Healthcare and hospitals are an interesting space as a thematic sector to invest. The big change I can see in the sector especially hospitals is that there is a huge shift in client preference and investments into corporate hospitals. A lot of new hospitals coming up are now corporate hospitals with deep pocketed investors as compared to earlier mom and pop kind of standalone set ups. The feedback I get from a lot of doctor friends is that its difficult to see future as a standalone hospital.
And with increasing penetration of health insurance the preference for corporate hospitals will continue to increase. The business itself is one with a very long runway for growth. This usually attracts good long term investors which often takes valuations to very high levels.
The big challenge for this business is a) Front loaded investment. Its an asset heavy business which requires a lot of upfront investments. b) High fixed costs business. The salaries/commissions of doctors, nursing and other staff, admin staff, infrastructure maintenance costs, plus nowadays added regulatory compliance costs (like fire safety costs which is the latest thing hitting hospitals post the slew of fire incidents in a lot of Covid hospitals) c) Government regulations . Corporate hospitals have become soft targets for all kinds of govt entities to score brownie populist points by announcing caps on the kind of charges hospitals can take from patients. Many of these regulations are outright difficult to adjust to by the hospitals and can play havoc with hospital profitability. d) Caps by health insurance companies. e) Cash flow management. Hospitals receive money from insurance companies with a time lag whereas they have to pay salaries and maintenance costs upfront. So during difficult times when occupancy levels are low, cash flow management often becomes a difficult job.
I think with all these kind of challenges it might be difficult for hospitals to earn a ROI beyond a certain point. My interaction with a friend who manages a hospital in which I have a minority stake does not excite me too much about the hospital business Of late those hospitals that converted and admitted Covid patients had an unprecedented good run for 3-4 months during second wave. A lot of balance sheets which were on the brink of collapse turned on their head for the good.
Coming to field of investing in hospitals there is a strong appetite in long term investors (read FII/DII/HNIs) for investing in hospitals. And that should remain strong in the near to medium term. So if bought at attractive entry points, these could provide decent returns.
Do look at a small company called KMC Speciality Hospitals if you want to compare stuff with other hospitals
@Daksh_Agrawal My views on Nalco remain the same as that for other metals companies. Nothing new to add here.
@manoopatil Cement sector too remains largely a cyclical plays though its characteristics and stock performance of companies in the sector is better than typical cyclicals like paper, sugar, steel and metals etc.
I donât track lyka labs. But I would be wary of companies which are betting on what I call âin fashionâ molecules which are used for current illnesses like Covid. Amphotericin by itself is not a molecule which had big volumes. Its only with advent of mucormycosis that it gained limelight. How long this lasts needs to be seen. Same goes for remdesivir.
@Harsh2021 I do not track aurobindo pharma. In fact in current markets, very few pharma companies are bucking the trend and going up. Some names that immediately come to notice are the API guys like laurus, divis, and the big one Sun Pharma. But in a sector which does not have market fancy its often difficult to find big winners.
All of a sudden Iron ore futures have plunged, Steel and metal stocks have taken a beating, down 6-10%, media is claiming commodity is no more attractive. I am amazed , how the growth story changes in a matter of days. Indeed, commodity cycles are difficult to time.
However, given China clampdown on steel, i think Indian steel manufacturers have a long runway ahead of them.
I do not track dynamatic technologies fundamentally. A quick glance at results for last few years indicates that company has not done too much to cause too much excitement in terms of its results. I donât know what has changed all of a sudden for it. Against a quarterly operating profit of around 35-40 crores, it ends up paying interest of 15-20 crores and depreciation of around 20 crores every quarter. This causes very thin profit margins. If we could figure out something that has changed which could improve the above numbers, then it might make sense to look a the company. On charts it has run up a lot from 1500-1600 levels to 2100-2200 levels in past few trading sessions. Now it seems to be sideways since past six trading sessions. It can be interesting if it can break out on the upside. However with no idea about fundamental triggers I would prefer to avoid getting into these kind of names. With or without famous investors on board. Big names invested in a company should not cut much ice with us if we are looking at a company fundamentally. They might be having their own reasons.
The current market correction in small and midcaps has been talked about earlier in the thread. The large caps remained strong while the small and midcaps remained sideways/corrected.
Personally I had started reducing my exposure to the small and midcap space since past few weeks/days and reduced my exposure to this segment. And have been invested in select large caps where I felt there was ample liquidity and charts were good.
The free fall you mention in certain stocks probably was induced by excessive stock specific froth. Even the mention of capex in a company, or a twitter post by someone was usually enough to send the stock soaring for higher levels, without any change in business prospects for the company. Growth rates were projected for next 3 to 5 years in businesses where I think even the managements were not confident about next 12 to 18 months because of a lot of variables affecting their businesses. So some day the balloon had to deflate or burst. And thatâs what seems to be happening.
As mentioned before, I find it difficult to project the future price movements of metals and commodities. So unless my entry point is very attractive, or my stop loss is well defined, I try to avoid getting into cyclicals. While investing in cyclicals, it always makes sense to make your exit while the music is in full swing. Otherwise there will be stampede at the exit gate.
Few days back a list of prominent shareholders of SAIL was doing the rounds and that caused a lot of excitement in retail and other investors and fancy targets were bandied about. Ever since then the stock price has undergone a sharp cut. We have to remember that in these days of social media barrage, we will be bombarded with such messages, but we have to be careful not to be carried away by them.
I remember a lecture I attended which was by Howard Marks in Mumbai a few years back. One example he narrated stuck with me and has been a very key learning for me.
The anecdote goes like this: Howard said that his son came to him very excited and worked up one day with the news about something very exciting in a new car that had come to the market. He was very keen to buy the company. Howard asked him only one question. âWho doesnât know about it?â
When everyone knows about a piece of news, its no longer news or a surprise. Most of the price adjustment has been done by then. All those getting in post these kind of news are there for crumbs. The real juice is already out of it.
This is not to say that metals and iron ores and other stuff wonât go up. Its only to say that I donât feel too excited by these sectors at this stage.
I read your post and then tried using this funda on a few cyclical stocks and this is the result that I got.
data source - screener;
period used for analysis - Last 5years
Example-1 Vedanta,
Max PE - 14.7, date - 21st Jul 2017, price on date - 268
Min PE - 2.7, date - 2nd Apr 2020, price on date - 63
Example-2 L&T
Max PE - 31.2, date - 26th May 2017, price on date - 1191.73
Min PE - 9.3, date - 30th Oct 2020, price on date - 929.5
Example-3 Balrampur Chini
Max PE - 36.8, date - 10th Mar 2017, price on date - 150.45
Min PE - 2.5, date - 20th Jul 2018, price on date - 63.45
It seems, we may not be benefitted using this plan. Am i taking wrong examples? Or is Peter Lynch referring to some specific cyclical sectors.
Here is what Peter Lynch has to say about cyclicals. verbatim. (besides what he says, we have to use our own common sense. )
With most stocks, a low price/earnings ratio is regarded as a good thing, but not with the cyclicals. When the p/e ratios of cyclical companies are very low, itâs usually a sign that they are at the end of a prosperous interlude. Unwary investors are holding on to their cyclicals because business is still good and the companies continue to show high earnings, but this will soon change. Smart investors are already selling their shares to avoid the rush.
When a large crowd begins to sell a stock, the price can only go in one direction. When the price drops, the p/e ratio also drops, which to the uninitiated makes a cyclical look more attractive than before.can be an expensive misconception.
Soon the economy will falter, and the earnings of the cyclical will decline at breathtaking speed. As more investors head for the exits, the stock price will plummet. Buying a cyclical after several years of record earnings and when the p/e ratio has hit a low point is a proven method for losing half your money in a short period of time.
Conversely, a high p/e ratio, which with most stocks its regarded as a bad thing, may be good news for a cyclical. Often, it means that a company is passing through the worst of the doldrums, and soon its business will improve, the earnings will exceed the analystsâ expectations, and fund managers will start
buying the stock in earnest. Thus, the stock price will go up.
thanks hitesh bhai for elaborate reply. I believe I should look for more examples
maybe the scrips that i chose are not the appropriate ones. i will look into a bigger data set
There is no error on some of the data set
L&T is not commodity
Many times we have to understand the message than take it verbatim
Letâs take 2 industries, value and commodity
In a value industry say nestle, if the pe is cheap you buy as you expect it will eventually correct
In commodity industry you buy when the pe crosses from cheap to expensive
Letâs say median pe is 8, you buy when the pe being low is now crossing 8 and going into 9,10,11,12 or more. Itâs crossing from lower into higher so the market it expecting something
You sell when the reverse happens, when pe from high crosses into low
You also have to look at price and volume action. Usually the crossing from low will start with some Huge volumes
On the coming down side from high pe to low pe, usually the volume is hidden. You might get one huge volume day, it could be a bullish or bearish volume but most often smart money will sell into strength
Based on the pe points you took, you can only know after a quarter or more if the pe was high or low. There is no way to trade. If you are waiting to buy when pe is high or highest, how do you know at that point it is indeed the highest ?
Main reason why i am interested in this stock is that the latest annual report released 2 days back discloses mutual fund investments of around 400 crores.On top of that the working capital of 263 crores.As a result it is now trading at a deep discount to cash +WC.Also all comparable stocks like NILE,Ram Ratna Wires,Precision wires are also at higher P/E multiples.
Furthermore,the company has paid 117 percent of its profits last year and 33 percent of its profit this year as dividend.
The shareholding has also gone up in the past year by 2 percent to close to 75 percent.The only unknown seems to be itâs nigerian subsidiary,but the company has generated cash and invested in MFs,never diluted equity,promoters have increased shareholding and recently paid heavy dividends.
The dividend yield of the stock is 4.5 percent.
BUSINESS DETAILS:
Sponge iron and value added steel products comprising Cold Rolled Sheets used in interior and exterior panels of automobiles, buses and commercial vehicles, Galvanised Corrugated Sheets used in the rural housing sector and factory buildings and Galvanised Plain Sheets, used in the manufacture of containers and water tanks and Colour Coated (Pre-painted) Coils and Sheets for sale to construction, housing, consumer durable and other industries.
ďˇ Aluminium rolled products in coil and sheet form used in closures, bus bodies, flooring and general engineering
purposes and Colour Coated (Pre-painted) Coils and Sheets for manufacture of heat exchanger fins for air conditioners
in the HVAC sector and Aluminium alloy ingots used in the steel and automotive industry.
ďˇ Roll on Pilfer Proof (ROPP) Closures for liquor and pharmaceutical sectors, Crown Closures for beer and carbonated
soft drink sectors.
ďˇ Kraft, Brown and Fluting paper
Can you please share your views on the newly listed company - Glenmark Life Sciences and also your views on the API/CDMO business for next 4 years (especially around the China+1 theory)?
Few additional queries that I have:
How is Glenmark Pharma (GP, the parent company) managementâs credibility and performance, which can be extended to Glenmark Life Sciences (GLS)?
GLS derives 40% of its revenue from it parent GP. This will come down once the CDMO business picks up but do you see any risks?
As mentioned above, deriving a lot of business from parent, are there potential corp governance issues that we should worry about? (I couldnât find any such negative news about GP management from the past, they seem to be quite decent)
GPâs growth has stalled in the past 4 years. GLS doesnât operate on the end pharma market but pharma companies are their customers (as long as overall pharma industry does well, then itâs a de-risked model for GLS which is not the case for GP). Is that a fair assumption?
Valuation: GLS is a very recent listing, so perhaps too early to sayâŚbut the current valuations look quite cheap compared to peers. What could possibly be the reason?
Hello hitesh sir,
Could you give your view on prakash pipes?? Itâs into pvc pipes and was demerged from prakash industries. Its trading at considerable discount to other pvc pipes makers like prince pipes and supreme industries. But by digging deep I came to note that there are cbi and ED cases against promoters opened by the BJP govt. And rakesh jhunjhunwala is also invested in this. It would be really helpful if you give your view on pvc and packaging industries as a whole and where do prakash pipes stand.
Thanks in advance
Businesswise, Manaksia comes across as a commodity company. But if it holds liquid funds in value close to its market cap, then it does seem like a value buy. Rest of the points about promoter holding, div payout etc also seem attractive. But this has to be treated like a typical cigar butt style investment where you are buying at deep discount and when stock price reaches fair value, one can sell. I do not track it too closely to offer any concrete view.
@newone I donât track glenmark life sciences. @Vikky9995 I dont track prakash pipes. @ganesh_bastwadkar I dont track either tejas or sasken tech.
I think the API /CDMO sector is seeing initial problems in terms of rising KSM prices. For many companies this was possible to deal with as long as demand remained robust. But once the scenario changes even slightly for the worse, these things tend to start creating problems. We did see a lot of froth in the sector with stocks running up much beyond their fundamentals and are now correcting. Case in point that immediately comes to mind is Neuland labs. Stock price went up to a high of 2844 and now is well below those levels around 1600 or so. Thatâs a close to 40-50% downside from top. Many other stocks from the sector are also experiencing corrections from their frothy levels.
A barrage of research reports on the sector and companies within the sector was a first sign of trouble brewing. When everyone and their mother starts getting bullish on a sector, its time to be cautious. We have seen these things upmteen number of times in the past with pharma sector in 2015, NBFCs in 2018, etc.
I am a firm believer that once a sector loses its fancy, its time to look elsewhere. Rather than try to hunt for value in a sector that is out of favour, its much easier to pick winners from sectors that have strong market fancy. Currently it seems large caps, power sector, real estate etc seem to be sectors showing good relative strength.
In the current markets, it seems strong large caps are doing well, besides select small and midcaps. A lot of stocks from small and midcap space which earlier were showing strong rallies have corrected and or are consolidating. The good thing is that in a lot of these stocks there seems to be strong consolidation just above or around 200 dema, which usually is a good sign, provided that level is not conclusively broken.
These are times to be watchful in markets in terms of finding out stocks and sectors that are getting off the blocks first. These are likely to be the set of winners going ahead.
Big names invested in a company should not cut much ice with us if we are looking at a company fundamentally. They might be having their own reasons.