I had invested in Edelweiss by looking at it as a Coffee Can Investment Stock (great company available at reasonable prices). More details about my investment thesis is available on Edelweiss forum and would be happy to answer questions.
PS - I had invested at Rs.160 and would suggest we wait to get the price in this zone to buy more.
Great going.
I appreciate youâre making post on this thread. This coffee can method is in true spirit of stock investment. This method encourages good investment habits: buy good, and hold as long as itâs good.
So far you have shortlisted the following companies that could be put into a coffee can:
It is note worthy that you have not chosen the obvious and expensive companies, for ex. Page Dmart. Nor have you chosen companies with even borderline corporate governance issues, like Yes Bank.
I would suggest a Pharma company be picked. One which largely caters to the Indian market and has a long road ahead.
Thank you sir.
There are a number of companies that could be part of the portfolio. Myself and the members have listed quite a few on this thread itself. I think the coffee can concept is a good concept and I think one can use its philosophy as a base and then apply it as per their own style/comforts.
I believe Abbott India is listed on this thread as a potential coffee can candidate.
The Mgmt. Plans to launch a large number of new products going forward. This can be found in their commentary/interviews.
I think 15% OPM is a fair expectation on average over the long run.
The business has a very high ROCE and pays out around 30% as a dividends on average so the company should be able to reinvest a respectable portion of its capital at a high return.
I dont know about any triggers on the margin expansion front, however the company has grown its sales by atleast 10% each and every year for the last 10 years. (not cagr but every single year) so hits the coffee can filter on both sales as well as ROCE
Thematically Indians will consume more quality or âbranded medicationâ as income rises and consumption increases. They dont have any overseas exposure, it is more of a branded consumer kind of a business, difference being that they sell pharma/healthcare products. So broadly in the long run they should grow well and throw out quite a bit of free-cash.
They are market leaders in quite a few of their segments and the business has great metrics, akin to an FMCG business.
Median PE for the last 8 years has been around 35x. Companies with an âFMCGâ nature and strong brands with such return metrics coupled with an MNC parentage might never trade cheap per se. That is something only each individual can take a call on.
Risks are that the govt can put price caps etc: but that is very hard to do in India. There is no quality control over generics. A doctor cannot prescribe a generic drug to a patient because the doctor will be unsure about the quality checks that the govt has put into place, if any at all.
Atleast reputed pharma companies have some quality regulation as they are indeed worried about their brands. This is because they can command a premium due to their brand and are hence incentivised to invest in quality control.
If the industry is commoditised there is no incentive to invest in quality control and everyone will look to drive down costs. In India this proposal may not be feasible from an employment point of view and a health point of view. So that risk will be an overhang but I think that is all it will be.
Another concern is the parent has an unlisted entity but this has not hampered the performance of the listed entity or its shareholder wealth creation.
They also have a cash balance that has been increasing quite rapidly over the years. The promoter owns close to 75% as it is. This build up of cash and high promoter holding could make them a delisting candidate in the future.
So all in all a decent candidate to consider with long term view of course.
Pharma companies with focus on domestic market are currently doing better compared to ones with USA exposure. Torrent has done well with acquisitions of elder and unichem brands. Unichem brands are still to show results but elder brands have matured and doing well.
But when we talk of domestic market, any govt that comes in power will look at bringing down healthcare cost.
There is generic push from government and the business is sure picking up. There are reputed names now getting into low margin generics, including MNCs.
DCGI is now making new product approvals a lot tougher and itâs expensive affair. Also, the copycat (through BE route) hit stands within 6 months resulting in MRP reduction.
Example tenali+Met was launched in 2015/6 branded is 120 while Unison sells it for Rs. 60. Still the margins are high and there is lot of scope to reduce further as this formulation sells for Rs 16-18 per strip in B2B.
Lot of drugs are now in price control. And the number keeps growing.
Many FDCs are declared irrational, industry goes to court and get stay orders. But the sword still hangs on fate if these FDCs.
Hospitals are now buying medicines through tenders - so the companies in ICU care or Injectables or such medicines are not having good margins. Same is true for companies in Onco they hardly make money Drs and Hospitals fleece patients. This is true even for advance biological products like trastuzumab, bevacizumab, darbapoetin etc. if there are more than 2 players. Higher the MRP more the money Hospital/Drs make.
So coffee can method for pharma company focused on domestic market is in my opinion is a NO unless the company is small in size and capable of growing by keeping low MRP for its products (generic).
Here the role of chemist is important as he replaces the Dr prescribed brand with a generic one, solely on pricing. Chemist influence the buying heavily.
One of the companies that could make the cut to the coffee can portfolio would be HDFC AMC. Its a business that has extremely long runway. Plus with HDFC group at the helm one doesnt need to worry too much about corp governance.
The govt regulation limiting the charges these companies can take from customers has played out in prices as of now. In future also something similar could happen but I guess chances of these types of recurrent diktats from govt would be low.
Its a company that requires little capital to grow, can attain (has already attained) huge scale and can throw up good amounts of cash which can be returned to shareholders.
Another candidate in my view would be HDFC Life. I think the low level of penetration of insurance products in India throws up a huge opportunity for the company. Again with HDFC group little to worry about corp governance.
These are businesses that are affected by very few variables. Crude, raw material, finished product prices etc which need to be watched in other businesses are not a factor here.
Pl look at products like Motif and small case . These are big threats to traditional AMC +
If you track how world largest AMC fidelity is looking at pricing products and if that happens in India - then EPS can see significantly decline from current levels âŚ
In continuation to domestic pharma market, in oncology Intas has launched Trastuzumab (Biosimilar) in India market with MRP od 20000. This is against market price of 58000 to 60000.
Now this may appear great to patient and someone may think existing players were making big bucks. But actually existing players were selling to hospitals and Drs @ around 20000 only. Itâs the Drs and Hospitals making money on this. Same was the case of Abiraterone - Cipla launched at around 25000 when others were âprintingâ MRP as 75-80000 per bottle. Cipla just stopped printing higher MRP.
This will happen in many drugs where the new entrants come in. Brand building is through Price disruption AKA âJio Marketingâ
HDFC Life
Insurance: Broadly insurance cos have two main streams of income
Now a large collection of premiums and a low payout (since most of the time the events are unlikely events like sudden death or accidents) puts these companies in a very unique position. They end up generating a large amount idle cash since payouts may not be as much in comparison. This unique position is what is I believe called the âfloatâ
In many cases Insurance companies may plan for underwriting losses if they think they can recover this and more through deploying their float. In a raging bull market this could be practiced and the company may be able to generate far more money on its float and compensate for underwriting losses. If they want to penetrate a new market, then again they may go in for underwriting losses initially and then raise rates once they gain market share in the hope to recover the previous underwriting losses.
I find it difficult to understand the many kinds of products and intricacies.
So why HDFC Life & why Insurance,
The parentage will continue to put a premium on the stock for a long time unless an issue pops up on that front.
Insurance is about trust. The policy holder would like to trust that the company will pay out its claims without too many complications. This where a policy holder might compromise and lose out a little to take the policy of a reputed insurance company like HDFC, ICICI, SBI etc:
A history of asset management helps. It is important for the float to be deployed efficiently. Again this is where the market might âtrustâ the brand to deploy its float efficiently and take care of risk as well. The same brands come to mind, HDFC, SBI, ICICI etc:
Distribution strength is a big deal in this business. And companies like HDFC, ICICI, SBI have an advantage on this front. In fact allowing banks to sell upto 3 insurers (I think this the new norm) from 1 and HDFC Bank happily doing the same shows the belief in HDFC Lifeâs product from the group. Moreover they now have access to other touch points through other banks as well. This holds true for all the big insurance guys, as earlier they only had their own bank network with regards to this method of distribution.
A great way to play the financialisation theme. In India it is easier to sell insurance, Real Estate, FD and Gold as âinvestment/savingsâ products rather than Mutual Funds or even debt funds. Given the lack of penetration in the space, I think the opportunity is akin to what the consensus view is on AMCs as a theme in India. Moreover we bypass the cyclical nature of AMCs to a large extent by investing in insurance companies and playing a similar opportunity.
Cross selling opportunities are available to the biggies (HDFC, ICICI, Bajaj etc:). With an expanding client base and banking network these companies have great cross selling opportunities. The banking apps can for example pull an account holder into a policy. ( I think we all have seen pop-ups in our banking apps). That is a very small example. Of course the rest is self-explanatory with regards to synergies in cross-selling available to these franchises.
Coming to the valuationsâŚ
This is a difficult task for a novice like me. However I will try.
I would go with the embedded value multiple or EV multiple. HDFC Life trades at ~5x EV (as per my best knowledge).
Now why do we value Insurance businesses on EV.
Insurance is a long term business. Meaning you keep paying premiums over a long period of time. Now it is from this future premium money that the insurance company is going generate its float and its income.
So EV represents the present value of future profits from the existing business (as in sold policies that are generating premiums which in turn generate a float) and any other equity or its equivalents.
It shows the value that can be generated from the business if the business stops underwriting any more business. (that is adding new premiums/policies/business freezes)
Hence you can understand that the more the company underwrites and sells policies the more its EV grows. Assuming the complex stuff are adhered to. (I dont understand the complex stuff like persistency ratio etc: very well you can read on this through our senior memebers posts)
Based on growth prospects, quality of mgmt, quality of business etc etc: Investors a assign a multiple to this EV.
So question is, when these insurance companies have such a large opportunity to grow their underwriting and as a result grow their EVs does it really make sense thinking about todayâs EV multiple? when the EV itself is growing quickly?
Yes at 5x a lot seems to be factored in but when I see similar banks, Kotak, HDFC or lenders like Bajaj Finance, they all have commanded 4x book value on average over the last decade or so. And prima facie Insurance seems to be a comparitively better business than lending/banking.
Let us assume the EV multiple halves in the next 10 years. from ~5 to ~2.5x. That is a -7% cagr on the account of de-rating. (this may seem to be quite a pessimistic view but mature insurance companies in Asia trade at 2x EV and under to the best of knowledge)
Question is can HDFC Life compensate for this de-rating through its growth and dividend yield in the long run? Moreover, will the EV multiple really halve in the coming decade? Will the company continue to quote at its premium valuation due to its parentage? With better product mix etc: can margin expansion occur as well? Are all the positives factored in already?
I think this issue is faced with regards to many high quality business, with high quality mgmt. & a large opportunity size with regards to Indian listed companies. They seem to always stay very expensive and end up delivering some of the best returns risk-adjusted in many cases over a long period of time!
Can HDFC Life be a coffee can candidate as Hiteshji says?
Prima Facie it seems to be a good candidate to add to the list.
Thoughts? 
Why HDFC life and not ICICI prudential life, as the latter is cheaper, has better dividend yield, and provides a play on the same opportunity with a trustworthy brand?
Can u pls tell which thread is that. Thanks
No concrete reason per se.
Both have great businesses, SBI as well. But one bears the HDFC tag that gives investors more comfort and it shows in the price. When you buy a company under the coffee can method, since youâre holding them for so long you want to make sure you do not take risks on governance perception.
Not saying perception towards HDFC canât change should something occur in the future. But today as things stand, they command a premium and might very well continue to do so should things stay the same.
VNB margins of HDFC Life are also fairly higher showing signs of margin expansion in comparison to ICICI and SBI.
HDFC Lifes product mix is said to be better and is not skewed towards ULIPs as much. Protection products offer better margins. I think for ICICI and SBI the ULIP share must be around 75%+ and for HDFC Life it should be around 50%.
ICICI also has a far higher dividend payout compared to its peers in HDFC Life and SBI. So that is something to take into consideration with regards to the difference in yield as well.
The EV as per what data I had read was/is ~15,000cr for HDFC Life and ~19,000cr for ICICI Bank. So yes there is quite a difference between the two on the EV multiple.
I cannot come out with a solid argument as to why HDFC command a premium but this seems to occur in all their listed businesses.
I think insurance is a good theme. I leave the valuations to each oneâs personal view. I think all three are expensive to say the least, but the coffee can philosophy says a coffee can companyâs entry valuations do not matter over a decade long period, if right on the earnings potential, competitive moats etc: of course:)
P.S all these numbers are based on whatever I could recall based on whatever Iâve read. I think the theme is good. And one can consider such companies for their coffee can lists.
While a coffee can method means entry valuation does not matter, it also means that the company should be small so that it can achieve superior growth over a long period of time which makes entry valuation irrelevant. All these insurance companies quoting at 50k plus market cap are not small companies. The top line hardly doubled in the last 5 years. So assuming the same and your argument that EV to halve in a decade, we can expect the money to double in this time which is a return of 7%. Insurance looks like a good theme with low penetration. However as all these companies are recent IPOs, I think we should let the market discover the price before jumping in as the current valuations are very expensive. I particularly like ICICI Lombard as they have a number of insurance products and hence a huge addressable market. Their listed competition are making huge underwriting losses and hence cannot sustain. But Lombard is making good underwriting profit and investment profit.
I am looking to start studying HDFC Life or Insurance Sector. Had a very initial doubt on the working of the business. Have seen peopleâs interest for the sector, reason cited is low penetration.
As far as my readings and observations of the market , i have seen many people giving advise to avoid ULIPs / Life Insurance Policies and to prefer Term insurance. Have seen people advising others to treat Insurance as an expense rather than as investment. Even before the penetration theme plays out , people are getting aware of avoiding ULIPs or Life Insurance. I think that ULIPs and Life Insurance are more beneficial for the insurance companies and agents while term insurance are not that attractive. Reason being that companies getting high premium amounts at very low cost for Life Insurance Policies.
Coming to the Term insurance calculations , a person between 25-30 years of age with Non smoking profile can get a cover of 1 Cr for 40 years at a premium of at max 15000 per year. Suppose he survives for 40 years. For 40 years , he had paid 6 lakh premium and will get nothing. This will be the earnings for the Insurance Company. Suppose 15 people opted similar plans but unfortunately one dies during the policy period (very much possible and conservative estimate). Company would have collected 90 Lakh from 15 applicants and had to pay 1 Cr to the died applicant. What if 2-3 people dies or no one dies. Any way , this looks very uncertain earnings business at first look if we look for term plans which are gaining lot of traction.
Though term insurance / Life Insurance is only a part. Besides this , they do offer Retirement plans , Children plans but these offers very poor returns. FDs may be a better avenues . Flexi-FDs are also catching the pace. It is also in contrast to the theme of savings moving out in equities. SIPs are catching good attraction and people may prefer SIP in equities over Children future plans. Govt schemes like Sukanya Samriddhi Account for girls have seen good response which offers superior returns. PPFs/FDs are better avenues for Retirement.
India too me looks a different market with affirmative actions by the governments⌠Govt schemes like PM Surakshit Beema Yojna (Rs 12 per annum premium for 2 Lakh Accidental Cover) and PM Jeevan Jyoti Bima Yojna (Death/Disability cover of 2 lakh at 330 per annum premium) affects Health Insurance too. Ayushman Bharat Yojna covers 10 Cr families (50 Cr population) and offers 5 lakh per year benefit to 10 Cr families.
How should one see these factors and is it possible to share good sources for studying the sector
@hitesh2710 @1.5cr
Disc: I am 23. I have very limited understanding of markets with less than 2 year of experience. My points may sound weird and i am sorry for that.
We cannot look at things that way.
HDFC Bank traded at around 600 in 2013 or so. It was not a small company by any stretch at that point. But today it trades at 2000+. Company market cap does not determine its return potential. In many cases a de-rating does not occur over a decade long period. The stock simply remains expensive and delivers returns. At the end of it all many miss out on low beta high returns over a long period of time because the stock was expensive almost everytime.
Marcellus who have just started their PMS hold all these guys. Asian Paints, Berger Paints, Bajaj Finance all close to current prices I would assume (since they just started and gruh was swapped for bajaj finance recently). What I try to get help with in this thread is finding companies with the characteristics of a coffee can company.
Even a 10% growth in top line in many cases has a far bigger impact on bottom line growth due to various reasons (this differs with each business of course, but you get the point). So you canât look at top line growth alone.
Yes I agree they are very expensive as I have stated in my post as well. Do give us your view on why ICICI Lombard and general insurance over the the other players
I am not sure if Buy and forget is a good way to invest. https://www.caixinglobal.com/2018-11-29/ant-financial-renames-health-insurance-like-product-after-regulator-says-its-not-insurance-101353661.html . Here is a business model that can potentially disrupt insurance industry. I am not saying it will, just that it is important to be continually on the lookout for potential risk factors and appropriately modify the investing approach.
This presentation provides a good understanding of ICICI Lombard
What is interesting is that non life insurance penetration in USA per person is $2500 in USA and $160 in China as compared to $18 in India. Therefore long runway. Also the combined ratio is less than 100 which means the insurance is making underwriting profit and hence all investment profit are on top. The insurance is in all lines other than life which shows itâs addressable market is huge. Also only 12% is equity investment and more than 80% debt investment would give safe investment returns and hence predictable profits.
One problem I see is valuation which looks expensive and I have no clue how to value an insurance company. But looks like a good candidate for coffee can at right price.
By FAR the best resource is to read all the shareholders letters by Warren Buffett. Trust me youâll thank me. Most of the time he talks about insurance anyway as thatâs his primary business. Even if not life and even if demographics are different you absolutely will benefit from readin them and grow as an investor
Hi. Since we are discussing HDFC life I wanted to know how fellow members perceive the below risk of direct tax increase for life insurance companies. Also asked this on the HDFC life forum so apologies for dual posting but wanted to get the views of the members here
Based on the sensitivities that these companies give in their filings there could be downside of 10-15% if direct taxes are increased to 25% for the cos. Though article below is dated I believe the risk is still there?
Article also says that insurance income from policyholders will be taxed unless sum assured is 20x of premium
The Economic Times â 23 Nov 17
The Finance Ministry constituted a task force for redrafting the direct tax law.
@phreakv6 , i agree with your insightful post for coffee can candidates. I am specifically looking at hdfc life and havells, both great candidates and a great runway, however isnt the valuation on a higher side and chances of pe contraction if they falter in growth . I mean isnt much of the upside or growth of atleast 3 years factored in . I have enjoyed reading your thoughtful posts on quality companies especially page industries and hence thought to seek your views on the above 2 companies . Moreover would like to know whether page also be considered equivalent to havells as a coffee can candidate and if not, where in your above list of rankings, would it appear ? Many thanks
@A_shah - Companies with high returns on capital will stay expensive even if they falter in growth for a few quarters - if the runaway for growth is long, it will make the investors stay put because sooner or later, growth will return - unless reduction in growth is due to company specific factors - maybe a competitor is eroding the moat and stealing market share, the business model itself is undergoing transformation and so on. Other than these fundamental transformations, one shouldnât have to look into quarterly results in a coffee can portfolio. No returns for 3 years or corrections due to disappointments are very real problems which have happened in Page and I think will also happen in D-Mart. These donât make them bad businesses though and over the long-term they will still make good money for the investors. Great businesses at expensive valuations can and will still make money if held for longer periods than mediocre businesses at cheap valuations.
Coming to Page - Page at 80 P/E is different from page at 60 P/E. At 60 P/E it is not exorbitant as it used to be. Somewhere around 40-50 P/E would be good buy but its not a bad choice to nibble at it between 50-60 P/E as it remains a phenomenal company with great returns on capital, a simple underlying business with a great brand and a long runaway. Overpaying a little bit shouldnât matter much if the holding period is 10-20 years. Their working capital management is bound to improve further as they cut down their raw material inventory because of outsourcing and payable days could improve further due to franchised EBO outlets which are increasing at a faster rate than before - these fundamental shifts will make it return a lot of money to shareholders due to its high returns on capital, even if it has to continue to grow at 20%. I would slot it into a Coffee can portfolio. With the benefit of hindsight, I would probably replace Thyrocare with Page or Bata in the list from that post.
One more change in thought-process since that post was written is that HDFC Ergo whenever it lists or ICICI Lombard could be a better play than HDFC Life in the insurance space as general insurance looks to be better with lower long-tail risk. In a young population like ours, the long runaway might mask long-tail risks for quite sometime though, so there may not be reason to put down HDFC Life right away yet. This is still an evolving thought-process, so I am yet to make up my mind.
Disc: I hold Info Edge and Bata and looking to add Page and Eicher as they are out of favour. Havells, Titan, ICICI Lombard, United Breweries and Britannia are some other businesses I want to add over the next 2-3 years to my wealth-protection portfolio (to replace my FDs) whenever they go out of favour. I donât know if I can do a coffee-can portfolio but I would like to keep churn very less in this portfolio as anything above FD returns is good for my return expectations.
