Taking cues from Nifty Fifty History- Tone down Expectations

Yesterday, Nifty reported PE crossed 21 for the first time in 3.5 years (last time it was at 21+ PE on 2nd May 2011). See here. 

I did some calculation on how Nifty has behaved in the past from various PE, PB and Div Yield levels (taken all data from NSE website) & here is the analysis-

PE	1yr Return	3yr CAGR	PB	1yr Return	3yr CAGR	Div Yield	1yr Return	3yr CAGR
<12	70%	39%	<2	11%	26%	>3%	82%	55%
12-15	52%	30%	2-3	35%	27%	2.5-3%	55%	43%
15-18	20%	18%	3-4	14%	13%	2-2.5%	53%	36%
18-20	8%	10%	4-5	8%	5%	1.5-2%	32%	19%
20-22	5%	6%	5-6	-3%	5%	1-1.5%	4%	7%
22-24	-7%	1%	6+	-52%	-1%	<1%	-11%	2%
24-26	-29%	-3%
26+	-34%	-9%

So, data clearly says- "Be Greedy when others are Fearful and Be Fearful when others are Greedy."

Currently, Nifty is at 21.1 PE, 3.5 PB and 1.25% div yield.

So, history says-

1) Tone down your expectations. Nifty won't run up fast from here.

2) But 1 yr and 3 yr returns are not into negative territory as yet. So, we are not into bubble territory as yet.

Though, there are early signs of bubble-

1) Small & mid caps are running up fast on (a) One good quarter results (b) Some expert's reco

2) IPOs are coming and getting huge subscription

3) Quality Consistent growers are selling at 30+ PE.

But these are early signs only. Big zero Profit IPOs are yet to come. Valuations are yet to get over-stretched.

So, according to history, Nifty Index should give close to FD kinda returns over next 3 years. 

But, some will say, it's different this time-

1) We are at the bottom of the economic cycle. Q1 GDP growth is encouraging, interest rates should go lower in some time which will give boost to ROEs and PAT growths.

2) Strong government and PM after a long long time.

So, according to me, its time to get a bit cautious; but only a bit!!!

FY15- Where are We Heading?

FY14 has been an amazing year for Indian stock market thanks to strong election verdict and turnaround hopes.

25,000 on BSE and 7,500 on NSE looks too high to someone waiting on the sidelines and looking to enter. Wish someone can forecast where are we heading !! I certainly can't.

But at least we can see where are we now & use that as a guide for decision making (as suggested by Howard Marks in his book The Most Important Thing).

So where are we right now?

1) PE- Nifty standalone PE is 20.4 (See Here) while Sensex standalone PE is 18.5 (See Here).
Consolidated will be somewhat lesser. This is little higher than long term average PE but lower than 2008 peak levels.

2) Mcap to GDP ratio- Market cap of BSE listed companies is 87.8 trillion INR which gives a Mcap to GDP ratio of 79.5%. At 2008 peak, this ratio went up to 103%. See news links here and here.

So, here is the good news- We are not into insane levels yet! However, we are above long term average on Valuation. Hence, don't expect huge up-moves in FY15 like we saw in FY14.
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Now a word of advise-
Ignore all of the above. Everything is just noise.
Just find a portfolio of stocks which can surprise the market by earnings growth or by dividend payout or by special situation (de-merger, de-listing, asset sale, or even stock split) and sit on it.
   

V Mart Retail- A Possible Multibagger...

Wrote on V Mart Retail as a part of Safal Niveshak Value Investing Contest.

Report can be accessed here-

http://www.safalniveshak.com/value-investing-contest-v-mart-retail/


However, please note-

This is not a Buy & Forget Stock. There are things which can go wrong here.
An investor needs to monitor-
1) Sales/ sq foot — A declining trend here means they are struggling to grow in their existing stores / growing too fast for confort.
2) PAT margins — A declining trend here means they are giving too high discounts to attract customers may be due to increased competition or due to lack of customer interest.
3) Inventory Days — A declining trend here means they are not able to sell inventory fast enough & run the risk of obsolescence.
4) Payable Days — A declining trend here means suppliers are taking better terms from the company.

Disclosure- Invested

2014- Model Portfolio

As promised in the last post, here is my Five stock model portfolio for 2014.

But rather than picking one portfolio, I have picked four different portfolio for four different investment styles.

Value Picks	Low PE	Medium PE	High PE
Nesco - 783	Canfin - 174	Repco - 348	Page - 5164
Selan - 304	RS Soft - 194	Astral - 330	ITC - 322
Piramal - 551	Acrysil - 205	Ajanta P - 946	Nestle - 5297
Noida Toll - 21.5	Avanti - 248	Symphony - 424	Gruh - 256
IL&FS Inv Managers -13	JB Chem - 129	PI Ind- 247	Sun Ph - 568

* stock picks along with recommended price

Value-picks Portfolio has stocks wherein there is a huge asset base supporting the market cap like Nesco has 700 acres of land in Bombay. But there is uncertainty about how that value will be realized. However, I feel, these five have potential of value-unlocking in 2014. Ben Graham & PPFAS Value Fund might well have these picks in their portfolio.

Low PE Portfolio (PE < 10) has stocks which are cheap relative to their current earnings & book value. These five have potential to beat the market in 2014. However, future visibility is low & hence market may not pay very high PE/ PB to these. Who will have these? Don't know... Maybe Howard Marks will have them.

Medium PE Portfolio (PE < 25) has stocks which are growing very fast currently & have good potential to keep doing that in next 2-3 years. These are stocks that have moved from small caps to mid caps in past few years & can become semi-large caps in next few years. Maybe Charlie Munger will have them.

High PE Portfolio (PE > 30) has stocks which are proven great stocks. The Tendulkar, The Kallis of investment world. These are the stocks to buy once market drops 30-40-50%. However, current high PEs makes investors worry whether they are paying too much or not! Stocks which will fall into portfolio of Philip Fisher.

PS- I/ Good investors I know are bullish on all the 20 stocks. I hold some in my portfolio and hence bound to be biased.

Lets see which portfolio performs the best in 2014.

2013- The Year That Was!!!

As 2013 comes to a close, its time to review & analyze the year that is about to end. As 2013 ends, I finish my 3 years in Equity Investing!!!

So how good/bad have I done & how I want to move ahead? Here are my views on Equity Investing-

• Apart from contingency funds & tax saver funds, most of my net worth is in equities & I plan to maintain the same as I believe equity should do better than any other asset class over the long term. I still maintain my views of What, if not Equities? 

• Equities are & will always be volatile; so in optimistic times its better to have cash to keep portfolio Anti-fragile i.e having ability to profit from volatility. How to judge optimism/pessimism? Look at sell-side analysts view. If they seem optimistic, its better to be cautious & when they predict doomsday, just go out & shop. Currently, most are optimistic!! 

• The amount of money I have invested in these three years is much less than the amount of money I plan to invest in the next decade. So, I want bear markets rather than bull markets.

• Its better to buy Good Business than Cheap Business!!! In good businesses, Margin of Safety comes from the earnings growth, the ROCEs, the free cash flows, the increasing dividends and not Price paid. So, now I am OK to pay about 20 PEs provided I expect good growth at good ROEs. Though, still not comfortable enough to pay 40 times earnings for great businesses like Page. 

• Of-course, the best thing is buy a Good Business at a Good Price. How is that possible??????(1) When that good business & its potential is unknown to the market. Ex- Mayur Uni 2 years back. (2) When that good business gets into temporary issues & price falls due to those issues. Ex- VST Tillers last year after a bad Q2. 

• I am in the Diversified Portfolio Camp. I want to limit a position to a maximum of 10% of portfolio value as I want to save myself from Black Swan events as well as Illusion of Control. I neither meet the managements nor talk to customers, suppliers, competitors etc so to get a great deal of confidence to put 25-30% of money on one stock is tough. I am happy with my 10% limit rule till the time I start doing those things.

• I want to achieve 19% CAGR over the long term. Why 19%? Because- (1) 1.19^4= 2. So, portfolio doubles every 4 years at 19% CAGR. (2) Because both God & Guru have nearly similar CAGRs over the long term. See here and here. At 19% CAGR, I believe, I will be able to do better than most mutual funds and most other assets. In the first three years, I have done much better than my target rate. However, as my portfolio grows and as equity markets become less rewarding, I think, my return CAGR will fall. 

• The most hurting mistakes of 2013 are on the Selling side. I have sold a stock which then rallied 50% in the year, sold a stock on seeing margin pressures to see it go up 20% in a quarter, and have a few stocks in my portfolio which I don't know when to sell. So, clearly I need to work on getting selling right.  

• In 2013, my portfolio returned 31% CAGR thanks to some good work, good side-car investments alongside great investors and good movement in small & mid caps. I expect 2014 to be much tougher.

In the next post, I will pick my stock-picks for 2014!!!

HaPpY NeW YeAr 2014!!! 

It Happens Only In Markets!!!

Imagine I buy something from you, then can we both lose in the trade??
I think No because this is a Zero Sum Game... Either you gain or I gain or we both stay same (if Price = Value).

But that's not what happens in Stock Markets!!!

Torrent Pharma decides to buy Indian Branded Formulations Business of Elder Pharma for 2000 crs.
And what Mr. Market does?
It punishes both. Torrent down 4%, Elder down 8%. At one point, both were more than 10% down.
How can both lose in the trade???

Actually both can lose if we involve Tax angle. Elder would receive only 1300 crs (assuming 35% tax). So if intrinsic value of the business is between 1300 & 2000 crs, both will lose. 700 crs goes to tax dept.

However, Torrent Pharma lost more than 900 crs at one point (when down 10%) & Elder lost 70crs. So clearly there is more to it than just the Tax Angle.

Lets think from Torrent's shareholders' perspective. If I am a shareholder, I will think-

1. Oh No!! They are buying other business, means they are not confident of growth from their own business segments. Let me sell.
2. M&As are generally value- destructive. May be this is also the same. Let me get out. 
3. Oh No!! Who will pay for these 2000 crs? This will distort the balance sheet & the company will have to pay the interests also. This will hurt the near term PAT also. Let me sell.

And none of the concerns is illogical.

Lets think from Elder's shareholders' perspective. If I am a shareholder, I will think-

1. Oh No!! I was bullish on that segment only. What's the point of keeping this stock now without that segment?
2. Will I get anything from this sale? The press release hasn't even talked about dividend. So, I guess, nothing is come my way. Lets not keep this.

And none of these concerns is illogical either.

So it makes perfect sense for both to fall after this trade announcement. It happens only in the Markets!!

Behind every trade there is a Buyer and a Seller, and, I think, both can be right due to difference in time frame, access to information, analysis of the information and/or circle of competence.

And this is precisely the reason why equity markets are so volatile and so interesting. In case of perfect information & perfect analysis, stock returns would have just followed earnings growth just like Fixed Deposits.

And because of these shortfalls, it isn't possible to master equity markets (with zero errors) even with decades of experience!!!

Disclosure- Neither invested in Torrent/ Elder nor planning to invest.   

  

Special Situation - Fresenius Kabi

Whenever I see special situations, I ask myself 'Why bother'?? I am stress-freely enjoying plain simple equity plays & CAD is at two year low & QE is continuing in US & so India should do well.

Then I recall words from Prof Bakshi in some article- "Special situations should be treated as an alternative to cash. And I increase my allocation to these plays whenever I find equity markets over-valued."

If that's the case, with 20.5K on the board & within inches of ALL TIME HIGH at a time when GDP growth is terrible, this is a good time for Special Situations.
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Fresenius Kabi Oncology Ltd is a subsidiary of a Singapore based multi-million Euro company. Promoters have decided to delist the Indian company & have received all the necessary approvals. Tendering will start in another 3 days. For success, 9.5% of total shares need to be tendered out of 19% total non-promoter shares. Lets try to answer 3-4 most important questions in this case.

WILL THE TENDERING SUCCEED?
Highly likely.

• 6.5% shares are with just 4 FIIs.
• Next 3% shares are with 24 FIIs/ Banks/ MFs as per the last available shareholding pattern. 

So, the cards are clear to everyone- who needs to tender to make this a success!! Unlike, cases when whole  25% is with retail guys- who all keep thinking that let others tender... Why should I tender. 

WILL PROMOTERS ACCEPT THE DISCOVERED PRICE??
Highly Likely.

• Only the global entity is listed. All other country entities are not listed.
• Company has raised & won appeals against SEBI over de-listing. So, would be desperate to get de-listed.

So, case of Deprival Super-reaction Syndrome & Commitment & Consistency Bias should make them accept even at a price higher than what they think is justified.

WHAT WILL BE THE PRICE???

• Floor price decided by SEBI formula is Rs 116/-
• Promoters have indicated Rs 130/- as indicative price at which they will accept.
• They indicated this price on April 16, 2013 when Euro was 71 Rs. Now, its 82 Rs. So, this 15% depreciation should make them ready to pay 15% extra on 130/- promised. That's about 150/- Rs.

• BUT those FIIs which hold the controlling power were all issued shares at Rs 80 in Dec 2012. So all of them are sitting on huge profits. So, they may not tender at such high prices.
• FIIs may be operating on Promoters' guidelines. This can be a BIG plan- I give shares to you at 80 Rs; you give me back at 120 one year later. 

• Even if this whole game is pre-decided, I don't think they would like discovered price to be very near to floor price just to avoid facing SEBI's wrath again.

So, there are various angles which makes this case interesting to watch, even if you can't see the whole picture.

My prediction is that Delisting is going to be successful at price of  Rs 140-150.

That's a cool 10% upside in less than 1 month.

Less favorable case would be successful delisting at Rs 130. That's no profit- no loss.

Worst outcome would be delisting failure. High Unlikely. But if that happens, stock may fall 20-30%.

Let The Game Begin!!!

Disclosure- Playing but not heavily. Need to build more conviction on these to play heavily.