Companies which can deploy large amounts of capital at higher rates of return are always attractive to the markets. But I would tend to rate companies which generates high (70-80%) percentage of profits as free cash flows much higher that the former group. Simply because this free cash flow can directly be distributed to shareholders in form of dividends or buybacks. And companies which require very little capex to grow and can still grow consistently are very very rare and are accorded very high valuations by the market and these valuations are sustainable for long periods of time.
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Thank you so much Hitesh bhai for the detailed and insightful answer . The concepts are pretty clear now .
My apologies for the same Hitesh bhai . I too liked the answer ( my intention was not to discourage ) however the only reason I asked not to post was I thought that if someone else answers , I wouldnât get your perspective as you may not answer the question since itâs already answered . Sorry once again for the same
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I like the chemical industry space in India. The trend of outsourcing from India seems sustainable. But one has to be choosy in selecting the companies. The companies to look at are those which are having a wider product basket, are dominant in the segments and subsegments they operate in and are not too much into commodity products whose product prices tend to follow cycles.
I think the companies to look at are aarti inds, atul, deepak nitrite, vinati, etc. As of now valuations in some of these seem very high and one has to be patient and figure out what is a comfortable valuation to pay for these in order to make decent money.
In contrast there are a lot of companies like Tirumalai, Bodal, and such companies which suffer from commodity like business models.
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Hello sir,
One stock which not fallen in this small/mid cap fall in RITES. R u tracking this�
However it is a govt psu but order book is quite strong, cash rich company, surprisingly good RoE, arnd 4% div yield also âŚGovt thrust on Railway is knownâŚ
Key risk is execution, âŚ
Your view sir on this�
RITES remains one of the better PSUs. It has a healthy order book, some export presence as well and likely to grow at a healthy clip. Dividend payout is also good. Stock price has been resilient during the correction which is always a good sign. Management gives guidance at the beginning of the year and for the year FY 20, it looks good and is validated by q1 numbers too.
Only flaw in the ointment can be some kind of stupid antic from the govt which might gum up the story and cause a rethink in the current stance.
disc: invested.
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Sir please give you view on CRISIL. Monopoly, second and third best companies in the sector way behind CRISIL, growing economy where ratings business is expected to do well, S&P has significant holding in the company, high ROCE with consistent dividend payout; growth is a concern at present but surely it will pick up as financial sector grows in the coming decades. Is it not the kind of consistent compounded one should hold for decades? But hardly discussed and corrected significantly.
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Thanks sir for your replyâŚhowever I didnât studied in deep just look on prima facieâŚyou r also invested in this which makes me more confidentâŚ
I am planning to change over from CCL to RITESâŚ
@hitesh2710 Sir, Can Castrol be an example of the kind of company you mentioned?. A shareholder gets decent dividends, but the share price has not been rewarding.
Many thanks for your insights on the Chemical Industry. 
I havent tracked crisil too closely to not much idea about it.
@rkatikam, Castrol is a dividend play with very little growth. I am surprised at this poor growth because a competitor gulf oil was showing decent growth all the time castrol was struggling. But then if I wanted fixed income I would go for fixed income instruments rather than waste my time after these dividend yield stocks. If at all I invest in dividend yield stocks it will be to temporarily park funds (as these may have some downside protection due to dividend yields -in sharp drawdowns even dividend yields do not protect 
) or if I feel in the longer run there are chances of capital appreciation due to some triggers lined up.
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Sir, My question was more about your idea of companies that generate high FCF and distributing away as dividends or buybacks. Market doesnât seem to assign more value to these. So it must be coupled with growth, for which reinvestment is a necessity. I donât see why should one in invest in just high FCF companies. I was trying to (for lack of better word) contradict your idea with the example of Castrol. My point is high FCF is more like a sufficient condition (where dividends are paid and downside is protected) where as a growth is a necessary condition for wealth creation
Original question was to compare two companies with same growth rates, where one is growing with negligible capital and another with large doses of capital. So growth was always a given in both cases. Castrol does not fit into either categories as growth is missing and not consistent enough.
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Sorry I didnât see the original question
Hiteshbhai,
Wish to know your views on Thomas Cook please. It has fallen from 250 levels a year ago to approx 150 now. The restructuring is still under process I believe, as the record date for allotment of Quess Corp shares is still not announced.
Do you think it can be a steady compounder from here onwards?
Rgds.
@hitesh2710
@hitesh2710 Hitesh bhai what are watchouts for investing in microcaps (<50 Crores mcaps). What has your experience been in this space. Since we cannot build meaningful position overnight it helps to gradually add based on performance. But I am looking for tactical direction on how does one build a position in a 10 Crore Mcap company. Obvious watchouts would be management quality and trust in numbers and that should hopefully be evaluated over time by avoiding companies debt, looking for dividend payers, other confirmation of quality for e.g. partnership with trusted foreign players etc.
I am obviously not expecting you to have heard of Pulz Electronics (I have written a note - Pulz Electronics - proxy to the Indian entertainment sector) but I am looking for general wisdom from experienced investors
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I used to track thomas cook earlier. But was disappointed by its numbers in its core business of travel and related business. The valuation sustained at that time at a price of 250 due to holding value of quess corp. Since then quess also has halved and consequently thomas cook has fallen significantly. Problem I find with thomas cook is that inspite of such a big boom in the tourism industry in India, and a lot of Indians going out for foreign tours, Thomas cook has not been able to capitalise on this opportunity.
Rather than thinking of it as a compounder (compounders need to have consistent earnings and long runways), I would prefer to look at ITC. Currently its out of favour and languishing around 243. Valuationwise its at its cheapest in probably last few years. And its FMCG business seems to be gaining scale. Cash on books around 25000 crores against mcap of close to 3 lac crores. I think for someone who is patient it looks like a low risk option at compounding. I have it in my watchlist .
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Sir
Can we consider the Reliance Nippon Assest Management Company in the changed management as now management is being transferred to Nippon. Japan and good cash flow and dividend and wide valuation gap with HDFC AMC keeping in view of your above thought process ?
I think the aspects to be looked at while evaluating these companies are management quality and business quality. Since the company is very small, one has to be reasonably confident about the company and then take a call.
The next aspect is look out for opportunity size as one has to be sure if and when the company is likely to hit a wall in terms of growth.
Regarding building up position, I think it has to be gradual process as and when confidence level keeps increasing. Since risk reward is often very high, one should limit these allocations to comfortable levels, so that if the call goes wrong, at a portfolio level too much damage is not suffered.
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With the entry of Nippon in the Reliance Nippon Asset management company, some part of concerns regarding management quality is reduced. Valuation gap with HDFC AMC will remain because of the pedigree of HDFC in the latter company. I dont track any of the two too closely so cannot comment on comparative valuations in a very specific detailed way.
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@hitesh2710 ji,
What is your opinion on the Business Services [Staffing] companies such as SIS India, TeamLease Services and Quess Corp? There is not much history involved in any of these three as all were listed within the last 3 years.
All these three companies are growing steadily and also the headroom for growth seems huge in a country like India. Each of these companies seem to have strengths of their own in terms of market share [SIS and Teamlease], diversification [Quess] etc. However, given the nature of the industry margin is less in these companies.
In the last one year both SIS India and Quess Corp have corrected quite a lot and so PE is now in mid-20s, whereas Teamlease gave good returns and is available at PE of ~ 50.
What should one look for in these kind of companies?
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