Pathetic service by Hathway in our apartment complex. There are 2000 flats and they have been able to retain only those customers who because of line of sight problem can not shift to airtel/tata sky. The day association allows the roof top(not allowed right now) to be used to put the satellite TV nobody will remain probably.
This is just a pointer…please check out more.
Anant
Quality of business must not be sacrificed when searching for disproportionate results… Its like spotting Virat Kohli in under 16… If we sacrifice the quality then it may be considered as TurnAround/Special situatuion/Short time play…
Hi Kiran,
It’s always good to get some counter-views to keep our confirmation biases in check and that’s one of the most important utilities of such forums.
I also have similar impression about TypeA+business that it can compound for a long period of time. If we analyze the size of commodity markets as compared to other developed financial markets, as I mentioned we are just scratching the surface. However, as you so rightly mentioned, it is very important to think where will the growth come from. I am sure you must have come across FCRA Amendment Bill and Parliamentary committee report on the bill. But it will be useful to go through the document posted on MCX website highlighting FAQ on the Bill which very effectively summarizes the Amendments and rationale
So,
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Increased participation especially form Banks/FI/Insurance companies. From above documents it seems that most stakeholders are in favour and it makes lot of sense (At least for banks) to participate for hedging their risks
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Bill is clearly talking about allowing to trade in options. Options market is much less risky as compared to futures and lot of smaller participants can join in to trade in options. Size of options market is likely to be much larger than futures market and participation can be more broad based
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Currently, FMC is allowing to trade in only 100 commodities while the universe is of at least 2500 commodities. So there is definitely some headroom. FCRA Amendment bill also talks about weather and other such commodities to be traded. So, the canvas is large.
Will these amendments get passes soon? I don’t know. But, if we move toward more integrated trade with the world, our financial markets have to evolve (and with due credit, it has evolved so far in last few years) and reach the sophistication level comparable to developed world. So, in medium to long term, I see such amendments happening. It adds to the comfort that already such amendments are being discusses, debated and analyzed by parliamentary committee which typically is represented by major political parties. So, odds of that fructifying in 3-5 years seems to be in favour. So in 10 years market reaching 4-5 times today’s size and continue to grow is very much possible, if these things play out.
And I am getting the option to be in a very strong franchise business ( from whatever I have come across, very few can match the “moat” of a dominant exchange) exposed to secular growth, if it happens, on very favourable terms. Just in case, if growth doesn’t play out, I have nothing to lose, and may be I will get decent returns too.
But again, the investment rationale is not to get a “doubler” in couple of years, but it surely act as margin of safety.
Open to more counter views and also views on where I have succumbed to “bias”
Discl: I initiated a “nibbling” position in MCX @ 420 yesterday
TypeA+business typeA+business (< 2-3 years) (thereby, asymmetry kicks in), but am only saying that to qualify as TypeA+, it needs to compound say at 20% for a long time, which I don’t see happening.
Would love to hear your views. (And of course, can continue the conversation in the MCX thread)
P.S: a) I see very high probability of a HDFC/Kotak or some other player of pedigree taking Jignesh Shah’s 22% stake quite soon and hence the doubler in < 2 yrs argument
b) Volumes in NCDEX have actually dropped quite significantly from 2012 to 2013. I would have thought players would shift from MCX to NCDEX in the face of such a carnage. But nope - the data indicates otherwise. Forget the increase in NCDEX, there has been an average drop of 33% in value on NCDEX (and 31% drop in volume) indicating the moat of MCX.
Agreed Mallikarjun but generally when we look out for quality of business we start from a historical perspective and trim our lists as soon as we see bad roes and it is after this that we start analyzing the future ratio. I do not think we ever pay attention to how the quality of business could change for perceived under-performers. Looking at the analytic skills here here of the senior members I am very sure they can figure this out although this would be a far more laborious task. Look at any FMCG today and see the state of business in its formative years with lots of capex, I am very sure the quality of business would not have been the same.
a typicalA+grade business
Sleepy company with equally sleepy management but with great products and brand recall…Some of its brands even are akin to OTC brands… generating loads of cash… Plenty of cash on balance sheet… lots of buybacks done in the past…
Enjoying EBIT margins of 25% or thereabouts and net profit margins around 20%…
Obviously it will have good ROEs but dragged slightly down by cash on balance sheet…
WE ARE TALKING ABOUT FDC…
Its a laggard as Mr M described… But it will need only a little more effort to sweat its brands and generate higher sales and profits… Plus till now exports are practically very little in overall scheme of things… If somehow they can manufacture growth be it in the domestic markets or in exports or preferably both… This could be very very interesting… Even after the recent run up its quoting at a trailing PE of around 12… If you take out the cash, which is around 25% of total market cap, this ratio comes down to around 9…
all it needs is for a trigger to play out…
Which may be in the form of improvement in business or sellout by promoters…
Till the time any trigger is visible, I think returns may be slow in coming but it is definitely a company to keep under radar. Markets though seem to be thrilled about something in this one…
It has closed at 52 week high of 115 today… And at arm’s length of its all time high of 117…
Personally I cant make out the trigger in this one… except may be markets have changed the way to look at it…
disc: invested… technical pattern was great… 
Very interesting discussion indeed, After trying various investment styles over the years this is where I have gravitated towards in last few years - the “pregnant” companies !
However I think with such companies one need to take one of the following approach:
A. Portfolio approach: As some of my Angel investors (in tech startup) tell me that for them while the individual story is important, they always look for how it fits in the portfolio given the success rate of exits is typically less than 10%. So they create a diversified portfolio on multiple dimension.
B. “Not much to lose, lot to gain”: To bet big on a few business one should find the ones where:
)- Core business is expected to continue doing well (with reasonable growth and usual margin of safety measures).
)- Should have high headroom to grow and impeccable management integrity
)- And should have a few unpriced near-term high-probability catalysts which can increase the business opportunity size by more than 2-3x.
I’ll post my views on how to identify such companies in the other thread (“Art of Valuation”) and leave here a couple of ideas I am working at. (Disclaimer: invested)
1). Piramal: Talked a lot about already in multiple forums. Business sub-units have now shaped up and doing well. All it needs is a re-structuring and/or a few licensing deals to deliver.
2). Biocon: Ready to deliver anytime now. Core business continues to grow at 20% and atleast 3 huge opportunities each of them can more than double the business size.
I have copy pasted the below information which I found at http://rakesh-jhunjhunwala.in/index.php/2013/12/22/5-potential-multibagger-stocks-ripe-for-a-buy/.
This is relevant to the discussion that we are having in this thread.
Raamdeo Agrawal emphasizes that the task of finding a similar wealth creator stock like ITC, Asian Paints, Nestle etc does not have to be one of chance and luck. Instead, because wealth creator stocks exhibit definite characteristics, if you can spot those characteristics early on, your chance of bagging a wealth creator stock is substantially increased.
In the Motilal Oswal Wealth Creation Study,
Raamdeo Agrawal has proceeded on a systematic basis. He has identified the factors that must be present both at the industry level as well as at the company level for a stock to become a winner. Letâs take a quick look at those factors:
|
Check-list Of Factors At The Industry Level |
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(i) Competitive landscape and bargaining power: |
Is the industryâs competitive landscape favorable? Do players enjoy superior bargaining power / terms of trade with customers and/or suppliers? |
|
(ii) Size of opportunity and profit pool: |
Does the industry enjoy a large profit pool which can be effectively tapped into by a company with a unique value proposition or strategy? |
|
(iii) Value migration: |
Is the industry showing trends of value migration? Or does it offer opportunity for the same in future? |
|
(iv) Stability of industry: |
Is the industry fairly stable i.e. less prone to destabilizing factors like business cyclicality, high production innovation, and regulatory controls? |
|
(v) New industry or strategic opportunity: |
Is it a new industry or strategic opportunity with huge potential? |
|
Check-list Of Factors At The Company Level |
|
|
(i) Quality of corporate-parent / management: |
Does the company have a solid corporate-parent and management team? |
|
(ii) Unique value proposition or strategy: |
Does the company have a unique value proposition or strategy to overcome competitive forces? |
|
(iii) Nature of business: |
Does the company enjoy Consumer Advantage or Production Advantage? How strong is the advantage? |
|
(iv) Market leader or pioneer: |
Is the company a market leader or a pioneer? |
Converting Theory Into Practice:
Now, identifying these factors in theory is easy. It is in putting it to practice that the difficulty arises. This is where Raamdeo Agrawalâs wisdom and experience comes in handy.
Having identified the characteristics that a potential multibagger must have, Raamdeo Agrawal has put the theory to test by doing back-testing and applying the methodology to identify potential Emerging Value Creators. He has identified the following five stocks:
|
(INR b) |
FY13 |
1HFY14 Growth |
||||
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RoE % |
PAT Gr. % |
Sales % |
PAT % |
Price (INR) |
P/E (x) |
|
|
With amplifiers |
||||||
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Bajaj Finserv |
24 |
18 |
33 |
36 |
739 |
7 |
|
Bajaj Corp |
35 |
38 |
20 |
15 |
231 |
19 |
|
Zydus Wellness |
44 |
43 |
9 |
29 |
544 |
20 |
|
Symphony |
29 |
11 |
19 |
27 |
408 |
23 |
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Others |
||||||
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Cairn India |
25 |
49 |
-2 |
6 |
324 |
5 |
What you will notice from the said five stocks is:
(i) All of them have a high ROE in FY 2013 (and earlier). The lowest ROE is 24%;
(ii) The PAT growth in FY 2013 has been good, ranging from 11% for Symphony to 43% for Zydus;
(iii) In HY FY 2014, the companies have recorded good sales and profit growth. Bajaj Finserv has reported a 33% growth in sales and a 35% growth in PAT;
(iv) the Price to Earnings (P/E) ratio is reasonable based on the current prices. It ranges from a low of 5 for Cairn to a high of 23 for Symphony;
(v) Each of the stocks has a strong competitive edge which gives it an edge over its competitors (such as a strong brand name for the consumer companies to exclusive access to an oil well for Cairn);
(vi) All the companies are well-known for their ethical and efficient management.
Regards,
Rajarshi
Perhaps Disproportionate growth is lying in following idea.
In many sectors, most of the market share is dominated by unorganized cos. However Branded players are gaining (or eating or stealing) their share in systematic manner. These sectors are worth investing.
**examples:
**dairy products, agrochems, automobile parts, restaurants (specialty restaurant), industrial coolers, kirana stores, healthcare services (routine medical checkup, diagnosis), retail, security & manpower solution, hair / beauty saloon, multiplexes, etc (I am sure someone can suggest more based on personal experience)
**Few exceptions:
**gold loan (washed out because of gov policies, interest sensitive market)
kirana stores (margins are low but proprietary products can add values)
** Industrial grow… **
On popular request “Type C” is now renamed as Type A+.
Type C inevitably leads to some confusion with C grade. Wheres A+ is unambiguously seen as top of the class!
Henceforth let us start using Type A+ for businesses that have laid/laying the foundation for disproportionate future growth. All Type C references hitherto are being edited to A+.
Hi Donald I think Dhanuka qualifies as A+ on most counts
Though I am not sure about the integrity of the promoters
Report in your mail box
Hi Donald,
I agree with Subhash on JB.
I was going through JB chemicals thread. Hitesh had mentioned following drivers for JB chemcials when he started the discussion.
I am not sure how any of this driver qualifies the stock to be of Type A+. Is there something else which we should consider while finding an A+ stock?
I am not sure how any of this driver qualifies the stock to be of Type A+. Is there something else which we should consider while finding an A+ stock?
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Jb chemcials seems to be in deep undervaluation territory
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Company has cash and investments of around 550 crores
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management seems upbeat about the prospects of remaining parts of the business which mainly includes Indian operations and Rest of World exports
There were few more drivers mentioned when the discussion restarted.
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The main theme here is the expected margin improvement due to change in drug pricing policy.
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Marketâs perspeption change towards the cash.
Is JB be a student who is sharp and has fast grasping power?
Please guide on what I am missing here. What is that Mr M sees here which I do not?
hi donald
nice discussion on A+ companies (stocks)
my list of A+
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ENIL (Radio mirchi) : retaining & expanding market share . only radio player to have made profit & good ROE.
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HDFC Bank & HDFC & Gruh : all know it
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Muthoot Finance : yes this one is also A+ bcos in last 12-18 monthseverythinghas gone angaist it still has advances of 24,00 to 25000 cr. whilecompetitionhas lost nearly 40% of advances.
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Asian Paints & pidilite: greatcompounders.
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JSW Energy (May be) ; see what other power generatingcompaniesare in for and this one is going strong.
and yesterday’s A+ : hero honda & maruti . (due to competition they will loose pricing power & market share)
but valuation has to be considered . otherwise all of them are buy on dips(25% correction) for next 5 years or more
By Kunal Shah
Great to see so many people participating in this discussion. Now that we all agree that companies poised to deliver disproportionate returns can be multibaggers, how do we identify these companies at the cusp of explosive growth? I have a theory about it and would like for comments about it.
The analogy of smart students and great companies is most interesting. Smart students are able to employ multi disciplinary skills to solve complex problems. This implies that they are able to use basic fundamentals in addition to subject matter expertise to solve problems that they have never encountered before. This is as opposed to labourious students who can only solve problems that they have practised before.
I think that we should look at companies that are able to excel at multiple disciplines. The A category businesses are those that at least excel along two vectors and A+ businesses are those that excel at at least three vectors. Is the business that we are trying to identify excel at two or more or these. The vectors that I can think of are branding, distribution, manufacturing, IP, network effect, technology etc. Let us list our A+ businesses and check whether they are improving along at least three of these vectors for them to be very difficult to replicate businesses. If it is just one of these vectors, then be great assured that they will be overrun by competition very soon.
We should also do a historic analysis of great businesses and see if they fitted into the above model of exceling at multi disciplines or not. Titan, ITC, HDFC bank etc.
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Consistency, Smartness, Effort Integrity and luck these five are main ingredient of success.
If I put what I understand in in a formula that would be like:
Consistency + Smartness + (Effort) + Integrity = A+
Consistency +Effort+ (Smartness) +Integrity= A
( ) denotes secondary attributes, luck will come to those who does put first 4.
By consistency I mean willing to excel and continuously make effort to achieve it. As I have seen smart andgeniuspeople not putting enough effort to take them ahead.
Saregama needs to be evaluated now on the back of it’s new product launch and it looks like a multibagger in the making. They are monetising their content and the new product is as revolutionary as iPod was to Apple.
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For the last few months, I’ve been going through various and several VP stock threads learning and grasping as much as I can. This specific series of threads (Capital allocation framework, ART of valuation and Type A+ businesses) have been very informative and useful for me.
The recent crash provides us a great opportunity to consider finding great type A+ (I think original type C have been renamed as A+) businesses since the valuations would allow much better entry levels now (after a few months of Nifty correction and 2+ years of midcap/smallcap correction). Also, such adverse conditions provide a great opportunity for us to judge many of the qualities required for Type A+ businesses and managements.
To kick off this thread again, I would add an interesting pattern I have seen in several companies with longevity of compounding of fundamentals (and hence stock price):
There are several type of companies which are able to provide a longevity of fundamentals compounding (a few among them have outsized returns: for every dollar invested many dollars come out as profits). It appears to be that there is certainly a class (or subset) of businesses among the Type A+ which fit the following Description:
Description: Company has proprietary/complex/difficult-to-copy manufacturing processes for creating a product which has a stable and growing market. Either the provider of the technical know-how or the client (the two could be the same) has entered into long-term agreements (5+ years) enabling the company to have a long runway of fundamentals growth.
Companies which fit the bill:
- PI Industries: Company enters into long-term CSM contracts with global innovators and utilizes those to provide a clear growth of the fundamentals. The Long-term nature of the contracts ensures the disproportionate output from 1$ of invested capital. The trust built between the company and its partners (eg Sony) enable the long-term contracts.
- Divi’s Laboratories: One of the earliest post describes it as “The King of CRAMS(Contract Research and Manufactring Services) in pharma industry.”. From the beginning Divi’s for example had partnership with 20 out of top 25 pharma companies of the world.
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Motherson Sumi*:
MS is run by a maverick owner operator who makes great deals with American and German car makers, asking them to pay him to take-over loss making OEMs all around the world and turing these OEMs around. In Mohnish’s own words, this is a very unique kind of moat, and CEO Chaand is able to reliably project earnings for years because of the nature of his long-term contracts with BMW, Ford etc. - RACL Geartech~: A small and upcoming drivetrain manufacturer entering into long-term contracts with A* world-class companies like BMW Motorrad, Kubota, Piaggio etc. The company has built their relationship with their clients the hard way, over years and slowly scaling up the supply chain.
- Transpek~: The Company sets up its contracts in such a way that it can easily pass on RM increases to clientele. The Company has long-term contracts with the MNC DuPont providing them the specialty chemicals it manufactures. Global cos are exploring opportunities for long term partnerships with Transpek as well.
IMO (in my opinion) the first 3 stocks growth have played out to a large extent already but the last two are yet to play out. I also hope I have managed to convince the reader the the present of a long-term contract with globally recognized cos and the ensuing trust are a part of s strong moat. Whether the growth plays out in the long-term is a function of the management’s ability to execute as well as whether the industry (specially downstream industries) remain growth stories or not.
Inviting fellow ValuePickrs to comment on my understanding, and if possible add the Type A+ stocks they are tracking/invested in currently.
*Gentle note that I have not yet read the ValuePickr thread for Motherson Sumi. Most of my knowledge is based on browsing screener and also Mohnish Pabrai’s lecture in Peking University. Despite the disastrous slowdown in the Auto-industry, motherson sumi has been able to hold its own in terms of earnings which have remained largely flat in last 2 years.
~These two companies are part of around 100 companies, some of which i went through quickly as a part of a screener I have set up for small cos which are turning around.
Disclaimer: No positions in 1st 3 stocks, small positions in last 2, looking to build more conviction as the downturn goes on.
PS: Admins, if you would prefer that I start a new thread with this post, I would be happy to do that as well.
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