Hitesh Sir… Can you please explain in layman terms what does warren buffett means when he says that he likes business which can grow without need of additional capital…"… and secondly how to arrive at earning growth expectation embedded in Price to Earning and Is it of some use? Kindly guide sir.
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Hi Hitesh ji,
As per your replies, I understand that you want to be sure of recovery before buying into the companies on your watch-list. You also exit some of your holdings at times due to Technical weakness.
Can you please explain your thought process when you got-in and then exited Bandhan bank?
Do you have a Long-term buy-and-hold portfolio that sees no change even when seeing Technical weakness?
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Hitesh Bhai
It will be very interesting if u can share ur current portfolio so one can take reference from it…
Really confused with current situation…
Thanks
There seems some merit in the argument based on expected higher dividend payout especially in PSU companies. But here too I think we can take our picks and zero in on companies where payout is likely to continue. For that to happen the company has to be on a sound footing and good prospects and price has to factor in most of the possible negatives.
I think one can look at Petronet, Gail, Rites, Nalco, NMDC etc. I dont own any of them as I feel going ahead there will be times when good bargains will be available in plenty.
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Bandhan bank was having good support around 400 and when that broke down, I got out as that gave me an indication that things were not okay with the company. I could have got signals earlier also based on closing price history wherein strong support was at around 440 levels.
Regarding long term buy and hold portfolio, I scrutinise that too based on technicals. One company where I have remained invested inspite of all ups and downs in stock price is transpek. I continue to monitor it closely and like the management and the way the company is shaping up. But aside from this, I ahve exited most of my core PF stocks because I was jittery about the impact of Corona and its after effects.
@Kuldeepjadeja I have earlier mentioned multiple number of times that I wont be disclosing my portoflio because of reasons I dont want to divulge. But from whatever I have written on the forum of late, it should not be difficult to figure out that I am out of most stocks and sitting patiently on cash. I put in my disclosures wherever I am invested so you can keep track of that if you feel it to be necessary. (I dont think one should be too bothered where me or other investors are invested. The aim of this forum is to make investors into do it yourself guys. So make it an aim to analyse companies in details and only then think about investing. And stay away from garbage stuff . ( I saw you getting too interested in companies like bhel and dhanlakshmi bank in the past. – its a difficult habit to get rid of but one needs to work on it and get out of these kind of ideas in the hopes of getting quick multibaggers. Rest is up to you. )
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Hi Hitesh…First I would like to thank you for patiently replying to all the queries posted here.
I was going through roto pumps, you were interested in 2012 it seems after that could not see your comments. Mgt is guiding for 15 to 20% growth next 5 years. Quality of the mgt seems to good and product is accepted through out world but only in rotor based positive displacement pumps. Currently they are in top 10 global companies and aspiring be part of top five and asipiring to be a fluid service provider. They have a dedicated R&D team.
Are you still tracking this company and your coments please
I dont track roto pumps too closely now. But after reading your post, I had a look at screener to view its numbers and since that was encouraging I looked up the company website. One thing that struck me was the company mentioning that it was among the top 10 players in global positive displacement pumps. One discordant note I found was that if a company doing a turnover of only around 150 crores annually figures in top 10 global companies, we need to seriously look at the opportunity size. If the top 2-3 players are far ahead in terms of turnover say to the tune of 1000-5000 crores or more then only it makes sense to look at Roto. Otherwise even if globally opportunity size is limited, it might be prudent to skip it. (I think that would be the first question that comes to my mind looking at the company. )
Numbers have been good since March 2017 till date and even with increasing turnover and profitabililty, interest payment has gone down. Plus margins have been on an uptrend consistently. Since it addresses industrial pumps, q1 fy 21 probably could be a washout quarter and that needs to be accounted for in valuation or has to be figured out whether its in the price.
Since 2014 the company’s chart has been behaving like that of a cyclical so that too needs to be looked into.
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Hello sir… in current sitiation whats ur views on psp projects… mainly describe on migrant workers problem and project completing time line pr…
Thanks a lot for your reply Hitesh…I am also reflecting on the same thought process…I am not able to figure the market size of positve cavity pumps or screw pumps…but could understand the opportunity size is small…
They have invested in US office in 2014 and this year in Malaysia office. This will help the sales to increase and margins to sustain.
Management is good, quality of the product ks good but not sure of opportunity size…so I hsvr to let it go…
I am looking at another market leader called Voith paper fabrics india, similar story…not able to understand the market size but a zero debt small cap company with 125cr cash… supplying paper machine cloth…
Rgds
Ram
Hitesh Bhai… Please reply my query also.
Businesses which can grow without excess capital are those which usually work on negative working capital. Imagine hind Unilever. They sell their stuff to retailers against advances. But they pay their suppliers with a lag of few days to few weeks. Hence they always remain flush with this money which they can use to suit their own purpose. Plus they get a lot of their products manufactured by vendors on jobwork basis and there too they enjoy credit period. For them to increase production does not involve excess capex. They only need to get more stuff from existing vendors or if that is not feasible, appoint new vendors.
Regarding what kind of growth is priced in at a price, there are two aspects here. First is the expected growth rate and second is the longevity of this growth period. Companies which are perceived to have a very long runway for growth without too much competition attract high multiples. High growth companies which grow at very high rates also attract high multiples once markets are convinced about consistency and sustainability. If you have a company where the market perception of high growth and longevity are there, valuations can go sky high till the time the perception of growth hits a roadblock. Most recent example is of the sudden de rating of bajaj finance. In a short period of time, market perception regarding growth and invulnerability of the business has taken a hit and stock price has corrected to more than half. Maximum money is made when in a high growth company, initially there is worry regarding sustainability of growth but as company keeps churning out good numbers, market perception changes and there is swift or often gradual re rating in a company.
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Hitesh bhai, do u still track Shree Digvijay cement ? Sir what’s view now at this rate ?
Thabks a tonne Hitesh bhai. I thought it meant companies which does not require capex apart from maintenance capex and which can grow with a combination of volume and price growth, without much capital expenditure.
Secondly, from the perspective of valuing a company as a thumb rule, say one company is earning ROE of 18% and growing it’s EPS @10% pa and another company earning ROE of 12% but growing it’s EPS @16% pa, what earning multiple should be paid, assuming expected runway of growth is same and both the companies are same in terms of other quality measures like debt to equity etc. are same.
Also say in case company A retention ratio is 50% and company B retention ratio is 70%, then what effect will it have on the earning multiples for both the companies.
Once again thanks a lot Hitesh bhai
The question about company A with ROE of X and growth of Y vs company B with ROE of P and growth of Q is a very theoretical question and you will get multiple answers based on various other parameters and none of them will be close to absolute truth. Markets move more based on perception and there are periods when business A would be perceived better vs business B. While these kind of academic conundrums maybe interesting to discuss and I have seen guys fill pages writing about these, and people can argue till they are blue in the face, does it really help in making money?
Valuation rests on a host of other factors besides the financial matrices and hence we have to take the whole picture into account. We as investors cannot afford to have a tunnel vision. If only these calculations would be needed to make money, a lot of excel cowboys out there would end up billionaires. But in the real world it is not so.
Different companies would be valued differently during various times by markets depending upon market fancies. e.g Currently financials are taking a hit and if one were to only focus on any two parameters, he/she would be mauled.
@HIMSHAH I had exited digvijay cement during the meltdown. With all economic activities at a standstill since almost 2 months now, I think all these cement companies would have a tough time as a sector.
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They dominate in screw pumps which is Very much used in Gas and Oil Industry…looking at current scenario Of oil sector…Dont think so any short term growth…
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Such a simple yet powerful way of looking at things. Amazing learning shared in 2 lines sir…Top 10 player with such a small revenue figure.
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Hello Hitesh Bhai,
Hope you and your family is safe and healthy.
I had a query regarding the Theater business companies ie Pvr and Inox.
As we know they are already fully shut and might be the last one to open too.
Also business is not generating any revenues and have some fixed cost like Rental, payments to employees etc and we don’t know when it shall.come on track so the immediate future is uncertain for few months. The same is reflected in Share prices of these company too as they are at 52wk low and at lower side of last 5-6 years PEs. However we know the Indians love the theatrical experience and its more than just watching movies which shall come back as soon as the Lockdown ends ofcourse in gradual manner.
So considering the Medium to Long-term Outlook and the Available valuation at which the Companies are trading, do you see there is a potential Investment opportunity with lesser risk amd higher reward for 3-5 years view?
Hi Hitesh, First of all appreciate your views and can appreciate only more in hindsight. The sureity with which you mentioned everyone about Nbfc sector issues almost 2 years back is admirable. I was little late in realising same and ended up a 12% cagr instead of a previous 25 plus in my investment of almost 8 years. No regrets for drop in cagr as learning was immense. Biggest learning for me was to stay away from such sectors where you lose confidence of stability in underlying business and eventual collapse of firms.
Consciously, I stayed away from Nbfc in recent dips, also did not venture much into banks. However, even before the crash, I had been accumulating life insurance firms and with recent fall, they form significant almost 25% of my portfolio with HDFC being most. I intend to bring the sector to 15 % in due course. Somehow, the aversion for financials was lost in this case. Partly because of the longevity of sector, still a begining in India for insurance and decent growth rates.
Having said above, the Nbfc experience is still ripe. I don’t mind a 12 to 15% cagr over long…I am ok with my returns in Nbfc that I got but the experience it gave me was not good.
With all this in mind, I would like to know your views on Life insurance sector for long term, HDFC life in particular and also what could be extreme black swan events for life insurance firms…comparable to NPAs, defaults of corporates, default by customers, ALM mismatches of the banks and NBFC s…what can destroy a life insurance company? Many thanks
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Once the Corona scare goes away and becomes a distant memory (I know its difficult to imagine such things in current scenario but this too shall pass 
) players like pvr and inox will definitely make a comeback. Problem currently is we have no clue how long this problem is going to persist. But if we can figure out a price which includes a margin of safety and inculcates 2-3 quarters of zero or near zero growth, it can be considered. I personally have no idea what that price would be so I will wait for signs of reversal on charts.
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Regarding attractiveness of private banks and high quality NBFCs going forward, as said many times before once a sector loses its market fancy its difficult to make money from the sectoral stocks. e.g Pharma sector peaked out in 2015-16 and it took almost 4-5 years for it to show some signs of a comeback.
There are and will be exceptions to the above observations. From among pharma also stocks like torrent pharma, divis, ipca, jb chem etc have delivered reasonably good returns but back in 2015-16 it was difficult to imagine which stocks from among the pharma sector to bet on. Longevity was never in doubt for the pharma segment even back in 2015-16. But as seen all during these 4-5 years, problems for the sector kept cropping up off and on. Now it seems to be getting back on track atleast from the resilience and strength shown by the sectoral companies in the last few months. A big change I see within pharma sector is renewed preference for export oriented pharma stocks.
The problems facing the financials sector are quite evident to us all and we all expect things to be bad for next couple of quarters or more. There is near consensus negative views on financials which is always a good sign for the sector. A bottom is usually formed on these sentiments. But for meaningful upmove to resume, it might take some time. Even after a bottom is formed, these stocks can move sideways for long periods of time. So I dont prefer to be in the sector which has lost market fancy recently.
Regarding insurance, I think over the very long peiod of time, of say next 10-15 years it can do quite well. I can compare the investment theme that played out in private banks many years back to the insurance companies currently. Back then when icici bank and uti bank (axis bank then) and hdfc bank were starting out, PSU banks were an inefficient segment and people were pissed off with their services and with emergence of these new options, they lapped it up and these banks managed to take away market share from these PSU banks and the latter got deeper in to the mire with issues related to NPAs. That has till now led to humongous wealth being created by good banks like hdfc bank and kotak bank.
Similarly, the govt run insurance companies like LIC and New India assurance, Gic insurance etc are not so well known for the kind of service offered to clients. We are clearly seeing the private insurance companies gaining market share from the govt companies and this trend can continue for many years to come. That can lead to a lot of winners going ahead. HDFC Life because of its parentage seems to be in a pole positioin to deliver good returns. But one will have to keep a mindset of accumulating the stock over next 2-3 years to ride it for next 10-15 years. I have not gone into details of individual insurance companies but can clearly see the parallels between private banks in their infancy and insurance companies now.
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