I’ve used a 15% Discounting Rate. Removing the Margin of Safety, it becomes 19.50% (15*1.3). Ok, maybe this isn’t a great way to arrive at the expected returns, but it’s approximately fine. That isn’t the point though. Even if it’s 15%, the same things I mentioned above would still hold. Like I said, everything in investing is a function of Opportunity Cost. Everything.
The Cost of Debt Discounting is just a mechanical sell limit. I’m not trying to match it with anything or trying to figure out my next best bet. I immediately sell if it reaches that level, regardless of the company actually doing very well.
As far as inaccuracies are concerned, yes, I’m bound to be inaccurate with estimates. That’s why I purchase only with a wide Margin of Safety. There are times when I’ll be way wrong with my estimates (Based on consecutive worse results, for Instance). That’s when I should rethink my investment decision altogether.
I assume and hope that the use of ROI interchangeably between the business investment and stock investment is deliberate.
That said, Dinesh you’ve written a crisp piece with clarity and no self-doubt. I am curious to hear your opinion on some of the FMCG’s that quote at high valuations ( & the new term I hear these days to justify any valuation is that it is merely “optical” and real valuation is much lower ! )
Did you also consider additional investment in Ion exchange and preferred Mirza over it ? Or you wanted to diversify ?
Hi @dineshssairam , As per your assumption sales growth will be 10.86% from this current year to next 5 year ? will you sell the stock if they will not able achieve the sales growth in 2 year as per your assumption .
Thanks,
Value is created (For me personally) when Mirza’s RoIC is above my Required Rate (19.5%). So it stands to reason that a consistent/increasing RoIC of Mirza above my Required Rate will make it more difficult for me to sell Mirza. That’s what I intended to imply anyway.
I’ve mentioned elsewhere as well, that FMCG companies aren’t valued so highly because they can grow incredibly fast, but because they can grow slowly for an incredible number of years. Toothpaste and biscuits can’t be disrupted. 50 years from now, we’ll probably still be using Colgate and eating Britannia.
As I already mentioned way back when this thread started, I invested in Ion Exchange primarily because of Valuation comfort. I did little by way of research, so I’m not able to build up conviction to invest more. Besides, after the midcap crisis, I found better companies like Cera and Mirza within my comfort zone, so I never actually got a chance to invest in any of my old picks anyway.
Selling is always a trouble. If your conviction about a story and in the ability of the management to execute it is strong, you’ve got to give them some leeway. I re-value my holdings every half year or so, based on new numbers. If I find my expectations lacking in the real world, then the above mentioned cycle begins. If the company is going in a direction which I’m not comfortable with, I should re-write my entire investment thesis for the company and then again, Value it.
Here again, the Margin of Safety plays a crucial role. It’s there to protect against assumptions gone wrong. If, during my Valuation, I find that my Margin of Safety itself is about to be breached, I might consider selling.
It may not be true. Please read about the dangers of sugar and processed food. If people learn about the issues of carbohydrates and sugar, Britannia may not be there after 50 years. We cannot predict it. A low fat diet postulated in 1980s destroyed many industries.
That’s why I was careful enough to mention the brands and not the product itself. What I meant was, while the individual products themselves may get disrupted, the uses for them will not. 50 years from now, nobody’s going to say “I will stop brushing my teeth” or “I won’t consume any sort of biscuits”. If at all that happens, I’m sure it will happen via a massive disruption, the likes of which cannot be accounted for in any sensible explanation of a stock’s value.
I have always found your analysis in depth and insightful. However,due to pre-occupation with my work I am able to devote less time for analysis. In short I often deploy capital,when I find good and straightforward analysis. Moreover my allocation for stocks is not more than 5% of my portfolio so the risk is often softened.
To come to the point,In current market scenario I find 2-3 good stocks to employ some money. All these 3 stocks are on your radar it seems.
HArita seating—I intend to but about 500 shares at 500—and hold it for minimum 3 years.
Similarly CUPID—around 800 shares at CMp-175
castron—around 2000 shares@125/- Cmp@140.
I realize that you do not owe me any responsibility but what I usually look for is around 10-12% yearly returns with safety of capital.
Do you think it is the right time to get into the above stocks.I am unperturbed by fall in prices,however permanent loss of capital does affect me.
I do not believe in market timing, nor do I think it matters a lot in the long run. If I didn’t know any better, I’d say this is a conviction crisis. The ideal solution is that you should research more about these companies and the industry in order to build a story that you can stick on to while holding these stocks. I can provide you with mine, but I strongly suggest that you do it to yourself.
However, I can do this. To reiterate how cheap both Harita and Cupid are, take their current EPS and divide it by the dividend-adjusted Required Rate i.e. Perform an Annuity calculation on them. An Annuity is the simplest DCF available. By doing an Annuity, you are assuming that there will be no growth in the current EPS and the company will earn the same EPS from next year to eternity. Let’s see how it’s done.
Cupid
Current EPS: Around Rs. 15. Your Required Rate: 10% Cupid’s Dividend Yield: 2.60% Net Required Rate: 7.4%
If Cupid earned only Rs. 15 as EPS from next year to eternity, it should be valued at 15/0.074 = Rs. 202. The CMP of Cupid is Rs. 173.05.
Similarly for Harita
Current EPS: Around Rs. 40. Your Required Rate: 10% Haritas Dividend Yield: 1.09% Net Required Rate: 8.91%
If Harita earned only Rs. 40 as EPS from next year to eternity, it should be valued at 40/0.0891 = Rs. 449. The CMP of Harita is Rs. 551.55.
In fact, these companies will grow their profits at a minimum of 10% going forward, which would place their value much higher. Obviously, this provides you just a numerical comfort. I suggest that you read the Annual Reports of these companies for the past 2-3 years, read sector research reports and derive your objective comfort from there.
I’ve never had Castron in my radar, so I can’t comment on it.
The market pays for cash flows. Even if we ignore the logical approach, my calculation simply showed that even assuming that both Harita and Cupid never grow their profits, they’re still attractively priced.
Dividend comes from eps, so in your calculation you should subtract the dividend amount from eps and the calculation for cupid goes as follows:
eps: 15
r.r:10%
d.y: 2.6% =rs. 4.5
eps after dividend : 15-4.5: 10.5
net r.r: 7.4%
value of cupid: 10.5/0.074=141.9, cmp:173.05
Many thanks for taking time out and replying my uninvited query. I have read Harita’s annual report. Only redflag which came to my mind was the Chairman’s age near 80. But with TVS group the pedigree is assured.
Actually its Castrol and not castron, regret the typo. With your valuation methodology Castrol’s fair value comes to be around 134 with its CMP @145/-( a five year low due to higher crude prices). I feel with this sort of brand value the company will be able to pass though the input price increase. Just ask yourself,would you mind paying an extra 100-200 rupees on an oil change when your car is serviced once a year. However,the company has not posted any sales increase for last few years and market will further discount its ability to do so in near future. Its only attractive valuation wise.
However,The DCF method assumes linearity in the company’s path which may not hold good,if the promoter changes course in the middle. Although it provides valuation comfort. Moreover,it also fails to assign any value to the brand building effort put in by the company.
If you have information about how the company’s sales and operating costs will fluctuate, you can use that in the valuation. But obviously, not even the most experienced analyst can predict that, say, after 5 years.
Like I keep reiterating, valuation is all about limiting your downside. Yes, that means you may potentially miss out on a “multibagger” or two sometimes. But the market doesn’t punish you for not buying something. It punishes you for buying something well above its supposed value.
You are right about this. However,i feel with rising markets,investors ignored the downside risk and became complacent for which I think the market is punishing them. However,the debt contagion is purely unwarranted and prudent investors who did not put money into equity due to froth are being punished for no fault of theirs.
In a market downturn, nothing makes sense. I read somewhere that about 90% of the listed universe have crashed since January. The Midcap and Smallcap indices are down 21% and 36% each respectively. But it’s times like these that separates gamblers and investors. By simply ignoring short term swings and looking at the big picture, one gets an immense advantage.
This whole debacle reminds me of what Mike Tyson said: “Everyone has a plan until they get punched in the nose”.
I got punched in the nose with AAA rated debt funds like TATA liquid and ICICI long term bond funds.
I quietly watched over the equity markets throughout 2017 and 2018 mid,parking my fund regularly into liquid funds because everything seemed overpriced by conventional valuation methods. Now with this ILFS fiasco I am in a catch-22 situation.Whether to redeem my debt funds and make the gain taxable,or wait for the NAV to be marked down.
! )