Tuesday, December 24, 2013

20 Year Investment as envisaged in 2013

Maybe this post should be on my notebook as a  mind-map instead of a post.

I have been trying to replay the scenario in my mind over and over, at-least few thousand times in the past 1-2 months as to what should be one's biggest financial investment, all debt free and leaders for over 25 years in their region. 

Unilever Nepal (9% div yield, 10 PE), GSK Bangladesh (2-3% Div Yield, 25PE), Crown Paints Kenya (3% Div Yield, 10 PE), Steamships Trading (4% Yield, 17 PE). There is Gillette Pakistan where it is hard to open SCRA (Special Convertible Rupee Account) for non-institutions. Akzo Nobel (Worlds largest Paint Company http://www.wpcia.org/news/2012report.html) is selling for a song at just 10 times earnings in Pakistan too.

Based on adjusted population I feel the maximum potential to expand is with GSK Bangladesh followed by Akzo Nobel Pakistan. Chances of lowest loss are with Unilever Nepal and GSK Bangladesh.


Many random probabilities run through the mind making final choice harder. Bangladesh has a precarious balance with sea level but 2.5% of worlds population offering a global 130 Billion USD company at 800 Crores INR. This is cheap on global average by about 31 times. Seemingly cheap Unilever Nepal is only 7 times undervalued. If Bangladesh merely reaches mid point/average of world price appreciation can be 31 fold over next 20 years. Nepal has no such issues with rising sea level snowballed by global warming but is home to only 0.5% of worlds population. (Am I the the brutal Capitalist silently praying for increased fertility rate ?)

130 Billion USD (GSK) * 2.5% Bangladesh population =  25,000 crores. (Current market cap 800 Crores INR) (Remember we are not expecting Bangladesh, Nepal, Pakistan, India to become economic equivalent of West but just world average). 31 times undervalued

Some companies may have exhausted their easy potential. eg: Unilever India.

120 Billion USD (Global Unilever) * 17% India population = 122,000 crores (Current market cap 122,000 Crores INR), i.e. already at world average. Not undervalued

206 Billion USD (Global Nestle)  * 17% India population = 210,000 crores ( Current market cap of 52,000 crores INR). 4 times undervalued

One would tend to think that at this rate Nestle globally at 206 Billion USD is relatively cheaper (in India at 52,000 Crores) to Unilever in terms of its potential.

120 Billion USD (Global Unilever) * 0.5% Nepal population = 3600 Crores (Current market cap 500 Crores INR). 7 times undervalued

Some companies may quite look expensive at 45 times earnings but need not necessarily be. eg: RECKITT BENCKISER Bangladesh is undervalued on population adjusted metric by 30 times as well. I believe it to have greater latent potential but not much growth as yet . I prefer consumer brands to prescription pharma - natural tendency to consume for a life time vs fickleness of regulator and lawsuits. GSK has made it clear that it would operate only 6-7 large brands whereas RECKITT is building more muscle in consumer category with 19 power brands. Interesting interview http://businesstoday.intoday.in/story/reckitt-benckiser-global-ceo-rakesh-kapoor-interview/1/191047.html

RECKITT is actually growing much rapidly in rest of the world relative to GSK but Bangladesh is not yet its focus. 
==============================================================

Number of times undervalued is only one part of the equation. Others are:

Absence of other leaders that have not yet entered the market

Seriousness of company to expand

Dividend Yield, prefer 70-100% payout ratio, small countries should be marketing outlets

Royalty (In India Unilever extracts profit in two ways, by dividend and royalty, not so in Nepal, all profits are extracted via Dividends !! Hence if you become a co-owner you get Royalty + Dividends in Dividend Payout, hence the 21% NPM of Unilever Nepal more than anywhere else)

Nestle or Agro Tech like food companies do not translate into like for like comparison due to varying foods habits of India vs West.

Tendency of company to acquire smaller companies and build assets

Market  Cap / Sales (GSK Pharma India 9 times, GSK Consumer India 6 times, GSK Global 4 times, GSK Bangladesh 1.5 times)

Then, there are googlies like Press Corp Malawi with a very diversified portfolio but dividend payout ratio is only 10% http://www.presscorp.com/


Although Malawi Kawach has depreciated 50% against USD in the last one year,results are astounding

They have tripled this year alone, still available at 10 times earnings. Inflation has reached 20%

http://www.natbank.co.mw/index.php/publications/financial-reports

http://www.standardbank.co.mw/malawi/Standard-Bank-Malawi/Investor-relations/Financial-results

Only 11 banks have a licence to operate in Malawi opposed to 100s of them in similar sized countries



Nice to have a problem of plenty for a change. Mind yearns for what isn't yet owned. I want Akzo Nobel just because account has not yet opened in Pakistan. A story comes to mind. Its about a young boy's interest for an ugly dog belonging to a neighbour. He kept  demanding for it despite offers of other pets with better appearance from his parents. Moral in his own words: ’Attachment is blinding. It lends an imaginary halo of attractiveness to the object of desire’ 

Saturday, December 21, 2013

Timing is important | GSK Consumer India - 10 years of negative returns

Its primarily NOT doing that it more important in terms of timing rather than clockwork precision of sports. 

Discipline of not buying for months, years, decades unless the price is right instead of buying it at the lowest possible price.

GSK is 130 Billion USD company globally even bigger than Unilever in terms of market cap. It dominates product niches yet what did GSK Consumer return between 1999 - 2009 ? negative 25% as opposed to Sensex returns of 600%.



10 Years of no growth in share price


 10 Years of below average growth in earnings



4 years of mediocre growth

Since 2009, no wonders have been accomplished. A mediocre 18% CAGR of sales. Extreme shortage of ideas, desperation amongst investors led to PE rerating to 40 times earnings. EPS in the past 4 years has only doubled yet the stock returned 8 fold.


So, making abnormal amounts money has three possible dimensions, EPS growth, PE re-rating and a potentially favourable exchange rate. First two are almost a requirement.





Monday, December 16, 2013

Multigenerational Investing Idea #4 and possibly #5

In continuation of investing in stocks for a lifetime (multi-generational investing), I have done sufficient research to bejewel Glaxo Smithkline Bangladesh with multi-generational proposition.

Previous Ideas that I am most confident about are Steamships Trading Company and Unilever Nepal. Gillette Pakistan is great but investing is hard for non-institutions. GSK Bangladesh isn't fourth in ranking, just numerical sequence in the series of posts. Again, any citizen the world over can invest in this opportunity. It does not appear cheap on the face of it in PE terms but super cheap in Markep Cap / Sales,  global average parameters and potential to expand.

http://multibaggersindia.blogspot.com/2013/06/multi-generational-investing-idea-1-and.html

 http://multibaggersindia.blogspot.com/2013/09/multi-generational-investing-idea-3.html

Recently read about a person living out of trailer, unbeknownst to anyone had been acquiring Coca Cola shares for 10-15 years in 1980s. If you can go back to a country that looks like 1970s, you run a similar risk of getting rich.

Just when I thought I had found the best stocks ever and ready to invest in them for next 10-15 years, yet another opportunity falls into the lap with effortless ease. This might well again be the best opportunity to invest and surpass any other idea. Corporate Governance is unquestionable. Annual Report is a delight to read. A subsidiary of Heineken and franchisee of Coca Cola in Rwanda could well qualify for a multi-generational  investing idea. Available at 22 times annual earnings, not super cheap but not expensive either.  Feast your eyes on the Bralirwa's Annual Report
http://www.bralirwa.com/cms/index.php/investors/downloads/file/22-bralirwa-annual-report-2012-low-resolution

When was the last time you read, "Company has introduced a brand recently, which is now #3 position in the country, just after the first two brands also owned by us".

Recent Press Release from Bralirwa:

Underpinning this performance has been Bralirwa Ltd’s portfolio of brands.
1. Turbo King has been established in a short time as Rwanda’s number three beer brand behind our Mutzig and Primus

2. In the International Premium, segment our Heineken volumes doubled.
3. In soft drinks the appeal of our Coca Cola brands continues to drive sales growth.

Anyone should be able to invest in Rwanda through Stanbic Kenya.

PS: Invested in GSK Bangladesh, not yet in Bralirwa Ltd.

When Statistics Lie


Saw today a front page of report titled Motilal Wealth Creation Study. An abnormal amount
of national time and energy is spent on analyzing past successful stocks and funds.

I had recommended TTK Prestige in 2009 at 150 Rs here (not that I am always correct) and then again in 2012 downgraded to sell at 3200 Rs here and choose RS Software at 45 Rs instead. My argument was was that TTK Prestige would have to reach 12,000 Rs to deliver 3 bags and RS Software would have to rise from 45 Rs to 180 Rs.



Since 2010 songs in praise of TTK were penned and reached a deafening resonance by 2012.

Unfortunately, eulogies were written for winning stocks but investor continued to be deluded in chase of 95% CAGR. 

So called Loser Stock returns 3 bags




















Super Hero returns single digit returns


 Alpha returns are unlikely to be made where the puck has already been.

Tuesday, December 10, 2013

Near Monopolies


First
--------

East African Breweries Ltd is an exceptionally impressive company. Listed in Kenya on Nairobi Stock Exchange, open to all investors world over, with majority holding by DIAGEO, sells at 5 times sales, 4 Billion USD market cap. 800 Million USD revenues, 33 times earnings.

ROE of 100%.

That is how stocks should trade, even in country like Kenya with every circumstance against the grain, blue chip like this are 4-5 times revenues, just like other emerging markets. Nothing special about BRIC. Whats super cheap is Gillette Pakistan at 13 times earnings or Unilever Nepal, or GSK Bangladesh 1.5 times sales and also the unrealised potential.

https://www.eabl.com



















http://en.wikipedia.org/wiki/East_African_Breweries



Most of top tier in India is 4-8 times sales. Pendulum swung too far in cases like GSK Pharma India at 8 times sales with nothing to show on growth report card. I am too intoxicated to buy GSK Pharma, because perhaps I was not born in Japan and not used to 0% rate of interest. So, stocks for them need to trade at 1% dividend yield, useful to know how they think ! At the other extreme the world is either undecided or trying to imitate and pull trigger only after five other funds have bought. Second one fits that description.


Second
-------
Pressman Corporation is the best conglomerate of Malawi, need to investigate more.

The business interests are wide ranging with dominant position in each business, Carlsberg Beer, Coca-cola franchise, Bank, Fisheries, Energy, Telecom, Real Estate, Trading and much more. This company is ditto as Tata Sons or Steamships Trading Company PNG.

Quality of Management and Annual report is outstanding. Company contributes to 10% of GDP of Malawi with 300 Million in Revenues and 25 Million USD profits. Available at only 2 times earnings. Since the conglomerate is a Bank as well Debt/Equity ratio does not compare with FMCG companies. In India, Nigeria, or New Zealand I am certain this would trade at 45 times earnings.

http://www.presscorp.com


Disclosure: Not invested in Press Corp or East African Breweries as yet, vested interest in rest of the stocks mentioned.

Friday, November 29, 2013

Economics and holistic approach to problem solving - the Indian Genius


 This small lecture is just a tip of an iceberg into sneek preview of economic prosperity possible if man applies his mind and where we are headed. Most modern universities of 2013 not excluding the MIT, Harvard are veritable kinder-gartens. 

What is not covered in this lecture is - already in title - it was not just the Indian Vedic Rishis but exemplary men from all civilizations Greece, Egypt, Persia (http://en.wikipedia.org/wiki/Omar_Khayyam) etc. that produced masterpieces of men, so profound in their intellect, thorough in outlook, well rounded in personality and focused on their goals that everything was work of art springing out from inside their essence, and not a probe from outside in. The ascent and descent of civilizations, given that we had space faring civilizations using nuclear fusion, using gravity has to do with what in Vedic system is called Yugas, or many other civilizations like  Mayan, Greek as Golden, Silver, Bronze, Iron age. Intellect of the man itself rises and ebbs during these ages and the ability to creatively produce. Read more on the ages by Yukteswar Giri.

Enjoy a couple of the trillion enigmas of cosmos


A Monopoly business unearthed & uncovered

I wrote about 6 months back at link "My search is on for investment in another morally corrupt monopolistic venture."

Continue to hold the view that a < 10 stock focused and concentrated portfolio of MNCs in developing countries is likely to outperform all sorts of buy-and-hold investing and small cap investment as a portfolio. Though you may never get 20-30 baggers in 4-5 years as one can make in Kitex Garments, Mayur Uniquoters, TTK, Symphony or Cera, but the limited portfolio weight to small caps reduces the prospects of equivalent gain.

The ones I have mentioned in the past are Unilever Nepal here, Steamships Trading here, Glaxo Bangladesh, Reckitt Benckiser Bangladesh in which I am invested.

I have made a passing reference to Gillette Pakistan at 13 PE. Another nice deal is Coca Cola Nepal at 6% dividend yield. Each one in solo cited above is better than stock indices in other countries and collectively as a garland of dream portfolio, in my opinion, unparalleled in bequeathing investing reputation with peerless glory.

The best for a capitalist and perhaps also controversial by far is Murree Brewery Ltd. based in Pakistan in which am not invested as yet. Reading a bit about it - all the excitement felt by group thinkers and funds alike appears like a Cola without any fizz towards United Spirits. I don't get the excitement with United Spirits, I won't buy it at half the current market price. I must be feeling really lucky with alternatives or a simpleton. 

Murree Brewery is a legendary company founded in 1861, only company with liquor license in the country since independence with no competition. Mysteriously for capitalists also happens to be listed in Stock Exchange. Profits have nearly quadrupled in past four years. 

http://www.murreebrewery.com

http://en.wikipedia.org/wiki/Murree_Brewery

http://www.telegraph.co.uk/news/worldnews/asia/pakistan/9153934/Ale-under-the-veil-the-only-brewery-in-Pakistan.html

"The Murree Brewery is in an obscure lane off the road that leads to Army House, an imposing Victorian building that is the official home of Pakistan’s Chief of General Staff"

"If you are non-Muslim Pakistani in Punjab and have a permit, you are allowed to buy six bottles of whisky or one case of beer per month. ('Not enough,’ jokes the company’s technical manager, Fakher Mahmood.) Given that the company produces some 820 million half-litre bottles of beer, whisky, vodka, brandy and other alcoholic drinks per annum – and that those minorities make up less than five per cent of Pakistan’s 170 million people, those Christians, Sikhs, Hindus, Buddhists, Parsees and pagan animists would have to be consuming more than 90 bottles per person per year, man, woman and child."

http://www.spiegel.de/international/spiegel/alcohol-in-pakistan-the-politics-of-boozing-a-405232.html

http://www.telegraph.co.uk/news/worldnews/1543915/Pakistan-brewery-produces-Muslim-worlds-first-20-year-whisky.html

"Few distilleries in the world, even the high-end ones in Scotland, produce 20-year-old malts," said Minnoo Bhandara, the Parsee businessman whose family has run the Murree Brewery since the creation of Pakistan at the partition of British India in 1947."


Perhaps some of you get an inkling why I feel in a Louis Vuitton showroom when I look at Sensex and the dross listed there, well not really detritus, I do like Hindustan Unilever and Nestle India and it will be attractive at 1/3rd their current market price relative to opportunities. Murree Breweries Ltd. has given bonus shares in the past 5 out of 7 years, has tripled in past 12 months and is still available at 9 times annual earnings. Did I say monopoly ?

Saturday, November 16, 2013

Pakistan Vindicates

I have had an uphill battle trying to convince others to invest in Bangladesh, Nepal, Kenya etc. for what appeared to me absolutely no-brainers, geo political risk and currency risk notwithstanding. I have found those opportunities better than any listed company in India. Friends aside, I have not even been able to convince my own family members. My enthusiasm and exuberance met with nonchalance and derision. That is putting it mildly. Until Pakistan story unfolded I felt like the only person who had some lose nut in his brain.

Over the past few months Pakistan Stock Exchanges have opened up to foreign investment, legally for any and every citizen/institution anywhere across the world. I tried early in 2012 to get an account opened to buy Unilever Pakistan, then available at 5000 Rs, similar valuations and attractiveness as Nepal Bangladesh companies are trading today, but it was not allowed for foreign nationals to  invest. It finally got delisted at 15,000 Rs recently.

http://tribune.com.pk/story/527447/going-private-for-delisting-unilever-pakistan-faces-a-higher-price/

 Come 2013 and portals of heavenly abode for value investors, sorry, legal investment hurdles for foreign investors are cleared with foreign repatriation. Pakistan, deemed to be an even less economically stable country than Nepal or Bangladesh, serves as a good example. 18 Month spot charts of 3 out of 25 or so MNCs listed in Pakistan for the recent 18 month period ending 17th of November 2013, i.e. today, are pasted below.

Abbot Labs - 4 bagger in 18 months

WYETH - 6 bagger in 12 months, 10 bagger in 18 months








NESTLE Pakistan - Only tripled in 18 months. 

"only" is intentional

Some people had automatic explanation why Gillette/Colgate/Nestle in India can trade at 50-70 times annual earning but similar companies in other developing countries can only trade at 10-12 times. Today NESTLE Pakistan has been re-rated to 60 times earnings ! This had to happen as certainly as death and taxes. Sigh of relief. Peter Lynch never invested in multibaggers in Financial Industry right in his own backyard. A funny quote applies to all of us laser focused on BSE and NSE India trying to find value in Louis Vuitton like priced BSE Index, not once questioning whether we are in the wrong store. "The closer you are to the church, the farther from God".

Even today, these countries mentioned are more attractive than India and that's where I am investing. Buffett - "I skate to where the puck is going to be, not to where it has been". Thank God sufficient people with investment muscle think like me so as to be able to re-rate companies in seemingly unstable countries. Common sense prevailed over xenophobia. Thanks for the Pakistan precedent, I am hopefully on the right track.




Saturday, November 9, 2013

Success

I am a firm believer that living up to a single phrase can transform one's life. Depending on our mental attunement to an idea we only choose to play the radio station that is on our frequency, and latch on to quotations or phrases that suit us. World is full of ideas, but we choose to pick only the ones that fulfill our immediate needs. Its rare to find a person who follows Buffett as a role model not primarily for  investing/stocks/material wealth, other things being secondary. Amazingly, he did not bring up any of his children to follow him, none of them accumulated much wealth or pursued investment profession. Then, isn't is worth paying heed to what Buffett himself took seriously. According to Buffett, at 2 min:50 sec into first interview, "Success is not to be measured with Money. It is living up to your full potential." The definition of "full potential" is out of scope of discussion, probably cannot be discussed, only experienced. In case you follow Buffett, are you living up to your full potential ?



Three Genertions



What Buffett learnt from Munger - Making Silk Purses from Silk



Recall writing a similar post on success few years back here.

Friday, November 1, 2013

Booking Losses, Keeping Profits and Holding on

My personal portfolio comprises with an exception of maybe one, all companies with market cap well below 1000 Crores i.e. small caps. Its verily a roller coaster ride.

Its easy to make money in the markets but harder to retain them over long term.

In analysis of past 18 months over mistake made and what could be improved upon.. Net of losses in Vikas WSP, holding on, Zylog - booked loss, Cravatex - a minor position now, the other small caps like Atul Auto, Wim Plast, RS Software, Orbit Exports etc more than made up the loss.

What have I learnt:

#1 is that in a small cap portfolio, the diversification needs to be wider

#2 Once the environment/underlying hypothesis has changed, eg: RBI legislation on gold curbs is effective. Do not be brave, err on the side of cowardice, cut all positions, sell all jewellery stocks

#3 Stay hungry and change with the times

By # 3 I do not imply lowering your standards but stop doing what does not work. The best part about investing is the limit on losses to 100% of investment and no upper limit on profits.

Keeping Profits

That is only possible by being right and making fewer decisions. i.e. Holding for longer term. One simply cannot be right 50 times a year.

As you can see, with 3 out of 8 small caps misfiring, you may be correct in your assessment but if your temperament is to hold on to positions for ten years or longer many a spanner lie in wait for the compounding machine to break.

Holding On

Small caps rarely qualify holding on. There was a time when leading debt free companies were growing at 30% per annum and available at 10 times earnings. Now leading companies are growing at 10-15% and available at 50-75 times earnings. eg; Dabur India, Nestle India, Colgate Palmolive India. Hardly a better alternative ?

A risk of leveraged financial institutions can be taken to get close to 20% compounding. All housing finance companies in India fall in this bracket. 

Or alternate geographies where some leading companies are available at 10-20 times earnings. Reckitt Benckiser Bangladesh available for 300 Crores INR ( population adjusted value should be 9000 Crores INR if Bangladesh is to reach world average in next 15 years), Reckitt's global market cap is 300,000 Crores INR. Bangladesh would be roughly 3% of world population in next 15 years.

GSK Bangladesh for 900 Crores INR (again 25 times undervalued on world average parameters), or Bata Bangladesh etc. look quite promising for buy-hold-and-retire type of investment. Just have a look at their balance sheets, overflowing with cash, needless to say zero debt. Just the kind that can sport 100%+ ROE. In IT speak they're companies in Gartner Magic Quadrant with outstanding ability to execute with broadest vision.

My leaning has moved from small caps and focus is now on leaders available at mid cap valuations. Also I am encouraged by holding a concentrated portfolio which is more amenable to Global leaders. A different type of risk is assumed, country and currency.

Two quotes from Munger come to mind, not quotes verbatim but something on these lines "You are supremely rich if you hold shares of three best companies". and
"You are adequately diversified if you have biggest mall, best restaurant and best grocery store in a town". What begs an answer also is, would you buy a company that is successful and has a leadership status in one state of a country ? (eg: Thangamayil, Atul Auto), or a leadership in one country (eg: Dabur, Havells, Emami, TTK), or leadership in over 150 countries ? (eg: Colgate, Unilever, Reckitt, GSK), isn't that an easy answer... 


If you do not know the process of investment in Bangladesh, feel free to ask.

Disclosure: Vested interest in Bangladesh stocks mentioned. 

EDIT: Unilever Nepal available at 2 times annual sales. Unilever India available at 5 times sales. 
GSK India available at 6 times annual sales. GSK Bangladesh available at 1 times sale. 

GSK Global is bigger than Unilever, both are no-brainers IMO.

Friday, October 11, 2013

Long Term Stock - #1 Paint Company in Kenya, Uganda and Tanzania

As trillions of dollars are chasing the opportunities at the speed of light, this results in drying up on obvious bargains amongst market leaders.

Above normal returns, then can be made in industries which are neglected, geographies that are considered unsafe, companies below a certain size/revenue threshold, or markets where trillions of dollars are not allowed to come in. If money is allowed to flow freely, then even in countries with abject poverty, leading stocks trade at 40+ PE multiple.

You may have appreciated numerous 100 year charts with breakdown of equity CAGR returns segmented by market cap. And, that companies with greatest market cap perform almost predictably below mid cap, which are further out flanked by small caps. What skips the instant analysis is that Large cap are dozens, mid cap in scores, and small caps in hundreds. That is, 100 out of 500 midcaps may have been decimated, which no longer feature in any 100 year chart. If you invested in 20 small caps out of which 10 did not survive, then then personal returns as elucidated by charts would prove to be a mirage. Therefore, one needs to diversify to a larger extent with small/mid caps.

For an investor with 10 stock portfolio, either conviction in small cap has to be unshakable (which is always the case when one begins investing :)), as a general guideline one should invest in leaders in an industry niche or geography for long term investing. Wouldn't it be better though - if a leader is also available at small cap valuations. If not in India or New Zealand, who cares.

-----------------------------------------------------------------------------------------------

Enough is said about raising opportunity cost. Any foreign investor is able to invest freely in Kenya. In India you get leading paint company (Asian Paints) at a market cap of 5 times annual revenues and even #2 and #3 players (Akzo and Berger) at 2 times annual revenues.

Crown Paints Kenya (www.crownpaints.co.ke) (formerly Berger Kenya), similar in stature in product line, industry offerings, present in Decorative, Industrial, Commercial, Marine and more segments is available 1 time annual revenues.

- #1 company in the Country
- Now also rapidly expanding in Uganda, Tanzania and other East African countries.
- Promoted by Crown Paints of UK, (www.crownpaint.co.uk), now a part of 200 year old Danish Hempel Group, #2 worldwide in Marine Paints www.hempel.com
- Available at 10 PE ratio
- With no Debt
- Cash flows as good as Net profits
- With much room for improvement in profit margins
- With products from Crown, Dupont and Hempel

Five year performance:

100% returns in 2012 and over 57% in 2013 until September


















Financial dissection, so dear to an analysts heart can be downloaded and broken down in threadbare detail from here.
Something you may not have read in any Indian annual report for years now, because such magnitude of inefficiency and disequilibrium does not exist in Indian companies, such as 9% productivity growth in one year that Crown experienced.

Risks: Geography and Currency Risk.

Disclosure: I and my family/friends may have positions here

Monday, September 30, 2013

Is Pristine Balance Sheet imperative for a prospective multibagger ?

Which company is this, with Debt Equity ratio of 2:1 , losses in two out of previous five years ?


Balance Sheet













Revenues


























PAT




 





Tuesday, September 24, 2013

Relaxo India or Bata Bangladesh ?

Tirumala, a friend of mine and also another friend communicated to me that Relaxo is a hot topic these days as Prof Bakshi has written a couple of reports on it. He asked me for my opinion on whether Relaxo would perform better or Acrysil.

http://fundooprofessor.wordpress.com/2013/09/22/the-relaxo-lecture/

I had initiated a discussion on Relaxo on the 8th of Jan 2010 at theequitydesk.com

http://www.theequitydesk.com/forum/printer_friendly_posts.asp?TID=2610

What I felt and saw at the time were screen slapping me in the face with:

Sales/Market Cap ratio of 0.25

Cash flows of 60+ crores per annum on market cap of 200 crores

30 Crores per annum was spent on Ads per annum in 2010 and effects of which are noted well in Prof. Bakshi's reports.

The company has only got better since then.

I also wrote on the above link, on the 23rd of Feb
--------------------------------------------------------------------
Posted By: amitdip
Date Posted: 23/Feb/2010 at 1:53pm
Good observation but I believe Rubber comprises only 33% or so of raw material and EVA accounts for 60% or so of raw material. Not sure how to track EVA foam prices.

Not a shadow of doubt that margins will be under pressure when raw material prices rise, but what happens is players from un-organised sector get wiped out into bankrupty and Relaxo survives because they refuse to/combination of unable to; pass on price to customer. They are lowest cost highest volume due to economies of scale of Slippers 3 lac pair a day so company is unlikely to go bankrupt, if 3 "chappal" makers survive in world, relaxo will be one of them
---------------------------------------------------------------------

What I feel today is that Relaxo is selling for 1 times Sales with cash flows of 75 crores on Market Cap of 900 Crores. Still better than larger peer Bata at 2.8 times Sales etc.

======================================================================

Relaxo:

- It is unlikely to make a dent in Shoes space, infact word BRAND does not connote much of a meaning in conventional terms.
Visit three sites popular in India, Myntra.com , Yebhi.com, Jabong.com and check the number of brands

http://www.myntra.com/men-footwear?nav_id=17

And that is actually a subset of brands that have only hit India. More than 20 premium brands have not even significant presence in India.

http://www.onlineshoes.com/brands

Digressing a bit, of the top footwear brands like Salomon, Kathmandu, KEEN, TEVA, Merrell, INOV-8, Columbia, Patagonia, Mammut, ECCO, La Sportive etc. the brand behind the real brand is Gore-Tex. A magnificent company of epic proportions. Privately held, now a 3 billion $ company.

www.gore-tex.com

www.goremedical.com

www.gore.com

Its evidently clear to me ( with a chance to be wrong ) that future of footwear is not Relaxo. Perhaps I am not willing to bet on invincibility of moat of Chappals, or perhaps I am afraid
of losing money. I am not sure the brother and sisters of India would like to identify a strong association with 100 Rs chappal as a superior brand. Chappal/Flip-flop story is likely play for another few years with low income segment. I don't have the stats on how many are transitioning to higher end Chappals. For now, for me its a pass.


Coming back to Original Question Relaxo or Acrysil:

- They are not in the same segment hence not directly comparable.
- For comparison sake, Relaxo has a much higher probability of consistent returns.
- Detailed study on Acrysil left for another day, primary reason is that Schock process technology (10% owner of Acrysil) accounts for 75% of worldwide quartz sink production.
- Acrysil products are sold to top 10% income strata for whom money is not a constraint, but style, aesthetics or superior performance is paramount, this is 180° crosswise to Relaxo model.
- Chances of losing money are low in either
- Growth is likely to be more consistent in Relaxo since it has reached critical mass
- Acrysil has over 60% market share in India but probability of consistent growth like clockwork are low
- However, probability of re-rating to 35PE or more is higher with premium products, which is advantage Acrysil
- Acrysil's return ratios are likely to suffer as it chases other product lines
- Downside, if dividends are any barometer to protect downside then 0.4% yield of Relaxo offers stunted support
- So, the answer is NOT AT ALL CLEAR which will perform better over next five years

Every person is unique:

Any single one of you is likely to make more money than me, Buffett, Munger and RJs of the world in certain stocks only if you stop following other but instead listen to your own conviction and heart. In fact some of you may have already missed few stocks by following others.


Opportunity Cost and second, third best alternatives:

I would invest either in Unilever Nepal with 8% yield at 10 PE. If I can't do that - I would spend two months to try to get a Stock Trading Account opened in Bangladesh. I disclosed this one to my partners and friends couple of months back when Bata Bangladesh was at 600 Rs and 5% yield and PE of 10.5. Indian citizens are allowed to invest in Bangladesh equity markets.

Even today Bata Bangladesh at 4% dividend yield and PE of 14 is far superior opportunity with leadership position and great menagement. (I think over 40% share in Bangladesh).

http://www.dsebd.org/pdf/facilities%20for%20for%20foreign%20investors.pdf

http://www.dsebd.org/displayCompany.php?name=BATASHOE

http://www.batabd.com/about-us/investors/anual-report.html

Hence my answer, is a bit round about but you get the picture. You can go crazy over financial and cash flow, SWOT and all the other fancy analysis of Bata Bangladesh, I think you will like the results. Also, not being a sales man but do read  AR 13 of Acrysil.

http://www.bseindia.com/bseplus/AnnualReport/524091/5240910313.pdf

EDIT:
Since value cost matrix for every investor is unique and different, otherwise shares will stop trading altogether, a share is likely to be on buy bucket of one person and sell bucket of another. Also, I want some dividend to protect downside in worst case scenario. 5% Rs on JK Bank or 4% for Acrysil looks better than 0.5% for Relaxo.

I have been insisting that you increase your opportunity cost. It can take about 2 months to execute the process for an Indian National to open Stock Trading account in Bangladesh.

Enjoy and get rich

Monday, September 23, 2013

ROE



Long term investors typically search for stocks with high RoE. You can google Warren Buffett ROE.

http://www.gurufocus.com/news/151702/understanding-warren-buffetts-preference-for-roe

Or Charlie Munger ROE. There are books, cults, clubs dedicated to these two persons.

Whilst recognising the importance of RoE and fact that long term stock compounding will do no better than what the underlying companies' RoE does, it has more often than not proven to be self defeating to search companies over RoE over 18%. Its the direction of RoE that makes all the difference, that direction is the land of 20-50 baggers. Rerating coupled with Earning Growth are multiplied to form what results in material dreams being realised.

I recently read a 60 page report by Garry Evans, head of HSBC Global Equity Strategy which validated my own conclusion.

Why ?

Companies which already have 30% ROE are either expensive (PE over 40, eg: Nestle, Unilever) that it would take decades of patience to compound at 20% or market size is saturated with few established leaders. In short, market has already recognised.

Companies with lowest ROE quintile have outperformed highest companies in highest ROE quintile, time and again.

In my search of past 50 baggers, I have found that companies with RoE in range of 12-18% are the most likely candidates for re-rating even though their sales growth may continue at 15% plus.


Rahul Paliwal, a friend of mine had a great call on Relaxo at 260 Rs, which I ignored as Titan was at 145 and other quality names were also cheaper. Nobody mentions that Relaxo was at 42 Rs in 2003 and only 32 Rs in 2009 after six years of penance. Management quality is at par with the best.

At my stage in life, while not even close to being a billionaire yet, I stopped watching CNBC five years back. In the past two years I stopped watch any TV interview, other than following a few companies. I have also stopped following experts and billionaires as I believe that in the Munger speak they are too narrowly focussed in a single squirrely field of expertise. I am finding and realising that life is most fulfilling when lived in harmony with the cosmic plan, knowing your full potential, your position in infinite, of which holding share certificates are infinitesimally tiny part, definitely not the heart, although I can add that myself included, we have given it a lopsided share in the grand scheme of things. Also, we are greatly under estimating our potential both spiritual and mental by consigning it to domain of insurmountability, impossibility or disbelief and something that would happen in a distant future.

Bees
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Found another small company (infact the only small company that I liked in Australia), with 60 years of successful operation, availble for 120 Crores INR, any Indian national should be able to buy, listed on ASX with 70% market share in Australia for the past couple of decades.

Company is available at only 7 times earnings and 5% dividend yield, which is higher than term deposit rates of 4 years. http://www.anz.co.nz/ratefee/Interest.asp?section=PTDNZ#PTDNZ

The company is a likely candidate for acquisition by Kraft or Nestles of the world.

www.capilano.com.au
















Bees are disappearing:




There was a book on bees mentioned earlier here.

Disclosure: Not invested