The Tried & the Tested: Quest for the Bluest of the bluechips!

Lessons from Mr Market
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**There are a few businesses in India that continue to compound at an astounding 25% plus CAGR over the last 15-20 years. **

Fortunately for us a wealth of data on this compiled for us by Motilal Oswal since 1996. The17th ANNUAL WEALTH CREATION STUDY (2007-2012): Economic Moat - Fountainhead of Wealth Creationcan be found here. As also all the 16 previous compilations.

I got to see this annual study in 2007/8 and was astounded to see the long term compounding track of ITC (30% plus), HDFC (42% plus), the Pharma Majors and many others including the IT giants (who are of course past those heady days of growth). ITC and HDFC are continuing their great track and there should be atleast 5-6 more?

At around the same time, I was reading the highly acclaimed “The Future for Investors: Why the Tried and the True Triumph Over the Bold and the New” by Prof Jeremy Siegel where he showed the top Wealth Creators over the last 50 years in US Market have been the Consumer Facing, Branded (with pricing power) Tobacco, FMCG and Pharma companies.

There was an exact echo in the India list from Motilal Oswal - consumer facing, branded Tobacco, FMCG and Pharma companies have been the most consistent wealth creators (apart from the IT pack). Ofcourse the Motial study only goes back 22 years now vs Prof Siegels over 44 years of Compustat data.

Nevertheless I thought there were important signals there. I latched on to an ITC for myself and an HDFC for wifey. Wanted to take this further, but didn’t/couldn’t …lured as I was by Ayush’s charm and the emerging beauties he would seduce me with very frequently:)).

With the exhilarating ride/experience of last 3 years in micro & small caps, and the great learning/discipline that that quest has distilled in us - for separating the wheat from the chaff - I think we are in a much better position today, to return to this original quest.

If we have to bolster ValuePickr Portfolio with 3-4 Bluechip Evergreens for the next 5-10 years, which should these be?

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Very interesting thread. everyone wants a holy grail.

1). I think among the tried and tested the 20-25% cagr kind of companies would be itc, hdfc bank, hdfc etc.

2). from smaller market cap companies the list would be interesting and would comprise of gruh, page inds, indusind bank, yes bank, titan. Since there has been sharp run ups in these companies, one needs to be patient in building up positions but over a two year period if one is patient, MR MARKET does offer opportunities to load up on these beauties due to one or another reason. One needs to bold and fearless to load up these companies during sharp corrections without hoping to catch the bottom prices.

3). Coming to smaller cap companies I think I would include ajanta pharma, unichem labs, mayur uniquoters, polymedicure, astral poly and supreme inds. Advantage with these is that these are available at reasonable valuations of 10-15 PE based on fy 13 expected numbers.

So from the above three groups one could choose depending upon risk profile of the investor.

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To add few more to Hitesh bhai’s recommendations, I think we can add few consumer focused stocks like Amar raja battery, Cera Sanitaryware, Kajaria Ceramics, Hawkins Cooker to the list.

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I take the liberty of suggesting a 3-stage approach.

1). Document the most Consistent Compounders

2). Examine the Value Drivers of these businesses (refining on the work done in the Business Value Drivers thread) and shortlist say 10 such businesses also using other important aspects such as Management. Business Quality, Size of Opportunity, proven ability to harness opportunities and execute

3). Dissect further to check if Balance Sheet/Cash Flow quality has kept pace with the Business Growth (Revenue & Profits). Finally the recent track/visibility

Plan to read the Motilal Oswal last 3 years Wealth creation studies NOW - to see if they throw up any new insights than what I had gleaned in 2009. (and the prof Siegel Book again).

These are my suggestions. feel free to throw ideas/question inputs from others. This should be as much a free flowing discussion we all learn from, at the same time, produce some tangible results (based on some broad framework we evolve out of the discussion).

-Donald

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The Agenda: Identify 3-4 Evergreens for the next 5-10 years to bolster existing ValuePickr Portfolio.

**
**

So these will have to come from the Large Caps and well-discovered midcaps. A Page Industries and a Titan should get in by default.

But let’s leave out our smallcaps like our usual Mayurs and Ajanta’s. They get a lot of attention at ValuePickr (traditionally) anyways, and we do have lotsa experts there.

We are trying to build a side of ValuePickr that does not really exist today. Expertise in Blue-Chips, the why’s and the how’s. The objective is clearly to build the expertise for constructing a more balanced well-rounded ValuePickr Portfolio.

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I think what we also need to remember is that businesses are compounders, not stocks. Buying great businesses at cheap prices lead to multibagger, at reasonable price to compounders and at expensive price to growth traps.

I agree with all the points Hitesh made.

But that’s perhaps last stage of evaluation - first is to understand the business opportunity, management skill & integrity, competitive edge etc.

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An interesting article which may be relevant to this discussion: http://www.moneylife.in/article/wealth-creators-2003-12--a-moneylife-study/30623.html

Money life study detailing the top-500 wealth creators in the past 10 years. This period (2003 to 2012) saw one of the longest and steepest bull-market followed by one of the nastiest bearish phase.

More than 270 stocks listed have provided 30+% of compounded annual returns. Symphony is the topper in this period with around 83 %, and TTK Prestige no:2 at 79% . Some of the valuepickr favorites like Hawkins, Balakrishna Ind, Gruh, Kajaria, Amararaja etc. are in the top-50.These stocks seem to have enough fuel in their tanks to be toppers ten year down the line as well.

-Raj.

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Top 10 Consistent Wealth Creators -Latest 5 yr study (2007-2012)

Rank Company 10yr
Price CAGR %		 5 yr
PAT CAGR %		 PE (x) PE (x) RoE
(%)		 RoE
(%)

2012 2007 2012 2007
1 Kotak Mahindra Bank 48 28 30 22 18 15
2 Siemens 44 17 48 30 36 23
3 Sun Pharma 40 27 29 25 38 25
4 Asian Paints 35 28 26 32 37 39
5 HDFC Bank 31 36 27 23 19 19
6 Hero Moto Corp 30 23 18 19 38 66
7 HDFC 29 26 22 18 19 19
8 ACC 29 3 12 20 41 19
9 Ambuja Cements 26 2 15 22 35 16
10 Infosys 21 17 29 20 42 29

All the companies have appeared 10 times in the MO Wealth Creation studies

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Consumer facing companies score high on Consistent Wealth Creation

Consistent Wealth Creators (Last 5 years 2007-12)
Consumer Facing Non Consumer Facing
Healthcare Consumer Others Technology Others
Cipla (1) Asian Paints (4) Hero Moto Corp (4) Infosys (5) ACC (2)
Piramal Heathcare (1) ITC (2) HDFC (5) Satyam (1) Ambuja Cement (3)
Ranbaxy Lab (1) Nestle India (1) HDFC Bank (4)
Hind Zinc (1)
Sun Pharma (5)
Kotak Mah Bank (3)
ONGC (2)




Siemens (1)




RIL (4)

Number in brackets indicates times appeared within top 10 in last five Wealth Creation Studies

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Just to re-iterate, the objective for this thread is to shortlist a few of the most consistent wealth creators in the Indian market. The focus is on the Large-Cap/Midcap Universe. (and not our usual kind of stocks)!

The discussion should enable us focus attention on large companies that have continued to be consistent wealth creators (at higher than 25% CAGR) - despite their size. We can go on to shortlist a few of them for further dissection for inclusion in ValuePickr Portfolio. This single step, many seniors have advised will lend solidity to the Portfolio - and perhaps a more balanced one for being upto the task - in all types of markets.

To get back to the data

Sun Pharma, Asian Paints, HDFC, HDFC Bank, Kotak Mah Bank stand out for me - most recent data seems to reaffirm their continued momentum. ACC & Ambuja Cements are out for me (a. difficult to be on top of cyclicals b. earnings cagr is what I am interested in). Odds are on that Infosys cannot keep growing at 20% plus CAGR from here on. Hero Moto corp might be back in contention any time (Why doesn’t Bajaj Auto figure in these studies ever?). Siemens has figured so prominently in these studies - I never understood its high valuations - but will make another attempt.

What does the data tell us - everyone??

Those tracking/Invested in large caps like these - please educate on the finer nuances of these businesses, some may be inherently better than others, etc. Any nuances that are missed??

-Donald

Ps: will go thru the subtext - sustainability of Economic Moats - the theme for this year and last 2 years studies too - if they throw up any new conclusions to report.

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Asian paints in unique among the biggies you have identified for the fact that PE wise it is even more attractive now than it was 5 years ago. Its Price CAGR has lagged the Pat CAGR. In the other case like Kotak Bank, Sun Pharma, HDFC and HDFC bank, they have become relatively expensive.

You have rightly ticked off others that have become cheap like ACC, Ambuja… but why is Asian paints lagging?

I also feel Bajaj Auto should be in this list… probably it is out as it does not have 10 yr history.

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About Bajaj Auto, I feel otherwise. For a auto company to grow over a sustained period of time they need to innovate and provide products that bring in a new wave of enthusiasm among prospect buyers. Or else it’s to difficult to sustain higher growth levels over a period of time. The two wheeler market is waiting fot the next big 2 wheeler offering for long. The point is who would come out with such a break through.

On the three wheeler segment there. Is nothing that a Bajaj outo adds that other offerings don’t.

In summary I fido not see a moat here.

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@Akbar - yes Asian Paints is probably more interesting to go deeper into first. It is the only one having become cheaper than 5 years back on PE basis.

And HDFC Bank is the only one where PAT CAGR (36% is great) exceeds Price CAGR.

@Somya -Re: Bajaj Auto, my question was relative to Hero Moto Corp (10 times in last 17 years of 5yr wealth creation studies). If Hero corp can be there consistently, why not a Bajaj Auto, atleast a few times?

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Not sure but could be because of:

1). Bajaj Auto had a restructuring in 2008 with separation of the financial service business. So some studies might be excluding it for lack of continued history.

2). Bajaj Auto had a major business shift from scooter to motorcycle, before that Hero used to rule.

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This thread reminds me of theorizing on a one-stock portfolio.

Suppose you have a fairly large amount to invest in the stock market. Assume that the amount is a significant amount of your networth. And also assume that you can invest only in one stock. What would you do? To look at this problem in the Charlie Munger way (by way of inversion), let me see what I would NOT do.

I would not invest in any company with the following characteristics:- Commodity producer Capital intensive (one which requires a lot of incremental capital) Large debt on its balance sheet Company with poor scalability of its core business Free cash flow is negligible or negative consistently Questionable management An insignificant player in its sector

The more I think about this from a top-down approach, the more I get driven towards FMCG, Pharma/Healthcare or Financial sectors. The main aspect for this investment would be that I would not want to lose much of the money. Here are some stocks I would shortlist:-

  • CRISIL
  • HDFC Bank
  • SBI
  • Apollo Hospitals
  • Cipla
  • ITC
  • Godrej Industries
  • Titan
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  • CRISIL
  • HDFC Bank
  • SBI
  • Apollo Hospitals
  • Cipla
  • ITC
  • Godrej Industries
  • Titan

Thnx Abhishek,

What waiting 4 ur thoughts on this particular topic.

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Sun Pharma - Verydifferentiatedmargin. Since their top line is small compared to market cap and opportunity, they can still grow it for next 20 years.

Private banks - 20 years from now they will be much bigger. HDFC/Yes/Kotak

Private Insurance - People have forgotten this. Max India, Bajaj Finserv stands out. I can see them growing even after 20-30 years.

Staples - Non-discretionaryspend companies like Britannia, Dabur, Marico.Discretionaryspend is cyclic, not sure what will happen after 20 years.

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Some Random Notes from this years Wealth Creation study - that struck a chord

1). Markets remain slaves of earnings power

  • Pace of wealth creation is almost singularly decided by quantum of earnings growth, atleast in the short- and medium term. Earnings growth, in turn, has a very high correlationwith Sales growth, as margin expansion is not sustainable over long periods.
  • Our last year’s study on Blue Chip Investing had revealed to us the power of dividends inwealth creation, especially over long periods of time across economic and businesscycles.
  • Wealth creating companies continue to demonstrate that companies with high RoE’stend to have high payout ratios, as they require very little external capital to grow.
  • Companies with high dividend payout ratios tend to enjoy high share of share of wealthcreated.

2). Some other names for Consideration (High Dividend Payout correlation)

  • Castrol India 90% payout; price cagr 38%; PAT cagr 28%
  • Colgate-Palmolive 85% payout; price cagr 27%; PAT cagr 25%

3). Interesting Concept - Competitive advantage period (CAP)

  • CAP is thetime during which a company is expected togenerate returns on incremental investmentthat exceed its cost of capital.
    • Michael Mauboussin in a brilliant paper writtenway back in 1997 that with each passing year,the CAP period of EMCs simply rolls over,creating incremental excess return for investors in these stocks

http://www.capatcolumbia.com/Articles/FoFinance/Fof1.pdf

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Thanks Lalit.

Important perspective adds for me from your comments. Yes, I used to wonder about Max India in particular, and Insurance in general in 2008/9 even but lost touch. That can be really huge.

Look forward to more inputs form you.

-Donald

Verydifferentiatedmargin. Non-discretionaryspend Marico.Discretionaryspend

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With as many as 70% of the population being dependent on agriculture, directly or indirectly it feels strange and sad tat there is not a single blue chip agri company.