Value Investing - My Thoughts and Approaches

Background:

• I started my corporate career as an IT Programmer and ended as an IT Infrastructure Project Manager as I decided to do something I'm passionate about

• I have been actively involved in markets since 2002 and strongly believe in Fundamental Analysis of stocks and approaches of great value investors like Warren Buffett, Peter Lynch

• I felt the valuations were extremely expensive and exited completely in end 2007 before the crash  and of course missed the subsequent rally as I wasn't comfortable with the overall fundamentals

• I suggested partial profit booking same time last year as well, as there was a fundamental disconnect between the earnings and valuations

• For the first time since 2008, I have started creating a portfolio for the long term since October 2015, because of the attractive valuations and the intentions of the Indian government in structural reforms

Just a disclaimer, the stock selections are purely my own and I am not licensed to offer stock recommendations.

Art of Investing and Markets:

I believe Investing is an art with a bit of science. Art part comes in understanding of the business, industry , future predictions and so on.  Also, different markets require different metrics for getting the right valuations. India is more of a growth story and stock appreciation, whereas Singapore is more of stable growth rate with decent dividend yields. The art in understanding the price to pay for, what we believe is decent returns. It took few years to understand the Singapore markets.

Metrics:

• As you are aware, value investing requires different metrics for different sectors and stocks. There are so many factors which determine those

• Some of the factors I use include P/E, P/B, D/E , Market Cap which is the science part and almost everyone uses them. I too use this as a reference

I also use PEG ratio on stocks which has delivered sustainable consistent growth with management quality

• I try to identify the larger themes and on board the journey as soon as possible and enjoy the journey during the big growth phase. One eg is identifying Havells at the beginning of their CFL boom and how they expanded into domestic appliances. The same with BPCL when the pricing was adjusted to markets and the fall in oil prices helped recover their marketing losses

• Currently, I am concentrating on the much beaten down power sector as I believe there are many multi-baggers sitting there if we believe in the good works of power minister Piyush Goyal

Past Recommendations/Views:

• I wrote on the importance of Margin of safety, especially when the markets were defying fundamentals. Nifty was 7300 when I wrote the need for caution and nifty is higher only by 4%, but as you could see the sample portfolio with those 4 stocks I had given has out-performed significantly

• When the fear was at the peak, I did suggest some stock recommendations with entry price here. Again, these have given excellent returns from those levels.

Reasons for Recommendation:

I shall share some thoughts on some of the Indian stock recommendations I made. I am also attaching the screenshots of my recommendations. I would like to keep it simple and stick to my circle of competence without bothering about the size of the circle.

IndusInd Bank (Recommended Price on 11th Feb Rs 810 ; CMP  Rs 986) :

IndusInd bank numbers are the dream for any fundamental value investors. They are doing what HDFC did 15 years ago, growing at a CAGR of 25% for the last 5 years. I was comfortable with the valuation of 25 times as I felt the growth is sustainable, considering the improvement in commercial vehicles segment and potential economic recovery. They are likely to end the year with Rs 41-42 per share and at Rs 810, am getting a company at 20 times, which will grow at 25 times. Even if the growth drops to 20%, there is still a potential 20% gains from current levels. There is huge margin of safety as they are likely to end up with Rs 50 per share for the next year which is only 15 times next year forward earnings. 

Larsen & Toubro (Recommended Price on 22nd Feb Rs 1150; CMP 1238) :

There has been a huge thrust on Infra development, though the words have not completely transformed into actions by the Govt. The stock has corrected almost 40% from almost 1900 levels. Consolidated EPS for last year was 51 and assuming they do the same for this year, it's available at 20 times. Stocks like LNT , HDFC will never be available at such valuations when everything is going fine. Also, the basic understanding is that India's economic reform can't progress without LNT being part of it and I thought it offers huge Margin of safety even assuming the order growth is muted

ICICI (Recommended Price on 22nd Feb Rs 198 and first around 240 post the correction; CMP 240) :

I don't believe in timing the markets; focus only on the valuations and the predictability of future growth. ICICI corrected to almost 12 times TTM at around 240 levels, which I felt was a good entry level for one of the leading private banks, I was personally very disappointed with the NPA of ICICI in the 3rd quarter, especially when you compare the likes of HDFCB and IndusInd and also considering their huge retail exposure. They reported Gross NPA of 5% which was almost PSU banks levels and quite rightly market hammered the stock post the results and also compounded by the overall sentiment. In spite of the huge NPA, Net Profits was still up for the first 9 months. They did Rs.22 per share last year.  You are getting one of the top private banks at 10 times and compare that to the 25-30 times of HDFCB for almost similar growth rates. I felt that market was extremely harsh with ICICI and the question I had to ask myself was "Will it go the PSU way or will they be able to fix" and if the answer is latter, it's a steal and the market will correct the anomaly soon and that's what has happened.

Tata Power and Praj Industries (Recommended Price on 22nd Feb Rs 59 / 80 ; CMP 70 / 91) :

These are theme based bets. The reforms in power sector and also the UDAY scheme of arrangement with state board should reform the sector better. Also, there is a major emphasis on the Ethanol blending and Praj is the only major structured player in the segment.

Singapore Stocks.
Singapore Banks (21st Feb UOB : $17.24 , CMP 19.64 | OCBC $7.98 , CMP $9.20) :

Singapore banks reporting increase in profits compared to the global peers. UOB spent close to $12M on buy backs last year.  Similar to ICICI, the first time I started liking was around the $20 levels, the same value as their NAV. So here you have one of the most conservative banks, who have spent $12M on buy backs, fundamentally still growing and available below book value. The stock has corrected more than 30% from the peak, offers a yield of 4% plus at $18 levels with the fundamentals still intact. I have seen similar situation in 2008 with some of the Singapore monopoly business like Straits times, Singtel offering 10% yield but the fundamentals weren't impacted due to the global financial crisis. I drew some parallel and thought it isn't 2008 and the company is still growing and available below NAV. Also they spent the most on buy backs. DBS reported 20% increase in net profits and the guidance is 7-8% growth for this year at an extremely attractive yield of 4%. The worst case scenario was increase in NPA from 0.9 to 1.3% if the oil drops to $20. So the choice was easy given the circumstances.

Keppel Infra ( 21st Feb recommended Price $0.485, CMP 0.50) :

This is an interesting business. The stock may not move much as it's more of a dividend play and the last few years have consistently given close to 7-8% yield. They have complete monopoly on the cylinder business, improving WTE and Newater business and couple of others. The merger with City Infra has further strengthened and offers 8% yield at that level. Singapore companies should be looked at flat revenues but the art part is identifying the par values so that they are attractive for the respective yields as most companies have limited growth opportunities. It provides almost 2% per quarter as divided yield

Fraser Hospitality Trust:

The company came out with an IPO for 0.88 cents in July 2014. They have so far out-performed the DPU projected during the IPO, both for the first year and the first quarter of this year. So with the fundamentals intact, the fear in market led its fall all the way to 0.72 cents with the yield increasing to 10%. As the numbers are better with a diversified portfolio and a not so high gearing, I felt it offers huge margin of safety.

Global Logistics Properties:

GLP is a very interesting company with the emphasis on state of the art technology for the logistics properties globally with diversified presence. It's a GIC owned company and the IPO happened at 1.96 in 2010 and went all the way up to 2.80. The reported net profits for 9 months of this year is 50% and the most recent quarter was 64%. They keep increasing lease space rapidly and in an important space of logistics. The valuations seemed extremely attractive considering the growth potential and backed by the management with huge financial capacity.

Is it time to be greedy?

I have been wanting to write about the markets and the valuations for the last couple of weeks. Co-incidentally I got an email about 8 timeless quotes from Warren Buffett and I thought using two of them would help to share my view of the current market correction.

• “Be fearful when others are greedy, and be greedy when others are fearful.”
• “Price is what you pay, value is what you get.”

Budget 2015 - Now :

I would like to rewind a bit, before I share my thoughts on current levels. In May 2014, I wrote about the importance of three words, Margin of Safety  as the markets were really euphoric post the BJP victory and the market was marching way ahead of the fundamentals. Same time last year, before the budget, my view, which was shared with many of my clients who had exposure to Indian equities and Mutual Funds was to exit India completely as the government had to present a transformational budget to sustain the huge valuations at Nifty 9000 levels. The budget happened to be a non-event for the markets, similar to the last few years and the market duly started its long overdue time and value wise correction, though it took few weeks post the budget.

In the last couple of years, on many occasions, market was celebrating every bad news with huge rallies, for the hopes of liquidity continuing. If we just go by the second quote of WB above, it was visible that the valuations were not sustainable, especially when the rally was driven by liquidity than fundamentals. It was just a question of when before markets correct itself to adjust to reality or pay the price for riding it higher with easy money. We even added Gold below 1150 levels exactly hoping for the current situation when the central banks couldn't control the markets once the tightening cycle begins.

The much required/expected correction started few weeks post the 2015 budget and reached 7800 levels from the high of 9100 in March and that's when I started to get interested again, which I shared here. The markets seemed to have factored in the Fed hike in November and were trading at higher levels by end of December. Suddenly storm hit the markets from day one of the new year and the ferocity of the fall took everyone by surprise. Being the results season and the AQR by the RBI which forced the banks (might require another blog on this) didn't help along with the sentiments in global markets which pushed the nifty to below 7000 levels.

Why Now and Why India :

As much as one believes in Efficient Market Hypothesis, market tends to prove everything wrong time and again. I don't think any single factor could be attributed to this massive sell off since the new year. May be, as Mr. Rajesh Nambiar, puts it, in his Nasscom 2016 welcome address, "The price of not knowing" is what I believe the reason for this panic. Not knowing the duration of access to cheaper funds or the potential future rate hikes along with the fall in commodities, led by Oil is what many believe are the reasons for this sharp fall. There is no single formula which works except buy when there is value and exit when there is irrational exuberance. As market often does, irrationality happens on both sides and I believe its currently on the downside.

The latest quarterly results were more or less in line with the expectations, till the PSU banks started to report their numbers following the revised RBI guidelines for bad loans. Ever since the 50 bps cut happened, RBI Governor has promised to look into the impediments which stops the banks from passing on the rate cuts and I believe the new norms for bad loans was part of that to get the system in sync with the policies. I hope and pray, the long overdue process for consolidation of PSU banks start along with this cleanup.

As per the two quotes of WB, there is huge fear on the street and even the compelling valuations haven't attracted much buying. Nifty has gone back to 2 years back levels, but look at the price of some the blue chips like HDFC and TCS, just to quote a few. The companies during this time have grown more than 30% compared to 2 years ago. If you had invested in March 2015, you would have waited two years for the earnings to catch up with the valuations. But, at these beaten down levels, where several stocks are trading at similar price levels compared to before but with increased earnings. You are getting an opportunity to accumulate blue chips at attractive valuations. Now, the crisis presents you an opportunity where companies like TCS, HDFC Bank will grow at the same rates, or even more, depending on the execution speed of Make in India and Digital India, but without having to wait for the valuations where you don't lose sleep over.

As referenced earlier in the Margin of Safety piece I wrote 2 years ago,

Stock	Feb 2014	Feb 2016
Deepak Fertilizers	106	145
HDFC Bank	667	988
Vardhman Textiles	358	758
NTPC	119	125

The markets might be back to 2014 levels, but the returns of the above mentioned stocks are still atrractive. The good news is there are many such attractive stocks available at current levels. This is a very healthy correction and I strongly believe it's that time to be greedy. For eg, IndusInd bank, which has been reporting close to 25-30% CAGR for the last 5 years is available at 23 times TTM. I also believe some of the rewards for UDAY and the restructuring on power sector will help turn around the sectors. Do you homework, stick to your circle of competence but don't miss the opportunity. Multibaggers in markets are made by investing at the peak fear and sit tight.

Following are some of the stocks I have added recently.

Stock	CMP ( 22nd Feb 2016)
TCS	2315
HDFC Bank	988
Bharat Bijlee	750
Balkrishna Industries	560
Havells	281
Tata Power	59
LNT	1150
Praj Industries	80
KVB	415
ICICI Bank	198
City Union Bank	84

Disclaimer : The usual caveat applies. :) Please do your own research. I believe in value investing and I get excited when the downside risk of 10% is extremely compelling to invest. The situation in Feb 2015 was the reverse, with the max upside potential of 10%.

Good Luck and Happy Investing.