ValuePickr Forum

Actionables 2.0: Perennial Favourites

@Donald Basically there are two types of companies. One that invest in capacities and another which invest in capabilities. Let me share with example of cement cos.

While some companies used good market to set up additional capacity (sometimes by taking debt), others first built an extra godown to store materials, invested in Waste Heat recovery, set up own Railway siding and controlled their opex. Only after they did all this, did they invest in new capacity. The other category may just have to resort to fire sale of inventory

Obviously the first category will do better now.

They will be able to say store extra material in godown, their balance sheet will allow them to take leverage to service temporary debt…they will be able to maintain relationships by being good with payment and commitments.

This is the time to just stay away and observe responses of companies. That will guide us which cos are gold standard and hence why they deserve extra PE.

In fact their Balance Sheet strength will allow them to pick up bargains. Imagine Dmart or Shree Cement last fund raise Is equAl to Future RetAil, India Cement market Cap.

Some desperate sellers will sell their stocks to these well managed guys.

I am sure that the companies with good balance sheet strength are the ones to back.

Maybe make a laundry list and invest into these cos in 5-6 tranches, say every Month.

Some companies which I believe are prime for picking and can only be picked during such crashes are

A. Shree Cement
B. United Spirits
C. ITC
D. Crisil
E. ICICI bank

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Thanks @ashwinidamani for sharing your perspective, and alerting us on these kind of bargains going. It may be indeed be good to prioritise picking up some allocation in some, as these will probably be among those that move up fast, once lockdown lift off is understood. I would daresay that please do not paint all the 5 with the same brush. This is the time to be extra extra choosy in well-discovered names, too!

As addressed well by Mr D too, if we are going to be extra extra choosy, make sure to work hard at identifying the next set of strongly-differentiated small business, with good balance sheet, evidence of operating leverage kicking in soon, good to great earnings visibility, and demonstrated track record of competent Management.

A large chunk of next set of big winners will come from those who exhibit twin possibilities for both value migration (certainty of re-rating) and high earnings trajectory. Of course, we need to wait to see Management responses to micro issues faced, which can be equally differentiated, whereas Macros may be a commonality. And of course, these will NOT be the first to move up! Some of these will also take time to get discovered (VP can/will help). The beauty is therefore, that we can keep digging better, following better, and pick up larger allocations as we gain higher confidence/ or discard if not. The potential rewards for keeping your faith in these are extremely skewed when seen from a 2-3-5 year Risk/Reward perspective. There is no CONTEST, in my mind where my energies have to be devoted!

The first set don’t require much work, only awareness/alertness, and MUST be leveraged upon. The second set requires lot of hard work, and much will be still be be a puzzle waiting to be solved.

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Hi @ashwinidamani
Following in-line with your thought process? for your comments

(carried as is from a forward)
Godrej consumer products peak PE 62x, current PE 22x
Marico from 60x to 26x PE
Havells from the peak PE derated from 70x to 38x.
KRBL down 80% from peak of 35x PE to 5x PE
Page ind from 102x to 48x
Eicher from 81x to 17x
HDFC AMC: 68x ti 33x
HDFC Life 131x to 61x
La Opala 70x to 17x
Bharat Forge 71x to 15x
Astral poly 135x to 51x
ICICI lombard 60x to 41x
Titan from 85x to 55x
Kajaria 50x to 20x
Nerolac 65x to 36x
Berger 95x to 70x
TVS motors 89x to 20x
VIP Ind 60x to 20x
Bata 82x to 40x
ITC 45x to 13x
KEI Ind 26 to 8x
Zee 60x to 7x
Maruti 48x to 20x
Britannia 78x to 44x

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I selectively chose a few stocks only… Stocks which have runway left for growth… Stocks whose balance sheet is pristine and stocks where management is good (atleast now in case of Icici)

For a lot of stocks in the above list, they seem to have exhausted the market (Ala Page)… Others like Zee and KRBL have promoter level issues… Some like Marico and Havells seem to be struggling to grow.

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Pardon me, the idea is NOT to put you in a spot. Not to get you to comment on every business mentioned in list, but just to make sure we try and understand how your brilliant forensic mind works. And are not overtly biased by strong balance sheet (although extremely important in recovery context) as primary drivers for selection and/or other biases that might creep in!

The purpose was to see whether you would select a few more in the same league as that of Shree Cement, ITC, United Spirits, CRISIL, ICICI Bank.
Will be good to know why you would NOT include a Marico, HDFC AMC, Bata (I think you did the original work in spotting the re-rating opportunity 3 years back), Titan, in the same breadth.

For that matter why would ITC not get excluded on just poor capital allocation track record in Hotels, other segments even if one were ignore the overhang of the excessive regulation/taxation impact on Cigarettes.

Or is it the extent of undervaluation in your mind (ITC, could be case in point) that is pulling it’s weight more in selection? And the length of the runway left in FMCG foray perhaps, all other aspects being equal?

Believe this discussion if conducted in the right spirit by all interested in perennial favourites category (available at bargain basement prices may be not yet :slight_smile:) will create very instructive and enriching mental models for new learner’s as well as seniors.

The idea will be to engage the best senior minds in such discussions to create an effective mental model map for selection of perennial favourites at bargain basement level prices (yet to come) by also focusing on (all other aspects being equal) bringing more weightage to other equally important aspects such as strategic capital allocation/vs poor allocation, growth evidence, capital efficiency, operating leverage evidence, value migration pathway evidence, and the like. Bring the much needed focus on what attributes move the needle the most, and why?

For those interested in such an exercise, good reference material for Mental Models map for Emerging Moats is put up here.

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@Donald : I Genuinely believe in the power of Surprise. This triggers the biggest re rating in a stock.

Market despite its efficient nature tends to react very strongly to surprises (Positive or Negative)

It is also a fact that despite multiple analysts tracking many stocks, some obvious things miss the eye of market participants.

Let me try to answer my self in multiple parts

How I observed Bata, IRCTC or Jubilant Food Works
I try to follow local advertisements, read non market stuff and follow non market influencers and do regular market rounds with observant eye. When I observe change, I take a note of it and try to guess what the impact could be

  1. In case of Bata - it was very clear from observation that Bata shops were changing. If you took a walk down the road, you would have observed changing interiors etc. All one had to do was walk into the store, speak to staff and judge what is happening. Then you go back to Announcements and Annual Reports of Company and check why this change is happening.
    After that I made a thesis that change is ok, but this change has to be announced and has to be visible to customers. The day I saw the Kriti Sanon ad of Bata I was clear that change is visible and company wants to announce from rooftop.

Market will be surprised by the numbers and suddenly a forgotten stock will come into limelight, leading to rerating over and above earning growth. Obviously I did a lot of number crunching , set my expectations on numbers and margins and kept doing scuttle butt across stores to remove biases. Twitter helped a lot here

  1. Jubilant Food Works
    On a visit to Dominos, I was surprised that menu was revamped and company had stopped giving discounts of all kinds. Started speaking to staff and they mentioned management has withdrawn all promotional schemes because “accha sales hai” and “naya strategy hai”

After that tried checking across analyst community and other people to judge what was expectations - and most people expected loss of sales due to resurgence of Zomato and Swiggy, whereas store after store (went to 20+ stores and also asked friends and family across India to go) kept saying sales is strong. Lot of home delivery happening even without discounts.

Market was surprised when earnings came in

  1. IRCTC
    Same thing when I could judge the impact of new ticketing charges.

Why Shree Cement or ICICI or CRISIL
Market maybe looking and could be right in short term about say credit losses at ICICI, but there is a bigger change happening. How many will trust a Yes or IndusInd or CSB to keep their money. The big will keep getting huge. Management has changed a lot from Chanda Kochar tenure and ICICI in its latest analyst day presentation mentioned how they are transforming (also visible as a customer)

Shree will surprise everyone with their actions and balance sheet strength. These are phenomenal guys who planned for such contingencies and invested in capabilities because they have been in this situation in past. The latest QIP will help them and we could see lot of aggression from this guy. I have personally been following this company since long and this is the exact time I waited for…A slip up in market to allow me to get the company at a favorable price. The other players will lose their competitive intensity, but this guy will be able to move ahead due to his relationships and deep pockets. That will create a goodwill which will help him to come out fastest from crisis and surprise markets.

Crisil is another natural beneficiary of loss of credibility of other players. There could be temporary issues due to lower outsourcing in KPO segment but in longer run the cost benefit they offer to foreign clients will be even more.

Why not a Bata or Marico or HDFC AMC

Where will be the new surprise on Bata. It will perform equally in this market like other players. Remember this is a low entry barrier business and low product differentiation. Customer can postpone his purchases or purchase a cheaper alternative. His Balance Sheet will allow him to tide up, but wont throw surprises.

HDFC AMC has to be watched - but as of now my expectations are that AMC growth will taper down. There can be corporate actions but by and large this is a strong group and on hawk watch. On first hint of stability in earnings this will be a stock to backup.

Marico
The stable cash cows will remain that but the more luxurious new launches will lose money. Stock still isnt as cheap as say a ITC. Same reason why I skipped a HUL.

In case of ITC, the dividend yield is just too lucrative and the capital allocation thing I have already answered in the ITC post (as a narrative fallacy). What more the company has announced a dividend policy of 85% payout thus indicating that less money will be put into further capex

One must remember that ITC other biz dont burn cash. They throw whatever small profits they can so profit wont be better off if they close these biz

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Thanks Ashwini for responding at length. Wonderful!
I do understand your reasoning.
Not convinced though that this is the complete picture.
I will come back now with some comparatives across some of these perennial businesses.

Request Senior Members allocating capital mostly to such long-term opportunities to share their perspectives so we can all learn from these interactions. @deepinsight?

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I would like to add a couple of things here, if you check out the revenue breakdown of crisil, you will realise that they make only 32% of their revenue from ratings.
60 odd % they make from research, which is their bigger moat is what I personally feel any why do I say that, looking at Care’s annual report I noticed that they have negligible income from the research division and same applies for ICRA as well.
Also, the revenue alone which CRISIL makes from their research division is of 2x of entire revenue of Care and ICRA combined.

Now what my concerns are, that
a) The revenue from the research division has become stagnant and also cannot figure out what their margins there exactly are.

b) How do they grow their research division which is already so huge? Already they have collaborated with 75 global banks, that number hasnt increased in the last 3 years. They have tied up with 17/20 top banks in the world.

c) What are the new services they can bring to the table? They have been acquiring companies like Greenwhich analytics (2020) and Pragmatix in 2018, dont know their value addition.

d) There is severe competition in the ratings division, they clearly have reduced their margins there as they have rated more than 33,000 institutions in 2019 compared to 28,000 in 2018 that is a significant improvement of 18% but that doesnt reflect in their revenues.

But I still love the business as it being a market leader by a huge margin and is available at a PE of 25 where as in developed markets like the US as well the rating agencies trade at a higher multiple ( I am aware its TTM and not forward, things might change this year)

Please correct me if I have gone wrong anywhere @ashwinidamani, I am new to investing field and also this is my first post here.

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As they say in banking: Banking is not about the quality of book its about the promoters DNA. Don’t you think at these junctures and given the valuations, an anti-cyclical bank like Hdfc (past cycles) would make a much better bet than ICICI Bank. Which time and again has been caught up in trouble.

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Sir what changed for Crisil ? Is it peers becoming weaks?

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I find it quite ironic that for a forum called Valuepickr, stocks with such valuations have way more discussions than other lower priced stocks. I mean paying premium for a consistent performer is one thing, but does it really makes sense to pay >50 P/E to company whose growth is nowhere near that? Are companies like Berger and Titan really worth the premium with <20% CAGR growth? I feel that FMCG theme has run its course to point where I don’t see much upside even in case of economy growing at higher rates. I think when other sectors will start picking up pace, people will migrate from such companies who have performed well historically but were overpriced in recent bull run because of their moats.

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Rightly said, at their PEs they might find growth triggers after a decade of consolidation.

An investing style that befits this forum is about forming a vision about the near future of a sector, purchasing stocks at lower PEs, and when the good times roll in, there is plenty room for PE expansion and price appreciation.

Say for ex. Now IT sector is fairly suppressed … but has a good prospect. A fairly reliable stock like Sonata, CMP 167 and 6PE. I can depend on it growing it’s Eps at 10% Cagr, as a result in 5 years it will be at EPS 44. In bullish markets this stock touches PE of 20. Making its market price close to 900. That is a six bagger, with safety of capital and a good dividend yield.

With a dozen such plays in your portfolio why is there a reason to cower behind high PE Asians and Pidilites. Why so much aversion to risk, which comes at a steep opportunity cost?

Important: This example is only for putting a point across, and not a buy recommendation.

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I don’t think those are risk averse picks. I genuinely think they’re more risky than even financial stocks because of how high they are priced. For a stock like IndusInd bank, atleast investor knows why his investment is losing value (because of Yes Bank fiasco, general lack of trust in private banks) but when it comes to losing money in FMCGs, it is hard to make sense of it because company is growing at the same pace it was growing. If HUL, Nestle or P&G lose their premium validations like Marico and Godrej, investors will be left scratching their heads because companies will be having their usual 10-12% growth, while still losing half of their values. They are more risky because of perceived value of their good business is fetching exorbitant prices in market without growth triggers to support those valuations. They will be priced decently even if they lost half of their valuations. So, what I am left wondering is why everyone is so keen to invest in companies where potential upside in investment is nowhere near potential fall?

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How can we assume sonata’s earnings will grow at 10%. Also, the dividend payout ratio is more or less the same?.
If investing was so easy, then all you needed was to look at the TTM PE!.
I am not justifying the valuations of HUL, Asian paints though.

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That is where the investors hard work comes in. One has to dig deeper to get answers. It is not as simple as looking at TTM PE. Definitely not.

One might know people in Banglore, friends working in the company, or it’s competitors… Go meet them. A recent bit of info tells me that the management is heading towards cost cutting, pruning employees. It being a small cap, these steps will reflect in it’s OPM.

And there is always a chance of being wrong. Therefore, we diversify. Taking the risk is indispensable part of investing, is the point.

PS: I would appreciate it if you asked a direct question, instead of being patronizing.

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A house at Nariman Point is and will always remain expensive than a house at Dharavi.

You have to judge why certain companies command high valuations and is it available cheaper than historic valuations (assuming growth, market size and other parameters are intact)

Have enough examples where people tried to buy

  1. KCP instead of Shree Cement
  2. Speciality Restaurants instead of Jubilant Food
  3. Jet instead of Indigo
  4. Mirza instead of Bata
  5. TBZ and PC instead of Titan
  6. Future Retail instead of Dmart

Just equating PE with valuation is a wrong way. Valupickr focuses on creating value, not on finding cheap just for the sake of it.

You might also realise that I have rejected certain entities because I feel growth is no longer visible since Industry is mature

In case of say Titan…so many levers are yet to come.

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If you just focus on arithmetic cheapness , arithmetic growth then basically you are doing it wrong.

Today due to Covid issue you will realise that something like a Dalmia may have a much much tough time than a Shree.

Small guys in jewellery may have to shutdown lot of stores, and Titan may end up capturing market vacated by small guys.

Its like saying, a Healthy Person is always more valuable than unhealthy person - even assuming both are given same road to travel on.

The healthy guy will slow himself down from time to time, to recharge himself, make himself more stronger in capabilities but in the end you know he will reach the destination.

With an unhealthy guy, you are not sure, if he will ever reach his destination.

Market is right in valuing the healthy guy much more, unless you feel the destination itself has arrived or probably the healthy guy has caught some sudden bug

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I totally understand your reasoning for picking up good companies. But at some point, valuations need to make sense too, right? Like how you picked ITC instead of HUL/Nestle/P&G. ICICI Bank instead of Kotak Bank. Not because Kotak or HUL are bad companies, but because at current valuations, ICICI and ITC give more upside. I am not denying that companies like United Spirits, Shree Cement or Crisil don’t deserve their premium prices, because CRISIL is head and shoulders above CARE and ICRA. I don’t even mind paying premium on a company like Avenue Supermarts or Interglobe Aviation because of their long term outlook. I am not a P/E guy either because that will leave just Metal companies and PSUs available for investment opportunities. But I don’t get why some stocks command higher valuation which is way more than any other companies in same sector without showing growth to support it.

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IMO, only real bear market will tell you the right valuation of stocks and no other formula. So have patience and wait for the turn to get answer to the most waited and puzzled questions of stock investing.

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The discussion between @ashwinidamaniand @Chaitanya_Tanti pretty much settles upon finding a good mix of quality and value, that is the crux.

One cannot buy because something is cheap, has a low PE and in the same breathe one cannot assume something is good and will assuredly give expected returns just because it has had a glorious past and holds a high PE.

Due diligence is needed. Hypothesize, support it with data, and execute… And post your PF on VP, in case you are off you will be guided.

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