Institutional Hands: Examining their role in sustainability of enhanced valuation!

Investing Strategies
21

Dear Mallikarjun,

Each one of us has the potential to reach where Mr D & Mr M are. I truly believe that.

The only caveat - you have to first truly make people like them your Twin-Gurus if you like. Mr D gives us the vision where to reach and Mr M shows us how to develop the MIssion and almost lays out the Road-Map for us. I have made them my Gurus - that has helped me progress every year.

What they so generously share - is Distilled Wisdom - You don’t find these in books or gyan, do you? So if you truly accept them as your Gurus - you got to live by every tenet they ask you to. Take their words very very seriously - and act on those - give your 100% to it - to the best of your ability - you will see from nowhere - you have extra legs and extra hands, boundless energy for anything you set yourself up to achieve.

But how many of us - can honestly say - they have done that - Lived Capital Allocation Framework by the T - every single waking hour - and that’s only the beginning we made in early 2011 - see where we are going :slight_smile:

Do not wait for Certificates form anybody - doesn’t matter - Living by their Tenets will!

22

Hi Donald,

I would like to discuss a stock in which corporate action(stock split)has recently taken place. I am talking about Kaveri Seeds, one of VP members favourite. Have a look at the chart given below:

Total Share
Out. (lakhs)

Free Float
(lakhs)

FF (%)

DII
Hol. (%)

FII
Hol. (%)

No. of
DII

No. of
FII

Market Cap
(Rs. Crore)

Dividend/
Bonus/Split

P/E

Mcap/Sales

FY10

Jun

137.02

53.47

39.02

14.77

1.22

9

2

256.47

10.30

2.08

Sep

137.02

51.91

37.89

14.32

4.90

5

2

348.24

Final
Div Rs.2

12.75

2.24

Dec

137.02

50.62

37.86

13.73

4.90

4

2

330.76

11.71

2.00

Mar

137.02

49.5

36.69

13.88

4.97

6

2

388.04

13.21

2.31

FY11

Jun

137.02

49.73

36.29

13.73

0.21

6

1

390.44

13.44

2.38

Sep

137.02

49.73

36.29

13.96

0.24

7

2

457.46

Final
Div Rs.2

12.33

2.16

Dec

137.02

49.69

36.26

13.74

0.76

7

3

494.86

12.98

2.24

Mar

137.02

49.69

36.26

13.32

1.89

7

4

445.57

11.83

1.93

FY12

Jun

137.02

49.02

35.78

12.91

2.69

8

7

534.80

12.59

2.28

Sep

137.02

49.02

35.77

10.09

3.72

8

8

584.36

Final
Div Rs.2.5

9.98

1.79

Dec

137.02

48.49

35.39

10.96

3.41

12

7

613.92

10.23

1.81

Mar

137.02

47.89

34.95

10.81

3.43

10

7

726.24

12.04

2.08

FY13

Jun

137.02

47.89

34.95

10.62

3.64

9

9

1131.60

19.48

3.04

Sep

137.02

47.89

34.95

10.61

3.67

8

15

1432.54

Final
Div Rs.4

12.80

2.34

Dec

137.02

48.02

35.04

10.60

5.00

9

26

1746.13

15.40

2.79

Mar

137.02

48.03

35.05

10.38

6.19

10

35

1646.19

Int.
Div Rs.8

13.55

2.43

FY14

Jun

137.48

48.49

35.27

10.44

7.51

10

38

2174.59

16.74

3.06

Sep

137.48

49.99

36.36

10.06

8.50

13

42

2003.29

Final
Div Rs.8

10.48

2.07

Dec

137.48

49.99

36.36

10.47

9.26

18

48

2465.22

12.74

2.72

Stock
Split

687.40

3771.1 (as on Feb 28 2014)

Stock Split
(FV: 10 to 2)
Interim Dividend: 2.40

17.20

3.63

Note: The price of the stock has been taken as the last day of that month (eg September 30 for Sep). The December quarter factors results upto September quarter.
We all know about Kaveri's story and hence I wont be repeating it. I want you to focus on two things:
1. FII holding has increased from 1.22% ason June 30, 2010 to 9.26% as on December 31, 2013. What is more interesting is the no of FII's holding the stock. This has increased from 2 as June 30, 2010 to 48 as on December 31, 2013. There are some interesting FII's invested in the company likeOppenheimer Funds and HSBC (Mauritius). Let's not forget IDFC Premier Equity (Kenneth Andrade, Fund Manager has made huge money in other stocks like Page, Blue Dart, TTK Prestige) who has been holding the stocks since its IPO. DII holding in the stock has always been pretty high. Surprisingly, DII's have been reducing their holding in the company which is what Mr. M was stating (selling the best performing stocks bcoz of redemption pressure).
2. The second thing I want to highlight is the increasing trend of dividends (interim dividend being paid for the last two years) and stock split which has happened recently. The stock has historically traded in the range of 10 to 14. The liquidity of the stock has increased significantly and the stock's P/E has also started increasing (its too early to say this with confidence). I think we need to watch out for the stock and if the results for the June quarter of FY15 turn out to be good, there could be interesting times ahead.
23

Ankit,I am not sure if you intended the table to be this way.As I had intimidated,you should use the ‘Insert Table’ option available at VP.In the same line as ‘Bold/Italics’,etc.Good work,though :slight_smile:

24

Their wisdom and nurturing us is everything…Thanku Donald… Will try to tighten my loose ends…

Regards

mallikarjun

25

Hi,

I have not been able to read a lot of posts on this forum but putting my thoughts on impact of institutional hands.

Everyone at VP has been rewarded by 100-400 % returns in stocks like Mayur, Ajanta Pharma, Kaveri and so on because of the institutional hand. So in humility one should be thankful to the institutions to have spotted these gems late or taken the guts to jump in at higher prices also.

The process of buying a stock in a MF and Insurance company is not that simple if its a small cap company. Lot of internal processes before a decent stake is bought.

Also i see the board was not functional in the 2005-2009 where a lot of this Institutional Investors got duped in midcap/smallcap stocks. So here there is no legacy bias in play and analysis is purely on fundamentals.

Two things matter for an institutional investor Size of Stake and Convenience of Exit.

In a company of 200 cr with 10 cr available float an investor may jump in but is there an exit available in need ? A shilpa medicare trades around 10k shares at times.

Also one needs to realize the reasons for the solid run up in Mayur/Ajanta is not because of the inherent fundamentals of the company but the lack of relative opportunities.

In the current economy a lot of high capital businesses , leveraged businesses are in not a good spot. Given the tough economic scenario people are not interested in conglomerates as you never know which business will take a hit !!

( Just Dial at a market cap higher than Godrej Inds )

I had mentioned on Mayur Uniquoters when the management had come down to Mumbai in the thread. Post that the stock might be up a 100% or more. Shows the impact of institutional hand. I would say for all of us we should term the institutional hand as Hand of God :slight_smile: ( VST tillers , Atul Auto saw insti interest after many would have partially or totally booked out and the stocks are not dipping a bit )

I do see a lot of people with concentraded holdings in many of the quality stocks discussed. As a cautious investor all of you need to ask is when will this Hand of God stop coming in.

My take is there can be two scenarios when it can change.

the day when economy turns around to the positive , interest rate turns and companies with debt and huge size will have a better expected rate of return. We might see a reduced participation in stocks. . This might not be a period of a stock price fall in quality companies of VP but a sideways period where these stocks stay at the same price for 6 mths to 2 years.

The day when Economy takes a hit ( aka 2008 ) then it would not matter for a insti investor to dump a 1 % holding. Also with most of investors being pretty much invested or risk averse behavior will stop providing a buying support to stock prices.

Alternatively we may even discuss on how luck was also a factor in the tremendous price rise in last couple of years :wink: .

Cheers,

Nooresh

1 Like
26

Sorry, I was a bit indisposed most of this week - and couldn’t participate.

Many thanks to Utkarsh, Sagar, Ankit for presenting hard data. All cases so far have only re-inforced our hypothesis. Will be good to see someone posting similar data on Mayur, Supreme and TTK - so we can have a decent sample size and bring this discussion to a logical conclusion :slight_smile:

@ Nooresh - Agree completely on

a) that we should be thankful that Institutional hands exist. That they have their limitations :slight_smile: because of which we retail investors have somewhat of an edge!. At the same time we believe forums like ValuePickr and numerous quality blogs play a significant role in sharing the early in-depth work in quality small businesses - that helps TRANSFER some of the CONVICTION in these businesses to the larger investment community. We met Manish Gunwani head ICICI Prudential MF recently at a Value Investor meet in Chennai - he took one look at our card and said " I know you guys, I have visited your website. You are the guys who picked Astral"!! That was a memorable moment for us.

b) what happens when the economy turns around - again completely agree with you. The sheen will be off most of these stocks that have given us dream runs in last 4 years- since most of these have run up so fast so soon… agree that these will probably consolidate for 1-2 years. Meanwhile Mr Market will start providing many more opportunities then (unlike now). It’s time for all of us to think hard on this ; high time we started work on contrarian bets - neglected by the market so far - where rebound may be the fastest.

Quality businesses in Financials and Capital Goods space is one area.

Nooresh - do you have any sectors or favourites - you suggest us to start focusing on, NOW?

27

Great to know VP making waves. :slight_smile:
Call me crazy,but the move we saw in Tata Elxsi almost immediately after Hitesh bhai started a thread,made me think that some ‘big guys’ maybe snooping around & having a look here.And why not? The quality of discussions is very good here,its a trustable website & old enough now.High time VP got its due! Personally speaking,I am able to think more rationally now about a stock I wish to invest in…the results have certainly been good.Recently,doing the ‘digging’ about Kajaria,helped me overcome another of my mindblocks. :slight_smile:
There are two financial cos. which I feel can do very well & need more digging: Bajaj Finance,Federal Bank.
Hope to see you guys on some ‘Investothon’ or a ‘Researchers meet’ on CNBC/ET Now soon :wink:

28

@Nooresh/Donald,

May be a naive question,incase of “when the economy turns around”, have we reckoned the fact that the retail investors who have been sitting on the fence will jump in and start buying the value stocks?

Also, Would not those mutual funds who turned blind eye on small and mid cap stocks all these years (from 2011 till 2013 end) start investing in these stocks?

One example: SBI Small cap Fund invested in Mayur Uniquoters recently.

29

Here’s the updated trends for Mayur Uniquoters. Refer attached excel.

Going by the emerging patterns, the ride seems to have just began !!!

**Would be interesting is someone can supply data for Mayur Uniqouters.**I think it underwent similar and at the current stage higher re rating than Ajanta. Probably due to higher dividend payout and calibrated expansions by management.

Mayur-Uni.xlsx (13.1 KB)

30

thanks rudra.

the TTM PE column needs to be reworked.

I think there’s an error due to bonus related adjustments which may not have been made.

Mayur currently has trailing 12 month net profit at around 52 crores and market cap of 1000 crores. Thats more than 19 PE.

regards

hitesh.

31

Exactly. Even I feel that the ride just began. Though it is not a very long-term story It is a superb investment for next 3-4 years. I bought it. and Buying it.

32

Hello Hitesh bhai,

The historic prices are split and bonus adjusted, hence the market cap at historic prices are calculated based on current shares outstanding, I have cross verified the data with couple of sources and it looks fine to me. Kindly point out any specific glitches.

To illustrate,

**_Sep-11 Closing prices:
_**Un-adjusted price : Rs 336 Shares OS: 54.13L Market Cap: 182 Cr
Adjusted price: Rs 84 Shares O/S: 216.53L Market Cap: 182 Cr

Quarterly figures and TTM earning are sourced from Screener.in (http://www.screener.in/company/?q=522249)

Since complete March quarter data is not available, I have updated till Dec-2013. Given the forthcoming 1:1 bonus, I expect further spurt in FII and DII activities with enhanced liquidity, will be good to revisit this again after a couple of quarters.

33

ok. rudra got your point.

The data is till dec 13 qtr. I was considering current valuations.

34

Think this thread has served its purpose: Alerting us on how to play/ride quality emerging businesses once we have a good position in.

To bring everyone on the same page (one of the most difficult jobs), let me summarise as below:

Stage For a Quality Emerging Business you are invested in Action
0. Without doubt - Corporate Actions like Increased Dividends and liquidity enhancing measures like Stock Splits/Bonuses unlock Value Creation opporotunities (Our Guru Buffett's comments need to be seen in the context of mature discovered businesses) DO NOT UNDERESTIMATE
THE POWER OF
......
1. Value gets created by normal business performance -25% CAGR business performance over 2-3 years usually translates into 25% Stock Performance or doubling within 3 years. KEEP FAITH;
WAIT FOR CORPORATE ACTIONS
2. Corporate Actions - increased Dividends, Stock Split and/or Bonus follows. This usually takes upwards of 2 years for the first concrete actions on this front BE HAPPY;
WAIT FOR THE first FII's PARTICIPATION;
DO NOT EXIT
3. Some more Value Creation - repeat bonus or splits create more liquidity. Some more FIIs participate. This can happen within a year of 2 above TIME TO BASK;
CHECK VALUATIONS;
BOOK PARTIAL PROFITS
4. Business continues to grow at 20-25%; Business is well-discovered; Mr Market starts discounting 10 years into the future; Valuations exceed fair/potential PE Bands DO NOT FULLY EXIT;
REMAIN PARTIALLY INVESTED;
WHO KNOWS:)

Do not get greedy and keep jumping around for the next big multibagger. Do your homework well on the business you like, take good positions, track well, keep faith & sit tight. DO NOT GIVE AWAY YOUR EARLY OWNERSHIP in the business for normal 2-3x returns.

It's the easiest thing to do - sitting tight in a business you understand well and are tracking well; it becomes easier & easier after couple of years; but you need to do the job with integrity & honesty.

The ValuePickr journey of last 4 years - this is the biggest lesson - staying put in Quality businesses. Does not need too much of running around (what we equate as work) if we do a pretty good job the first time round.

As long as you have selected the business after good thought & diligence and the business keeps performing and growing at 25%+ CAGR, Valuations will keep rewarding you handsomely - keep that faith :). Keep that faith also in ValuePickr Community and add value in your own small way to support the communities goals - making everyone better-informed investors. In 90%+ cases the community will ALERT you in time if things are not going as expected - as per our Initial Investment Hypothesis. This is the job ValuePickr has taken upon itself - you might have seen - we are trying to do the job with full integrity and honesty, at least for the ValuePickr Portfolio picks.

Ajanta, Astral, Mayur, Atul Auto (is a quiet 10 bagger) has shown us the way. So has Kaveri Seed. Keep faith that a PolyMed and a PI Industries and a Shilpa Medicare will also reward you equally handsomely one day (they already have haven't they) - we just need to make sure at every stage that -

a) 25% CAGR in business performance is still possible for next 2-3 years

b) 25% in stock performance is still possible in next 2-3 years (that Valuations haven't become too rich)

If the 2 conditions are met, keep that faith, keep tracking well, and DO NOT QUIT prematurely. Some of us have great talent - we are very nimble - to jump from one money-making opportunity to the next - they have that amazing ability - but VP Portfolio must have shown - that there is an even better and easier (?) way!!



It's important to do the initial homework solid. Give 100% there - allow no laxity in that phase. Make sure you are not missing anything - Is your framework rigorous enough? Slot your business in the right category (A, A+, B). Know why you are investing in that business - are you able to explain that in 2 paras to your wife or friend. That your selected business's competitive advantage and hence performance is sustainable for next 2-3 years - present the hypothesis and sustainability data and info points vetted by every senior you know - pester them to show up any holes in your investment hypothesis, and/or endorse.

If something passes the rigorous vetting and you have made your investment, then it becomes more important to enjoy the process - not to be feverish about the outcome - i.e. constantly analysing and re-analysing based on newsflow. Be aware that a good businesses' fortunes don't change every week or month or even a quarter. In my experience doing a thorough re-visit is necessary only once in 6 months! After a couple of years familiarity once a year look is enough :). Be contented, relax :). Things will happen in due course. Any exciting new development that fellow-investors throw at you - I am fond of taking that as a Bonus - as this wasn't factored in in my 25% CAGR visibility.

As for any bad news, rest assured the ValuePickr Community will keep doing its job. Evaluate and Alert you fast, hopefully in time - remember we have an Edge over Mr Market in these businesses. Help uskeep it that way by doing your own bit in adding value to the community's goals!



1 Like
35

Would request folks like Utkarsh Patel to summarise for the community - what stage are PI, PolyMed, Kaveri, Shilpa Medicare and any other quality emerging business in your radar, so readers can have a more concrete guide on how to keep riding these excellent businesses.

Again to bring everyone on the same page - that way discussion quality improves drastically. It works becasue if we CAN bring everyone on the same page - it usually means we have done the job well - we understand what we are doing/saying.

Cheers

1 Like
36

I will try to classify some stocks I track closely according to above classification.

Canfin Homes seems to be at Stage 1.

I think stocks like polymed, PI, shilpa etc are at Stage 2 according to above table. some more way to go after some sideways action. Even Repco seems to be at stage 2.

Symphony seems to be at Stage 3 or somewhere about there. Even Mayur and Astral seem to be at Stage 3.

Some clearcut place is occupied by stocks like Page, Gruh finance etc. And thats Stage 4.

Ajanta seems to be somewhere between Stage 2 and 3.

Key remains to stay put with great business once we can latch on to it.

37

Wonderful summary post, Donald! Its a great road map for the small/mid cap investing.

38

@Donald: Sorry for getting in late here.

Be contented, relax:

One of the thinking that’s pretty hard to get around in the head is near term opportunity cost.Once we are in great business with good visibility and lower on valuation levels, it’s easier to hold even if stock under performs the market for a year or so. What’s tricky is when business with high quality are priced near perfection and discounted good results a few years ahead. This is when it’s tough due to constant flux of new and better opportunities every now and then and makes it difficult to stay put in some A/A+ category business at higher valuations. I have always been surprised with how quickly Ajanta becomes cheap from seemingly expensive valuation just due to its super-normal growth. I try to take it as a bench mark while making up my mind on why to stay put in the quality businesses at cost of near term misses. I’m slowly psychologically letting go of the feeling of missing the bus, because one will always miss some of them.Your differentiation in terms of possibility of achieving 25%+ CAGR for 3 years certainly seems like a good point to keep in check.

I guess the quickest CAGR risk adjusted returns (risk here being not the desired unfolding of the story) are made in the period when a business transits from stage 2 to stage 3. The transition is here can be pretty quick as one can see in Mayur.VP’s analysis on identifying the correct linchpinch points (market cap barriers) for differentiated business from FII’s perspective (as devised in thread) can help us propel returns significantly in the shorter term, even if one has missed the bus during transition from stage 0 to stage 2.

Regarding differentiation, I agree with Hitesh bhai categorisation.

Ajanta - Transition 2-3. It has been in this range for a while, thanks to its ever increasing earnings which makes it cheap again

Alembic Pharma - Stage 3. Sort of stabilised EBITDA margins make it a stage 3, but still with lot of latent potential.

KSCL - Stage 2. Perceptible Opportunity size is large.

Symphony- Stage 3. The ability to materialise disproportionate gain by tapping the outsourcing model with little incremental capitalin event of highly probable shift coming from unorganised to organised segment and segment growth itself .

1 Like
39

Hi Utkarsh,

You are an amazing guy. The investing-thinking maturity that you display at just 20+ is exemplary. We have very high hopes of you. Just where are you based? - I must make a mental note to meet you next when I am around your city :slight_smile:

You will figure these things out yourself pretty soon. I have only 1 thing to add"

The simple advice I got from Mr D. You don’t need the biggest multibaggers. even a 2x is enough - provided you have allocated enough capital to your highest conviction. Yes you can work at a lot harder at building your own conviction - join us in some of our field-work, Management Q&A when you can and develop the habit of keeping an eye out for local scuttlebutt. Most of us keep forgetting the old adage - “A bird in hand is worth 2 in the bush”! As you mentioned, there will always be misses - we must get used to this fact of life sooner than later, meanwhile maximise what you have, and help maximise this amazing community’s collaborative efforts first!

Re: developing an eye for local scuttlebutt

I keep seeing Ayush & Hitesh (in different cities) never tire of pointing out - “arre yaar Atul auto bade deekh rahe hain” or Astral ke ads to chha gaye itne ad pehle nahi dikhte the" (which are businesses we own and one can be sharp at noticing things on the ground) but they are equally alert to Real-Estate posters all over or Gold Loan schemes - whatever is on the ground - they see it - almost in unison :)…that’s the beauty of it when you get tuned to that grounds-up style!

40

Hi Donald,

Would love a meet-up with seniors and contribute as much as I can.Got done with engineering yesterday, a month in Surat, then headed to MDI,Gurgaon for next 2 years.

Cheers.