with FMCG-with-pricing-power brands. The sheer consistency shown by the latter is unmatched. Industrials will meet cycle turns sooner than later.

2). If I have to bet on which has a higher probability of sustainability of business performance for the very long term, the choice is clear. Mr Market is very clear about this, and thatswhy we see the Delta MAktcap/Delta Networth at those astonishing values. (Nestle and GSK consumer will be other very good examples of the same - brands where competition intensity is perenially low; HUL would be a wrong example as it has me-too brands where competitive intensity is very high)

3). For any sum of money that a Fund Manager is looking to allocate capital in above scenarios presented - I would assume for him the first priority is Capital Preservation, followed by moderate to decent growth while still allowing a good shot at 20-25% compounding possibility over the long term - without much active management. Less aggressive, low-risk medium-gains strategy.

4.The analysis is of-course based purely on historical fundamentals. It assumes for both companies, the long term pattern in both companies will more or less repeat, since the respective industries have not seen much churn/change over a very long history. And Holding time is 10+ years.

As wannabe efficient capital allocators (as Hitesh is fond of saying) we must learn to ride different businesses differently. I have started adding another dimension to it - we must also learn to read/anticipate/ride market fancy cycles each time differently. I am slowly converting to the theory that current FMCG fancy (2009-2014) in general is likely played over & out -valuations having peaked (like the Infra/cg/real estate fancy played out - it had its big time 2003-2008; this time round in next 5 years - some other market fancies will catch on -Exports is one predominant theme, Soft commodities (unlike Metal, Oil) like sugar, agrichem is another. Will have to be flexibly ready to allocate more capital to these themes;) after more scrutiny/guidance from market experts.


(Govindarajan) #14

@ Samir,

Concentration or diversification depends on one’s choice. Growth and Risk Management are two key aspects in portfolio management. Both has to be considered but a portfolio can be growth oriented or not depending on which of those dominates in ratio.

If you want to bet on growth and you can invest in one stock or a dozen of stocks as long as they are expected to grow at around your expected growth rate. In reality it is very difficult to find a dozen of such stocks. Hence most folks who are growth focused, go for very concentrated portfolios. After all, a portfolio return is a weighted average return of constituent stocks. Constituent ‘N’ in that portfolio should depend on one’s skill in managing those investments.

Diversification is one of the ways of managing risks.

I give more weight age to risk management part than growth part, hence I would opt for both. In longer term, the consistency of returns matters. I guess both are very good businesses and will look cheap even if those are bought at high PE (if one plans to keep them long for say 10 years or more)


(Donald Francis) #15

Prabeesh,

sORRY. Noticed your post only now.

I am surprised someone like you hasn’t yet explored ValuePickr properly:(

Check the Basics Section

Stock Market Glossary Link: …/…/…/…/basics/stock-market-glossary/stock-market-terms

This is a very useful section when strating out. prepared by us as we learnt along

Stock Market Basics Link: …/…/…/…/basics/stock-market-basics

Useful section when we want to understand GuruSpeak on stock analysis when they quote investing jargons - basic ratios and how to use them.

implications


(SAMIR SHAH) #16

Thank you all for your efforts, and considered responses. It has been a learning experience.

Just to give a little background on the reason for the query and my thinking (and action).

I am desperate to find consumer facing/FMCG/MNC Pharma type companies to include in my portfolio. But I simply can’t get myself to buy anything which is more than 30 PE. So I have been giving all these stocks (some of which are great companies in and of themselves) a miss. On the other hand, last year, around June, I had purchased Colgate, GSK Pharma, and ITC. I was sitting on Okish gains on all three. And I felt that I if I could not get myself to buy at this price, then I should think of selling. So on Monday, I sold both GSK Pharma and Colgate. (I did not sell ITC, since I bought it last year after overcoming a lot of mental reservations about buying a Tobacco company, so I feel I may not be able to overcome these reservations again!!).

Later that evening, I lost conviction on what I did, so I tried to convince myself by looking at the figures again. GSK Pharma was not an issue, but I realized (through the screener) that Colgate has a phenomenal track record of 100% ROE, and whatever calculations I did, I could not justify selling at 30 PE.

I bought a large quantity of Cummins (to the point that it is now 4.5% of my portfolio) a couple of weeks back @392. The reason I bought it is that it is a high growth company which has built significant capacity. And given the bad industrial scenario, it is available at reasonable valuations.

I just wanted to get other perspectives on whatever I did. I realize now that perhaps I was too hasty in selling Colgate. But I shall not be buying it back immediately. I feel that most frontline FMCG stocks (other than HUL and Colgate) are selling at sky high valuations, which cannot be justified by their fundamentals. Sooner or later, I couple of bad quarters, and the whole sector will become significantly cheaper. And when that happens, I will certainly buy Colgate again.

Some of the valuations in these MNC companies is around Offers for Purchase by their parents. But i really don’'t like to engage in such speculations.

@govindrajan, Actually, I completely agree with you. I was just playing the devil’s advocate, to provoke some responses.


(Donald Francis) #17

Samir,

I was in a similar mode to add Consumer FMCG/Pharma/Tobacco brands a few months back. But I like to complete detailed work before taking complete responsibility for my actions. Despite lot of work in the consumer brand threads, I wasn’t getting convinced. Increasingly now am getting more and more convinced that the recent Consumer boom is most likely over…(with a caveat for mature business unable to grow at more than 15% or 20% at best).

Just to verify what has happened before - have these so called perennials always remained favourites? A look at the Charts available from say 2000 onwards says much more than our Excel sheets - lets take Colgate -from 2000-2006, there was hardly any movement, 2006-2009 very moderate, the real take off is only from 2009-present.http://www.moneycontrol.com/india/stockpricequote/personal-care/colgate-palmolive-(india)/CPI

Similar for Nestle or GSK and others…On the other hand the ITC chart is much more steady secular over the years, as is an HDFC Bank, or even HDFC. So your gut feel is in the right direction I think ITC is a better bet than Colgate or the others. But its huge market cap size has to play spoilsport at some point, perhaps as some have pointed out.

These hallowed brands also seem to have their cycles, as someone I know keeps saying - end of the day every business is cyclical, In hadn’t taken it seriously enough, I realised. As you said the predominant Consumer boom of last 4 years most probably has peaked in the last 2009-2013 phase. Additionally, it looks very unlikely to repeat this in the next boom cycle, whenever that comes. There will be others that will catch market fancy. So should I really bother to average down a Colgate or a Nestle or GSK over next 2-3 years as they crash- I now have serious doubts.

On the other hand, Consumer/Brand play is still relevant I think for the still young guns (first phase of growth) like Page Industries or others like HDFC Bank which still look very capable of growing at 30% plus for a number of years - the sheer momentum of performance will keep the markets on their side and valuations become much more comfortable within a year of holding with solid buisness performance, I would venture to stick my neck out and submit.

Would like to explore this more with our long-term chartists:) - Hitesh & Ayush and how do they interpret the long-term charts for these big names.

Anyone here has direct experience with Colgate, Nestle or GSK or PGHH from year 2000??


(Hitesh Patel) #18

hi donald,

Coming to the returns generated by these fmcg companies, most of them started their bull market somewhere in 2002-05 and have gone up by around 8-10 times and that also includes ITC. Before that these stocks remained range bound from around 1994 and 1999 to close to 2003-04… Most of these stocks took almost 3-5 years to cross their earlier tops. Most of these stocks gave returns to the tune of 8-10 times.

Another group of stocks … guess what…:slight_smile: pharma stocks like cipla and sun pharma gave returns to the tune of 10-15 times… Some housing finance companies and banks also gave close to 20 times returns. And no one is talking about a bull market in pharma stocks having happened.

It is anybody’s guess how long this consumer bull run is likely to continue… but like all bull runs this also is likely to go into hibernation some time in future… And as donald mentions, some other sector will take over… its always difficult to find out the sector at the beginning… Even if one manages to catch it half way, the ride can be exhilirating.

Personally I think we need to focus our energies on what we have till now been doing best… Finding out small companies with big futures.

Just keep doing more of the same.:slight_smile:


(Gautham U) #19

Hi donald,

FMCG: I havent checked income data for the period 2000-2003. But I have checked (for a few companies) 2003 onwards. Till 2006 or so, the earnings were not impressive either. So I think this rally is a earning driven rally. Even post 2009, the earnings were consistent and healthy. So one can attribute that to earnings.

Personally I would continue holding or buying select ones on correction, as long as earnings don’t fall drastically. The best part is that, these companies dont crash even after an earning disappointment. One can get out with minimal damage. As for switching to other sectors, i think it would be better to switch only when the turnaround is reflected in their earnings.


(Donald Francis) #20

Hitesh,

Thanks for the feedback on fmcg coys/pharma coys during last say 10 yr+ periods. I only want to make a clarification. ITC is in a different league - it has grown ~16x in last 10 years from 2003 till date (22 to 350) not the usual 8-10 times in 10 years.

Tobacco+ companies (the addiction factor?) have a slightly better long term performance in other markets too. The best long term performer over 50 years is Phillip Morris of the Marlboro fame - despite all the stringent litigation and regulatory threats there! ITC may or may not keep repeating the performance of last 10 years, but I do think it still has an operational performance edge over other FMCG top brands.

As for staying focused on what we do best - small companies with a promising future - I agree 100%. Its not as if we are short on promising opportunities here for next 3-5 years, that we are trying to look elsewhere. Infact we are still spoilt for choices - despite the continued bull run in these - as in most of our top picks - we are confident of staying put and buying more for next 2-3 years even as we are unearthing 3-4 newer opportunities on a regular basis.

As a senior put across to me after hearing me out patiently (btw he put the same caution as you), this is an inevitable part of the maturing process as an investor. We now have some mental models of our own for decision-making on small company opportunities. Now newer mental models are emerging for us - again broad patterns - that come more from macro industry/sector perspectives.

The next fancy sector trends to catch will never be easy, and like you said even catching broad trends from halfway is great. We don’t have to focus so much on catching the sector from listed opportunities - but from keeping our eyes and ears open )- as we talk to people more and more on the ground, on the field. As per the Senior - the next fancy sector (in Markets) is actually happening on the ground from before - Entrepreneurs/ Local businesses - are on top of things, are working on the same for sometime already - if a theme has to play out - say a reversal from the lowest point - like say in Sugar - its evident to the entrepreneurs/businesses (may not be listed:)) out on the field from much before. Only if we are aware and eager to listen, we may catch some of the next:).