Balkrishna, Not only their markets are cyclical, they depend on oil for manufacturing, which is cyclical 
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While you already got replies, thanks @Mudit.Kushalvardhan @sujay85 @Cshar for pitching in…mentioning my thoughts in brief below -
As evident from other’s responses, what I would say for defining cyclical/noncyclical - “To each his own”
For, imagine that after knowing that a sector/company is cyclical, when we as minority “long term” investors refrain from such cases (Short term/momentum investors on contrary may love such companies) - Why would Promoters or Big business houses put lump sum of their fortune or rest significant part of their group’s networth in such sectors?..The answer maybe same as above - To each his own
Time frame for these Promoters/Business houses is even longer spanning across generations, so while there are numerous short/medium/even long term cycles which destroys the faint hearted long term investors (including me in some cases), there is an ultra long term cycle in progress - which may cruise across all other cycles in an upward direction…If you look at these sectors/companies from this ultra long term cycle lens, they might not appear as cyclical as what they may seem…for eg. Automobile sectors (most companies) in India so far - M&M for eg. However at same time, ultra long term charts of Ford in US may present some other picture for the ultra long term cycle direction…(Food for thought - difference might be company specific, time frame differences or economy specific as well OR maybe that’s what the real direction may turn out to be in case of emerging disrupters like Tech/EV/Tesla etc…I do not know)
Also, I feel if I want to target sectors/companies with least cyclicity, I would target those either impacted by “least variables” or having “most levers” in place to ride the cycles, if any… (This is still work in progress for me in some of the sectors I have in portfolio).
Disc: Above views only academic. I can be wrong in all my assessments. Not eligible for any recommendations/advice.
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During last significant correction few months back, I did an introspection on some sectors/companies I have and had made a significant decision on QSR segment - First step was consolidating from 5 to 3 only and second step was to limit the allocation with no further incremental addition. I had decided to revisit QSR thesis at later date when sector is faring better. So far there is status quo with the first two steps taken and need to revisit again later. (3% current allocation by market value)
Another sector which has underperformed and has been on my revisit radar is Consumer durables (Appliances). I have decided to keep its allocation capped with bare minimum incremental additions (5% current allocation by market value)
Recent Sector for revisit: The story of Insurance - The “I” in BFSI
The third sector which has been bothering me off late is Life Insurance. My tryst & affinity with this sector has been rather old. It started with the erstwhile Max India (prior to demerger) when Max Life as well as Max Health insurance was part of Max India. I had written earlier about that experience and major learning was to focus on pure plays.
Why did I like the “I” piece of BFSI?
Having burnt fingers in lenders such as PSU & even some solid NBFCs, I somehow felt that Insurance is a relatively safer sector where there is no question about asset quality, NPAs etc. (although a bigger insolvency risk may exist which can be mitigated only by prudent underwriting capabilities - something where Promoter & management quality becomes paramount) while the liabilities side risk is mitigated by strong government regulations in terms of where these insurance companies invest their float.
Why the inclination towards Life Insurance over General? - I decided to chose Life because I felt that General insurance have greater risk of Bankruptcy. Mass destructive events concerning Crops, property etc. can be more common than Life. Also, people generally insure full value of their property, businesses etc. as compared to life where they do not and opt for bare minimum protection in case of life and more inclined towards other instruments…Also, past history in US & other developed economies have shown greater Non-Life bankruptcies as compared to Life.
Having said above I was and am only interested in the “Health” part of the General Insurance because of the greater retail prospects.
With this backdrop, I initially chose a basket with Max Financial, ICICI Pru (as it got listed first), HDFC Life & lastly SBI Life. There being no pure listed Health player (until recent Star Health listing). Over a period of time, I have completely exit the first two and currently hold only HDFC Life & SBI Life, while I track Star Health.
Recent Thoughts
Most recently, I have seen these Life insurance companies decently mitigate one of the largest pandemic in the century. They have shown agility, perseverance, vision as well as growth. They have the capabilities & product mix which can benefit retail customers.
What I do not like - Is the perception of these insurance firms in minds of retail customers. Life insurance is still a push product and with past experiences of results in some of their products, many shun it. Moreover, globally Life insurance is kind of stagnated and over last 10-20-30 years, I have not come across a global life insurance firm generating wealth in developed economies (Pls correct me if wrong).
Health, on the contrary, has fared somewhat better. Mr. Buffet, on other hand, has built GEICO from its ashes to what it is today and has been one of the strongest lever in his group. No success stories yet for any Life insurance firm…(8% current allocation by market value)
There is now this strongly emerging dilemma to whether continue to hold Life insurance firms, replace some percentage by Health Insurance or exit this space when time is right? As is evident from my earlier dilemmas, I usually get such at the extreme testing phase of any sector…
Thoughts Welcome!
Disc: Invested, hence critical & biased. Thoughts for academic & self learning purposes. Not eligible for any advice or recommendations
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An insurance company acts as a risk manager as well as an investment manager.
The main source of operating income, Premium collection, remains mostly volatile. Unless legally enforced, insurance premium does not show up in household bills. If unavoidable, the lowest cost is a key consideration. This results in hyper-competition, liberal underwriting, and a lack of sufficient risk-adjusted premiums.
The other major source of income is net income due to investment of the float (upfront collected premium). For this money pool, Liquidity remains the top priority to honor the ever-growing and scheduled future liabilities. Hence, most of this is invested in safe instruments such as fixed income securities, which are historically known for single-digit returns.
Property and Casualty (P&C) insurance: Policy coverage is short term but claims are lumpy. Liabilities, both the amount and timing of the cash expense, are unknown as they depend upon unpredictable events such as weather, and accident. In an extremely negative event scenario, this business is a likely candidate for bankruptcy.
Life and Health insurance: Policy coverage is long term and claims are predictable. The amount and timing of the cash expense are certain when compared to P&C business. However, a low-interest environment is a major risk for this business. To mitigate the same and generate enough returns to cover the liabilities, the investment manager ends up taking risks of duration and leverage. Long-term liabilities involve extensive discretion from management for various assumptions. This leaves ample room for management to window dress the PnL on an ongoing basis. On top of all this, the star investment manager (Buffet’s replica) will always be looking for green pastures.
Considering the sources of income, nature of expenses/liabilities, and Indian context, the industry is not expected (personal opinion) to create exponential wealth.
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I have seen balance sheet of LIC. So atleast in LIC case, I can say that they dont invest totally in fixed instruments. Almost 17% is into equity also. Also since this business is push business and not a pull business…so no.matter what technology comes, whether aggregators, Apps, direct purchase from website, it will remain a Push based business and hence agency model is backbone of insurance sales, which is very costly and commission is the highest cost for the companies, which will always be there. Internet has come in US and western world from last 50-60 years, but even there, today also, policies are sold and never bought. But the positive thing there is people are very much aware of insurance. In India, we are still making movies like Toilet -ek Prem Katha, to make people aware of where they should do their nature-calls…so insurance awareness is very very faar away.
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The recent announcement from AMFI says that life insurance companies can launch health insurance products also
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This is because Life insurance companies invest their free float. These investments will be mixed of equity and bonds… The insurance companies earn more money when the inflation is high. Developed countries had very less interest rate in last few decades, hence no returns
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Nice to get different perspective from different people on Insurance firms. Thanks @Surender @Mudit.Kushalvardhan & @Ram47 for your thoughts on this…
Very important point and looks like you speak out of experience. Can see it in Motor insurance in India and even Health insurance in some other parts of the world
Agree with all your points here
In Developed economy such as US, interest rates have been close to 0 since decades. How are they mitigating this? Are they taking excessive risks with their float resulting in bankruptcies for some of them? Is there no regulations on the float from any Insurance regulatory authority? Also, eventually in any economy, interest rates would go down towards 0, so does this mean that eventually the insurance firms will either go out of business or bankrupt or survive by virtue of unpredictable risks alone? If that is the case, why any firm or business group choses to enter this business in first place? What is in it say for example an HDFC group or an SBI group or the privately held New York Life for eg.?
Lastly, inspite of all this, some health insurance firms like Cigna & even Humana have generated decent wealth in last 10-20 years…How? By taking unpredictable risks or there is something else to it?
Pls not al above questions are not just to you, these are some questions I am asking myself as well to understand the essence of this business better. I am thinking loud and would be great to have your thoughts as well for these points…
That sounds like a decent figure in a relatively very high interest rate economy such as ours. Good to know that…
I remember reading long back somewhere that this is precisely what Buffet targeted in GEICO to convert it to a pull or even if a push, to a push via “direct” channels such as online (read “digital” in current context)
This is a very welcome step for Life insurance firms. I remember reading about it when in contention but was not sure if it went through. In this context, with HDFC Life and HDFC Ergo for example in same group (same for others like SBI, ICICI, Bajaj as well), it will be interesting to see how this plays out. I do remember seing a recent article on HDFC Life/Ergo combo product but seems like now HDFC Life can even go solo on this?
If you aware on further details like is there any cap on the type of health product which life insurance firms can launch or not? What would differentiate the Health offerings of a Life insurance firm from that of a pure play Health insurance or General insurance firm (other than the hospital/doctor network etc. which eventually even Life insurance firms can build up. My question is more from the product perspective).
Interesting point. The behavior of Insurance stocks in current high inflation context in US, Europe and even in India does not seem to support this. Is the market overlooking this?
Similar thoughts as above on success of some Health insurance firms like Cigna, Humana etc. comes to mind. They also operating in same low interest rate scenario. What different are the doing?
Disc: Same as above. Views only for academic purposes. Not eligible for any advice.
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Its indeed amusing how even after observing & participating in markets since many years, we get euphoric near the top and fearful near the bottom …and so far my personal record has been bang near the crest/trough, be it sector vise or any index…
So far, emotion of extreme fear has not come yet in this fall, maybe bottom for current cycle is still below now (just like anyone else, I don’t know)…
Insurance seems to be holding well in current crash…that is so far…again an extreme emotion that could be a near bottom of a sector? (I don’t know yet, lets see)
Disc: View above is only academic, acknowledgement of getting the opposite emotions and how human behavior works in my case. I can be wrong in all my assessments. Certainly not eligible for any recommendation or advice.
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The stupendous fall in Nykaa/New Age companies
Some random thoughts -
- In hindsight, I remember many experienced folks mentioning at time of IPO that these can fall by 70-80% and they would not be surprised. These were 20+ years experienced and had seen the .com boom and bust… Experience matters!
- Again realisation that Retail investors are very very small people and we should always be cautious & humble.
- New Age companies are not really for us at any price!
- Flurry of IPOs, as some wise men have often said, point to a short/medium term peak and Oct/Nov 21 indeed was such peak for overall markets/New Age Tech IPOs etc… - I think this is my biggest and most useful learning/take home from this entire tution fees paid to such companies
- Missing the fact of lockin period (although was aware of 1 month Anchor investor lockin but missed the 1 year Pre IPO investor lockin) is totally unacceptable. Very basic I should have kept active track.
- Major protection has been from Allocation. I think this is the biggest card that we can play in this world of unknown. Having consciously chosen ONLY 1 New Age company and that too with ONLY 1% allocation helped to save my face.
- Actionable is - because of Point 6, as I could save portfolio from drowning, I might have option to add some in this fall…Lets see
Disc: Small approx. 1% position in Nykaa. Transactions this week also. Views only for academic purpose. Not eligible for any advice.
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Fall in Nykaa was expected due to fall in all internet stocks, but fall due to lock in period opening caught me off guard. The degree of fall is not certain, so I have decided to keep track of its price in relation to the 7 Months moving average and buy when it crosses above it. It closely relates to the 200 Day MA or 30 Week MA advocated by many in this forum.
To know why the PE investors are selling, we have to see it from their point of view. They must have invested in many startups at their initiation or early phase and many of them have failed leading to a loss. The success rate is low in all businesses and very low in startups. Exiting this stock with decent return will offset those losses and give them required capital to further invest in other startups or give back money to investors.
By December, all who have to exit will exit. Then growth and margin will determine where the consolidation happens. Allocation decisions can be taken then.
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Nykaa successfully, but unethically, pulled this trick to arrest their share price drop.
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Read about Sula Wines IPO - Anyone tracking Sula or any other pure play wine business globally?
Not delved deep, but wine business looks different than other liquor in the sense the gestation period for developing a vineyard might be higher and also compared to wheat, barley etc. grapes maybe more choosy of soil climate and season…
In this context, curious how does growth of a wine company happens…by aquiring or building more vineyards or by increasing throughput of existing or by using better tech/seeds/all season variety, if any?
Scotch is also from farmlands of scotland…so am I overthinking on this vineyard for growth? Insights welcome!
Also, any insights into Sula’s business would be good to know…
Disc: Interested in the IPO hence trying to figure out the possible growth in business
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Business has some moat due to its location and tax concession along with restriction on international companies, but the company has some corporate governance issues.
- IT raids happened in 2018 and judgement is pending.
- Company buys land and residential properties from promoter and the valuation is questionable.
- Company impaired goodwill as some brands failed. Judging the book value becomes difficult due to this.
GMP is 43 and price is 357 indicating a listing return of 12%. Note that GMP changes daily and should be used as an indicator only.
For reference:
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Thanks, by location moat I guess you are referring to suitable climatic conditions? Tax concession - can you mention which concession is this and is it specific to vineyards/winery or all liquor companies? Also, what are restrictions to international companies? I see many international wine brands doing well in India…I guess you are referring to developing the vineyards within India?..do you see it going away if that’s the case…today pepsi’s lays does potato farming in India, if I am not wrong…
Any idea on how does a pure play wine company grows? I checked and revenue growth over last fiscal for Sula is 8%… doesn’t look that exciting…is that a norm?
Also, Sula looks like having a tinge of premium hospitality too…it’s rooms/suites go at premium rates…better than many 5 star hotels in the nearest urban Pune as well when I checked online to compare…not sure how much that business contributes to over all piece… Thanks
Maharashtra government had given tax concession to vineyards to promote local vine production. As a result most of the vineyards are in Maharashtra.
They withdrew this concession in 2017.
Then they gave a waiver.
New policy is giving 10 year GST rebate.
Yes and Sula is the biggest of them with more than 50% market share.
Import duty on wine currently is 150%, this along with logistics cost is a huge advantage for local producers.
https://www.indianwineacademy.com/item_3_871.aspx
Developing a vineyard is not as simple as potato cultivation. It has a long gestation period and skilled farmers are required. The inventory has to stored for long period.
I don’t consume alcohol but from what I have observed, people in India want to get high quickly with the least amount of alcohol. So they prefer whisky, rum and vodka to vine and beer. This causes governance and social problems which led to complete ban on alcohol in certain states. So I don’t expect vine production to grow at rapid pace anytime soon.
Of course, this is not a hotel stay, this is vine tourism where vine lovers from around the world roam around in the vineyard and do vine tasting of the collection. Check this video.
Services contribute 7.6% of the revenue.
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Thanks for sharing, you have good details on Sula’s business. To me this is nice to have but a small risk or a future bridge that may form as and when such tax concessions/waivers eventually go away
This again is good to have now and IMO in a global world a future bridge that may form as and when the market opens up.
Is such high import duty on Whiskey, Scotch, Rum, Vodka also?
Agree and I did mention that the long gestation period, although a barrier to entry, may also be a barrier to growth…idea was that when pepsi, being a foreign entity, is allowed potato cultivation, if in future any foreign brand wants to have their own vineyard in India, are they allowed?
Going on same lines, are whiskey, rum etc. producers (foreign brands) allowed to do Wheat, barley, sugarcane etc. cultivation in India and have their own farms? Do these firms, even Indian brands, have such farms of their own? Scotch is world famous for having their own farms where they process produce of those specific areas only…never heard same concept in India so far or at least not famous the way grapes cultivation for vineyard is…any reason for that is what I am thinking…If you have idea, will be good to know…
Now, this is the only point which is not good for now for Sula/Wines, but for me, this is the only point which can prove to be a gap to be filled…I like all my invested companies to have such a gap as that provides me chances of better growth as and when that happens…
Sula would indeed be a nice business to list & track in above context. I am still evaluating if I should apply for IPO or play wait & watch. If at all I apply for IPO, it would probably be only a small tracking position.
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Yes
150% for whisky, rum, scotch and vine.
100% for beer.
I don’t know of any regulation preventing foreign companies from opening a vineyard here. I may be wrong here. But I don’t think foreign investors will open vineyards in India as it makes no business sense unless people start consuming more vine in future. The regulations can also change in the future.
| 31 March 2022 | 31 March 2021 | Growth | |
|---|---|---|---|
| Sales | 456 | 421 | 8% |
| Operating profit | 116 | 64 | 81% |
| Net profit | 52 | 3 | 1633% |
| OPM | 25% | 15% | |
| NPM | 11% | 1% | |
| Equity | 395 | 304 | |
| Debt | 228 | 301 | |
| Roe | 13% | 1% | |
| D/E | 0.58 | 0.99 | |
| CFO | 87 | 120 | |
| CFO/PAT | 376% |
The sudden jump in profit just before IPO raises suspicion. The way these IPOs are structured is that the company shows massive growth before IPO and one quarter after. The market maker or operator is given some money and some stocks to create liquidity. Once retail investors start buying and selling amongst themselves, they sell their stocks and leave. If you want to buy then buy small position in IPO and wait for 2 quarters to get the real picture and price.
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