Saturday, May 17, 2014

DELTA BRAC HOUSING, Minimising Variables

An investor must endure and persevere the compounding machinery to create long term wealth. Secondly, what has been gained thus far must not be lost. 

Although I have an opinion on every subject matter, however with a view to limit the twaddle on the concentrated / diversified debate, I can say with a quite high degree of certainty that:

Wealth can be preserved if you can predict future changes in an industry or stick to existing proven ideas.  [ How can I be more vague and yet correct ? ]

I also view diversification of portfolio as a cost to my quality of life. I want investing to take no more than 10-20% of my waking hours after other interests. ( 1-2 hours per day). 

Some of the market leader MNCs in Bangladesh and Nepal have grown 100% - 400% (GSK 300%, Bata 100%, Reckitt Banckiser 100%, Unilever Nepal 50% in past two months) in the past year, still available between 15 - 22 times earnings. In those companies one can even put 20% in a single idea ( with quality of life Index unmarred). Relatively to India they still look far cheaper and equally strong companies and in my opinion better rates of growth impending. You can't ask for more in life than market leading MNC growing at 25% and available below 20 times earnings, 80% dividend payout ratio, and some more.

Value Investing

I do not intend to belittle or disparage any investor but you have to agree that market is full of surprises. 

Very recently (February, March) you heard a large number of people that it is very risky to own PSU Banking stocks and beaten down names in India. Yet this category has delivered maximum returns. 44% compounded by BANKEX alone in the past 90 days. 

I have tried to simulate a virtual portfolio of 30 - 35 stocks which did better than my actual 12-14 stock portfolio in India. Downside is quality of life. In the actual portfolio Wim Plast, Cera, Atul Auto, Bajaj Finance were the best performers in the past 24 months. Kitex a minor holding since past 2 months did well too. What I am trying to say is that its possible in my opinion to make more money in a more diversified portfolio than more concentrated. ( Diversification can be too much to tackle for me if it goes above 100-200 stocks)

Given that I find India slightly overvalued to peripheral geographies, I'd like to diversify a bit more in India. 

When is diversification too much

I feel that when it starts impacting your personal life and despite full time devoted to investing the results are same or below averages, diversification become detrimental.

A well known investor returned same as averages.

Delta Brac Housing (DBH)

You will also hear that it is impossible to identify a company as a 20-30-50 or 100 bagger before it has become one. Based on my past few months of research, understanding of Housing Industry, a thorough bred company like Delta Brac Housing. Promoted by best of breed organisations like World Bank, HDFC and BRAC NGO and BRAC Bank, this company has no reason, not to be 100 times bigger in the next 20-25 years. An apartment in Dhaka costs between 4-8 million BDT. Pioneer and market leader in private sector DBH has a loan book (that the company has refused to grow in the past two years), is only 2600 Crores BDT. 90% of apartments/housing loans originate in Dhaka, which accounts for 10% of Bangladesh's population. Bangladesh's housing finance market is 20 years behind India. 90% of borrowing of DBH are directly from fixed deposits from small customers through strong distribution network and Ads in media (nobody can cut off DBHs lending lines).

Corporate Tax Rate in Bangladesh varies from 27% - 42.5% (down fom 45% last year and expected to come down to 40% next year). It is highest for Banks, FIs, NBFCs i.e. 42.5%. Eventually it will come down to a more rational 30%, which can take  several years. GNPA of Bangladesh's banking sector are around 10%, NNPA of 4-5% post financial crisis of 2011. Despite these setbacks, DBH is growing profits at 20-22%, GNPA of 0.2%, NNPA of 0%.

It has chosen to limit AUM growth in the short term. Only 6 companies (including parent BRAC BANK) have been rated AAA out of thousands in Bangladesh by CRAB ( The only company to be rated AAA in Bangladesh, eight years in a row.

With taxation relief and a more even development in the 8th most populous country of the world. (Roughly 15% of India's population). This leading and pioneer housing finance company should be north of 10-20 Billion USD market cap based on the simple maths of having 10% mortgage market share (something it currently has). You'd ask then, why is it the leader. Because 80% and rapidly shrinking market is held by inefficient Govt. owned organisation. (  It had 0% market share in 1995, 5% in 2010, currently 10%. Average apartment price after 15-20 years is likely to be in several crores (70 Lacs today) but I have assumed only 1 crore BDT for my calculations. Bangladesh is three times more densely populated than India - meaning house prices are not heading south. Current market cap of DBH which is in the same league as HDFC was in 1980s in India is less than 100 million USD. And that is a market leader. 

Using a simplistic assumption of Bangladesh  reaching India's economic development level ( which is what, 110 out of 180 countries), Bangladesh's housing mortgage market should be 15% of 7 Trillion INR. i.e.  131,000 Crores BDT, Currently it is almost a 6th of that. Mortgage to GDP ratio in India has risen from 2% of GDP in the year 2000 to 7% as of 2014.

Bangladesh mortgage finance market is growing at 20% CAGR, and I believe it can grow at 30% CAGR as wholesale lending develops. As Bangladesh is 20 years behind India, its Mortgage to GDP ratio reflects that, with somewhere in vicinity of 1.5%. Some of the developed countries like the US, UK, Scandinavian countries, Singapore have this ratio as high as 70-90% of GDP. That makes me actually very optimistic about morgage finance industry even in India [ not that my fellow beings will be steeped in debt :) ]

Despite these tax challenges and lopsided growth of Bangladesh (extreme destitution), per capita income less than half of even that of India, DBH sports 22% ROE, which is already commendable, but can go to 35% if tax stucture is same as for Indian corporates. DBH has not been a a cheap company at 30 times earning in 2011, momentarily selling at 12-13 time earnings as the banking industry is in throes of NPA pangs in Bangladesh

If not 200 times, 80-100 times growth is assured. Do some research and read past three years of annual reports. You have chanced on a stock which probably does not even require 10 minutes per month of monitoring. It is on the way to become my biggest holding in another couple of months.As successful long term investing requires reduction in number of factors effecting results and minimising the number of decisions. With DBH the only variable you have to worry about is an earthwide flood that may require building Noah's Ark.

Disclosure: Invested / vested interest in all stocks above.

Wednesday, May 7, 2014

The miracle called India

My father informed me a few facts about India, roughly15 years back, something that he believed would shock me.

Since then the outlook has not improved. One of the hideous facts that he informed was - Police Stations in north India are sold in auction system to highest bidder / head cop / SHO. Police Stations are after all a business with discounted cash flows of illegal revenue streams. Capitalists would be inclined to buy into these public monopolies only if they were listed.

Worth checking a few fun facts of similar proportions from this episode.

Some of the learnings from this episode is:

- It takes 20 Crores to become MLA
- It takes 100 Crores to become MP

(What kind of favours have to be returned for the sum of money spent, to whom?)
- Fake marriages happen in India to give party to people to win votes ( for 500 Rs they take away 10-30 Lacs per person owing to them in schools, medical care, national resources)
- Ambulances carry black money with no patients
- All licences for schools, hospitals, telecom, coal, mining are sold for thousands of crores, main reason for India's poverty
- Garbage disposed by MCD or all municipalities in India is provided for a cost to contractor for thousands of crores (most of it taken back by politicians elected in power for a 500 Rs cost per person), meaning we all pay money, thousands of crores per annum to clear garbage in New Delhi, Lacs of Crores for cleaning up whole India
- There are private players who are willing to take up Garbage for FREE, not only FREE but they are willing to pay back Govt. to collect KOODA/GARBAGE, but Govt. is not giving them. It can be recycled and made into compost/recycled plastic/paper etc.
- But there is a Big nexus of Gundas/Goons/Policiticans, they dump Garbage and make mountains of garbage in landfills, that causes cancer in whole environment and leeches into underground water with toxic and poisonous chemicals
- Lacs of crores are stolen every year from our Tax
- Everybody is paying Tax in India including Rikshawala, 66% tax is indirect meaning through toothpaste, soap, water, clothing etc. 33% tax is direct from Income.
- More than 90% tax is stolen by politicians
- Govt sells iron ore to 27 Rs a tonne which is sold for thousands of Rs in market
-  Nearly 20% of Member of Parliaments of India have murder and rape case against them. But country was up in arms against only one such high profile case.

Given the crystal clear view of situation. Why should Government workers perform their duty honestly, why should public sector bank officers be fair and not simply steal the money like their Senior counterparts. Afterall imitation is the sincerest... Does that also mean Can Fin Home, a company I am interested in not investment worthy?