Coffee can method

Investing Strategies
272

Liked this interview - https://economictimes.indiatimes.com/markets/expert-view/how-the-hell-it-took-so-long-for-this-unravelling-to-happen-in-yes-bank-saurabh-mukherjea/articleshow/74506330.cms

"If you look at countries like Japan and Korea, once they were done with their formalisation phase – in Japan’s case it sort of took between 1950 and 1990 while Korea’s economy formalised roughly between 1970 and 2000 – you will have no more than 15 companies accounting for three quarters of the country’s PAT. We are nowhere near that as yet. In the next 10 years, we will polarise this economy in a way I do not think anybody in our country fully understands.

People expect that as they grow money, they will be spread it all around, there will be prosperity all around, that is not how free markets work. Just as in the case of the banking sector, a titan like HDFC Bank – a high quality lender – has only 6% market share. That makes no sense at all. A decade hence, even if HDFC Bank’s market share is a mere 12%, this bank will be worth closer to $700-800 billion. So that is what polarisation means. You cannot have a champion like HDFC Bank with just 6% market share. This 6% goes to double in 10 years and HDFC Bank shareholders, therefore, make money. Ditto with Kotak Bank. I suspect that is what polarisation means.

People are getting worried about polarisation. A decade hence, I suspect 20 companies will account for three quarters of the profit generated in India. That is why your and my job should be to push investors so that they can make money from this process of formalisation, from the process of concentrating profits in the hands of a small set of really high quality companies."

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273

Can we identify few of those companies that can end up cornering that kind of profit share ?
Or atleast sectors / subsectors from which such companies can emerge

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just look at top 2,3 players in each sector. But underlying assumption for these sector leaders still remains , >15% Sales growth and ROCE

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15% sales growth is unrealistic in an economy growing 5% and inflation of ~4%. May be this was true few years back when growth and inflation were higher.

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True, just an example of the kind of simplistic filter Saurabh suggests. You can definitely modify keeping in mind the points you mentioned and the prevailing risk free rates.

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Few questions that immediately come to mind on reading the article above -

  1. Why is India being compared to Japan/South Korea? I think the largest democracy would chart a path similar to Americas, if not its own.
  2. Not sure about Today, but a quarter back, Apple was one of most profitable company in Americas. Other Giants (not sure about profitability) today are Google, Amazon etc. - Were these any important sectors couple of decades back or even a decade back?
  3. Claims are big - No one (only one) can imagine the polarization that is to come
  4. Only good thing - He is asking investors to put money in Quality companies. (At least not in chor ones)

Thanks

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Its just my guess

South korea and Japan (apart from being asian like India) started around same time with that of India.Korean War ended in 1953 and Japan was vanquished in 1945 in world war 2 and India achieved independence in 1947 . USA was miles ahead by then.

South Korea and Japan are rare Asian countries that escaped “Middle Income Trap”

An interesting note I read somewhere is either in 1950’s or 60’s South Korea photocopied the 5 year plan of Pakistan. The difference between both country today was in exection

Sectors keep changing and more or less it provides the snapshot of economy at that point of time.If you see US index , from being Rail road heavy to current FANG stocks they have come long way.Even if you see our own Sensex or Bull Markets, they have come long way. From Cement in Harshad Mehta time to Banks/NBFC occupying around 30-40% of Index

Apart from the repeated examples of Duopoly/Concentrated Players he makes like Biscuits, Paints and likes, if you see they exist everywhere.From Audit firms(Big 4), to E-commerce(Amazon and Flipkart) to Food App (Swiggy and Zomato) to Telecom (Jio/Airtel).Partetto’s 80:20 principle at play. Weaker player will be left behind. Its Winner takes it all.

1 important fact that is not taken into account while constructing portfolio (inluding myself) is that Per capita Income of India is $2000 (nothing more , nothing less)

Any decent portfolios core part has to have exposure to this section of “Bharat” (as they say). I missed the China chemical story but its fine with me.If you filter them you will end up with same Marico , Nestle, HDFC Bank, Bajaj Finance and Unilever.

India has long way to go to Middle Income group, till then I am happy to see my fellow countrymen’s major income being spent at Dmart counter for Nestle or unilever product

The above is just my opinion, and am great fan of Coffee Can concept.

Edit: i own only Nestle, HDFC , HDFC Bank, and Bajaj Finance.
Have never owned Marico, lever or Dmart

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279

Well I agree to all points you mentioned above and myself a great fan of Coffee can investing as well. Point to ponder is, Marico was once a coffee can stock couple years back and now no more. What kind of Coffee can is this? :slight_smile: This makes me all the more filter the sayings of all the self proclaimed geniuses around be it coffee can genius or small cap ones.

Disclosure: Removal of Marico from so called coffee can portfolio of genius gave me good opportunity to accumulate it further. I wish they remove pidilite and asian paints also in next 1-2 years from the coffee can portfolio.

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Well i honestly am torn between adhering the concept (i.e holding for a decade) or taking control once in a while.

what if one of the iteration would have thrown DHFL or Lupin (which it did)? How long will be rope will be given? or following the concept with rigidity and iron will has to be the mantra

I have no easy answers to that.

i think each of us can alter the Coffee can a bit according to need of the hour or our personality. However the tinkering has to be minimal and to save capital.

Also sometimes the rigidity of Coffee Can as promoted by Saurabh causes you to miss the steady compounder (irony). having said that we owe it very much to him

For eg VST Industry might not have had sales growth of 10% each year , (it does have compounded), however the profit grows much faster then sales growth due to operating leverage.

I think from 2009-2019, VST Industries has given better returns then HDFC Bank and if not better then they are neck in neck (if Dividends and its reivestment are counted then VST beats HDFC bank)

Bottomline : To each one his own, Shutting the can for a decade is easy theoretically and most difficult in real life

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What do we owe to him? This term and methodology has been long back, if I am not wrong. He is a believer in this ideology and has used it for his professional as well as personal benefit (He wrote a book on it and gained immense fame and rightfully so as the book is very well written) . In his profession, providing investors with the returns is what he owes to his job. pls correct me if I am wrong?

I am sorry for being harsh and so direct, nothing against him or anybody…the point I wanted to make is that most PMS managers sound extra confident until one fine day…

At least Saurabh has that fine day protected by carefully choosing well run companies and investing with minimum (but decent churn).

My simple question - Is a Coffee Can investor an opportunist? I believe no, because he is busy drinking and enjoying coffee. Mr Saurabh is an opportunist - at least the way he moved out of Marico (I am not tracking his every move).

Btw it is good to be an oppotunist

Thanks

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Do you expect PMS fund managers to be permanently successful? Everybody survives a period and make money. Nobody can be perpetually successful. It is an approach and if we like it, we should embrace. Picking holes is good but that is true for everybody-nobody is perfect
.

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PMS has to show some activity to justify its fees, right ??. All of the holdings are well-known companies so nothing stops people from running a few screens and cloning it if they did not add a discretionary element to it. For an average investor, Its much better to buy and hold, an over-valued quality company which might not give returns for a few years than the so-called multi-bagger, chor bane mor themes which is most cases do not deliver or make the investor multi-beggar.

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Just a few thoughts…

  • HDFC Bank is now trading at around 3.5x book and around 20x earnings. It is trading below its most recent QIP at 1100

  • The bank is levered at around 7x. Historically HDFC Bank has had its leverage closer to 8.5-9x. The more the bank levers the more it can drive up its ROE.

  • Corporate rate cut. HDFC Bank will be a big beneficiary of this rate cut. This would meaningfully boost its ROE.

  • HDFC Bank has two subsidiaries HDB and HDFC Securities both of which it owns more than 90% of. The significance of this is that through the listing of HDB (a sought of after IPO for sure) it will be able to raise capital at a good valuation thereby preventing the need of a future dilution significantly. This is another kicker for the bank.

  • Credit in India usually grows at a multiple of GDP and close to nominal GDP or slightly above. This means assuming nominal GDP hovers around 12-15% we should see the credit market in India roughly double over the next 5-7 years.
    With the above in mind HDFC Bank holds only 6% or so of the current market in India. With the market doubling and a consolidation occurring in the Industry, HDFC Bank and a few others will not only take existing market share, but the market itself will actually double over the coming 5-7 years. (Kotak holds around 2.5% if im not wrong)

HDFC Bank now has the opportunity to boost its ROE very meaningfully through the rate cut and as and when it decides to increase leverage to its average levels. This along with an infusion of capital from HDB’s IPO will enable to increase its equity base again without a dilution/QIP.

The only issue apart from the overall global scenario is the succession of Mr. Puri.

The above points apply to kotak bank as well, except of course the succession uncertainty.

  • Kotak’s ROEs should jump due to the rate cut.
  • Historically Kotak does not leverage their book more than 5-6x (do check the exact number) this is what leads to its ROE being lower than an HDFC bank, however their ROA’s are higher thereby making them a more prudent underwriter than HDFC Bank.
  • Kotak has 3 major subsidiaries, being its insurance business, brokerage and AMC. These businesses are not very large in size but can boost ROE in the long run.
  • Fee income as grown well too.
  • Kotak pays high rates on its CASA franchise. This has been decreasing and will add meaningfully to their bottom line as it flows in the next few years and this should again give them a meaningful kicker on their ROE.

Could this be a time to add good banks and hold on to them for a while?

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286

The time horizon of the average market participant has shrunk drastically, people are now asking where the stock will be 1 week down the line rather than 1 year down the line. We will soon be in extreme times at the current rate.

In such times the risk of thinking the normal way is that a stock that looks reasonable today will look more reasonable 2 weeks down the line. Fundamental way of looking at things still works but it is not easy to keep one’s wits when the stock you bought because it looked good on fundamentals is down 15% in two sessions.

It is very easy for someone with 0% exposure to equities to start buying now, it is much more difficult for someone who has 60% deployed already. If such a person had started with the static rule of deploying 5% every time NIFTY 50 fell 500 points, he would have already deployed 25% with no sight of the bottom yet. And he is already 85% invested!

This correction has already butchered some widely acknowledged coffee can names and we may not be done yet. By the time this bout of selling is done people will realize that buying quality names does not make a portfolio immune to sharp falls during extreme times. Anyone who experienced 2008 knows what it feels like to buy a quality company (that eventually recovers) but goes down 30% from the buy price. It is easy to call steep corrections buying opportunities while looking at historical charts but it is incredibly tough to experience a 50% index level draw down and actually buy at the bottom.

Some of the more experienced investors I know haven’t deployed a single paisa yet after the correction started, they know very well to not buy too soon. They also know better than most people what business quality is, just that they know that timing matters. While the gyan is always that timing does not matter, experience teaches you that timing matters big time. Though you can’t get it right consistently enough, one has to take precautions not to get it wrong.

99% of the people do not have the stomach to hold onto an Asian Paints or an HDFC Bank if that stock falls 40% in 10 sessions, irrespective of his reasons for buying the same.

Coffee can might be a good approach but it is not a panacea for the pitfalls involved in equity investing. That is pure sales talk and nothing else.

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I completely agree on this point. There can be multiple reasons for them not plunging yet. One can be that they already have significant portion of their net worth in equity and are well satisfied by it. Those are the people who are not building their portfolios, they would be the ones who already have a portfolio to sit back since many years and not in a hurry to build one anymore.

Pure psychology and law of nature - The person who does not need it much, gets the best price while the one who needs most and is eager gets the worst :slight_smile:

This is just my interpretation sir, I maybe totally wrong. Thanks!

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One more reason could be, even though the stocks have corrected, they might not have gone below most of the investors buying price by much, so there is no need to buy now as average rate of purchase wont change. For instance a person who has bought Manappuram @ 100 wont be in a hurry to add now if he has already bought the desired % allocation in his portfolio, even though it fell from 180 to 105 now, he would just wait to add if it goes below 80 or 70 levels, so that atleast it makes a difference in his average holding rate. This is just my interpretation I may be completely wrong. I am following this when I am thinking of adding more to any of the stocks which I already own.

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The difference lies in a person’s perspective. If he considers this to be a correction in an ongoing Bull market then this correction is a dream come true. But if he wants to start a portfolio in a bear market and expects his portfolio to go through further Price and time correction both then he will be wanting to wait a little more to start.

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290

I think for someone building positions in compounders it is a great time. I also think this gives an opportunity to switch out positions if mistakes have been made.

I only speak for the two banks here. They barely have any market share of the industry. There is a large scale consolidation in the industry that is taking/going to take place. These companies have strong moats due to processes and liabilities. They have a long runway to grow and grow fast with high returns and reinvestment rates over the long haul.

At some point valuations will turn very attractive and it seems like it might make some sense to start building positions from scratch in these banks if has not yet done so.

Being a new entrant to the markets I never got the chance to take a position in these two banks. I have been gradually nibbling, but just like everyone else I’m scared about deploying a large sum anytime soon.

However, it is anybody’s guess as to what can happen. Maybe the new valuations/Price to book values become the norm for them…

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Hi

Here is the historical chart of PBV for HDFC bank. It is about to go lower than what it has ever been in the last 18 years if the price destruction continues for a few more days.

image
image1109×436 18.8 KB

Rgds

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292

https://marcellus.in/blogs/indias-kings-of-capital-part-i-uday-kotak/

On Kotak Bank…

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