Saturday, June 28, 2014

Its 2009 once again

Hi Amit,
If you are given chance, what are your recommendation in Sri Lanka market. I selected Nestle Lanka ( PE 29), Chevron, Piramal Glass, Tokyo Cement and United Motors. Pl share your insight.
PS: Finally opened Bank account in SL. Trading account in a week time.

Dear Karthik

All the best for the venture and wish you success.

Just some high level numbers:

Sri Lanka GDP 60 Billion USD
Sri Lanka Per capita (divided by 20 million population)
3000 USD per capita

India's per capita is 1500 USD

Astounding !! after 20 - 30 years of civil war and genocide, Sri Lanka is 2 times richer per capita ! Just shows where your, mine and everyone else's tax went from India over past 70 years, in Switzerland, okay I may be exaggerating, not all but just 92% of the revenue collection, legal + illegal.

Market Cap / GDP looks awesome for Sri Lanka !
20 Billion USD Market Cap / GDP of 60 Billion = 33%. You will get many winners.

In India I believe Market Cap to GDP is well over 100%, Investors make lot of money when this ratio is below 50%.

Below were India's numbers. In 2014 it should be around 120-130%, that can break the compounding machine on a downturn - and we do not want the compounding machine to ever stop or go in reverse!
Market Cap to GDP ratio as a percentage.

Country name       2009    2010    2011    2012
India                     86.4     94.6     54.0     68.0

I would invest in Sri Lanka in FMCG companies with over 50% market share. Nestle, Chevron fit the bill perfectly.

Why should you also not invest in Bangladesh as well ? Similar numbers for Market Cap / GDP, infact per capita is just 600$ i.e. even less than half that of India and population is also 7-8 times that of Sri Lanka with about 10 good companies listed where you can invest and go to sleep with nary a worry.

Just until last month I was averse to Investing in Bata Bangladesh because revenue growth is only 12%-14% per annum. Then I checked out Bata India, surmised that if BIG money is willing to give 41 PE multiple to same company with 20% market share in India, then why not buy same company at 13PE wiith 40% market share in that country. Bata Bangladesh is just for 920 Taka, EPS 60-70 Taka, Dividend 30 Taka. Infact its land bank market price is more than its market cap, which can also one day be unlocked, currently big part of it is given to farmers as CSR initiative. Both Bata India and Bata Bangladesh are equivalent in growth rates, zero debt position. One is twice as strong in terms of market share. So if established names are available at 15-25 times earnings, I believe they will even out perform hand picked small and mid caps. I have no doubt that with this policy we would miss great 60% CAGR runs in companies like Gulshan, Superhouse, Muthoot Finance, La Opala which can break the 100- 1000 chart in 3-4 years (while you can do that with part of your portfolio), but over all you will do very well with this approach until they also to get re-rated like Indian counterparts. With rush on the front door, we will happily and very willingly hand over these blue chips share certificates to the future generation of bold, pioneer and herdy investors at 40-60 PE multiple. 

I only set sail to buy relatively cheaper but well respected companies in other countries. However a serendipitous gift that fell into the hands as a consequence of investing in multiple countries is a truly weak correlation amongst stocks, while one market makes a top, other is only half way in the middle or making a bottom, capital allocation is more efficient. One can stay in stocks and never need to call a top of market, and re-allocate capital.

In my classroom I remember nobody could answer the question posed by my professor except one person:

What is the first Objective of a Company ?

Growth, expansion, work for profits, work for shareholders, employees, produce products with utility etc. are secondary.

Survival is the answer. Same applies for an investor. The real game is to be in the markets always, to survive all market cycles. 

Remember that all research reports, regardless of PE multiple, 15 or 60, will continue to lure prospective investors for these blue chips with a perpetually boring blanket commandment "Investors with horizon of 5 or more years can consider Nestle Sri Lanka, Bata Bangladesh or X as good investments and expect 20% compounding". Just compare the PE multiple against India and buy at a discount, there is no reason why these countries will not grow as fast. Meanwhile for your solitude and patience earn 3-4% yield and 15-20% or more compounding. Once the bridge comes we will cross and plan the next course, meanwhile get 10 times richer over the next 10 summers. Indeed it is 2009 with certain companies.

Disclosure: Invested in all companies above except La Opala.

EDIT: Spent a few hours today in combing through Sri Lanka. Looks great, all hospitals trading around 10-12 times earnings. There are several other gems. Conglomerates and FMCG companies like Emami in India are selling for 10-12 times earnings. Thanks for the initiative, I'll start the paperwork to get an account opened. Will update after some more research and once I buy something.