Praveen's Information Attic (Obervations, Lessons, Thoughts)

[praveen_potnuru]

Today I happened to look at the stock of SBI cards as there’s some news chatter around it (RBI changes risk weights for Unsecured lending). I could see that the stock is still trading @733 at close against IPO issue price of 755 Rs. Few things that are hampering the stock performance are

1. P/B is 6.3, which is expensive, but the growth is also good as the co. grew it’s book value at ~26% CAGR over past 3.4 years
2. Loss in spends market share from 19.1% to ~17.5%

Positives:

1. ROE is 25.7%
2. P/E is ~30x
3. Asset quality is decent. GNPA 2.43% and NNPA ~0.9%
4. Along with above metrics, short to medium term trigger would be cutting down of incentives by Credit Card cos (like removing lounge access or restricting it, More constrains on cashback (not allowed for offline spends, or constrains like that)
5. Technicals: 3 year low is ~680 levels, which may protect the downside

Considering above points the co. looks expensive in terms or P/B (but reasonably valued in terms of P/E, if someone considers this metric for evaluation).

Views on co:
Co has always looked highly valued, as there are good story/narratives around the future of Credit Card business in India and TINA (There Is No Alternative) factor. But, considering the historical valuation, the co is avaialblle at good price (since it’s close to historical lows), but not too attractive at current levels when compared with other alternatives avaialble.

Disc: No recommendation. No position at the moment, but open to buy/trade in future

Praveen

[Mudit.Kushalvardhan]

Valuation , business performance, ROE etc comes much later. First and foremost you should give enough attention to the business model and whether, business model is threatened by any other market factors and other alternative forces. Kodak was threatened not by any other photofilm company but by mobile phones. On similar lines, check if sbi cards is threatened by Fintech or some other means of unsecured credit made available.

[praveen_potnuru]

I have always found it difficult to average up in any stock. I generally buy a stock when it’s at attractive valuation. That means If a stock price is moving up, that means it’s not as attractive as my first buying, and so I couldn’t find comfort in averaging up. I was discussing this with few of the VPers in one of the meet, and I got following suggestiong
1) Read and understand about technicals. Learns from Vivek Mashrani and Hitesh
2) Put into practice the learnings
I feel l should test the waters with some part of my capital (with skin in the game) and depending on the outcome of my experiments I could gain confidence in averaging up in a stock. I think my problem is mostly psychological and I’d like to train my mind to find comfort in it

So, here I go. I have some fundamental view on MCX (with conservative valuation comapred to peers) that I’ve posted recently in MCX post
Link to the post here

Whatever gain i expected from the stock in 18 months, I’ve gained in 45 days itself. So, on valuation front MCX is not so attractive any more (after 40% up run in last 45 days). But instead of valuation factor, there’s momentum factor now. When I made the analysis, I compared the valuation with CAMS and CDSL and benchmark, but they have also gains handsomely in past 2 months. So, I expect even MCX to move up in tandem.

One can also see how BSE has performed over last 1 year, as it’s option volume is increasing well and gaining market share. Even MCX is going through somethign similar currently i.e. option volume growing at 35-40% YOY at a sustained rate. So, I expect MCX to rerate significantly from here

I’m averaging up in MCX and would like to track in future, how this performs in future. I consider this to be a new beginning and would help me learn to become a better investor (or momentum investor)

Disc: No reco by any means

Thank you
Praveen

[ChaitanyaC]

In addition to TA, supply and demand when the price is going up also helps.

To witness an idea, an investment, becoming profitable sooner than expected can be called as luck too, and if FA is the reason for such an investment, and when the investment duration is long, and the price has picked up some momentum, we can go along with the price, adding to the position slowly. One unfavorable scenario is consolidation when price moves up fast, and if price falls, we can stop and resume our journey along with the price.

Just some thoughts and I buy following the price too.

[praveen_potnuru]

@ChaitanyaC

if price falls, we can stop and resume our journey along with the price.

Do you mean the following?

1. we can stop out ( exit with stop-loss) or stop averaging?
2. and buy it back once we see the positive trend?

PS: I Understand the basics of trend following. But don’t have the stomach for it. I’m trying to dip my toes to test the waters and gain confidence. I believe having both fundamental and technical view on a scrip will give added advantage. Nad even 2% additonal returns will make significant difference in long term

Thanks
Praveen

[ChaitanyaC]

Yes, averaging up is what I meant. We buy, price moves up beyond our expectation, and there is some momentum seen, which could be prolonged or temporary, so if we see buying interest at higher prices than our initial purchase price or our average price, we can add to the position slowly, we can wait for the price to come down but it may not happen, and if price comes down, we can add more or stop and resume our buying as price goes back up again. There must have been a reason for the price to go high, some favorable change in the business. There could be no reason if it is a highly discussed stock in the social media, stock belonging to a sector in vogue, here maybe price goes up more than we had imagined, maybe here we can do some business checking. To give you an example, if ITC goes up by 20% in a month, then I guess there will be reasons which have not come out into public domain yet. If it happens with a small stock, I will have to careful.

We buy, price goes up, momentum is seen for days and weeks, this momentum could continue, there is demand, we can add, price keeps on going higher, demand continues, we slowly add, if price consolidates we can stop adding, if it falls, we can see the strength of the fall on the chart, if the fall is big, there could be reasons, we can come to a decision of selling or holding, or even adding.

A lot of small moving parts, but when we start with a stock, and create a process, it will be easy.

Stop loss in general is not applicable to investing, as FA is the basis of investing. While price can fall by 20% or 30% after we buy, we don’t necessarily have to take the loss, unless the reasons for such a loss are clear, something has happened with the company or the business, and it will take a lot of time for the price to come back, like a fraud, an arrest, a family dispute etc.

To understand a business is valuation difficult, following the price and buying, when FA is done, is not that difficult.

Just some broad thoughts, and I am still learning too, so there will be some misunderstanding on my part.

[praveen_potnuru]

Came across this intersting compilation posted by @rajivmehta19 on twitter today . Link to the tweet here

This is a list of stocks that didn’t given any return for x months. By looking at the list one can easily guess that the main reasons for this underperformance were 1) Expensive valuations at the starting of the period 2) Cycle high earnings 3) High starting valuation for lower growth rates (very high PEG)

My KTA is that one should always pay attention to the valuation one is paying. Have been a victim of my naivity in the past and the objective now is to avoid or lower the occurence of such mistakes.

Note: The 3 reasons I’ve mentioined for underperformance is not true for all the stocks in the list. For example, I don’t think HDFC bank was trading at exorbitant valuations (but high) to start with. The reason for under performance is slight derating and short term headwinds faced by the co. because of demerger. On the other had I feel that the reason for under performance in Kotak Bank was expensive valuation considering the ROE was/is <15% and the growth rates also were <15%. While many support the valuation saying that there are subsidaries that are unlisted, but that didn’t stop the scrip from under performing the index/market

Remember ? few months ago everyone was gung ho about Bearing companies, the people who bought at those Euphoric valuations bear the cost.

Disc: No reco to buy or sell. I still don’t find many of the above mentioned stocks worth buying, expect a few like banks and probably Reliance

[ChaitanyaC]

Even within the same sector, there could be differences between 2 companies for many reasons. So while such lists do give an idea about price, each business should be evaluated separately, and I don’t think anyone could always predict the future price movement. One point I can add is the size of the company, with or without multiple business segments, in instances like these, I guess, even 1 year is not long, for investors who are in for the long run.

For many, it does not feel good to see price not moving for years, Coal India took 7 years to reach the same price, Mayur Uniquoters took almost 4 years, Page Industries took 3 years. Stocks can trade in a range for years, and I think, investors who understand businesses very well don’t mind this aspect.

Just some thoughts.

[praveen_potnuru]

Agreed. But there are few caveats

1. Paying >6=50x P/E multiple for a co with steady state growth rate of single digits or even teens
2. Paying 4x P/B for a bank (Kotak) with 14% growth rate where as same quality is available at lower P/B growing at 17% or higher
   While investing in these highly valued cos the question one need to ask himself is " Is there a similar or better quality co available at reasonable valuation ?"
   In my view there are always reasonably valued cos with reasonable business prospects. It’s not very difficult to find.

Few things that people are tempted to do for several reasons but I Feel is not prudent

1. Buying Innerware cos (except Rupa) at 2.5-3x sales. They are very cyclical and the average ROE is not too high above cost of capital. Ex: Rupa, etc
2. Buying slow growing FMCG by paying 50-60x multiple. If one buys at these valuations, can’t expect higher returns than the growth rates. Even worse if the multiples derate. Ex: Marico, Dabur, etc.
3. Buying cos like pidilite at 80x or 100x
4. Buying IT cos growing in teens at 40x P/E, Ex: TCS, Infy in Fy22
5. Buying Pharma/chemicals at 60-100x P/E. Ex: Divis, Amines, etc.

One should always have some margin of safety while buying either in terms of lower PEG

If someone waits for 4-7 years without any return, He’d need >25% CAGR for next 6 or 3 years to get a decent CAGR return on par with index. In a market with more than 2000 stocks, one can avoid such drawdowns with a few hours of reserch in a month

Praveen

[newbie_007]

I am not sure how much sense that list makes. Is the list comparing apples to oranges? Different investors have different times of entry into a particular stock. A company that gives zero or negative returns to one investor could be a multi bagger for a different investor based on when they bought the stock of the company.

Also, I find that investing in a “good” company that hasn’t gone anywhere for a long period of time has yielded good returns as long as the company’s fundamentals hadn’t changed. A good example is Wonderla Holidays. I remember it was at 350 levels then it went nowhere for sometime and then went to 100 levels during covid and now is trading at 900 levels. Same goes for a company like NMDC although I have been in it for 10 years now for a little better than FD level returns. I think eventually it will pay just to stick to a good company for a long time.

One psychological mistake I have to constantly fight back, in my case, is that I want the stocks I invest in to go up sooner. However, in the markets, some stocks take 1 year and some take 10. Some stocks go up in 1 year by 1000% and then goes nowhere for 10 years following that and then might go up again by another 500%. If we don’t stick to a company long enough, we will never find a 100 bagger!

Companies build value by reinvesting internally or in other businesses. Markets take their own time to give a correct valuation (or inflated valuation). As the accomplished value investors have shown us, we just have to keep searching for dollars available for cents. Our entry price matters a lot but so does averaging. Many times, we buy into a stock and stop buying when the same stock becomes a better deal.

Coming back to the list, most of the companies in the above list are multi baggers and market leaders. Looks like a good list for stock picking. Sometimes it seems like we can find value exactly in these type of stocks because they seem to be going nowhere.

[Mudit.Kushalvardhan]

Just curious, since u r invested from 10 years in NMDC, why your handle has the name newbie? You seem to be a seasoned investor.

[newbie_007]

An author, I don’t remember his name now, said that the more he read/learned, more he realised how little he knew or will ever be able to learn. So I will always be a newbie, making new mistakes, learning from them. It’s ok though. It’s fun to keep learning from each other and relish the eureka moments. Isn’t it similar to what a student feels when he or she figures out an answer to a relatively hard problem on their own? The student doesn’t stop there and think they know everything. They just move on to the next interesting problem to solve.

[praveen_potnuru]

Hello Folks
I’ve posted about Averaging up in MCX on 19th Nov. I’m still going to ride the trend.
Today I’d like to make a comparison between two Cos in both technicals (mostly but some Funda as well)
Let’s look at charts of Angel One and MCX over past few days

Angel One:

1. Over Last 8 days, I see there are 2 candles (marked with arrows) where I could see 2 candles with wick on top, which indicates that the price rise did not sustain
2. Even though yesterday there was big green candle (on Monthly business update release), but there’s no follow up and today the stock gave away some of the returns
3. By looking at the Volumes, we can see that the Green candles have higher volumes, which is a positive sign technically
4. On Funda side, the co. is trading at PE of ~25.3. The stock made a peak in Apr 2022 at 26.9 PE. Which means that the co is close to peak valuation it achieved last year
   
   

MCX:

1. As per my interpretation, the stock is still not seeing much pressure in continuing the uptrend even though the momentum is not as much as it was 2 months ago
2. On Funda side, the stock is trading at 40x P/E FY25 estiamted earning (assuming 424 cr PAT for FY25). Though it looks over valued, but considering that it’s a monopoly business it may not be the peak (not undervalued either). Also CAMS and CDSL trade at >45x, 62x TTM P/E and have infirior growth compared to MCX

So, from my Funda view Angel one is close to it’s peak and no opinion on MCX funda wise.
Coming to Technical view Both are making new highs. But Angel one shows signs of exhaustion but not MCX.
MCX is clearly stronger on chart compared to Angel One. My view is that MCX is stronger and should outperform over next few months.

Why and What I’m doing:

1. I’m writing down my thoughts in Technofunda and would assess in future how my views played out. This would give me confidence and also help learn few things
2. SInce I’m a beginner in TechnoFunda, comparing 2 stocks from my tracking universe (also in PF) is a better exercise than comparing with TechnoFunda picks of other people.

Please feel free to share views on how you’d interpret these charts and earnings. Let’s learn from each other

Disc: No reco to buy or sell. Currently holding both Angel One and MCX

[praveen_potnuru]

Few Thoughts regd the portfolio and expectations from current market

1. Considering the Interest rate cuts to happen in US, FII flows into indian market should improve and I see the Market and my Portfolio to do well even though current valuations in the market are not too attractive (index wise). While at individual stock wise
2. Most importantly Interest rate cuts should have very positive effect on IT stokcs and the rally has started. I feel that cos like Infy, Mastek, Mphasis, TCS giving >25% returns in next 1 year. This opportunity is tempting me but I already these stocks are trading at >20,25x valuation and so not cheap by any means. For that reason I’m refraining from selling some existing PF stocks to move into IT. My only existing IT investment is CIgniti tech. And Moldtek Technologies is into Construction activity in US (some kind of ER&D, but of inferior quality). I’ll see in future how this plays out
3. K solves is an IT co which is trading at 37x FY24E which is too expensive. But considering the US interest rate scenario and the growth being > 40% it may give decent returns

Disc: No reco to buy or cell

Praveen

[Mudit.Kushalvardhan]

What are your views on LTI-Mindtree and Tata Elxsi considering rate cuts by FED?

[praveen_potnuru]

I think they’re good cos. But I don’t bring myself to buy them at these valuations. They are valuations are reasonable but not cheap enough for me to buy.
I’d rather invest in my existing portfolio cos (portfolio here

Disc: No reco buy or sell

[goldcasting2005]

Fundamentals for Angel broking are definatly going to improve as we are in bull market rally as well as pre election rally. Here all brokering and wealth managment companies are going to show high performance. Before that to wait for quarterly results is best as technicals changes immediately . Now coming to fundamentals companys financing business is showing improvment every quarter so one must wait for quarterly results

[praveen_potnuru]

True brother.
You’re absolutely rights and It seems I’m on the wrong side earlier. The annualized EPS of Q2FY24 is ~145 rs and so the co is trading at 22-23x P/E which is reasonable and not expensive. Plus growth is there and the stock just broke out of the recent consolidation near highs. Currently have just 2.6% of my PF in this co at the moment and should’ve refrained from selling.

It’s one of my common mistakes to sell a stock while it’s reasonably valued and I’m/I would trying/try to improve this in future.

Thanks for sharing your views
Praveen

[praveen_potnuru]

I never had much to worry about in terms of significant promoter selling until recently.
Recently promoter started significant selling for two of my portfolio comparnies (PF here). Promoters of both Cigniti Tech and MTAR tech are sellng significant quantities in open market.

Personally feel Cigniti is cheaply valued and I see no significant downside unless something unexpected happens and the promoter sale is significant but not too huge. So, I didn’t make any changes to my allocation to this co and the postion size is just under 6%.

Coming to MTAR, the co is richly valued as justified by the growth they’ve delvered over past few years since listing and huge addressable markets with so many deals under discussion phases. However the promoter has been selling huge quantities which make me question about the insider information and possible weak earnings/ reduction in guidance for next few quarters of FY25. So, I’ve reduced my position size slightly as I see equally impressive opportunities elsewhere. I may sell more once I get clarity aftter Q3 concall

[praveen_potnuru]

Valuation, the mystery:
I have always found it (still does) to understand how much valuation a co. deserves. Even though I believe P/E is not always true measure of valuation of any co, I’ll consider P/E based on normalized earnings to the measure in the current write up.

Question to the reader:
Please try to answer these Qs for yourself to follow the post better. Here for the answer for any Q needs to be normalized P/E in a band (20x-30x P/E band)

1. Let’s say there’s a co that grows at 10-11% CAGR with decent stability in margin and growth. How much P/E does it deserve ?
2. Let’s say there’s a co that grows at 10-11% CAGR with decent stability in margin and growth. But always lags the industry growth. How much P/E does it deserve ?
3. Let’s say there’s a co that grows at 10-11% CAGR with decent stability in margin and growth. In addition to be this it distributes 4% yield (buyback and dividend included. )But always lags the industry growth. How much P/E does it deserve ?

The I was referring to is wipro ltd. It has traded in a P/E band of 17.5x to 33x during the cycle of the industry.

My personal view: The P/E of 33x is insane for this co and P/E of 17-18x is fair (not cheap). However, there might be few reasons why it trades as 2-2.5x PEG (more in upcycle).

1. Stable and predictable cashflows
2. Large cap co with proven track record of 3 decades
3. Consistent distribution of wealth to shareholders in terms of Dividend and buyback

Question to the reader:

1. Let’s say there’s a co that grows at 20-25% CAGR with decent stability in margin and growth. How much P/E does it deserve ?
2. Let’s say there’s a co that grows at 20-25% CAGR with decent stability in margin and growth. Also leader in the industry in terms of growth. How much P/E does it deserve ?
3. Let’s say there’s a co that grows at 20-25% CAGR with decent stability in margin and growth. In addition to be this it distributes 3% yield (buyback and dividend included. ) and leads the industry growth. How much P/E does it deserve ?

Should the P/E band be definitely higher than the first co on normalized earnings basis??

The I was referring to is angel one. It has traded in a P/E band of 11x to 36x during last 3 years.

My Personal view: For a co growing at 20-25% CAGR (Inf act Angel one grew faster) 36x P/E may Not fairly valued. Not expensive either. But this co has traded at 11x to 36x P/E band for whether it’s right or not. The reason could be why this co trades at 0.5-1.5x PEG

1. Broking industry (at least the incumbents) has always been cyclical
   I can’t find many reasons for this undervaluation in this co. But at 10.5x P/E it’s criminal undervaluation for a co growing consistently. The optoinalities are a bonus.

Why did ANGELONE trade at 10.5x P/E at bottom and Wipro trade at 17x P/E. The reasons I’ve mentioned earlier could be part of the answer. But it can’t explain the whole thing. 10.5x P/E is surpirising under valuation but Mr. market decides what’s correct and what’s not. We make better money by predicting what Mr. Market thinks or how Mr. Market has behaved in the past

A stock or co could be undervalued/ over valued by just looking at the numbers ( before I revealed the name of the co). There is higher chances for us to go wrong when we do this.

The solution ?

1. Looking at the historical valuation band. It works well for established players. But not necessarily for the cos with very short history (Would have helped with WIPRO Ltd)
2. Consider all the available details in hand and decide for your self how much valuation a co deserves (would’ve helped with ANGELONE)

Solution 2 is difficult for new entrant in the market (like me). But sometimes we know we can’t be absurdly wrong at a particular price
Solution 1 could be a solution for some cos. But derating is a bth. Investor could’ve gone absurdly wrong by following solution 1 and invested in Coffee Can kind of stock in last 5 years.

Will try to write a follow up of this post, If I find good hypothesis/idea worth writing down for my self and fellow VPers.

Thanks for reading through

Praveen

Disc: Hold both the mentioned cos (although the weight of Wipro Ltd in insignificant for a reason)