Hi Ranvir,
You are right. Certainly bluest of bluechips can come from non-FMCG Sectors. FMCG was just the most obvious first sector - much easier to understand.Pharma and Banking space for sure, should throw up a few winners as the Motilal Oswal studies have shown.
But paintingYES bank, Axis Bank, Karur vysya bank, ICICI bank, ING Vysya bank, INDUS IND bank, city union bank, Hdfc bank- all of them in the same brush - is a defensive, passive strategy! Perhaps you can allocate roughly equally and be happy there; it may yield you decent returns too. But surely you will doing a poor job of allocating capital, in this way. Think about it!
As I have made it clear many times in ourCapital Allocation Framework, this is an aggressive strategy, fit only for passionate active investors.I spend lot of time doing in-depth analysis on promising businesses, meeting Managements, doing scuttlebutt with distributors and industry folks, and also discussions on ValuePickr. I am an active investor. I will be doing gross injustice to the effort & time we spend if I cannot differentiate between my portfolio candidates, and allocate capital more efficiently (have a framework, which we keep refining as we gain in experience & expertise).
So coming back …out of YES bank, Axis Bank, Karur vysya bank, ICICI bank, ING Vysya bank, INDUS IND bank, city union bank, HDFC bank, I surely want to pick only 1 or 2. where the odds are stacked decisively in favour. Once can intuitively pick HDFC Bank with minimal study, and be done with it - why all this big analysis, you may again ask.
That answer came to me in Mar 2009, when everything was screaming cheap. To take your banking example, all banks were available at 1 to 1.5x book value, except maybe HDFC at 2x. Gross & Net NPAs were good, Credit Adequacy was decent, Provisioning was Okay etc . But no one wanted to touch them. Yes Bank and SBI were available at less than 0.5 Book, fundamentals were good, the best ROEs in the business (High RoE & low P/BV is a sweet-spot combination) but everyone was shit scared to touch them… the common answer was sorry, Yes bank is a piddly bank only 4 years old, lending to SMEs, where liquidity has dried up, defaults are rising, contingent liabilities are 4x Assets, etc etc. Someone at TED guided some of us in the analysis, where we established there was very little risk in going with Yes Bank- Even if Asset quality deteriorated 10x in a year (which is impossible given the array of restructuring options) - the Bank will survive - it still would have better NPAs then HDFC Bank. And we got in at Rs 45-50!
Big Opportunities may/may not present themselves for a long time. But I have understood the value of prior homework. With homework done, we are better prepared to take advantage. The time to strike hard will come for sure - that’s the history of markets - when exactly no one can tell.
If we keep painting all decent investing prospects with the same brush…I know we will not be able to back ourselves to take advantage. We will never be prepared…we will be at a loss to decide…worse still, we will keep playing safe. And in my book, that’s a gross injustice to the time & effort we spend as active investors.
Sorry for the rambling answer…hope you got a flavour of why this quest at ValuePickr, to keep getting better at what we do - Separating the Wheat form the Chaff - Separating the Men from the Boys - will always be our guiding motto.
-Donald
