Then why is this coffee can investing and not just investing? Why attach a tag to it? And how is it different from what you are trying to do in your normal portfolio?
About HDFC bank, I don’t consider it to be a coffee can (for that matter any company). The idea of investing for me is to have a hypothesis which is different from what’s in the price, and constantly reevaluate based on new data.
This isn’t true, lupin started investing in 2016, cadila in 2008 (except that they don’t plan to sell to US), Reddy in 2016. So competition is coming. For all the hype around biosimilars, price erosion in US is around 40% for the first player (link). For context this number is 62% for the first generic player (video). In UK (&Europe in general) biosimilars price erosion is in the 60% range i.e. closer to generics (link, also covered somewhere in biocon thread). In India, this number is more like 70% (this is based on Cadila’s commentary saying that emerging markets are super competitive price wise; another data point is even biocon complains that they do not want to sell their biosimilars in India due to bad pricing). It will be interesting to see if Biocon can actually pivot to the next wave of biosimilars which starts in 2023. And if you plan on checking a pharma company once a year, good luck with FDA inspections.
Valuations are a function of market mood. I remember that repco home used to get 6x P/b in 2017. Focusing on business performance helps me stay more rational than what holding company discount market is currently giving. The hdfc folks are not stupid, they have always wanted to do a reverse merger with hdfc bank, but rbi doesn’t approve. At some point in the next decade hdfc will either be demerged or reverse merged with hdfc bank. Oh and by the way, the PB of almost every nbfc has come down from 2017 level.
I personally think that the last few years of high valuations have distorted people’s vision of financials. Lending is a commodity business, there will always be people who go for convenience but larger loans will always be a function of interest costs. Again I can be wrong in my assessment of lending financials, atleast globally it’s true.
About power grid, look at growth in book value (from ~16’000 cr. in FY10 to ~64’000 cr. in FY20). Utilities are valued according to their book (paper on utility valuations) and they have compounded their book by 15% over the last decade. At the same time, sales, profits and CFO has increased by >15% in the last decade. Also what are you talking about in terms of reinvestment? Utilities have the highest reinvestment opportunities, I think you should first try and understand how utilities (be it gas, power, road) actually work. A 5% electricity demand growth doesn’t mean a 5% higher demand for towers carrying power. Just like an annual growth of 5% in vehicles sold doesn’t mean we just need 5% more road construction. That’s because the average density of grid network in India is still low as we are not fully electrified as a country. The way it works for power grid companies is that they first have a capex which is later commissioned which is when revenue starts getting recognised as power flows through the grids. Power grid did a capex of ~1 lakh cr. in the last 5 years and has plans to do about 1.6 lakh cr. until FY22. For context, a 1.6 lakh cr. CAPEX is to add 63’000 ckm transmission lines which is ~40% of its current network (this is growth CAPEX and not maintenance CAPEX). Some part of revenues have been recognised and some part will be recognised as grids get commissioned. Just for context, revenues are 38’000 cr. as on date, so a doubling of revenue is easily feasible in the next 7 years, and if there is no subsequent capex (which will probably not be the case), the incremental revenues go to shareholders as dividend (debt/equity will be 0.7 as per regulatory guidelines). Also, other growth drivers are their consultancy business, cross-border transmission network and telecom services vertical (called powertel).
Market valued them at 4-6x book in the last decade which was wrong. Its probably much fairer now at 1.5x P/B (12-15% growth in book at 16% ROE)
I rate power grid a little bit higher because they are the carriers and are independent of the type of power supply. However government can do things which are not in the best interest of shareholders, recently government asked power grid to give a 1000 cr corona rebate to discoms. The AGR case has luckily been settled, otherwise power grid could have suffered really badly. Government interference is something to be watchful about. However, government has also started realizing that they can be smarter and are planning to list assets of power grid as invits. This should be good for shareholders as it will lead to value unlock. Let’s see if government can execute. About NHPC, my buy limit order is at 15. That guarantees me a 10% yield and I will be happy to own NHPC instead of FDs.