The Market’s Favorite Megabank Is Surrounded by a Lending Crisis https://www.bloombergquint.com/business/the-market-s-favorite-megabank-is-surrounded-by-a-lending-crisis
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This is article sourced from Bloomberg comparing it with global peers. HDFC Bank is placed differently compared to its global peers:
- India banking business needs license so it is controlled in a sense.
- Unlike other industries MNCs have failed to make an impact.
- All PSU lenders are in bad shape except for SBI.
- Most NBFCs are unable to raise capital except for a handful.
- So main competition is just from SBI and few private sector banks.
- Approximately 20% revenue and 25% of profits are from fees. (Growing at 21%). This is big kicker to higher PE as this is non-lending biz and hence no credit risks.
- Leveraging dominant position in cards business and trying to become one-stop aggregator and comparison for for e-commerce companies. Check their Smartbuy site. Most HDFC card holders use that to avail of card offers. May become a decent revenue pool.
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BloombergQuint thrives on spreading negativity. So no surprises there. It’s a joint venture of Bloomberg with Raghav Bahl’s company.
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Noticed a new entrant to coffee can screener: Amrutanjan Health Care Ltd, does it qualify to be in coffee can portfolio?
| Mar 2008 | Mar 2009 | Mar 2010 | Mar 2011 | Mar 2012 | Mar 2013 | Mar 2014 | Mar 2015 | Mar 2016 | Mar 2017 | Mar 2018 | Mar 2019 | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ROCE % | 34% | 30% | 18% | 14% | 19% | 20% | 24% | 26% | 29% | 28% | 25% | 25% |
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Quality theme: A house of cards?
@Julian Quality as a theme is the only thing that works in investing. A company that is not of decent or high quality will not generate wealth in the long run any which way.
If you are talking about quality at any price then that is a question of valuation. And debating valuations does not amount to a productive discussion with companies like this as it is just a back and forth pretty much. I think valuation discussions can be shifted and restricted to the company threads. It can be discussed here but it should be among the least important aspects on this thread.
The purpose of this thread is to find companies that show characteristics of great businesses that have not yet been discovered as so called coffee can candidates.
The rationale is to take the core concept of buying strong businesses depicting such characteristics. Not debate the method used by Marcellus word for word. It is to analyse the companies that show such qualities.
The above article is mostly about the “giddy” valuations of quality companies. Chor bane mor has been disproved in the last bull run. So if we track back and see, quality is the only theme that has generated long term wealth in India. Of course the value of a quality company will never be zero and it will never be worth an infinite valuation either. Is asian paints cheap at 35x? Many would call it expensive even then. I’m sure many say ITC is expensive at these prices. So my view is, let us keep the valuations aside as this thread is not intended for that. Further the profit growth for Nestle over the last decade is only around 12% but one has to account for dividend yield expansion and dividends as well. If ITC traded at 50% lesser than todays price, it would have a dividend yield of some 4.5% that would again expand as earnings grow. So it is not just PE that holds a stocks valuations there are even simple things like the dividend yield and expansion of the same or even anticipation of higher payout % as the business evolves and throws out more cash that can hold an elevated PE. I think valuations should be discussed on company threads…
Debating investor psychology is again not of relevance on this thread. Few can take a 50% drawdown, many can ride and exit a 200-300% gain, few can hold on further for a 10 bagger and very very few can average at a 50% fall and ride upto to a 10 bagger or more. There are other much better threads to discuss investor psychology on the forum too!
Finding a coffee can/quality company before most of the market changes its perception and discovers it, is perhaps where big compounding returns can be made. Compounding with such franchises can create great long-term wealth. And one needs to understand that making making 8% on high-quality corporate debt is not the same as making 6.5% on a govt. bond. The same risk adjusted return rationale should perhaps apply to stock returns as well.
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It is an article for filling up the pages. Quality will command super premium as choice becomes less.Somebody who has missed the bus-no choice.
Anyone who studies factor investing in slight depth along with some amount of quantitative analysis will realize any single factor (e.g. value, momentum, quality, growth etc) does not work all the time. Some work over extended periods of time and then under-perform for some period. But all these factors have been seen to work over very extended periods of time (40+ years). What makes the difference in consistency of the practitioner to follow a single strategy over extended periods of time. That is a rare attribute. People try to change their style (if they are consciously following a particular style… most people do not even know what is their investment style) to what is working at the moment.
So, it is a bit silly to comment on things like xyz factor will die or go on forever. History has already taught us otherwise.
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Very insightful for amateurs like me . Thanks dada
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https://www.niftyindices.com/indices/equity/strategy-indices/nifty-midcap150-quality-50
An ETF based on this index, if ever made, is very likely to bit active investing.
Look at the constituents! Most are good buy & hold candidates.
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The article starts with the theme that many quality companies have seen their prices moving way ahead of fundamentals and on a relative valuation basis they have never been more highly valued in the past.
Then it goes on to mention about how in previous bull runs newer methods of valuing companies have come up to then go out of fashion later.
The article talks about global companies witnessing growth in stable companies versus cyclical volatile growth companies. However for India the reason could be the number of frauds and broken business models coming up but the same is difficult to say for the US markets where there have been no frontline cases of corporate fraud to call for a run towards safety
The article goes on to mention that how if the companies keep trading at current PE levels and if they grow profits at historical growth rates to earn a decent return of 10-15% pa the PE’s have to go up from the current level which has historically not been seen anywhere in the world
A comparison of companies like Nestle & HUL is made with volatile companies in sectors like iron&steel, construction etc to show the relative overvaluation these companies are commanding compared too few of the core sectors of the economy
Over the last one year while the top 50 companies have seen more than 70% of the incremental domestic and foreign flows coming in while the companies between 400-500 have actually seen outflows
While whatever they say seem true even they have concluded that they don’t know what will trigger the bubble which is the premise of their article and thus it remains to be seen when the tide will turn in favour of the volatile cyclical core companies.
While I agree with a part of their article that the market has been bipolar towards a particular segment and that incremental PE given to many of these companies has been in triple digits the article simply shows what has been known for long without providing any solution on the contrary. Also the entire market has not been bipolar because many pockets of core economy where earnings growth have been visible have witnessed market capitalisation going higher. For eg:
Chemicals
PI Industries, SRF, Aarti Industries, Vinati Organics, etc
Aviation
Interglobe Aviation, Spicejet
New age Business
Naukri, HDFC Life, ICICI Pru
Capex Heavy
Garden Reach Shipbuilders, Adani Enterprises, Bajaj Auto
Infact many of the core sector companies were also doing well till some time ago like steel, cement and roads. What actually has happened in some of these is that earnings stopped supporting and hence the price erosion. The market has been rewarding earnings growth always and yes this time the reward has been higher in some pockets because the core sectors haven’t been doing well, are still saddled with over capacity and have seen many a cases of corporate misdemeanours coming out in the past. It’s a self correcting problem. As and when earnings growth comes back in the core sectors the market flow will shift from the stable companies to the cyclical one’s However, slowing down GDP growth and negative IIP growth doesn’t show that happening soon.
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Thanks for nicely summarizing this long essay.
The message is that it is a matter of time when these safe heavens will start to under perform the broader markets. These are market favorites at this point of time and stock market has got the habit of giving surprises which could be nasty at times.
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Nice article but it has only those companies where there is pe expansion without growth ( applicable to only list of companies mentioned therein ) and hence IMHO quality and high valuation cant be generalized . Found @basumallick dada article to be more insightful .
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@basumallick, dada this is an awesome article. Having been investing in equities directly for the last 6.5 years this is exactly what I’ve observed and learnt. And thank you for citing the often used and abused HUL example. It is always good to know someone who actually went through that journey and what that persons experience and thoughts are. If you don’t mind my asking, what kind of CAGR returns did HUL give you in that decade just through dividends and debentures?
Also, apart from everything else you’ve called out in that article, another thing I’ve learnt in my investing journey is the allocation made to each stock and MFs one owns. If you’ve actually bought a basket of quality companies and assigned a slightly higher % to ones that are growing faster, for e.g. a bigger allocation to Bajaj Finance viz a viz a Nestle, your returns tend to get even better. Though, again I’ve learnt not to go overboard with the allocation bit, a few % points of allocation difference does the trick without adding too much volatility to the pf.
I’ve duly bookmarked your article. The advice is worth it’s weight in gold and it displays tonnes of experience of someone having been in the market for long. Thanks so much for lucidly illustrating your thoughts.
Cheers.
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AIA Engineering
First a brief on what grinding media is. Grinding media is used to make smaller particles in general. This is used in industries like cement, mining, refractory material etc: (Google for more info). They are usually consumable in nature. They tend to have short replacement cycles hence leading to consistent demand. They are similar to refractories wherein they form a small part of cost but without them the entire operation for the producer company stops. In such a case there is high switching cost as, if quality of the product is poor or there are delays in timelines, it will hamper operations and hence there is pricing power involved in such cases. Therefore they can be classified under the FMIG or fast moving industrial goods category.
Now there are two kinds of grinding media apparently. Conventional mill and High Chrome mill internals or HCMI. High chrome has multiple advantages over traditional grinding media and in the long run saves the customer more money along with an increase in efficiency. However, the upfront cost is higher.
AIA Engineering is the second largest in the HCMI space and will become the largest in the world after its expansion comes on stream. Its only competitor is Maggoteaux.
Beauty is that AIA manufacturers in India where labour cost/cost of production is far lower than abroad. And it exports most of its product. This makes their margins multiple times higher than peers. Maggoteux works with around 5-10% whereas AIA works with around 20-30% inspite of being aggressive with its pricing!
The business is technical in nature. This results in high switching costs for clients. (The nature of product is that of a refractory, so it makes a small % of cost but the failure of the product will result in big hit on production).
The company also has around 1000cr in liquidity.
This is a classic non cyclical in a cyclical space.
These businesses are good compounders due to their consumable nature. It is also a simple way to ride growth of commodities/capex cycle. There are so many themes like housing, infra, steel, capex cycle etc: that one would love to play in the indian economy and these are all structural long term trends in my view.
But the businesses are all commoditised, not very attractive and require a skill set that not many of us novice investors have. But a great way to play it would be through these “FMIG” companies.
AIA has big growth ahead of it as it is now taking over the mining industry globally where HCMI forms only a small portion of the overall grinding media market for mining. Within which of course AIA and Magotteaux are pretty much a duopoly. They have one competitor who is not able to compete with them due to aggressive pricing by AIA. Customers don’t switch easily in their product lines either and AIA are actually taking market share and signing new clients.
It is expensive on a PE (25-30x) basis but the metrics are great and they have good growth prospects. I think they are or will be the largest in the world with their latest capex coming on stream. This is a business that can stay relevant for a long time, with a good moat, is mostly the lowest cost producer and generates good returns on capital while being capital intensive.
Can this be a coffee can like candidate for the next 5 years?
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Any idea , where can we find the data published on latest portfolio allocation of Marcellus ?