1. No category

1
S G Raja Sekharan
1
2
My portfolio performance last year
(as of 30th Dec 2012)
Warren Buffet –The sage of Omaha
World’s wealthiest –
Forbes 2013
Carlos Slim Helu & family –Mexico -$ 73 B – Mobile companies
William Henry Gates –US - $67 B –Microsoft
Warren Buffet – US - $ 53.5 B –Berkshire Hathway
Warren Buffet –The sage of Omaha
• One of the most
successful investors
in the world
• Noted for his
adherence to “Value
Investing”
• Also known for his
personal frugality
• Born in 1930, second
of three children,
father was a stock
broker and politician
• Early in school age,
he started earning
by selling soft drinks
and delivering paper
• At 14 years, with his
earning, he bought
40 acres of land –
which he rented out
• He went to
Columbia for
graduation - studied
under Benjamin
Graham –father of
Value investing
Warren Buffet –The sage of Omaha
• Benjamin Graham refused
to hire him –saying Stock
broking and Wall street
was not for him
• Warren Buffet came back –
got married and stayed in
Omaha with his father’s
brokerage
• Benjamin Graham changed
his mind and gave him a
job in his NY office
• Value investing means
seeking stocks selling at
extraordinary discounts to the
value of it’s underlying assets
–defined as “Intrinsic value”
• Buffet went a step beyond
Value investing – he looked at
the value of a good
management team, product’s
competitive advantage in
marketplace
Warren Buffet –The sage of Omaha
• In 1956, he came back to
Omaha and launched
Buffet Associates Ltd
• In 1962, already a 30 year
old millionaire –he joined
forces with Charlie Munger
• This collaboration
eventually resulted in the
investment philosophy of
Value investing that helped
Buffet to get where he is
today
• Along they way, they
purchased a dying textile mill
called Berkshire Hathaway as a long term investment
• Cash flows from this mill were
used to fund other
investments – eventually
other investments
overshadowed the textile
business
• In 1985, Buffet shut down the
textile business – but
continued with the company
as a holding company
Warren Buffet –The sage of Omaha
• Buffet picks up stocks in what he believes are
well managed under valued companies
• When he purchases any stock – his intention is
to hold the stocks for infinite period of time
• Coke, Amex, Gillette etc are such stocks held by
him for many decades
• He also purchases companies outright and let’s
their management teams handle their day to day
business
Warren Buffet –The sage of Omaha
• He believes that an investor and a businessperson
should look at a company in the same way. The
businessperson wants to buy the entire company
while an investor wants a part
• The first question any businessperson will ask is,
‘‘What is the cash generating potential of this
company?’’
• Over time, there will always be a direct correlation
between the value of a company and its cash
generating capacity. The investor would benefit by
using the same business purchase criteria as the
businessperson
Warren Buffet –his investment
philosophy
• The basic idea of investing are to look at stocks as
business, use the market’s fluctuations to your
advantage, and seek a margin of safety.
• Warren Buffett seeks first to identify an excellent
business and then to acquire the firm if the price is
right
• Once a good company is identified and purchased at
an attractive price, it is held for the long-term until
the business loses its attractiveness or until a more
attractive alternative investment becomes available.
Warren Buffet –his investment
philosophy
• Buffett seeks businesses whose product or service
will be in constant and growing demand. In his view,
businesses can be divided into two basic types:
▫ Commodity-based firms, selling products where
price is the single most important factor determining
purchase.
▫ They are characterized with high levels of competition
in which the low-cost producer wins because of the
freedom to establish prices. Management is key for the
long-term success of these types of firms.
▫ Buffett avoids commodity-based firms.
Warren Buffet –his investment
philosophy
• Buffett seeks businesses whose product or service
will be in constant and growing demand. In his view,
businesses can be divided into two basic types:
▫ Consumer monopolies, selling products where
there is no effective competitor, either due to a patent
or brand name or similar intangible that makes the
product or service unique.
▫ Buffet is interested in consumer monopolies
As per Warren Buffet – there are three
types of consumer monopolies
• Businesses that make products that wear out fast
or are used up quickly and have brand-name
appeal that merchants must carry to attract
customers.
As per Warren Buffet – there are three
types of consumer monopolies
• Businesses that provide repetitive consumer
services that people and businesses are in
constant need of.
As per Warren Buffet – there are three
types of consumer monopolies
• Communications firms that provide a repetitive
service that manufacturers must use to persuade
the public to buy the manufacturer's products.
Advertising agencies, magazine publishers,
newspapers, and telecommunications networks
are good examples
Warren Buffet – how does he spot a
commodity based business
• The firm has low profit margins (net profit divided
by sales)
• The firm has low return on equity (earnings per
share divided by book value per share)
• Absence of any brand-name loyalty for its products
• The presence of multiple producers
• The existence of substantial excess capacity
• Profits tend to be erratic
• The firm's profitability depends upon
management's ability to optimize the use of tangible
assets.
Warren Buffet – how does he spot a
consumer monopoly
• The firm has managed to create a product or service that is
somehow unique and difficult to reproduce by competitors due to
 Brand name loyalty
 A particular niche that only a limited number of companies can enter
 An unregulated but legal monopoly like patents
•
•
•
•
•
•
A strong upward trend in earnings
Conservative financing
A consistently high return on shareholder's equity
A high level of retained earnings
Low level of spending needed to maintain current operations
Profitable use of retained earnings
Warren Buffet –his investment
philosophy
• Target successful businesses--those with
expanding intrinsic values;
• Value is measured by the ability to generate
earnings and dividends over the years;
• Buy at a price that makes economic sense,
defined as earning an annual rate of return of at
least 15% for at least five or 10 years (I would
opine, in India with Inflation of 10%, we need to
target 20% returns).
We will now get into specifics
• There are 14 questions that we need to answer
• We will take one corporate example –Asian
Paints and analyze the stock to find out
▫ whether is it worth at all? and if yes
▫ at what price one must buy the Asian
Paints stock
21
Paint industry in India
–an overview
• Market size of paints in India is Rs 260 Bn as of
FY 2012 and has grown @ 15% in the past year.
• Unorganized sector consisting of about 2000
units control 35% of the market
• Organized sector has 65% market share –top
players in this sector are Asian paints (34% of
the 65% organised mkt), Berger Paints(15%),
Kansai Nerolac (9%) and Akzo Nobel (8%)
22
Paint industry in India
–an overview
Top 4 paint companies in India
Sales
Turnover
Net Profit
Market Cap.
Asian Paints
8,971.70
1,050.00
44,473.21
Berger Paints
3,024.21
209.8
7,947.62
Kansai Nerolac Paints
2,856.60
292.2
6,332.04
Akzo Nobel
2,231.98
218.83
5,328.84
(Rs. cr.)
23
Paint industry in India
–an overview
• Low technology and low capital costs help the
unorganized sector – however the reduction in
excise duties from 40.5% in 90’s to the current
16% has helped the large units to compete
effectively.
• The paint industry is raw material intensive -on
an average, raw materials account for 60% of net
sales (industry average). In case of small-scale
units it forms up to 70% of the net sales.
24
Paint industry in India
–an overview
• Around 300-400 raw materials are required to
manufacture different kinds of paints (pigments,
solvents and additives).
• The high number of raw materials and finished
goods highlights the working capital intensity of
the sector
• Most of the raw materials are petroleum based.
25
Paint industry in India
–an overview
• The products of the paint industry can be
classified into two major segments decorative
(architectural) paints and industrial paints
• 70% of the paints sold in India are decorative
paints – entry barriers here are investments in
branding and dealer networks –Asian paints is
the leader in this category.
• Industrial paints are used in automotive, marine
and other applications –Kansai Nerolac
supplying to Maruti makes it the market leader
in this market.
26
Paint industry in India
–an overview
• Supply exceeds demand in both the decorative
as well as the industrial paints segments.
• Brand, distribution network, working capital
efficiency and technology play a crucial role
• The market grows at 1.5 to 2 times the GDP and
with India growing at 8%, the growth is expected
to be around 12-15% in the coming years.
• Decorative paints are expected to witness higher
growth going forward due to boom in housing
sector
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30
31
32
Questions to determine the
attractiveness of business – Q1
Is it a consumer monopoly or commodity
business –does it have an identifiable
durable competitive advantage?
• Consumer monopolies typically have high profit margins because of
their unique niche
• Beyond high profit margins, look for companies with operating
margins and net profit margins above their industry norms
• Also look for strong earnings and high return on equity will also
help to identify consumer monopolies.
• Look at a detailed study of the firm's position in the industry and
how it might change over time.
Questions to determine the
attractiveness of business – Q1
Operating profit Mar '12
Asian Paints
15.03%
Berger Paints
9.50%
Mar '11 Mar '10 Mar '09 Mar '08 Mar '07 Mar '06 Mar '05
15.98% 17.18% 12.18% 14.24% 12.31% 13.20% 13.05%
9.41% 7.35% 7.38% 8.66% 8.77% 9.18% 8.58%
Net Profit
Asian Paints
Berger Paints
Mar '12
9.93%
5.64%
Mar '11 Mar '10 Mar '09 Mar '08 Mar '07 Mar '06 Mar '05
10.69% 12.27% 7.30% 9.15% 7.18% 6.91% 6.82%
5.94% 6.08% 4.58% 5.87% 6.34% 6.38% 5.60%
RONW
Asian Paints
Berger Paints
Mar '12 Mar '11 Mar '10 Mar '09 Mar '08 Mar '07 Mar '06 Mar '05
31.68% 34.82% 43.52% 26.58% 32.99% 25.18% 22.21% 21.26%
22.78% 21.77% 20.18% 21.26% 25.67% 30.36% 31.20% 26.28%
Questions to determine the
attractiveness of business – Q1
Is it a consumer monopoly or commodity
business –does it have an identifiable
durable competitive advantage?
• Consumer monopolies typically have high profit margins because of
•
•
•
•
their unique niche
Beyond high profit margins, look for companies with operating margins
and net profit margins above their industry norms
Also look for strong earnings and high return on equity will also help to
identify consumer monopolies.
Look at a detailed study of the firm's position in the industry and how it
might change over time.
YES - Asian Paints has an identifiable durable competitive
advantage in the form of it’s brand leadership and it’s
distribution network in India
Questions to determine the
attractiveness of business – Q2
Do you understand how the product
/service/business model works?
• Only invest in industries that you understand – for
example Buffet refused to invest in ecommerce
companies during the dot com boom because he did not
understand their business
• Yes - Asian Paints – the company buys or makes raw
materials, manufactures the paints, distributes it
through it’s network and sells it to B2C and B2B
customers – profitability comes from efficient
operations, volumes and ability to get a premium due to
brand positioning .
Questions to determine the
attractiveness of business – Q3
What is the chance that the product
/service/business model would be obsolete in
the next 20 years?
• Will there be a market for this product 20 years from
now
• If there is going to be technological changes envisaged,
then will this company have an upper hand still?
• Yes - Asian paints – The paint product may evolve
technically – but paints as a category will survive and
Asian paints is expected to have an upper hand due to
it’s size and reach.
Questions to determine the
attractiveness of business – Q4
Does the company allocate capital
exclusively in the realm of expertise?
• Where have been their investments in the past 510 years?
• Does the company stick with what it knows?
Yes - Asian Paints has not invested in unrelated
diversification in the past 10 years
Questions to determine the
attractiveness of business – Q5
What has been the company’s EPS history and
growth rate
• The company must show a consistent growth in EPS
over the past 10 years
• Erratic growth and dips in EPS would mostly make
the company unattractive for investment unless
there is a clear enough reason visible as to why it
happened.
• Yes - Asian Paints has a consistent EPS growth in
the past decade and has a EPS CAGR of 26.1%
Questions to determine the
attractiveness of business – Q6
Is the company consistently earning high
Return on equity
• The company must show a consistently high
ROE over the past 10 years –
• ROE = reported net profit /Net worth
• Yes – Asian paints has an ROE ranging from
27.16% to 51.69% with an average ROE of 37.0%
Questions to determine the
attractiveness of business – Q7
Is the company consistently earning high
Return on total capital?
• The company must show a consistently high Return
on total capital employed over the past 10 years
• ROCE = Reported net profit /Total liabilities in BS
• Yes -Asian paints has a high ROCE ranging from
18.71% to 43.52% with an average ROE of 28.76%
Questions to determine the
attractiveness of business – Q8
Is the company conservatively financed?
• Consumer monopolies tend to have strong cash
flows, with little need for long-term debt
• Screen for companies with no debt or low debt –
look at the interest coverage ratio –compare with
industry peers
• Yes -Asian paints has a debt ranging from Rs. 169
crores to Rs.336 crores and a net profit ranging from
Rs. 143 crores to Rs. 1159 crores – the company is
conservatively financed
Questions to determine the
attractiveness of business – Q9
Has the company been buying back its shares?
• Buffett prefers that firms reinvest their earnings
within the company, provided that profitable
opportunities exist. When companies have excess
cash flow, Buffett favours shareholder- enhancing
manoeuvres such as share buybacks
• This answer if Yes is good - but a NO answer does
not disqualify the stock.
• No –Asian paints has not bought back any shares in
the past 10 years
Questions to determine the
attractiveness of business – Q10
Is the company free to adjust prices to
inflation?
• True consumer monopolies are able to adjust
prices to inflation without the risk of losing
significant unit sales.
Total Income
Reported Net Profit
Profitability
Mar '13
Mar '12 Mar '11
11,736.56 10,277.18 8,246.96
1159.52 1020.58 881.35
9.88%
9.93%
10.69%
Mar '10 Mar '09 Mar '08 Mar '07 Mar '06 Mar '05 Mar '04
7,206.23 5,749.05 4,679.72 3,948.81 3,051.92 2,655.86 2,234.49
883.91 419.48 428.05 283.49 210.75 181.04 143.81
12.27%
7.30%
9.15%
7.18%
6.91%
6.82%
6.44%
Questions to determine the
attractiveness of business – Q10
Is the company free to adjust prices to
inflation?
• True consumer monopolies are able to adjust
prices to inflation without the risk of losing
significant unit sales.
• Yes – Profitability ratio of Asian paints is
consistently around 8.65% over the past 10 years
– that means that inflation does not impact the
profits of Asian Paints
Questions to determine the
attractiveness of business – Q11
Does company need to constantly reinvest in
capital?
• Retained earnings must first go toward maintaining
current operations at competitive levels, so the lower the
amount needed to maintain current operations, the
better.
• Not really – Asian Paints does not have a large capex for
investment in plant and machinery – the main
investments are in branding and the SGA as a % of Net
sales is around 18%% for the past decade – this is around
what any FMCG company would spend.
Questions to determine the
attractiveness of business – Q12
What is the initial rate of return (IRR) and relative
value to a Govt bond?
• EPS for the year divided by the long-term government bond
interest rate. The resulting figure is the relative value - the
price that would result in an initial return equal to the return
paid on government bonds.
• We then have to look at the CAGR of the EPS as well.
• Asian Paints – assuming a 8% govt bond rate – and based on
the current EPS of 120.88 – the relative value of govt bond
would be –Rs 1511
• With the current share price of Rs. 4553 – the Asian Paints
share gives a pretax return of 2.65% with the returns growing
at 26.1% p.a.
Questions to determine the
attractiveness of business – Q13
What is the projected share value and return on
investment using historical earnings growth rate:
• Calculate the CAGR of EPS for the past 10 years
• Calculate the average dividend payout ratio (DPS/EPS) for the
past 10 years
• Calculate the average PE for the last 10 years
• Asian Paints –
• CAGR of EPS is 26.10%
• Average Dividend payout ratio is 42.58%
• Average PE for the last 10 years has been – 23.49
Questions to determine the
attractiveness of business – Q13
What is the projected share value and return on
investment using historical earnings growth rate:
• Calculate the EPS for the next 10 years as follows:
EPS of year 2 = EPS of year 1 * CAGR of EPS
• Calculate the dividend payout for the next 10 years as follows:
Dividend payout for year 2 =EPS for year 2 * average DP ratio
• Calculate the sum of all the dividends paid for the next 10
years
Asian Paints –Historical earnings
growth rate method
Historical earnings growth rate
method
Year ending
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Total
EPS
120.88
152.43
192.23
242.40
305.68
385.47
486.10
612.99
773.00
974.78
1229.24
DPS
46
64.91
81.85
103.22
130.17
164.14
206.99
261.02
329.16
415.08
523.44
2279.99
Questions to determine the
attractiveness of business – Q13
What is the projected share value and return on
investment using historical earnings growth
rate:
• Projected share price at 10th year = EPS at 10th year *
Average PE ratio
• Total estimated gain at the end of 10th year = Projected
share price at 10th year + Sum of all dividends for 10
years
• Calculate the CAGR of your investment in 10 years –
FOR ASIAN PAINTS THIS IS 23.82%
Asian Paints –Historical earnings
growth rate method
Historical earnings growth rate
method
Year ending
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Total
EPS
120.88
152.43
192.23
242.40
305.68
385.47
486.10
612.99
773.00
DPS
EPS after 10 years
1229.24
46
Sum of Dividend for 10 years 2279.99
64.91
Average PE of the stock
23.49
81.85
103.22 Projected share price in 2023 28874.47
130.17 Total gain including dividends 31154.47
164.14
206.99
Current share price
4553
261.02
CAGR of investment
23.82%
329.16
Target share price for 20%
6037.944
974.78 415.08 CAGR
14
1229.24 523.44
2279.99
Questions to determine the
attractiveness of business – Q14
What is the projected share value and return
on investment using sustainable growth rate:
• Calculate the average PE ratio for the past 10 years 23.49
• Calculate the average ROE for the past 10 years 37%
• Calculate the average dividend payout ratio for the
past 10 years – 42.58%
Questions to determine the
attractiveness of business – Q14
What is the projected share value and return on
investment using sustainable growth rate:
Calculate the Book value of the share for the next 10 years
using the formula:
• BV for year 2 = BV for year 0 + Retained earnings for year 1
• Retained earnings for year 1 = Projected EPS for year
1– Projected Dividend Payout for year 1
• Projected EPS for Year 1 = average ROE * BV for Year 0
• Projected dividend payout for year 1 =
EPS for year 1* average Dividend payout ratio for past 10
years
Sustainable growth rate model
Sustainable growth rate model
Total
Year
2013
2014
2015
2016
BVPS
352.8
427.7
518.6
628.7
EPS
120.9
158.2
191.8
232.6
DPS
46.0
67.4
81.7
99.0
Retained
earnings
74.9
90.9
110.2
133.6
2017
2018
2019
2020
2021
762.3
924.2
1,120.5
1,358.5
1,647.1
282.0
341.9
414.5
502.6
609.3
120.1
145.6
176.5
214.0
259.5
161.9
196.3
238.0
288.6
349.9
2022
2023
1,997.0
2,421.2
738.8
895.7
314.6
381.4
1859.81
424.2
514.3
Questions to determine the
attractiveness of business – Q14
What is the projected share value and return
on investment using sustainable growth
rate:
• Calculate the EPS for year 10 – Rs. 895.7
• Calculate the expected Share Price for year 10 =
EPS (FY10)* Average PE = Rs. 21040
• To this share price estimate, add the estimated
dividends paid for the next 10 years = Rs 22900
• Calculate the expected CAGR of your investment
today – 19.66%
Sustainable growth rate model
Sustainable growth rate model
Year
2013
BVPS
352.8
EPS
120.9
DPS
46.0
Retained
earnings
74.9
2014
427.7
158.2
67.4
90.9
Average PE
2015
2016
518.6
628.7
191.8
232.6
81.7
99.0
110.2
133.6
Share price in 2021
895.72
23.489765
23
21040.229
85
Current share price
22900.04
4553
CAGR of investment
19.66%
2017
2018
2019
2020
2021
2022
2023
Total
762.3
924.2
1,120.5
1,358.5
1,647.1
1,997.0
2,421.2
282.0
341.9
414.5
502.6
609.3
738.8
895.7
120.1
145.6
176.5
214.0
259.5
314.6
381.4
1859.81
161.9
196.3
238.0
288.6
349.9
424.2
514.3
EPS in 2021
Total gain
including
dividends
Target
share price
for 20%
CAGR
At what price should one buy Asian
paints stocks
Based on Historical earnings method:
Total gain in 10 years – Rs 31554
Based on sustainable earnings method:
Total gain in 10 years – Rs 22900
Taking the conservative of the two estimates –
we will take the sustainable earnings method in
this case.
For a 20% CAGR, the current price for buying
needs to be Rs 4438.
59
60
Agro Tech foods
61
Bajaj Auto
62
BHEL
63
Colgate Palmolive
64
CRISIL
65
Dabur India
66
Gruh Finance
67
HDFC Bank
68
L&T
69
Jubilant Foodworks
70
Maruti Suzuki
71
Page Industries
72
Shriram Transport Finance
73
TCS
74
TTK Prestige
75
76
Bharti Airtel
77
Cox and Kings
78
Noida Toll bridge
My view on equity in 2013/14
• Markets
expected
to list
be volatile
to elections
I have
a private
mailing
where Idue
share
my buy and
in 2014 in stock markets. You can write to me and
sell activities
• Post
there
will be stability
and are yours
be part
ofelections,
this list –
remember,
the rewards
optimism
asyours
all parties have similar economic
and the
risks are
agenda
• Pick select equity after fundamental analysis
during 2013 – there are opportunities in volatile
markets
Through this book , I
am sharing ideas on
how to good ROI by
investing well in
Equity, MF’s, Real
estate , Gold ,Debt
and Insurance
You can reach me through my mail
id:
[email protected]
You can also subscribe to my
wealth management blog:
http://mbaclassdiscussions.blogsp
ot.in/
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– a very
84