I sold all of my Granules holdings after reading the notes of Aveek Mitra ji on granules on the forum. I realized that I was lacking some essential fundamentals in my analysis. I realized that even if granules manages to give twice the returns of blue chip companies like Lupin and Sun in the long run, its still not worth it given some hidden risk which i still am not aware of. I have not sold any of my alembic shares though. In fact, I have an ever increasing conviction on Alembic.
Regarding IT companies, yes I am playing the contrarian bet with an assumption that it might take them a year or so to reinvent and restructure themselves to cater to the right market. I think people are also worried about the size of the companies. However, I have an opinion that we have to now start comparing the size of these companies globally. I plan to dig further in these two companies as I would very slowly build positions over the next 6-12 months. And you are absolutely correct in your assumption that I am looking at 20%+ earnings growth in the next 6-7 years with a bit of P/E expansion. I need to dig further though to evaluate my hypothesis continuously.
I recently read a book âFree Capitalâ recommended in this forum by @basumallick ji. It was a book on different types of investors. I could relate myself to one of those guys who first sees a macro-trend in sectors and then go for few particular companies in the interested sectors.
Also, I plan to keep my downside limited by buying Put options on the underlying securities (in my portfolio) in the F&O market. (Although I have to do a lo of homework on this front too as I have heard that it takes about 4-5 years to understand the valuation of put options)
Being from a quant background, I did some analysis and I realized a trivial but important stuff that we underestimate the growth of Top 25 Market cap companies by thinking it to be extremely heavy and bulky.
Thanks a lot for your comment. I have heard the same news which justifies why the valuations across all large IT stocks are low. Frankly speaking I have not done too much of bottom up research. I have a more of a top down view of the Nifty 50 companies. These are some of my hypothesis upon which I have come to such conclusions and decisions to allocate such positions.
Atleast 16-17 of top 35-40 companies (in terms of market cap) should have 20%+ earnings growth in the next 6-7 years. This might not be linear but averaged across this time window.
IT, Pharma and Motors each should expand its share of total net worth of Indian stock equities.
Financial sector should shrink (relative to these sectors, not in absolute terms)
In the forbes richest billionaires rankings, I think Dilip Sanghvi (Sun Pharma promoter) , Shiv Nadar (HCL Tech Promoter) should improve their rankings given their acceleration shown in the past. I expect their global rankings to get halved in the next 5-7 years. Pankaj Patel (Cadila) and Desh Bandhu Gupta (Lupin) should break into top 100 billionaires list.
Rupee should keep deteriorating in relative terms to dollar.
Many people would contest with these hypothesis. I dont plan to defend them either. But somehow, I smell this happening in the future.
PS: I read the latest earnings concall transcript of HCL tech. They seem to be taking IoT segment seriously.
Also, sectors which are in complete disruption, you must understand it in and out.
Diversify in 4 sectors at least,
A sector which has already gone through 1 year cycle of bad phase and value is visible (pharma), you can ramp up fast and
Sector where there is lot of uncertainty on continuity of business models itself, ensure you are updated and accumulate slowly till you build complete conviction.
I am working in SMAC area in IT and seeing the speed and quantum of change happening, I am cautiously optimistic on selective Indian IT themes/companies but yet need to understand their operating model in deep.
Note : I am a diversification type of guy, so, our styles may be very different
I personally would not restrict my exposure for a particular sector. Nor would I keep in mind how many sectors to be in.
I think of diversification as a privilege of knowing the market extremely well that inspite of having set very high filters, one is able to find many jewels in the stock market.
I donât have that capability (yet) to find so many long term valuable opportunities. For me to diversify, I would then have to lower my bar of filters and criteria. Thatâs not gonna happen. Even if only 3 companies satisfy my criteria, then so be it.
On the IT Space -
If you are looking at advanced technologies.,- IOT, Big Data, Analytics shouldnât Persistent Systems,Tata Elxi to name a few form a part of the holdings? I have read a lot on the Promoter integrity for Persistent Systems. The valuepickr thread talks a lot about their engagement in IOT with a renowned MNC. Tata Elxi again has not had the kind of run for a year now, but potential is huge.
@gaurang_99 Buying a basket of Pvt sector bank is a good option. Will think about it.
However, I think IT should outperform the banks given the low valuations attached currently to IT sector. It just needs 2-3 years to start accelerating. Plus, I am not getting into small caps which needs much more monitoring compared to blue chips like HCL and TCS. There is a margin of safety inbuilt in form of low P/e and good dividend yield.
@samirhuli , I think my major focus is buying large caps with restricted downside and chances of considerable upside in case of favorable market conditons. In my understanding, these IT large caps are very agile and lean in nature. They have the ability to mold themselves to the new demands. They keep themselves extremely flexible and indulge in sticky business models.
IMO in such a disruptive domain, large caps have a higher chance of surviving and thriving.
A better way of constructing a large cap portfolio aimed at market beating returns could be to look at sectors/stocks which have created wealth over past few decades. I guess Motilal Oswal wealth creation studies could provide good insights.
According to my thinking, a bank like HDFC Bank or Indusind Bank could occupy a prominent position in a portfolio of large caps mainly bcos you are virtually assured of 20-25% CAGR growth over next few years.
Next should come the consumption basket. Here I would like to go for companies like Asian Paints, Page inds, Whirlpool, Kajaria Ceramics, Pidilite just to name a few. One can do detailed study on valuations and prospects and pick and choose.
Pharma has been and would be an evergreen basket. Obvious names that come to mind are Sun, Lupin etc. For long term compounding, one can have a close look at Divis labs bcos it is not riddled with too many variables. Only thing they need to be careful about is not getting into problems with USFDA. Till now they seem to have done a great job. Besides these there are plenty of options like Dr Reddys, Cadila, Alembic, torrent just to name a few.
IT would come lower down in the pecking order mainly bcos of the concerns surrounding the sector. Having said that with these negative sentiments one can keep an eye on some good opportunity presenting itself bcos all the companies in the sector are going to be painted with the same brush.
Among autos I remain very bullish on the two wheeler space mainly bcos it is a necessity rather than a cyclical commodity. Hero Honda remains the evergreen company. And since the portfolio is aimed at next 3 years I expect a good time for these companies. One can even consider battery companies like exide and amar raja. With so many vehicles on the roads batteries would definitely need to be replaced and one can simply buy the two companies and sit back and enjoy.
Another potential pocket of interest could be the FMCG basket. India is on the way to becoming a big consumer of FMCG products. In the shorter term Patanjali could have some impact but bigger players like HUL, Nestle would find ways to grow. And one can buy these companies as a basket.
One can select a basket of companies from above sectors and stay put for next 3-5 years and chances are returns could be good barring big market meltdowns.
Superb Post HiteshBhai.Yes there are so many options which can easily compound our money 18-25% cagr for next few years.
In addition to what Hitesh Bhai has said few which comes to mind which are solid companies are Kotak bank, Gruh Finance, Emami, Godrej Consumer, Marico, Berger Paints, Astral Poly, ITC.
But yes as Hitesh Bhai has said valuation is a challenge now if we think about short term. But if we can give atleast 4-5 years time valuation is not a problem.
Hitesh ji,
Thank you very much for such detailed inputs. This will be extremely helpful for a beginner investor like me. Just to tell you a small fact that my father had been holding HDFC, HDFC bank and Gruh since their listings. These three stocks created more than than 90% of the wealth of the current portfolio.
Last year, he handed over the portfolio to me. And I decided to get rid of all the stuff and start afresh
After a year of experimentation, I have realised the importance of compounders. After my takeover, the portfolio has gone nowhere in one year (although I am glad I did not destroy any capital, just 4% gains ) But the learnings have been invaluable.
Of my limited understanding, I think all the stocks mentioned by you are indeed great. I am just a little concerned about the valuation front in many of them like Kajaria, Amara raja, Nestle, etc. I see no room at all for any kind of P/E expansion. They seem to be priced to perfection, if not high.
A company like HCL tech and TCS available at 14-18 P/E, needs 18-20% growth to match up with the likes of Kajaria which can grow at 25-30%. Although, the surety of earnings is an important factor to consider, I really think that if one puts hard work to study the undervalued companies, one could squeeze in 2x bonus just through P/E expansion. I know that this thinking might be inappropriate by valuepickr standards but I really admire the power of P/E expansion along with the surety of earnings growth.
Nevertheless, I think seeking portfolio growth through P/E expansion is a dangerous trap as one can end up with low earnings growth companies. Hence, I have limited myself to experimentation with large cap companies with decent fundamentals so that the worst harm i could do to the portfolio is slower growth, rather than capital destruction.
I really will reconsider a lot of aspects of my current template after your invaluable suggestions.
Its a great question Hrishi that why I think TCS, HCL can command higher P/E than 18-20. Maybe they never will. But there is an asymmetry involved here. There is higher chance of P/E going up than on the down side, given we make sure that 18%+ growth is happening. Plus, I dont expect the P/E ratio to remain forever at higher levels like 25. IMO, But they do come at those levels during bull phases if the company shows solid 18-22% earnings growth.
PS: Regarding Granules, I guess the main reason was the decision to stick to large cap stocks (10k crores + range).
As per me many Indian IT companies are nothing but export oriented commodity manufacturing plants. Itâs just that raw material is abundant and cheap but of low quality and there is steady demand. They can keep giving decent returns over long period. But they not only carry technology related risks but also exchange rate related as well. With inflation, and deficit in control exchange rate may not provide too much support to rupee earnings.
Hrishi,
I think the more important take away for me is that low P/E also has the advantage of higher dividend yield. Thus there is an inherent margin of safety inbuilt.
As per your question on apple, I guess P/E shows the amount of faith people have in its future earnings growth. If apple beats those expectations, the market will appreciate and bump up its P/E. However, if apple is according to the expectations of the investor community, the P/E should stay stagnant (unless there is market meltdown when all stocks get affected). Thus, there is an asymmetry involved in the P/E direction. BTW, i think P/E is a very basic tool to analyze the valuation front. One needs a more sophiticated approach to it. Probably considering Price to book ratio (relative to industry standards) also might help.
PS: Regarding the control exchange rates, these companies make sure to hedge themselves as much as they can. They could possibly do so by setting up headquarters in many countries and getting themselves paid in not rupees but in other currencies as well.
Completely agree. But dividend yield takes care of downside protection but not the growth. TCS and HCL prices (P/E) can be determined by FII (given there m-cap). And they are saying Apple, Oracle may not show much growth. But Microsoft under Nadella can and that too was given higher P/E after pickup in cloud / Azure. Not sure Indian companies really proved anything new and substantial yet.
I am not saying TCS, HCL wonât give returns but 30% weight can drag portfolio returns down. In portfolio construct if job of IT is to provide stable 20% returns then why not costly Amara, Kajaria. (I actually own Page and PI for the same reason) The way dividend yield provides downside protection same way consistent growth also. But if growth picks up upside is more.
I think, I am looking for more than 20% returns from the combination of these two IT companies. Probably 30-35% returns (factoring in the Potential P/E expansion upto 25) in next 6-7 years.
Yeah, I know it sounds atrocious. 99% would disagree with such expectation (thats why its available at such valuations at the first place!).
The only thing I want to defend here is that I want to keep the upper expectations limit open. I am pretty certain that these two companies should give me 18-20% returns in 6-7 years. But, there is possibility that they give much higher returns upto a magnitude of 30-35% cagr.
Getting into traditional compounders closes than option. But it surely gives much more comfort.
I guess its a tradeoff between certainity and higher potentiality. One has to choose according to his investment style.
Which Country Would Win in the Programming Olympics?
Every day, developers around the world compete with each other to become the next Gates or Knuth.
If we held a hacking Olympics today, this data suggests that China would win the gold, Russia would take home a silver, and Poland would nab the bronze. Though they certainly deserve credit for making a showing, the United States and India wouldnât make it into the top 25.
I am bit surprised to see unanimous negative view about IT companies. If growth falls short of expectation by 1% share prices crash. But a 10% growth in not bad in todayâs world where company is available at 15 forward PE and 2.5% div yield and has tons of cash on book. This industry also provides a hedge against dollar as lot of our urban consumption (electronics) is dollar denominated.
Imagine Infosys using all cash of 6B USD for organic growth. It can buy a company which can immediately add 15% to mcap.
Though Indian companies do a lot of mundane work for volume they are also doing top end work. India will continue to enjoy huge competitive advantage of cheap and abundant raw material(labour in this case).
Good to read this article which was published in 2011 when there was similar pessimism
