Wealth-Insight - Aug 2023
Wealth-Insight - Aug 2023
Wealth-Insight - Aug 2023
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EDITORIAL POLICY
The goal of Wealth Insight, as with
all publications from Value
37 COVER STORY
Research, is not just limited to
generating profitable ideas for its
readers; but to also help them in
generating a few of their own. We
aim to bring independent, unbi-
ased and meticulously-
researched stories that will help
you in taking better-informed
investment decisions, encouraging
you to indulge in a bit of research
on your own as well.
All our stories are backed by
Too Hot
quantitative data. To this, we add
rigorous qualitative research
obtained by speaking to a wide
variety of stakeholders. We firmly
stick to our belief of fundamental
to Handle?
research and value-oriented
approach as the best way to earn
wealth in the stock market. Equally
important to us is our unwavering-
ly focus on long term planning.
Simplicity is the hallmark of our
style. Our writing style is simple
and so is the presentation of ideas,
but that should not be construed
to mean that we over-simplify. Worried about whether to buy stocks
Read, learn and earn – and let’s
grow and evolve as we undertake
or wait for a crash? Here’s the solution
this voyage together.
Through a
COPYEDITING Debjani Chattopadhyay
and Mithilesh Bhaumik
MARKETING
Aastha Tiwari, Ashish Jain, Jash Ashar,
Sankaran Naren Jinesh Gopani
Kasturi Kaushik ED and CIO, Head Equity,
ICICI Prudential AMC Axis Mutual Fund
ADVERTISING CONTACT
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SUBSCRIPTION
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Chhaya Verma +91-9560200520
CONTENTS
7 Edit
34 Words Worth Wisdom
by DHIRENDRA KUMAR
“People trade on noise rather than signals”
Action vs Inaction Key investment ideas from Sanjoy Bhattacharyya
What is the right temperament to find
success in the present hot market?
48 Stock Advisor
by DHIRENDRA KUMAR
8 Twitter
What is your investment brand?
The disciplined investor How to build any kind of equity portfolio
D. Muthukrishnan | @dmuthuk | 493k
50 Main Street
10 Market Reporter by SAURABH MUKHERJEA
Buzz of the month The sweet spot of wealth compounding
Find out the key characteristics of
14 Stock Story wealth-compounding machines
Tech Mahindra: The power of acquisition
From a communications service provider to a 54 Everyday Economics
leading IT giant by PUJA MEHRA
Tomatonomics
16 Big Moves The humour, the stories and what could have been
The most significant price movements done about tomato inflation
DISCLAIMER
The contents of Wealth Insight published by Value Research India Private Limited (the ‘Magazine’) are not intended to serve as professional advice or guidance and the Magazine takes no responsibility or liability, express or implied, whatsoever for any investment
decisions made or taken by the readers of this Magazine based on its contents thereof. You are strongly advised to verify the contents before taking any investment or other decision based on the contents of this Magazine. The Magazine is meant for general reading
purposes only and is not meant to serve as a professional guide for investors. The readers of this Magazine should exercise due caution and/or seek independent professional advice before entering into any commercial or business relationship or making any
investment decision or entering into any financial obligation based on any information, statement or opinion which is contained, provided or expressed in this Magazine.
The Magazine contains information, statements, opinions, statistics and materials that have been obtained from sources believed to be reliable and the publishers of the Magazine have made best efforts to avoid any errors and omissions, however the
publishers of this Magazine make no guarantees and warranties whatsoever, express or implied, regarding the timeliness, completeness, accuracy, adequacy, fullness, functionality and/or reliability of the information, statistics, statements, opinions and
materials contained and/or expressed in this Magazine or of the results obtained, direct or consequential, from the use of such information, statistics, statements, opinions and materials. The publishers of this Magazine do not certify and/or endorse any
opinions contained, provided, published or expressed in this Magazine.Reproduction of this publication in any form or by any means whatsoever without prior written permission of the publishers of this Magazine is strictly prohibited. All disputes shall be subject
to the jurisdiction of Delhi courts only. ALL RIGHTS RESERVED
Action vs Inaction
What is the right temperament to find success in the present hot market?
Y
ou may have assumed our some investors will feel that now while the prices are still high. The
cover story is about stocks that the market has reached so train will leave the platform any
and markets, but it’s not. high, it will surely pause and may time now. The general feeling is
Instead, it is about investor crash too. Others will feel that the that things are happening, so we
psychology. The markets look hot market is moving and will keep must do something.
and have looked hot for a while moving for a long while. As our In my way of thinking, these
now. But are they actually hot? cover story points it in a quote two views are not the opposite but
Only time can tell. I remember a from the renowned investment the same. They both ultimately
day in 2006 when the BSE Sensex manager and author (an unusual argue for continuous action in
first hit 10,000 points. Going from combination!) Howard Marks, response to external conditions.
a four-digit Sensex to a five-digit “...the essential inputs aren’t This concept of continuous action
one felt like a historic moment. economic data or financial is misguided. When I think of the
Psychologically, in terms of what statement analysis. The key lies in actual activity that should take up
investors felt about the future understanding prevailing investor most of the time of investors, then
prospects of their investments, it psychology.” it should be nothing. For most—
was a very big deal. However, the conclusion we almost all—of the lifetime of an
The only historical parallel was draw from this is not that we must investment, you should be doing
the day in July 1990 when the try to figure out the psychology of nothing about it, regardless of the
Sensex first crossed 1,000 points. the rest of the market or we won’t market conditions. The bulk of the
However, that was a different be able to create wealth for activity of investing is waiting.
India and a different stock market ourselves. That would be a waste The bottom line is that you
altogether. In any case, reaching of time. Instead, we’d like to side- should take the opportunity to fix
four digits is too entangled in the step the issue of what other people obvious problems, but on the whole,
painful memories of the Harshad are thinking and, as investors and this is not a time to act just because
Mehta scam. There will be a day analysts, focus only on our own the numbers are ticking up.
in a few years when the Sensex psychology. In other words, are
will reach 1,00,000 points. we, rationally and calmly, going to
These are major milestones, but consider the market value and the
every all-time high is not. In a intrinsic value of the stocks we
The disciplined
investor
Stocks are bought and sold based on short term price movements. Even
D. Muthukrishnan institutions don’t take more than few quarters view. As an individual investor,
@dmuthuk
you can completely ignore short term and take a decadal view. That’s why
each one gets different result from the same stock.
492.6k | Followers
If you feel twenty years is too long for wealth creation, need to come out of
Why Follow the mindset. Otherwise you may never create wealth. Very few have made it in
shorter time frames.
D
Muthukrishnan
calls himself an Why holding a stock for long term is difficult because there would be many
amateur investor periods when you would hear negative narratives from everyone in the
in his Twitter bio. But he markets. Holding on despite these narratives is a very difficult task. You need
tons of conviction and patience.
is anything but amateur.
He is a Certified Financial
Every investment should have commitment. Just because it is easy to sell, we
Planner (CFP), the founder buy without any sense of commitment. Without commitment, you can never
of Wise Wealth Advisors, build wealth from stocks.
and a licensed mutual fund
distributor. At present, he When you realise failure is the norm and success is an exception; you’ll be
is one of the most popular very careful in choosing companies to invest. Many companies die early. No
company would live forever.
investors on Twitter and
talks about market trends
If we can grow at say 6% over next 2 decades, many pension funds from
and businesses, focusing
west would chase Indian stock market. With many people entering old age
on long-term investing. and less birth rate, west wouldn’t have growth. They need India to fulfill their
But investing wisdom is pension commitments.
not all that he offers. His
tweets often venture into Success in investing comes more from avoiding mistakes of permanent loss
the territory of philosophy of capital.
and social commentary.
Follow us on
social media
@VROStocks vrostocks VROStocks
-ARKETVOLATILITYORAFLOCKOFBIRDS
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-UTUAL&UNDINVESTMENTSARESUBJECTTOMARKETRISKS READALLSCHEMERELATEDDOCUMENTSCAREFULLY
`24,000
IDFC Financial Holdings (the
`2.8 lakh cr
Reliance Industries
hives off financial
is the investment planned by services arm
Suzuki Motors by FY31 on new
Reliance Industries will soon
launches and expansions with a demerge its financial services
focus on India. It aims to double arm and rename it Jio
its global turnover by FY31. Financial Services (JFS).
Shareholders of Reliance will
get one share of JFS for each
share held in Reliance. In other
news regarding the Reliance
conglomerate, Reliance Retail
will soon extinguish its public Foxconn ends
shareholding, and shareholders
will be paid `1,362 per share. chip pact with
Tech giants declare their Vedanta
Q1 FY24 results
Foxxcon Technology
has pulled out of its
YoY growth (%) TCS Infosys HCL Tech Wipro joint venture with
Vedanta to
Revenue 12.6 10.0 12.1 6.0 manufacture
semiconductor chips
Operating
PROlT 12.9 14.1 11.2 12.1 in India. The
companies had a 60:40
Operating
margin (bps) 7 74 -14 81 partnership, and
Foxxcon had planned
.ETPROlT 16.8 10.9 7.6 13.1 to invest $20 billion in
this venture.
ECONOMIC METRICS
Wipro to invest .:;JVSSLJ[PVU
$1 billion in AI 2,00,000 In ` cr
acquisitions 4
Jun '21 Jun '23
Indian mattress giant, Sheela Foam,
plans to spend around `2,500 crore
0UK\Z[YPHSHJ[P]P[`!0UKL_VM
Proximus set to
to acquire a 95 per cent stake in
Kurlon (`2,150 crore), a market 0UK\Z[YPHS7YVK\J[PVU
buy Route Mobile leader in rubberised coir mattresses
and a 35 per cent stake in Furlenco
30
20
% change YoY
84
`42,000
Jul '21 Jul '23
cr *Y\KLVPS
($5.2 billion) is the
150 Brent $/barrel
investment planned by
Tata Group for an EV battery 120
plant in the UK. It will have
an initial capacity of 40 GW 90
T
ech Mahindra, the sixth- opportunity knocked on its doors While there were some high-
largest IT company in in the form of trouble-laden ticket acquisitions, Tech
India, is one of the flagship Satyam Computers. Mahindra largely focused on
companies of the Mahindra Tech Mahindra saw it as an small companies whose products
Group. It provides an array of opportunity to grow its business could be scaled up.
services to communication, and acquired a majority stake in This growth is evident in its
manufacturing, media, Satyam Computers for `2,890 crore numbers as well. Since FY08, its
healthcare, BFSI, retail, and a few in 2009. Thanks to the acquisition, revenue and net profit have
other industries. The company’s the company was able to become grown at 19 and 20 per cent per
journey started in 1986 as a joint the IT service provider for the annum, respectively. During the
venture between Mahindra & FIFA World Cup 2010. period, the company was able to
Mahindra and British Telecom Satyam’s acquisition maintain a median ROE of
under the name of ‘Mahindra catapulted the company into the 22 per cent.
British Telecom’. league of leading IT companies. Although the company’s FY23
Initially, the company catered Its acquisition drive continued performance was gloomy, its
to the telecom sector. Later, it unabated as the company aimed recent announcement to invest
started expanding significantly to expand its service offerings. `700 crore in its product and
on the back of acquisitions and Between FY14-23, it spent around platform unit has received a
geographical expansion. By 2005, `9,000 crore on acquisitions! positive reception. As a result,
it emerged as India’s eighth- with a return of 14 per cent, Tech
largest software exporter and was Mahindra has been one of the
renamed ‘Tech Mahindra’. But it best-performing large-cap IT
was way behind the heavy hitters stocks in the last six months.
of the IT industry. Then, a golden By Udhayaprakash
April 14, 2009 Sept 04, 2012 Sept 18, 2012 Jan 25, 2013
Acquires a Acquires Hutchison Acquires a Merger of
controlling stake Global Services for controlling stake Satyam with
in Satyam for `480 crore in Comiva Tech Mahindra
`2,900 crore Technologies
for `260 crore
96,HUK96*,
ROE (%) ROCE (%)
50
40
30
20
10
FY14 FY23
:LNTLU[^PZLYL]LU\L In %
Communications Manufacturing Technology BFSI Retail, Transport and Logistics Others
Dec 14, 2015 Mar 06, 2017 Nov 05, 2019 Feb 24, 2020 June 03, 2022 Feb 27, 2023
Acquires Italian Acquires an Acquires the Acquires Zen3 Acquires Unveils
car design 84.7 per cent BORN Group for Infosolutions Thirdware Sandstorm, a
company stake in HCI `677 crore for `460 crore Solution for remote network-
Pininfarina for Group for `784 crore monitoring
`1,240 crore `589 crore service
50.3 - -971
Zomato
Its loss narrowed by `172 crore YoY in Q4 FY23.
-77.7 -8.0
53
82
29.5 – 814
ICICI Prudential Life
Its value of new business and embedded value increased by
28 and 13 per cent, respectively, in FY23. 9.8 -8.6
450
*Price to book value. Our large-cap universe has 116 large companies, making the top 70 per cent of the total market capitalisation. The list mentions the stocks that have fluctuated most wildly in
the last three months. Data as on July 17, 2023
98.1 168.3 64
Olectra Greentech
It won a `10,000 crore contract from MSRTC, while its
net profit almost doubled in FY23. 2.6 68.1
679
563
96.2 – -289
Lloyds Metals
Its net profit more than doubled YoY in Q4 FY23.
0.6 -308.5
287
1,846
92.6 112.6 95
Kaynes Tech
It listed at a 33 per cent premium, and its net profit grew
200 per cent YoY in Q4 FY23. 14.1 62.4
959
1,477
395.5 – -108
JITF Infra
Its net loss narrowed by `13 crore in Q4 FY23.
– 6.6
116
4,057
254.7 269.2 5
Remedium Lifecare
Its net profit jumped five times in FY23, and the board
approved a bonus issue. 36.3 176.4
1,144
48
191.9 59.5 45
Shree Global Trade
The company’s revenue jumped eight times in FY23.
11.5 283.5
8
971
163.3 49.7 30
HPL Electric
It bagged an order worth `903 crore for smart meters.
1.8 11.3
89
198
149.8 – -664
Inox Wind Energy
The government announced a waiver of transmission charges,
while it bagged a 150MW order. – –
963
331
146.6 11.0 66
Master Trust
Its net profit increased by 19 per cent in FY23.
13.5 74.9
134
692
30.6 4.4
6,000
5,000
1.05 74.5
3,000
2,000
Sensex rebased to index
1,000
Dividend yield (%) Market cap (` lakh cr) Jul ’18 Jul ’19 Jul ’20 Jul ’21 Jul ’22 Jul ’23
7YPJL[VIVVR]HS\L7)
0UKL_^LPNO[Z 4.5
Reliance 4.0
Others 36.7 Inds. 23.2
3.5
3.1
3.0
2.5
2.0
Jul ’18 Jul ’19 Jul ’20 Jul ’21 Jul ’22 Jul ’23
Bajaj Finance
5.0
ICICI Bank 7YPJL[VLHYUPUNZ7,
16.8
100
60
=HS\H[PVUZKP]PKLUKZHUKYL[\YUZ 40
30.4
Dividend 1Y 20
Company P/B P/E yield (%) return (%)
0
Tata Motors 4.6 85.1 0.3 40.5 Jul ’18 Jul ’19 Jul ’20 Jul ’21 Jul ’22 Jul ’23
Titan 22.7 82.9 0.3 38.6
M&M 3.4 18.6 1.1 31.0
+P]PKLUK`PLSK
ICICI Bank 3.2 19.9 0.8 29.0 in %
1.6
Bajaj Finance 8.5 39.5 0.4 26.9
1.4
Sun Pharma 4.6 30.5 1.1 22.7
Reliance Inds. 2.3 28.4 0.3 16.4 1.2
25 22.9 P/E
24.6 12 16 20 24
20 Undervalued Overvalued
16.8
15 This graph is based on standalone data of Sensex companies.
Jul ’13 Jul ’23 If one takes the consolidated data, the P/E will likely be lower.
0.7
0.72
Jul ’13 Jul ’23
55 57
Considering market cap of all the listed companies on
the BSE, revised estimate of FY22 nominal GDP and
advance estimates of FY23 and FY24 nominal GDP
40
FY14 FY24
0
Jul ’13 Jul ’23 All data as of July 17, 2023
The much-anticipated
merger has brought
a win-win situation
for the bank and
the NBFC
F
inally, HDFC – India’s largest housing finance while personal and credit card loans are considered
bank – and HDFC Bank – India’s largest private unsecured loans.
bank – joined hands. Their merger was The merger between HDFC and HDFC Bank has
announced over a year ago to strengthen HDFC paved the way for the latter to increase the
Bank’s position in the country. percentage of the secured loans in its total portfolio.
Given that 70 per cent of HDFC’s customers do not
Reasons behind the merger bank with HDFC Bank, this would give a huge boost
Although the Indian housing finance market has to the overall business.
grown significantly over the years, HDFC Bank’s On the other hand, the merger has enabled the
share in the pie was low. Generally, average deposits NBFC to access low-cost funds through the HDFC
maintained by home loan borrowers are five to seven Bank’s deposits and leverage the latter’s vast
times more than those of retail account borrowers. distribution network.
Hence, home loan borrowers give stability to a bank’s Although the merger has been under discussion
balance sheet. Besides, these loans are considered since 2016, the companies chose to act now because of
secured loans where the property acts as a mortgage, the changes in the country’s regulatory landscape.
The introduction of scale-based regulations and other
such measures made the regulatory scrutiny of large
Pre- and post-merger deposits and advances NBFCs as stringent as that of banks.
Advances have increased by nearly 40 per cent
Pre-merger Post-merger In ` lakh cr The RBI’s directives
For the merger, the Reserve Bank of India (RBI) has
19.1
Deposits issued a set of directives to the bank and the NBFC.
20.6
Some of them are as follows:
16.2 z Banks are required to lend 40 per cent of their loans
Advances to priority sectors. However, HDFC Bank’s exposure
22.5
to the priority sector will go below this mandated
Data as of June 2023. Post-merger advances are on a gross basis.
40 per cent mark following the merger. The RBI gave
M-cap ($ bn)
438 238 232 172 167 163 159 151 143 135
5Y total return
63.9 12.1 14.5 29.8 41.7 -9.0 6.8 56.3 16.7 53.9
(% pa)
Loan book
($ bn)
1,116 3,419 1,047 2,916 2,705 1,075 1,028 271 3,072 692
JPMorgan ICBC Bank of Agricultural Bank of Wells HSBC HDFC China Royal Bank
Chase America Bank of China China Fargo Holdings Bank* Construction of Canada
Bank
$ATAFORTHEMERGEDENTITY- CAPASOF*ULY ,OANBOOKASOFLATESTÜSCALYEAR
IPO corner
Here is how the S&P BSE IPO index has performed over the last one year and
how the biggest IPOs have fared
HIGHEST
LISTING-DAY GAIN 076PUKL_]Z[OL:LUZL_
Ideaforge Tech The IPO index has corrected significantly over the last few months
130
94.2% z IPO index z Sensex
124
120
HIGHEST
LISTING-DAY LOSS
110 115
Inox Green Energy
-6.9% 100
HIGHEST 90
POST-LISTING GAIN
Kaynes Tech 80 Rebased to 100
;VW076ZI`PZZ\LZPaL
Subscription Issue Issue List Current Listing Change post Sensex Current
Company name Listing date ratio (times) size (` cr) price (`) price (`) price (`) gain (%) listing (%) change (%) P/E
Mankind Pharma 09-May-2023 15.3 4,326 1,080 1,300 1,844 20.4 41.9 7.8 57.6
Five-Star Business Finance 21-Nov-2022 0.7 1,593 474 450 628 -5.1 39.6 1.0 4.2*
Global Health 16-Nov-2022 9.6 1,571 336 398 707 18.5 77.5 -1.3 58.3
KFin Technologies 29-Dec-2022 2.6 1,500 366 369 374 0.8 1.4 1.4 32.5
Archean Chemical 21-Nov-2022 32.2 1,462 407 449 532 10.3 18.5 0.0 17.1
Fusion Micro Finance 15-Nov-2022 2.9 1,104 368 361 620 -2.0 71.9 -1.2 2.7*
Sula Vineyards 22-Dec-2022 2.3 960 357 358 478 0.3 33.5 1.7 48.0
Bikaji Foods 16-Nov-2022 26.7 881 300 321 431 7.1 34.1 -1.9 83.6
Kaynes Tech 22-Nov-2022 34.2 858 587 775 1,846 32.0 138.3 0.9 112.6
Uniparts India 12-Dec-2022 25.3 836 577 575 650 -0.3 13.1 -1.1 14.3
Tamilnad Mercantile Bank 15-Sep-2022 2.9 808 525 510 425 -2.9 -16.6 3.7 1.0*
Harsha Engineers 26-Sep-2022 74.7 755 330 444 442 34.5 -0.5 4.9 32.6
Inox Green Energy 23-Nov-2022 1.6 740 65 61 59 -6.9 -2.5 -7.1 -
Keystone Realtor 24-Nov-2022 2.0 635 541 555 619 2.6 11.5 -1.2 86.1
Syrma SGS 26-Aug-2022 32.6 628 220 262 490 19.1 86.9 5.8 72.3
*Price-to-book value. Data as of July 17, 2023
A
company’s public disclosures, including its
financial statements and annual reports, are
viewed as trusted information sources
investors can rely on. But what if the accuracy of
these documents comes under a cloud?
While going through a list of stocks that have
recently fallen significantly, we came across two
companies that made us rethink the accuracy of
official financial statements.
Here are their tales.
An unrealistic bet
High P/E comes with high expectations.
But can companies live up to them?
P
age Industries (a leading innerwear
manufacturer) has grown its revenue and net
profit by 14 and 11 per cent per annum,
respectively, over FY18-23. During this period, it
also successfully maintained a median ROCE
of 58 per cent! Impressive, isn’t it?
But despite this, the stock has returned
a measly 5 per cent per annum in the last
five years. An exorbitantly high P/E ratio
seems to be the primary culprit. In July 2018, the
stock had a P/E of 93 times. It breached the
100-mark in the following month. And as
on July 12, 2023, its P/E stood at 70 times.
So, despite the company’s good financial
performance, the stock fell victim to the humongous
7HNL0UK\Z[YPLZ»KPJOV[VT` expectations bestowed on it.
Falling P/E negates the effects of a rising EPS With a minor reconfiguration of the P/E ratio
Absolute Annualised formula, you can find the reason behind it. If you
Jul '18 Jul '23 (%) (% pa)
multiply the P/E ratio by the earnings per share
Share price 28,889 36,000 24.6 4.5 (EPS), the product will be the share price. Thus, the
EPS (FY) 311 512 64.6 10.5 two drivers of share price growth are P/E growth and
P/E ratio 92.9 70.3 -24.3 -5.4 EPS growth.
Data as of July 12, 2023 The P/E ratio generally increases when the
market expects high-profit growth. So, if a stock has
/PNO7,[YHUZSH[LZPU[VOPNOL_WLJ[H[PVUZ a high P/E, say 100 times, it sets a very high
Profit needs to grow substantially for a decent return expectation. The problem is that this kind of growth
10Y in earnings is almost impossible to sustain. So, when
share Required these hefty expectations are unmet, it results in a fall
10Y price EPS
M-cap Current FY23 ahead return growth
in P/E, ultimately bringing the
Company (` cr) P/E EPS P/E (% pa) (% pa) share price down.
Adani Enterprises 2,72,329 168 21.69 70 12.0 22.2 We have identified 29 companies in the S&P BSE 500
Index with a P/E greater than 100 (as on July 12, 2023).
Adani Green Energy 1,52,226 156 6.15 70 12.0 21.4
From the 100, we picked 10 companies that reported
Adani Total Gas 69,931 132 4.97 70 12.0 19.3
the highest five-year annualised growth in EPS.
Hatsun Agro Products 21,774 131 17.00 70 12.0 19.3
Next, we set out to find the rate at which these
United Breweries 39,607 130 5.05 70 12.0 19.2 10 companies need to grow over the next 10 years to
Westlife Foodworld 13,999 125 7.16 70 12.0 18.7 deliver an annualised return of 12 per cent (BSE 500,
Dixon Tech 25,828 122 42.90 70 12.0 18.4 on average, fetches 10 to 11 per cent in the same
Astral 49,421 110 17.00 70 12.0 17.2 period). We assumed that in 10 years’ time, the P/E
Trent 60,001 108 12.51 70 12.0 17.0 would come down to 70 times. As you can see, the
required EPS growth rates are quite high. How many,
ABB India 95,944 107 42.50 70 12.0 16.8
do you think, will be able to deliver?
Price data as of July 12, 2023
By Hemkesh Khattar
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I
n the world of investments, started reducing. This was
arbitrage opportunities are quite primarily because when investors
popular among investors. In spotted an arbitrage opportunity, ICICI
simple terms, they are opportunities they flocked to buy the stock,
10
that arise when a stock can be thereby reducing the price gap
acquired at different prices. For gradually. We also noticed that 5
or
B
acked by an experience of 35 years, behavioural finance.
Sanjoy Bhattacharyya is an acclaimed In an event conducted by the CFA Society
Indian investor. He was the first Chief India, he talked about several behavioural
Investment Officer of HDFC Asset faults investors are privy to. This month’s
Management and is presently the Managing Words Worth Wisdom revolves around his
Partner at Fortuna Capital (an investment speech at the event. You can watch the video
advisory firm). A true value investor, of the event here: https://tinyurl.
Bhattacharyya has a keen interest in com/2s3m74df
1
EGO
“If I have to pick one reason for the biggest number of investing errors in
history, it’s overconfidence,” exclaims Bhattacharyya. He firmly believes
that the thought that we know more than others leads us to nothing but
losses in the market.
To avoid such investing hubris, Bhattacharyya suggests, “Whenever you
have an idea, look for things that are going to prove you wrong… Don’t
become rigid or stubborn in your view just because someone challenges it.”
The moment we fixate on something, we reject everything else.
2
MYOPIA
One of the age-old behavioural biases many investors suffer from is myopic
thinking, i.e., they often solely focus on averting short-term losses. And in
that process, they often end up missing out on long-term gains.
Bhattacharya says, “Don’t worry about how much you can lose in the
short term.” Great investors buy assets that are perceived to be riskier than
they actually are. Instead of intuitive judgements, if we have probabilistic
thinking, it will help us think in the long term and get out of losers.
3
CONFUSION
In the age of information, it is often easy to get lost in the data jungle.
Investors are often influenced by the wrong information or are just
bombarded with so much information that they are left confused.
He explained this in the context of investing in IPOs. In view of the huge
success of a few IPOs, people tend to invest in all the IPOs. Given this,
Bhattacharyya argues, “IPOs are stacked against the average investor, it is
the dumbest thing to do.” We ignore the probabilities.
This happens due to information overload, which clouds our judgement.
“People trade on noise rather than signals because it gives them a sense of
belonging and they don’t realise it’s noise,” he says. Avoiding noise or
unnecessary information helps us navigate this trap. It is always worth
looking for simple and straightforward solutions.
4
EMOTIONS
This is the most important element, according to Bhattacharyya. Greed and fear
are two main emotions that drive human behaviour. “Emotion is one of the most
dangerous things you’re dealing with because your view of risk is based on your
state of mind at that time and how it affected you,” he says. If we follow a
strategy and it yields us results, we continue to do it, regardless of whether it is
in our best interest.
It is quite challenging to overcome emotions. However, we can surely manage
them. “Framing is a huge part of coping with an emotion,” says Bhattacharya.
Besides meditation, the automation of tasks with the help of a set of rules helps.
Moreover, constantly checking our portfolio causes us to do irrational things.
Too Hot
to Handle?
Worried about whether to buy stocks
or wait for a crash? Here’s the solution
By Karthik Anand Vijay
T
he Sensex recently breached
the 65,000 mark. In fact, many
stocks reached their all-time
high. Here are some data points (as
of July 7, 2023) that will provide
you with more insights into the
present state of the market:
z Of 1,380 companies with a
market cap of over `500 crore,
408 (or about 30 per cent) reached
their all-time high in 2023.
z Of the 4,491 companies trading on
the BSE or the NSE, 941 (or 22 per
cent) had a P/E of over 50 times.
z Of these 941 companies, 421 (or
10 per cent of all traded companies)
had a P/E of over 100 times.
z Alternatively, less than 40 per
cent of stocks had a P/E of less of several factors. And we cannot global financial crisis. But only a
than 30 times. identify these factors in advance. handful of people were able to spot
For example, three factors, these factors beforehand.
Is a market crash impending? including easy money, loose We can also cite a recent
Do these numbers indicate that lending standards and a bit of example here. In February 2022,
the market is overvalued? Maybe. financial engineering (read the Federal Reserve began
Does it foretell a market crash? trickery), created a financial increasing interest rates, and
We don’t know. maelstrom in the US housing Russia invaded Ukraine. Given
A market crash is the outcome market, resulting in the 2008–09 these, many experts opined that
the US (and consequently the
world) would enter into a recession
The P/E spread
by the end of the year or next year.
Distribution of P/E ratio over the years
100 % However, we are now in August
90 2023, and now the talks revolve
Negative around if the US enters into a
80
recession, it will be a soft one.
70
Over 50 All these show that one can’t
60
predict these events beforehand.
50 30 to 50 Long-term investors should accept
40 the fact that undervaluation and
0 to 30
30 overvaluation are an integrated part
20 of the market. As John Maynard
10 Keynes (the eminent economist)
0 aptly mentioned, “Markets can
June 2001 June 2023 remain irrational longer than you
For the month of June across all traded companies
can remain solvent.”
“I
f the markets are at an all- Speculators try to time the
the current conditions.
time high, shouldn’t I sell market. They try to profit from
my investments?” This is a betting on predictions and
Everyone can study
common question among investors. forecasts. But the problem with ECONOMICS lNANCE AND
However, its answer largely predictions is you win some and accounting and learn how
depends on an investor’s mindset. lose some. the markets are supposed
In that regard, we believe there are On the other hand, long-term to work. But superior
primarily two types of mindsets – investors are cut from a different investment results
speculation and investments. cloth. They sit through the ups
come from exploiting
and downs of the market and
Speculation vs investment benefit from a company’s long-
the differences between
In his book ‘The Intelligent term performance. They pay no how things are supposed
Investor’, famous value guru heed to the market’s cacophony. to work and how they
Benjamin Graham wrote, “An Importantly, they do not time actually do work in the
investment operation is one the market. real world. To do that,
which, upon thorough analysis,
the essential inputs
promises safety of principal and During market extremes
an adequate return. Operations
aren’t economic data
However, there are situations
not meeting these requirements where the market reaches an ORlNANCIALSTATEMENT
are speculative.” extreme. In such situations, analysis. The key lies in
We feel this could be boiled investors must decide whether to understanding prevailing
down even further. If you have get in or out of the market. A case investor psychology.”
invested with the objective of in point was the market crash of
selling, then you are indeed March-April 2020. Although panic
speculating. On the other hand, if gripped the investor community, He then gives a list of things
you have invested intending to some astute investors started that investors must do to
hold the company, then it is an investing aggressively. So, the determine the correct course
investment. question is: what should investors of action.
z Likewise, recognize when people are so z This is, however, very different from simply
depressed that they conclude things can only diverging from the consensus all the time.
get worse, as this often means they think a
sale at any price is a good sale.
z When the herd’s thinking is either Resist your own emotionality
Pollyannaish or apocalyptic, the odds increase Stand apart from the crowd and its
that the current price level and direction are psychology; don’t join in!
unsustainable.
Obviously, there’s a lot to grapple with when taking the temperature of the market. In my opinion, it has more to do with clear-eyed
OBSERVATIONSANDASSESSMENTSOFTHEIMPLICATIONSOFWHATYOUSEETHANWITHCOMPUTERS lNANCIALDATA ORCALCULATIONS
W
e have delved into what it expert’s opinion, your friend’s roof. You can revisit these
means to have an advice or something else. We get companies later if things cool down.
investment mindset. We buoyed by the pitch and invest
have also gone through the ways to without pondering the What not to sell?
hone it. Now, it’s time for you to consequences. Make use of the Don’t sell companies that have good
improve your portfolio. Here are current heightened market levels long-term prospects. Even if these
some points worth considering. and ditch these companies. companies are overvalued, you
You shouldn’t own a company shouldn’t sell them.
What to sell? unless you are confident of its
Even though companies with poor potential. After all, how can you What to buy?
fundamentals might get rewarded in evaluate a company if you don’t We never recommend buying
the short term, they can be injurious know the factors that drive its companies with poor fundamentals.
to your long-term returns. Your performance? Always look for quality companies
priority should be to remove such For companies with strong having good growth prospects and
companies from your portfolio. prospects, you should sell your trading at reasonable valuations.
At times, we buy companies based holdings (or at least trim them) if the Don’t fall for the “I’ll wait for the
on others’ opinions. It could be an valuations have gone through the prices to correct further” fallacy. If
Do nothing comfortable with your current speed bumps and potential hazards.
This seems simple but is tough to portfolio, then doing nothing is the It is natural to be fearful during
practice. With so much optimum strategy. such times, but you must always
information around us, we feel Investing is a long journey. It keep your eyes on the horizon.
that we should act. But at times, requires you to be firmly seated in That is probably why the
the smartest thing to do is to do the back seat while the current market phase calls for you
nothing. If you don’t have any poor management steers at the front. to be short-term fearful and long-
companies to sell and are Along the way, you will encounter term greedy.
Through a
professional’s lens
Find out what industry veterans think of the present market boom
The market is at an all-time high, and the general mood is euphoric. But how are the industry veterans,
the ones who have witnessed similar booms, navigating the market?
To find out, we sat down with Jinesh Gopani, head of equity at Axis Mutual Fund,
and Sankaran Naren, CIO of ICICI Mutual Fund. We asked them how they view the current market
and the common investing mistakes one should avoid during market booms.
The Indian economy has been incredibly resilient to business, structural reforms and indigenisation will
the events of the last few years. What factors have play a pivotal role in India’s growth. Companies like
been responsible for this? Apple, Amazon, etc., shoring up their investments in
Globally, economies have faced multiple headwinds India has led to faster job creation and has
in the form of high inflation, slowing growth, augmented the nation’s growth. A stable government
aggressive interest rate hikes and other geopolitical with a thrust on policy reforms will further cement
risks. The silver lining is that despite the same India’s growth.
setbacks, India’s growth story has remained resilient.
Despite the obstacles in the form of Covid-19 and the This cheery outlook is perhaps getting reflected in
Russia-Ukraine war, the economy bounced back the stock market. Is it time to be greedy or fearful?
quickly, demonstrating its ability to adapt to Rather than being greedy or fearful, investors should
challenging circumstances. focus on long-term quality instead of short-term bias
Lower commodity prices, better-than-expected and stay invested at all times. Missing a handful of
numbers from companies and expectations that India best days in the market over long periods can
will grow faster than most economies led to further drastically reduce the wealth-creating opportunities
exuberance in the market. A confluence of all these an investor could gain by holding onto their
factors has led to the FPIs moving to market weight investments. As a fund house, we do not get swayed by
from an underweight position and the markets market movements, given that market rewards
touching lifetime highs. quality over most periods. That is what one should
focus on, building a portfolio of good-quality stocks.
What needs to change/continue to ensure we remain
the fastest-growing major economy in the world? Where do you see the most value for your buck today?
India has the potential to emerge as a powerhouse in The current macroeconomic data, such as better GDP
the next few years. Continued focus on ease of doing growth, strong industrial production numbers and a
The Indian economy has been incredibly resilient to no non-performing loan problems, the banking system
the events of the last few years. What factors have is robust, etc. No other country in the world has such
been responsible for this? a robust growth story for the next decade.
We are of the view that India has one of the best Due to all these reasons, Indian valuations are high
structural stories globally. It has good demographics, relative to the world. In the equity market, good news
the long-term growth prospects are good, corporates and high valuations come together, as do bad news
are in good shape, corporate earnings are improving, and low valuation. Today we have good news and high
valuations. The challenge now is the high valuation.
However, due to global macros, monetary
mon policy
decisions and the geopolitical environment,
enviro there
could be some challenges along the way.
w So,
intermittent volatility should not be ruled out.
Good news and high valuations come together, as do bad news and
low valuation. Today we have good news and high valuations.
There could be some challenges along the way. So, intermittent
volatility should not be ruled out.
This cheery
c outlook is
pe
perhaps getting
re
reflected in the
stock
st market. Is it
time to be greedy
fearful?
or fear
At ICICI Prudential,
P we
have been big
bi believers in
multi-asset and
an asset allocation
strategies. We believe it is imperative to
adopt a multi-asset approach for
f better
investment outcomes. We recommend
recomme investing lump
sum monies into hybrid categories like equity
savings, balance advantage, aggressive
aggressi hybrid and
multi-asset categories. Since hybrid funds
f invest in two
or more asset classes, investor outcomes
outcom could be more
46 We
46 Wealth
Weal
a tthh IInsight
nsig
ns ight
ig ht August
Aug
ugus
ust 2023
ust 20023
20 23
23
favourable by adhering to a multi-asset approach Which long-term trends are you betting on?
rather than investing in a single asset class at this Manufacturing and housing are two long-term trends
point in time. we are positive about. Each of these trends holds the
The best way to invest for the long term is to use potential to boost several other underlying sectors. We
hybrid investing methods. In a hybrid product, we are believe growth is moving towards manufacturing
in a position to invest in attractive asset classes at outside of China. The changing global trend, along
attractive times. All the investment gurus, be it, with supportive government reforms, bodes well for
Warren Buffett or Howard Marks, say if you invest in manufacturing and manufacturing-allied companies.
undervalued asset classes, you actually make money. A These companies have been hurt over the past decade,
hybrid fund can do this because it always has cash. It and for that reason, they are still not richly priced but
can identify and invest in an undervalued asset class have reasonable growth potential.
when it is cheap. Hence, hybrid strategies can deliver
better risk-adjusted returns. At this point, investors can What are the common mistakes investors make
consider categories like the multi-asset, balanced when markets are at an all-time high?
advantage, equity and debt or equity saving, all exciting In an up-trending market, investors often tend to
categories in a booming or a correcting market. ignore valuations and risk-management practices. As a
means to tap into market gains, investors go overboard
Where do you see the most value for your buck today? with their equity allocation. Due to this, the portfolio’s
We remain positive on sectors aligned with the asset allocation gets distorted, leaving the portfolio
domestic economy like banks, auto, capital goods vulnerable to a change in market trends. Ignoring asset
related sectors and capex oriented sectors, allocation is a costly mistake and should be avoided at
manufacturing, etc. Pharma space also looks attractive all times. Investing based on past performance is
given the reasonable valuations. The period between another mistake one should be wary of.
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A
re you a branded equity collection of documents. In The question is, does Value
investor? If yes, then what finance, it specifically came to Research Stock Advisor do this for
brand are you? Are you mean the investments held by you, and the answer is that it
puzzled by the question? Let me an investor. depends on you! When we began
explain. A lot of investors adopt a That’s the broad meaning. the service, our stock list was
brand, as in, “I’m a small-cap However, in investing, ‘portfolio’ relatively undifferentiated. The
investor”, “I’m a large-cap is used with many slightly number of stocks was small
investor,” or even I invest only in different meanings. It could compared to today–just ten–and
this or that sector or worst of all, simply mean all the investments creating subsections was a little
“I’m an F&O trader”. you have–your complete asset pointless. The focus was entirely
This question I’m asking you is base. It could mean one specific on choosing good investments,
a counterpart to the one I get type of asset class, as in your and they were likely to stay that
about Value Research Stock mutual funds being a funds way for years to come. Of course, I
Advisor: What kind of stocks do portfolio and your stocks being say ‘relatively undifferentiated’
we recommend? Small-caps or your equity portfolio. That’s a because, as our long-time
large-caps or which sector or split by what is in the portfolio. members would recall, we always
whatever. My normal answer to It could also be by a goal, as in had the concept of ‘All Weather’
this question is that we your retirement portfolio or your stocks, even in the beginning. The
recommend stocks that will make children’s education portfolio. name is self-explanatory, as is the
money for you. It sounds like a Or, as in the present discussion, it role such stocks would play in a
smart aleck answer, but as our could mean a particular type of portfolio. Hence, even back then,
longstanding members know very stock like large-cap stocks, small- despite the fact that the group of
well, it’s the literal truth. cap stocks, dividend stocks, value ten stocks didn’t constitute a
Still, that does not mean that stocks, or anything else. portfolio, our members could use
our members can’t choose and In the past, we’ve typically the ‘All Weather’ tag as a guide to
adopt a brand. That means that advocated for goal-based portfolios adjust their stock investments in
the answer is both yes and no. when it comes to mutual funds, line with their preferences.
This question is the same as given our ability to tailor specific From that point, almost six
whether we recommend entire fund types to various objectives. years ago, our recommendation
list has grown to as many as 15 sectors. We have stocks with all tions. Use this set to start build-
57 stocks. However, the set is kinds of ownership patterns. ing your portfolio right away!
larger, so more differentiated now, What’s more, we have a full z The complete investment thesis
and there are two that we classify range of research and analysis for all recommended stocks so that
as such: Best Buys Now and All tools to help you do this. It would you understand why you are
Weather. I prefer simplicity, and not be an exaggeration to say that investing
as such, the labels are pretty using the tools we have bundled z New recommendations as soon
straightforward. While there may into Value Research Stock as they are released
be subtleties in how we define Advisor, you can build a parallel z Continuous updates and
these terms, interpreting them set of recommendations, provided analysis on all recommended
based on their plain, literal you exercise your judgement and stocks straight from our dedicated
meaning won’t lead you astray. your experience about stock analyst team
However, these are only the investing. If you are still making z Tools and data to research and
readymade sets we offer. These that, we have our set thali ready analyse any other stock
are the thalis, but you can also to be served to you! To start immediately, head over
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capitalisations, with the largest all this: You can take the one-year
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We have 42 industries across stocks from our recommenda- way, it’s a great deal.
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/V^PZ-*-KLYP]LK
A measure of cash left for shareholders after operating
.ET/EPRATING0ROlT
after Tax (NOPAT) 100 expenses & taxes. Can be calculated as EBIT x (1-taxes)
business. This additional capital How high ROCE leads to higher FCF cent, while Company B has a
is dependent on a company’s Let’s consider two companies, ROCE of 40 per cent.
ROCE. The higher the ROCE of a Company A and Company B, with This means that to generate a
company, the lower the addition- identical revenue, EBITDA and PAT of `100, Company A deployed
al capital required to generate PAT but different ROCE. `1,000 (i.e., 100/10 per cent) worth
profit growth. Company A has a ROCE of 10 per of equity capital. In contrast,
Company B deployed `250
(i.e.,100/40 per cent) to generate the
/PNOLY96*,HSSV^ZMVY-*-NLULYH[PVU same amount of PAT.
Company A Company B Now, next year, if Company A
Revenue (`) 1,000 1,000
wants to achieve a 10 per cent
PAT growth, i.e., grow its PAT
EBITDA (`) 500 500 from `100 to `110, it would need to
PAT (`) 100 100 deploy an additional capital of
`100 (`10 divided by ROCE of
Capital Employed (`) 1,000 250
10 per cent). However, Company B
ROCE (PAT/Capital Employed) (100/1,000) = 10% (100/250) = 40% would only need to deploy only `25
Targeted growth next year 10% 10% to achieve a similar PAT growth
of 10 per cent (`10 divided by
Incremental profit next year (`) (100 x 10%) = 10 (100 x 10%) = 10
ROCE of 40 per cent).
Additional capital needed for (10/10%) = 100 (10/40%) = 25 This additional capital that
growth (`; incremental Company A needs to fuel growth
profit/ROCE) would come from the PAT base of
Free cash flow (`; PAT - (100 - 100) = 0 (100 - 25) = 75 last year. So, Company A would
additional capital deployed) have to invest the entire `100 worth
Source: Marcellus Investment Managers
of PAT back into the business, leav-
ing it with no free cash. In contrast,
+ =
reflected in their FCF and share
price compounding.
However, the truly special com-
panies are able to take this idea up
High return on capital High reinvestment rate Sweet spot of a notch by consistently improving
employed (ROCE) exponential FCF growth their ROCE, which translates into
Source: Marcellus Investment Managers their FCFs growing faster than
their earnings.
by that company (as such compa- The stock price followed suit over ROCE can be improved by
nies have much longer as well as this period (FY12-22), with Astral sweating the assets harder to gen-
higher FCF generation). generating an annualised total erate higher sales (higher asset
As we’d discussed earlier, FCF return of about 56 per cent versus turnover) and/or improving work-
generated by a company can either just around 13 per cent for Colgate. ing capital management – by reduc-
be returned back to shareholders or Thus, while generating high ROCE ing inventory/receivable days or
redeployed back into the business and FCF is indeed a desirable quali- increasing payable days (freeing up
for future growth. Companies that ty, it is not enough to make a great capital otherwise locked up for
choose the latter path (i.e., reinvest- wealth compounder. For wealth meeting short-term obligations).
ments of FCF back into the busi- compounding, the profits must be
ness) are able to extend the sweet ploughed back into the business to Investment implications
spot period of exponential FCF consistently grow the FCF. z The best candidates for wealth
growth and make for much better creation are the companies which
investment candidates. Taking it up a notch are at the ‘sweet spot’ of exponential
So far, we have established FCF compounding within their life
Case study: Colgate vs Astral the following: cycle - implying they can grow FCF
Let’s exemplify this idea using two z Companies with superior capital and their intrinsic value for several
dominant and successful businesses efficiently vis-à-vis their peers years (if not decades) to come.
- Colgate and Astral. Both these z Such companies are valued using
firms generate healthy ROCE. In the discounted cash flow (DCF)
fact, Colgate’s ROCE has been much *VSNH[L]Z(Z[YHSV]LY-@ method, i.e., discounting the future
higher than that of Astral over the FCF and determining the fair or
10-year period till FY22 (the last z Colgate z Astral intrinsic value of a business. This
available full financial year results). 100.9 is the value that determines the
However, Astral’s FCF growth is degree of under/overvaluation vis-
far superior than that of Colgate. 76.8 à-vis the stock market quote.
The reason is related to the differ- z The FCF for such companies
12.6
ence in the capital reinvestment grows at a rate faster than earn-
rates of these companies. As can be ings (i.e., PAT). For such compa-
seen in the table below, Colgate 24.5 28.3
nies, the P/E multiples have no
returned most of its profits to its 7.4 bearing on their future com-
shareholders in the form of divi- pounding potential.
dends (average dividend payout Average FCF growth Average
ratio of about 77 per cent over FY12- ROCE (%) (% pa) dividend- Saurabh Mukherjea is part of the
22). In contrast, Astral reinvested payout Investments team at Marcellus
most of its profits back into the busi- ratio (%) Investment Managers (www.marcellus.
in). He is the author of ‘Diamonds in the
ness (average dividend payout ratio Source: Marcellus Investment Managers, Ace Equity Dust: Consistent Compounding for
of about 7 per cent over FY12-22). Extraordinary Wealth Creation’.
Tomatonomics
The humour, the stories and what could have been done about tomato inflation
I
t’s time for inflation jokes Meanwhile, there have been beside a firewood challah.
again – high prices of toma- reports of people stealing toma- Various cooking implements are
toes in India have caught car- toes from fields and toma- scattered about her. The pot on
toonists’ attention. But first, the to-transporting trucks. In other the challah is simmering. From
real news stories about some news, McDonald’s has dropped the pot, a tomato has taken off
incredible stuff that has hap- tomatoes from its menu in a like a projectile into the sky and
pened. According to a report in number of outlets. on it hangs light clouds. The
Quartz, people in the district of spry tomato has reacted to the
The subsequent rise in prices
Pithoragarh, Uttrakhand, are woman saying, “Prices likely to
beating the soaring prices of
consequent to the next crop cross hundred rupees”.
tomatoes by crossing over to turning out to be poor could have Prices crossed twice that level
Nepal and picking up the kitch- been avoided if farmers had in some places eventually.
en stable from there, as the pric- recourse to selling their produce What’s going on? Bad weather
es there are about half the going to food processing industries damaged crops, creating short-
rates in India. ages in the market. Cultivators
Most newspapers, including These reports of overreactions lost as much as half their crop to
The Times of India, have a rath- to unusually high tomato prices rain. The excessive flooding in
er interesting story from the are hilarious. As are the car- states like Himachal Pradesh
Shahdol district in Madhya toons, such as the one in the and Uttrakhand disrupted sup-
Pradesh. A man, who runs a tif- Economic and Political Weekly plies besides ruining crops.
fin business, ended up in a fight that has two men, backs to the Supplies falling short of
with his wife after he had used viewer, pointing at a whiteboard. demand pushed prices up.
two tomatoes while cooking a “MONEY EXCHANGE” is scrib- However, this could have been
meal without asking her. His bled on the top of the board, and avoided. Just a few weeks before
wife then packed her bags and below are symbols “$”, “£”, “€”, the shortages cropped up, farm-
walked out along with their and “`”. The first man wants to ers were dumping crates of toma-
daughter, forcing the man to know what the fifth sign on the toes, protesting the crashed
seek the police’s help to secure board, a capital ‘T’ with a double wholesale prices of the crop that
their return. BBC reported that strikethrough, is. “TOMATO” is had plunged to `2-3 a kilo due to
excess supplies following a and bumper crops, thus stabilis- the Parliament had to repeal.
bumper harvest. That price sig- ing market prices by reducing But it may still be possible to do
nal is a dampener for cultivators. supply-demand mismatches. It this, at least in those states
They naturally prefer lower sup- isn’t rocket science. where there are fewer restric-
plies so that the glut in the mar- An ecosystem needs to be creat- tions in agriculture markets.
ket clears out and prices return ed in which doing business is Locating such industries close to
to normal. Clearly, the subse- easy, credit is accessible, and the farms has the added benefit
quent rise in prices consequent power and water supplies are of creating jobs for the excess
to the next crop turning out to be affordable. In addition, a tax sys- labour on the farms. This would
poor could have been avoided if tem, including lower goods and improve their productivity,
farmers had recourse to selling services tax rate, is needed that incomes, consumption spending
their produce to food processing will then encourage food proces- ability, and, in turn, fuel GDP
industries. That would reduce sors such as puree-makers. growth. It’s not only good eco-
output wastage, offer consumers Transporting processed tomatoes nomics but probably also good
a wider choice of products, and from excess supply to deficient politics. Sudden sharp move-
smoothen out the cycles of poor supply areas is also easier. A vast ments in prices of staples in the
food processing industry for the Indian diet, such as tomatoes
whole variety of India’s horticul- and onions that are not as easy
An ecosystem needs to be created
ture and other farm produce – for to import as cereals or pulses in
in which doing business is easy, supplying not only the Indian con- times of shortages, are known to
credit is accessible, and power sumption market but also for upset electoral results and cause
and water supplies are affordable. exports – should be a policy goal. political setbacks.
In addition, a tax system, Doing this, of course, would
including lower goods and have been easier had noisy poli- Puja Mehra is a Delhi-based journalist and the
author of ‘The Lost Decade (2008-18):
services tax rate, is needed. tics and fear of corporate buyers How the India Growth Story Devolved
not derailed the farm laws that into Growth Without a Story’
been a definite trend down in only 0.5 points. This will mean that
inflation, with the latest print if the index continues to maintain
coming in at 3 per cent. The graph its 0.48 per cent monthly growth
‘USA CPI inflation’ seems to justify witnessed this year so far, inflation
the optimism. Year-over-year at the year’s end will be 5.79 per cent.
inflation has slowed to 3 per cent, If it remains flat, the inflation still
and the trend seems to be headed exits at 2.8 per cent - not a lot
lower. But it isn’t as easy as this. different from the 2.97 per cent
witnessed in June. For inflation
<:(*70PUMSH[PVU to continue to fall meaningfully,
YoY MoM (annualised) the index has to drop.
18 %
By Anand Tandon
<:(*700UKL_
12
HSS\YIHUJVUZ\TLYZ
T
he favourite pastime of all
2022 2023
macro-economists is to 6
312
second-guess the US Fed and
0
all other central bankers on what
304
they would do to policy rates.
-6
Investors can only react to
Jan ’22 Jun ’23 296
changes, and it rarely, except at
turning points, affects the overall 288
portfolio strategy. We live in one of The graph ‘USA CPI Index (all
those turning points. There is some urban consumers)’ shows why this 280
reason to participate in the occurs. The CPI index itself Jan Dec
speculation – if, as some think, the continues its upward trend, and
US rate increases are over, then inflation is the change in this
there is reason to make some index over the year (the difference Sticky Price CPI
changes in portfolio allocation and between the two lines as a (less food and energy)
start looking for assets that can percentage). The first half of 2022 “The Sticky Price Consumer Price
benefit from stable to lower had a sharply rising index, which Index (CPI) is calculated from a
interest rates. If not, it may be then flattened in the second half. subset of goods and services
early to make the shift and In H1 2023, the average monthly included in the CPI that change
portfolio performance can suffer in growth in the index has been price relatively infrequently.
the short term. 0.48 per cent. This allowed inflation Because these goods and services
to fall in the first half as the gap change prices relatively
What is the market betting on? between the two graphs narrowed. infrequently, they are thought to
Opinion, as always, is split. The In H2 2022, however, the index incorporate expectations about
bullish economists (if there is a stabilized – from July 2022 to future inflation to a greater degree
tribe like that) argue that there has December 2022, the index changed than prices that change on a more
A
stock screen filters out companies based on are less risky than their smaller counterparts. However,
certain criteria. Its main advantage is that it these stocks have already been ‘discovered’ (i.e., known
helps you generate stock ideas with just a few to most investors). For this reason, they generally trade
clicks. Once you have the list of ‘deserving’ at a premium.
stocks, you can research them further to find the ones Discount to book value: This screen is an old-school
worth investing in. value investor’s dream. The usual belief is that
The Value Research website provides you buying a stock for less than its book value
many ready-made stock screens. Here we will give you a margin of safety. However,
will be covering two such screens: that might not be true. Therefore, we
‘attractive blue chips’ and ‘discount to have applied additional filters to weed
book value’. We have also given a out poor companies.
concise stock list from the other
screens. To get the full list in real time, A word of caution
visit www.valueresearchonline.com/ Note that mere inclusion in a stock
stocks/selector. screen does not mean that a stock is
investment-worthy. Consider the output
What do these screens offer? of stock screens as the starting point for
This month we have got two stock screens for your research. You must apply your own
you. The first one will help you invest in blue-chip analysis to select companies.
companies at attractive valuations and the second one However, if you are interested in a list of stocks to
can help you profit from companies at a deep discount. invest in right away, then subscribe to our
Attractive blue chips: Blue-chip stocks are the largest and recommendation service at Value Research Stock
the most consistently profitable companies. Owing to Advisor. You can access the details by visiting
their strong balance sheet and high market share, they www.valueresearchstocks.com.
Key terms
<UP]LYZLJVTWHUPLZ ratio, while a value stock will have a market price of the stock. Since the two can service more than twice its
relatively lower P/E ratio. denominator in this ratio is the market current interest charges.
Should have traded on all the days for
7YPJL[VIVVR]HS\L7) price, a stock’s dividend yield changes 9L[\YUVULX\P[`96,
the last two quarters and should have
every day.
a market capitalisation of more than The ratio of the price of a stock to the Measured by taking profit after tax as
`500 crore, the lower cut-off for small- book value per share of the company. +LI[[VLX\P[`+,) a percentage of the net worth of the
cap stocks as per the Value Research It shows how much premium investors Calculated as the ratio of total company. Indicates how efficiently the
criteria. are willing to pay for the underlying outstanding borrowings of the company has been able to utilise
4JHW net assets of the company. company to its total equity capital. investors’ money.
7YPJLLHYUPUNZ[VNYV^[O7,. Tells us which companies use :[VJRZ[`SL
Stands for market capitalisation.
excessive leverage to achieve growth.
Obtained by multiplying stock price by Ratio of price to earnings to the EPS Derived from a combination of the
Conventionally, a debt-to-equity ratio
the total number of shares. Shows a (earnings per share) growth of a stock’s valuation – growth or value –
of less than two is considered safe.
company’s market value or size. stock. Demonstrates how high a price and its market capitalisation – large,
we are paying for the growth that we 0U[LYLZ[JV]LYHNLYH[PV0*9 mid and small.
7YPJL[VLHYUPUNZ7, Growth Value
are purchasing. In all our analyses, This indicator is generally used to For example,
The ratio of the stock price and
we have taken five-year historic gauge whether a company has the here is the Large
earnings per share (EPS). It shows in
EPS growth. ability to service its debt. Calculated stock style of
multiples how much investors are Mid
+P]PKLUK`PLSK as the ratio of operating profit to a large-cap
willing to pay for the earnings. The
interest outgo. For instance, a growth stock. Small
thumb rule of valuing a stock is that a Defined as the percentage of the
company with an ICR of more than
high-growth stock will have a high P/E dividend paid per share to the current
380
Reasons to invest The filters 336
Liquidity Market cap more than `9,860 cr 279
Large companies in respective Debt-to-equity between 0 and 2
businesses 99
Interest-coverage ratio more than 2
Strong balance sheets 5Y avg ROE more than 20% 36
Liked by institutions 5Y EPS growth more than 20%
12
5Y PEG between 0 and 1.5
5Y ROE consistency without losing 20% year on year
3
Solid foundation
Company Stock Debt-equity Interest 5Y avg 5Y EPS Market cap Share 52-week
Industry style P/E PEG ratio coverage ratio RoE (%) growth (%) (` cr) price (`) high/low (`)
Coromandel International 13.9 0.58 0.0 15.2 26.8 24 27,995 951 1,094-838
Other Fertilisers
Angel One
13.6 0.38 0.4 14.1 32.2 48 12,610 1,504 1,805-999
Brokerage Services
Bank Of Baroda 6.9 0.98 43 2.8 1.0 14.9 1,03,401 200 211-107
Banking
Canara Bank 5.5 0.87 26 3.5 0.8 16.4 61,399 338 342-208
Banking
Union Bank Of India 6.8 0.80 18 3.5 0.6 12.2 58,095 85 96-37
Banking
Indian Bank 7.3 0.93 10 2.6 0.5 13.0 40,489 325 335-166
Banking
Oil India 3.2 0.72 31 7.8 0.5 24.8 27,755 256 274-168
Oil & Gas Exploration
Tamilnad Mercantile Bank 6.6 0.98 21 1.2 0.0 16.6 6,757 426 549-399
Banking
DCB Bank 8.4 0.91 13 1.0 1.0 11.5 3,894 125 141-81
Banking
Jindal Poly Films 8.7 0.66 30 0.7 0.3 36.9 2,777 635 1,187-485
Packaging & Containers
India Glycols 15.1 0.99 58 1.2 0.6 20.9 1,889 610 978-512
Organic Chemicals
Andhra Sugars 7.9 0.95 15 1.9 0.0 11.9 1,461 108 155-101
Misc.Chem.
Excel Industries 14.8 0.95 52 1.2 0.0 16.1 1,183 942 1,575-752
Pesticides
Elpro International 22.6 0.86 176 0.4 0.0 151.3 1,084 64 86-53
Electrical Machinery
Nahar Spinning Mills 8.6 0.61 40 0.6 0.6 40.2 949 262 379-214
Cotton & Blended Yarn
Balmer Lawrie Inv 8.3 0.83 11 7.3 0.1 12.5 918 414 434-351
Misc. Fin.services
Man Industries 12.3 0.83 24 0.0 0.1 11.5 838 140 161-71
Steel Tubes & Pipes
Shreyas Shipping 3.9 0.95 15 0.4 0.4 39.0 779 355 413-215
Shipping
Nahar Poly Films 13.5 0.75 39 0.6 0.2 11.9 584 237 431-199
Packaging & Containers
Jindal Poly Inv. and Fin. 2.1 0.25 32 0.0 0.8 127.9 579 549 675-276
Misc. Fin.services
Data as of July 19, 2023. This is not the full list. For the full list, visit https://tinyurl.com/bdz329kn
www.valueresearchonline.com/stocks/selector
August 2023 Wealth Insight 61
PRODUCT LABEL
Alternative to: Suitable for: This fund is suitable for investors who
are seeking*:
• Long term capital appreciation
• Dynamic Investing in large, mid and
small cap stocks
Investments In Retirement Long Term Education
Large, Mid And Small Corpus Wealth Corpus
*Investors should consult their financial Investors understand that their principal
Sized Companies Creation will be at Very High risk
advisers if in doubt about whether the
product is suitable for them. Riskometer is as on June 30, 2023