Hi Harsh.
Have you ever written about your selling framework. If yes, can you please point me to that link.
Was reading this post(The harsh portfolio! - #39 by harsh.beria93) of yours and got me interested as your thread has always been a source of learning for me.
Thanks.
Hi
I had a query pertaining to Amararaja.
In case of valuation a large part of value is terminal value. With EV adoption and Amararaja not having a solution what is their play. Eventually as advanced batteries become efficient ( more power pee cm and gram), wouldnt they replace lead acid ones
As of today, I have shifted my 2% allocation from Lupin to Lincoln Pharma. There is a lot of near term uncertainty with Lupin (on sales and margin front), Lincoln on the other hand finished their capex and should commercialize their cephalosporin facility this quarter. This should trigger a 20-25% growth in FY23 (link to management interview). Previously, management has overguided and underdelivered which is clearly reflected in the kind of valuations they trade at. Cash remains at zero.
Core compounder (48%)
| Companies | Weightage |
|---|---|
| I T C Ltd. | 8.00% |
| Housing Development Finance Corporation Ltd. | 4.00% |
| NESCO Ltd. | 4.00% |
| Eris Lifesciences Ltd. | 4.00% |
| Ajanta Pharmaceuticals Ltd. | 4.00% |
| HDFC Asset Management Company Ltd | 4.00% |
| Aegis Logistics Ltd. | 4.00% |
| Gufic Biosciences | 4.00% |
| HDFC Bank Ltd. | 2.00% |
| PI Industries Ltd. | 2.00% |
| Control Print Limited | 2.00% |
| Shri Jagdamba Poly | 2.00% |
| ICICI Lombard General Insurance Company Ltd. | 2.00% |
| LINCOLN PHARMACEUTICALS LTD. | 2.00% |
Cyclical (36%)
| Companies | Weightage |
|---|---|
| Kolte-Patil Developers Ltd. | 4.00% |
| Sharda Cropchem Ltd. | 4.00% |
| Avanti Feeds Ltd. | 4.00% |
| Aditya Birla Sun Life AMC Ltd | 4.00% |
| Manappuram Finance Ltd. | 4.00% |
| Alembic Pharmaceuticals Ltd. | 4.00% |
| Amara Raja Batteries Ltd. | 4.00% |
| Ashiana Housing Ltd. | 2.00% |
| Ashok Leyland Ltd. | 2.00% |
| SWARAJ ENGINES LTD. | 2.00% |
| Kaveri Seed Company Ltd. | 2.00% |
Slow grower (4%)
| Companies | Weightage |
|---|---|
| Cochin Shipyard Ltd. | 4.00% |
Turnaround (6%)
| Companies | Weightage |
|---|---|
| CARE Ratings Ltd. | 4.00% |
| Punjab Chem. & Corp | 2.00% |
Deep value (6%)
| Companies | Weightage |
|---|---|
| ATUL AUTO LTD. | 1.00% |
| Jagran Prakashan Ltd. | 1.00% |
| D.B.Corp Ltd. | 1.00% |
| Time Technoplast Ltd. | 1.00% |
| RACL Geartech Ltd | 1.00% |
| Shemaroo Entertainment Ltd. | 1.00% |
14 Likes
I follow a relatively simple selling strategy:
- Incorrect assessment of business (e.g. exits made in Lupin, Shemaroo, etc.)
- Well priced (when expected IRRs < 10%). I am very stringent with this criteria and have made timely exits in a lot of cos (e.g. Balkrishna Ind., HCL Tech, Infy, IEX, Maithan alloys, Nalco, Natco, etc.).
- Switch to another company that offers significantly higher IRRs (e.g. switch from Mahindra Logistics to NALCO in April 2020, switch from Divis to Cadila in July 2020, switch from IEX to Inox Leisure in March 2021, switch from Biocon to Jubilant Ingrevia in March 2021, Bajaj auto to Maruti in April 2021, Infosys to HDFC Bank in May 2021, IEX to Jamna auto to Ashok Leyland last year, etc.).
- Changing portfolio weights depending on valuations (reducing Lupin’s weight and adding to Ajanta Pharma in March 2020, moving weights from Biocon to Ashiana Housing in Feb 2021, moving weights from Indigo to Maithan alloys and Cadila in March 2021)
If you go through my indiviual exit posts, you will find the reason mentionted.
Generally, most people struggle to exit their big winners (or their big losers). I have found that exiting both are very important. In order to understand my own track record, I analyzed each transaction of mine with a holding period of >1 year. My conclusions based on my own track record for outsized stock returns (>20% IRR) was:
- Whenever EPS growth was >20%, entry valuations didn’t matter
- For 10-20% EPS growth, I failed when I paid very high prices
- For 0-10% EPS growth, I always made money as the prices that I bought at were very reasonable.
- For negative EPS growth, I also did reasonably well except when the business went really bad (e.g. shemaroo, lupin). This was again because the entry valuations were very reasonable.
The presentation is below. The video will also be uploaded on the VP Europe channel (link) in a couple of weeks.
39 Likes
please share the YouTube link once you upload it. Thank you.
@harsh.beria93 a question on exit criteria.
Once you research a stock and set the target returns, say in 4 years you are expecting the stock price to double. The company is doing good on QoQ and YOY basis. But the stock has runup quickly ahead of growth of the business, in such cases how do you react ? A detailed explanation would be a great help to the followers of this thread.
I remember you made a quick doubler in Jubliant Ingravia and the same is playing out in Sharda Cropchem as well. In the above scenario the business still doing good but market has rewarded in advance.
As of today, I have shifted my 2% allocation from Swaraj Engines to Heranba. Swaraj is a top class operator, however their growth largely resembles overall tractor market growth (which is 6-8% volume wise). Heranba on the other hand has been growing much faster than Swaraj, operates in a similar space and are cheaper on valuations.
As I had earlier mentioned, I am looking to switch from lower growth cos to higher growth ones if both are available at similar valuations. Updated portfolio is below, cash remains at zero.
Core compounder (48%)
| Companies | Weightage |
|---|---|
| I T C Ltd. | 8.00% |
| Housing Development Finance Corporation Ltd. | 4.00% |
| NESCO Ltd. | 4.00% |
| Eris Lifesciences Ltd. | 4.00% |
| Ajanta Pharmaceuticals Ltd. | 4.00% |
| HDFC Asset Management Company Ltd | 4.00% |
| Aegis Logistics Ltd. | 4.00% |
| Gufic Biosciences | 4.00% |
| HDFC Bank Ltd. | 2.00% |
| PI Industries Ltd. | 2.00% |
| Control Print Limited | 2.00% |
| Shri Jagdamba Poly | 2.00% |
| ICICI Lombard General Insurance Company Ltd. | 2.00% |
| LINCOLN PHARMACEUTICALS LTD. | 2.00% |
Cyclical (36%)
| Companies | Weightage |
|---|---|
| Kolte-Patil Developers Ltd. | 4.00% |
| Sharda Cropchem Ltd. | 4.00% |
| Avanti Feeds Ltd. | 4.00% |
| Aditya Birla Sun Life AMC Ltd | 4.00% |
| Manappuram Finance Ltd. | 4.00% |
| Alembic Pharmaceuticals Ltd. | 4.00% |
| Amara Raja Batteries Ltd. | 4.00% |
| Ashiana Housing Ltd. | 2.00% |
| Ashok Leyland Ltd. | 2.00% |
| Heranba Industries | 2.00% |
| Kaveri Seed Company Ltd. | 2.00% |
Slow grower (4%)
| Companies | Weightage |
|---|---|
| Cochin Shipyard Ltd. | 4.00% |
Turnaround (6%)
| Companies | Weightage |
|---|---|
| CARE Ratings Ltd. | 4.00% |
| Punjab Chem. & Corp | 2.00% |
Deep value (6%)
| Companies | Weightage |
|---|---|
| ATUL AUTO LTD. | 1.00% |
| Jagran Prakashan Ltd. | 1.00% |
| D.B.Corp Ltd. | 1.00% |
| Time Technoplast Ltd. | 1.00% |
| RACL Geartech Ltd | 1.00% |
| Shemaroo Entertainment Ltd. | 1.00% |
5 Likes
Hi @harsh.beria93 - Given that you are fully invested, are you not able to take advantage of deep fall in share prices of your holdings?
4 Likes
As of today, I have shifted my 2% allocation from ICICI Lombard to Sundaram Finance Ltd.
Rationale: FY22 was an interesting year in insurance, where health insurance industry surpassed auto. ICICI Lombard has been struggling to gain market share in health insurance (regulatory arbitrage + more focused SAHI cos) and are guiding for 18% kind of ROEs. For an 18% ROE profile, I will prefer HDFC Bank and avoid paying a 6.5x P/B multiple for ICICI Lombard.
Sundaram Finance is coming out of a CV downcycle and should benefit from a cyclical uptick. They are one of the most conservative lenders with one of the highest ROA (due to lower credit cost) for the longest amount of time (last dilution was decades ago!). Their valuations have taken a hit and now they are valued at ~15x P/E and ~2x P/B (which is at cyclical low levels).
I am getting a prudent lender at reasonable valuations at a probable cusp of a CV upcycle. Lets see if the CV cycle plays out, I am also contemplating increasing position size in Ashok Leyland as they have filled their product gap and should also benefit from CV upcycle. Cash level stays at zero and portfolio is below
Core compounder (44%)
| Companies | Weightage |
|---|---|
| I T C Ltd. | 8.00% |
| Housing Development Finance Corporation Ltd. | 4.00% |
| NESCO Ltd. | 4.00% |
| Eris Lifesciences Ltd. | 4.00% |
| Ajanta Pharmaceuticals Ltd. | 4.00% |
| HDFC Asset Management Company Ltd | 4.00% |
| Aegis Logistics Ltd. | 4.00% |
| Gufic Biosciences | 4.00% |
| HDFC Bank Ltd. | 2.00% |
| PI Industries Ltd. | 2.00% |
| Shri Jagdamba Poly | 2.00% |
| LINCOLN PHARMACEUTICALS LTD. | 2.00% |
Cyclical (40%)
| Companies | Weightage |
|---|---|
| Kolte-Patil Developers Ltd. | 4.00% |
| Sharda Cropchem Ltd. | 4.00% |
| Avanti Feeds Ltd. | 4.00% |
| Aditya Birla Sun Life AMC Ltd | 4.00% |
| Manappuram Finance Ltd. | 4.00% |
| Alembic Pharmaceuticals Ltd. | 4.00% |
| Amara Raja Batteries Ltd. | 4.00% |
| Ashiana Housing Ltd. | 2.00% |
| Ashok Leyland Ltd. | 2.00% |
| Heranba Industries | 2.00% |
| Kaveri Seed Company Ltd. | 2.00% |
| Control Print Limited | 2.00% |
| Sundaram Finance Ltd. | 2.00% |
Slow grower (4%)
| Companies | Weightage |
|---|---|
| Cochin Shipyard Ltd. | 4.00% |
Turnaround (6%)
| Companies | Weightage |
|---|---|
| CARE Ratings Ltd. | 4.00% |
| Punjab Chem. & Corp | 2.00% |
Deep value (6%)
| Companies | Weightage |
|---|---|
| ATUL AUTO LTD. | 1.00% |
| Jagran Prakashan Ltd. | 1.00% |
| D.B.Corp Ltd. | 1.00% |
| Time Technoplast Ltd. | 1.00% |
| RACL Geartech Ltd | 1.00% |
| Shemaroo Entertainment Ltd. | 1.00% |
11 Likes
Hey Harsh, just a minor question. Can you explain why you have HDFC AMC as core compounder while Aditya Birla AMC as cyclical stock in portfolio?
1 Like
I think current stock underperformance is more of a function of margin compression and not due to terminal value loss. I say this because in Feb 2021, they were trading at 2.5x EV/sales (~30x P/E) which is the higher end of their valuation band. The EV story was also known in Feb 2021. You can read my more detailed analysis in the link below. Overall, I feel company’s competitive positioning is intact (and actually better than 5-years ago). The management also gave a couple of interviews at the Davos meeting which are worth watching to know about company’s future outlook (link1, link2).
I look at stocks from an expected return perspective. Let’s demonstrate this with a couple of examples:
-
Maithan alloys: I first bought the stock at 350 in March 2020. I expected a cyclical uptick by FY24/25 and projected a stock price of 1408 (link). This implied IRRs of ~32% in a 5-year time frame and seemed attractive at that point of time. The stock moved very fast and crossed 1000 in June 2021 which was when I sold my last chunk of shares. Why? Because my price projection of 1408 didn’t change and at >1000, future IRRs came below 10% and I didn’t find it attractive anymore. So I sold.
-
Jubilant Ingrevia: I first bought the stock at 267.35 in March 2021. Based on my business understanding, I projected sales to grow by 12% in next 4-years and an exit multiple of 3x EV/sales. That implied potential stock price of 1004 by FY25 implying 39% IRR which seemed attractive at that point of time. Stock moved very fast and I ended up selling my last chunk of shares at 683 (where expected IRRs became <10%) as I didn’t find it attractive anymore. Plus, business was going through an upcycle and there was no way for margins to stay at those levels. Thus I exited.
Hope this clarifies my thought process, let me know if you need more clarifications.
I also have cash coming in from my day job, so I have been able to add money to positions whose weightage came down. Also, I have been switching from low growth to higher growth cos if both are available at similar valuations (thus trying to improve risk reward at a portfolio level).
I feel that bank backed AMCs have a structural competitive advantage over non-bank backed AMCs. Also, I consider HDFC group of cos to be much better in terms of execution, you will also see that I categorize HDFC as a core compounder and other NBFCs (like Sundaram, Manappuram) as cyclicals.
HDFC AMC is probably one of the very few businesses that can be held for a decade and can offer >20% IRRs. If ICICI AMC was separately listed, I would also have considered it as a core compounder (rather than a cyclical).
16 Likes
Apologise if I’m polluting this thread with too much granules discussion but was hoping if you could share your views on below @harsh.beria93.
A lot of elements in this business look good/ potential slow Good change coming about.
Few things that bother me are their high receivables historically.
Receivables have always been >=25% to sales and >=21% total assets.
This number is quite high and shows larger percentage of its sales happening on a credit basis.
Couple this with average debtor days being > 125 and cash conversion cycle >133 days, the business starts looking a bit average despite them onboarding an amazing CEO recently.
Thanks.
As of today, I have reduced my position size in Care Ratings from 4% to 2% and allocated the proceeds in Time Technoplast, which now moves from being a 1% deep value bet earlier to a normal portfolio bet (position size of 2%).
Care Ratings: The recent management churn puts the turnaround in question, additionally their FY22 ratings growth rate was lower than ICRA and CRISIL. Other business lines are not yet meaningful to make a big difference to company’s performance. In short, they are losing market share in ratings, have high level of management churn and are unable to meaningfully grow other businesses. Thus, turnaround is clearly not happening at a satisfactory rate. In light of other more attractive opportunities, I am reducing its weightage. I will look at execution in the next couple of quarters and exit if they keep losing market share in ratings business.
Time Technoplast: The business has come back to pre-covid level, management has appointed investment bankers to sell low ROCE international businesses and use the proceeds for capex in higher ROCE composite business, in which they have meaningful competitive advantages. Time Techno entered the portfolio as a deep value bet in June 2020, at that time prices were very depressed (~0.5x P/B). In the last 2 years, business has improved and incremental growth is coming from higher ROCE composite cylinders. Current valuation of 1.1x P/B is not very demanding if they are able to execute their business plans. However, given the subpar return metrics, I am currently capping the position at 2%.
Updated portfolio is below. There is a residual cash position of 1% which will be deployed soon.
Core compounder (44%)
| Companies | Weightage |
|---|---|
| I T C Ltd. | 8.00% |
| Housing Development Finance Corporation Ltd. | 4.00% |
| NESCO Ltd. | 4.00% |
| Eris Lifesciences Ltd. | 4.00% |
| Ajanta Pharmaceuticals Ltd. | 4.00% |
| HDFC Asset Management Company Ltd | 4.00% |
| Aegis Logistics Ltd. | 4.00% |
| Gufic Biosciences | 4.00% |
| HDFC Bank Ltd. | 2.00% |
| PI Industries Ltd. | 2.00% |
| Shri Jagdamba Poly | 2.00% |
| LINCOLN PHARMACEUTICALS LTD. | 2.00% |
Cyclical (42%)
| Companies | Weightage |
|---|---|
| Kolte-Patil Developers Ltd. | 4.00% |
| Sharda Cropchem Ltd. | 4.00% |
| Avanti Feeds Ltd. | 4.00% |
| Aditya Birla Sun Life AMC Ltd | 4.00% |
| Manappuram Finance Ltd. | 4.00% |
| Alembic Pharmaceuticals Ltd. | 4.00% |
| Amara Raja Batteries Ltd. | 4.00% |
| Ashiana Housing Ltd. | 2.00% |
| Ashok Leyland Ltd. | 2.00% |
| Heranba Industries | 2.00% |
| Kaveri Seed Company Ltd. | 2.00% |
| Control Print Limited | 2.00% |
| Sundaram Finance Ltd. | 2.00% |
| Time Technoplast Ltd. | 2.00% |
Slow grower (4%)
| Companies | Weightage |
|---|---|
| Cochin Shipyard Ltd. | 4.00% |
Turnaround (2%)
| Companies | Weightage |
|---|---|
| Punjab Chem. & Corp | 2.00% |
Deep value (5%)
| Companies | Weightage |
|---|---|
| ATUL AUTO LTD. | 1.00% |
| Jagran Prakashan Ltd. | 1.00% |
| D.B.Corp Ltd. | 1.00% |
| RACL Geartech Ltd | 1.00% |
| Shemaroo Entertainment Ltd. | 1.00% |
8 Likes
Here’s the video for the presentation.
18 Likes
hi…Just Like VP Europe…do we have VP india on you tube? kindly give me the link
As of today, I have added 1% position in Modison Metals as part of the deep value portfolio which reduces cash to zero. I will look to increase the position and make it a core bet if quarterly numbers keep improving.
Modison Metals is a capital goods company making electrical contacts that goes into switchgear (Low, Medium, High and Extra High Voltage). This is a niche space with very few competitors (and consolidated profit pool).
Demand for low voltage switchgear comes majorly from residential sector (MCBs, DBs, RCCBs) and for medium/high voltage switchgear from industry and power utility sectors. In the past few years, there was significant growth in high voltage switchgear demand from utility companies due to expanding sub-station network (as can be seen in Powergrid’s growth). Since COVID pandemic, low voltage switchgear market has also witnessed significant demand increase from residential real estate segment and proliferation of manufacturing companies. On back of these tailwinds, company has managed to grow topline at 24-25% rates since FY20.
One trend in engineering goods space is that of increasing exports from India, which can be attributed to the government’s zero duty Export Promotion Capital Goods (EPCG) scheme. Modison Metal derives 15-20% sales from export markets and has also witnessed increase in demand from MNCs who are consolidating their suppliers (thus giving more business to more reliable suppliers).
If we look at breakup of domestic vs export sales, its clear that exports are more cyclical than domestic sales. In the last 2-years, most of the growth has come from domestic demand (I guess largely due to higher residential sales + more manufacturing cos being setup). Its to be seen how long domestic sales can keep growing. I am hoping that exports counter any slowdown in domestic demand or vice versa.
| Revenues (cr.) | FY05 | FY06 | FY07 | FY08 | FY09 | FY10 | FY11 | FY12 | FY13 | FY14 | FY15 | FY16 | FY17 | FY18 | FY19 | FY20 | FY21 | FY22 |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| India | 30.33 | 41.64 | 66.22 | 76.40 | 64.73 | 84.41 | 107.28 | 135.52 | 131.44 | 148.14 | 146.31 | 143.12 | 181.62 | 173.76 | 176.22 | 176.36 | 241.27 | 285.06 |
| Outside India | 6.78 | 11.17 | 15.57 | 28.68 | 12.42 | 12.10 | 19.64 | 27.08 | 28.34 | 36.71 | 25.51 | 26.09 | 26.90 | 32.93 | 44.77 | 45.83 | 52.38 | 56.14 |
| % of revenues outside India | 18.27% | 21.16% | 19.03% | 27.29% | 16.09% | 12.53% | 15.47% | 16.66% | 17.73% | 19.86% | 14.85% | 15.42% | 12.90% | 15.93% | 20.26% | 20.63% | 17.84% | 16.45% |
Currently, company margins have been severely hit due to increase in copper and silver prices, and are at cyclical lows. These margins should go back to long term averages with correction in copper and silver prices, thereby leading to higher profit growth, even if sales growth slows down.
There has also been a couple of company specific changes.
- In order to improve sales, company has changed employee incentive policy where some part of remuneration is linked to company performance
- Company has announced a 25 cr. capex plan towards building a new factory for HV segment assembly line (where company enjoys monopoly in India), upgradation of existing facilities through increased automation, etc. This type of capex implies that management might be seeing good growth opportunities
- Company is evaluating expansion plans in Battery Energy Storage System and EV charging Infrastructure, having signed an MoU with RENERA and LDrive (L-Charge)
Lets see how it works out. Detailed portfolio is below.
Core compounder (44%)
| Companies | Weightage |
|---|---|
| I T C Ltd. | 8.00% |
| Housing Development Finance Corporation Ltd. | 4.00% |
| NESCO Ltd. | 4.00% |
| Eris Lifesciences Ltd. | 4.00% |
| Ajanta Pharmaceuticals Ltd. | 4.00% |
| HDFC Asset Management Company Ltd | 4.00% |
| Aegis Logistics Ltd. | 4.00% |
| Gufic Biosciences | 4.00% |
| HDFC Bank Ltd. | 2.00% |
| PI Industries Ltd. | 2.00% |
| Shri Jagdamba Poly | 2.00% |
| LINCOLN PHARMACEUTICALS LTD. | 2.00% |
Cyclical (42%)
| Companies | Weightage |
|---|---|
| Kolte-Patil Developers Ltd. | 4.00% |
| Sharda Cropchem Ltd. | 4.00% |
| Avanti Feeds Ltd. | 4.00% |
| Aditya Birla Sun Life AMC Ltd | 4.00% |
| Manappuram Finance Ltd. | 4.00% |
| Alembic Pharmaceuticals Ltd. | 4.00% |
| Amara Raja Batteries Ltd. | 4.00% |
| Ashiana Housing Ltd. | 2.00% |
| Ashok Leyland Ltd. | 2.00% |
| Heranba Industries | 2.00% |
| Kaveri Seed Company Ltd. | 2.00% |
| Control Print Limited | 2.00% |
| Sundaram Finance Ltd. | 2.00% |
| Time Technoplast Ltd. | 2.00% |
Slow grower (4%)
| Companies | Weightage |
|---|---|
| Cochin Shipyard Ltd. | 4.00% |
Turnaround (4%)
| Companies | Weightage |
|---|---|
| CARE Ratings Ltd. | 2.00% |
| Punjab Chem. & Corp | 2.00% |
Deep value (6%)
| Companies | Weightage |
|---|---|
| ATUL AUTO LTD. | 1.00% |
| Jagran Prakashan Ltd. | 1.00% |
| D.B.Corp Ltd. | 1.00% |
| RACL Geartech Ltd | 1.00% |
| Shemaroo Entertainment Ltd. | 1.00% |
| Modison Metals | 1.00% |
16 Likes
Hi Harsh, Thanks for disclosing the analysis behind your picks.
Any idea why the margins have come down to single digits in last few quarters for Modison Metals? In fact, the margins used to be greater than 20% about a decade back. Is this because of pricing pressure or rise in input costs? Or is it because of change in product mix?
Thanks in advance!
Hi Harsh,
Have u made any study about hospital sector? Especially AsterDM healthcare. I feel it’s very attractively priced compared to peers with improving margins, improved India business, debt reduction, capex in India and other fundamentals.
I feel long way Aster can go and create wealth in next 5 years.
1 Like
I invested in ITC in October 2020 by doing some reverse DCF and thought it’s fair value should be around 210-220. That time I didn’t know these concepts of mean reversion or valuation by EV/Sales. ITC was down at that time due to lot of negativity around its cigarette business due to increased tax and ESG concerns. I thought it should not be valued at this much low valuation because people are not going to stop smoking no matter what and sooner or later govt will also realize imposing tax doesn’t stop people stop smoking (honestly I don’t care if the same flake I smoke costs me 5 rupee or 6 rupee after tax).
Now that I understand this pattern little bit, I feel HDFC Bank is showing similar pattern. Presently the bank is trading at historical low PB ratio. The bank trades in a range of 4-6 PB ratio. During this time the bank has seen several market cycles.
Fundamentally there is some uncertainties regarding the merger with HDFC Ltd and growth slowing down due to size and regulatory norms. But the banking sector of India is big ocean and the merged entity should be able to grow at mid teen rate (Inflation + market share gain from PSU banks + growth in Indian economy). So this bank should not trade at this much low valuation. Historically it has traded in a PB range of 4-6.
If we consider FY25 forward PB ratio it’s trading at of 2.0 (assuming the bank grows at 15% CAGR which matches the ROE of the bank). So if mean reversion happens and even if it attains a PB ratio of 4 by FY25 then the price becomes 2700 and that gives a CAGR of 25%.
So here I see the pattern similar to ITC.
What is your opinion on the thought process drawing this analogy?
7 Likes
I think it has more to do with growth in their consumer business which is very low gross margin as trading silver bullion margins are only 8-10%. I think with growth coming back in their core switchgear division, margins can improve.
In this sector, I follow Kovai Medical and really like how they have scaled up over years. I track other companies but am uncomfortable in buying them as most hospital chains make subpar ROCE. Kovai makes one of the highest ROCE is this sector, have diluted only once in 1990s (that too through a right issue) and have very long term focus (shown in their investment in medical college which should lead to lower employee cost over time, but costs a lot to build). For me, Kovai becomes a buy at around 2x book value. Sorry that I don’t have anything meaningful to add about AsterDM.
This pattern of mean reversion in large caps is very common. Every few years, market falls out of love with certain large cap cos and people come up with all kinds of narratives to justify stock price movement. Many a times, business is only slightly impacted (or sometimes completely unimpacted like in the case of ITC/HDFC/HDFC Bank). This pattern was earlier used by value folks like Tweedy Browne who have been successful in implementing this over last 6-decades! You can read more about this strategy below.
Coming back to HDFC bank, here are the longer term numbers. The lowest it has traded in last 20 years is around 1.76x P/B. On the higher side, it has traded upto 6x P/B. Generally, HDFC bank is a good buy below 3x P/B and a good sell above 4.5x P/B. I largely trade in this valuation band. Currently, HDFC is a better risk reward vs HDFC bank.
I am attaching my projections for both HDFC & HDFC bank.
HDFC bank projection on 02.05.2021
FY21 book value: 210’443 cr. (382/share), share count ~ 551.23 cr. In FY25 book value will grow @18% to ~ 408’000 cr. Long term share dilution ~ 2% i.e. 597 cr., Book value per share: 683 (including dilution). I would like to sell at >4P/B (share price: 2732).
HDFC projection on 07.05.2021
FY21 book value is 165’617 cr. which should grow to ~378’892 cr. (@18% growth) in FY25. Long term share dilution ~ 2% i.e. # shares ~ 195 cr. (from current ~ 180.4 cr.). Book value: 1943 share price. I would like to sell at > 3.1 P/B (share price: 6023). Start selling at >6000
Hope this is useful and clarifies my thought process 
38 Likes