I was reading an interesting Q&A session on Vanguard’s site about investing, when I came across this small but remarkable example of how to explain anyone about benefits of long term investing. An investor named Rick Ferri shares his experience about how he tried to convince his daughter about not selling her stock portfolio (or funds) when markets started falling.
And rest of this post is copied from that interview:
My daughter had saved up a couple thousand dollars, and we had invested in the total market fund. And it went down. She started panicking and wanted to sell. I said, “I’ll make a deal with you. I will guarantee all of your losses 10 years from now if you split all of your gains with me 50/50.” And she thought about it, and she said, “No, I’m good.” I got her to think long-term, and she’s never forgotten that. I think that was a good lesson.
PS – I think this example is indeed a very convincing way of making someone realize about the benefits of staying invested for long term. What do you think? How do you convince others about the benefits of long term investing?
“Experience tends to confirm a long-held notion that being prepared, on a few occasions in a lifetime, to act promptly in scale, in doing some simple and logical thing, will often dramatically improve the financial results of that lifetime. A few major opportunities, clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind that loves diagnosis involving multiple variables. And then all that is required is a willingness to bet heavily when the odds are extremely favourable, using resources available as a result of prudence and patience in the past.”
– Charlie Munger
PS – I strongly suggest that you read this statement multiple times to understand its real importance. And please do share your thoughts too.
Recently there has been a lot of noise about reduction in percentage difference (discount) between ordinary shares of Tata Motors and its DVRs.
For those who don’t know, Tata Motors has two kinds of shares listed on exchanges.
Ordinary shares (TTM) …and the DVR shares.
What is a DVR share?
DVRs are a completely different class of shares of a company whose ordinary shares are already listed on exchanges. DVR stands for Differential Voting Rights. It means that when compared to ordinary shares, a DVR carries different voting rights.
In India, it all started in 2008 when Tata Motors became the first Indian company to issue DVRs. The company came out with a Rights Issue where existing investors of TTM, were offered 1 DVR share for every 6 ordinary share held by them. As for the voting rights, one DVR share of Tata Motors has only 10% voting rights of an ordinary share, i.e. you get only one vote for every 10 DVR shares.
Apart from Voting Rights, is there any other difference between a DVR and an Ordinary share?
When you buy DVRs, you have lesser voting rights. And this needs to be compensated for. The shareholders of DVR are entitled to an extra 5% dividend compared to ones given to ordinary shareholders.
Unlike India, DVRs are used extensively in other countries to prevent hostile takeovers. At times these are used to bring money into the company without significant dilution of promoter’s voting rights. On an average, DVRs trade at a 10%-15% discount to ordinary shares.
Tata Motors – DVR Discount Trend Analysis
Like global peers, TTM-DVR also trades at a discount to ordinary TTM shares. But there is something interesting about this discount. I plotted this discount and found that in past 4 years, this discount has oscillated between 30% to 50%. And this is nowhere close to global average of 10-15%.
As of now, its quite close to its 4 year lows. And this has happened because share prices of DVRs have outpaced that of ordinary shares since start of 2014.
Discount at which DVR has traded in last 4 years
Now in 2008, when DVR was originally offered, the discount was a reasonable 10%. But over time, this discount kept widening until it reached almost 60% in mid-2013!
And this seems to be against common sense. That is because both DVRs and ordinary shares are based on the same business. Only difference is of the voting rights. And that anyways has been compensated for by a higher dividend promise to DVR holders. Ideally, discount should not be so large.
But in past few weeks, this discount has reduced to 33%. And many market participants now believe that this trend will continue and eventually, discount will settle at levels of 10%-15%. But we must remember that this is not the first time discount has come down. Few years back in 2010, discount had narrowed down to levels below 30%. Even at that time, experts felt that time had come for markets to give more respect to DVRs and that discounts will stabilize at 10-15%. But markets have this uncanny knack of surprising…And it did surprise once again by proving the experts wrong.
Price of DVRs fell and once again, it was available at huge discounts to ordinary shares. As mentioned above, discount almost touched 60%.
This time too, I am not sure if experts have any idea what they are talking about when they say that discounts would further reduce. 🙂
Beware – Controversial Idea Ahead
The last traded price for TTM was Rs 468 and that for DVR was Rs 312. Now simple calculation tells that for gaining ‘a’ vote in Tata Motors’ votings, you will have to shell out Rs 156 extra (468-312). I personally don’t think this makes sense for small investors. It might make some if you have substantial stake in Tata Motors and want to affect company’s decision making. But since you are reading this post on this small website, I assume you don’t have a very big stake in Tata Motors. 😉
I agree that its very important to exercise voting rights if the company is not being managed properly or its taking certain decisions which are not in best interest of minority shareholders. But broadly speaking, Tata Motors is managed decently if not brilliantly. And hence a small investor should not worry too much about his voting rights and consider DVRs as long term bets (if convinced about Tata Motors business).
One is getting the same business at 30% discount with assured higher dividends.
And if the DVR discount was to reduce further, a DVR investor stands to gain further as he will also be earning higher dividends in addition to capital appreciation. And if discount does eventually become insignificant, one can always sell DVRs and buy ordinary shares.
But having said that, please understand that we are not valuing DVR here. We are just discussing the discount at which DVR shares are available. It is very much possible that ordinary shares are over-valued and consequently, DVR may themselves be overvalued.
Why Did DVR Rise Much Faster Than Ordinary Shares in 2014?
The DVR shares have outperformed ordinary shares in last 6 months as evident from graph below:
Price Appreciation in last 6 months – TTM and DVR
Now the text that follows can be speculative and you should take it with a pinch of salt.
In last week of June 2014, a UK based fund house Knight Assets came out with a recommendation for Tata Motors. It advised the company to list its (planned) new DVR shares on New York Stock Exchange. But it asked Tata Motors to add the words ‘Jaguar Land Rover’ to the name of the DVR before listing. This according to fund would help it correct the big discount which DVR trades at and bring it in line with global averages of 10-15%. And since US markets are more familiar with JLR brands and with the dual-class shares, it would help listing the DVR in US markets.
This possibility of international listing might not be the only reason, but possibly one of the main reasons why DVR prices were running way ahead of ordinary shares.
Another possible reason can be that markets and analysts in general had ignored this stock completely in past few years. And because of this absence from analyst’s radars, it kept going down without any logical reason. Another evidence that markets can be irrational at times.:-)
What do you think? What are your thoughts about DVR shares of Tata Motors?
Disclosure: No positions in both the shares discussed above.
In May 2013, my interview got featured on Safal Niveshak (SN). A few days back, a reader (of both Stable Investor & Safal Niveshak) left a comment saying that I should consider sharing this interview with readers of Stable Investor too. I liked the thought and Vishal (of SN) permitted me to reproduce the interview here.
Stable Investor’s Interview
So here it is…
Safal Niveshak (SN): He claims to be no superstar of an investor. But as the legendary investors say, “Focus on the process and not the outcome,” Dev is a superstar when it comes to working on a sound process that I surely believe will lead him to a great outcome in the future.
SN: Before I pick your brains on investing, please share about your life, family, and career.
Dev: I was born in an upper middle class family of advocates and doctors. But instead of becoming a doctor or a lawyer, I chose a different path and went on to complete my engineering.
After engineering, I got a job in an Indian Fortune 100 organization in oil refining sector where I worked for a few years. After that, I went onto complete my MBA. Very soon, I would be joining the banking sector.
Being born and brought up in Lucknow seems to have had an effect on my investing style too.
I prefer ‘Nawabi-styled’ passive and long term investing.
It is based on the premise that you should not work for money. But money should work for you.
SN: What got you into investing, and how did you begin to learn about the market and investing in general?
Dev: There were two things which got me interested in investing.
First was when my father used to occasionally bring home a copy of The Economic Times. He had his money invested in shares of a few MNCs and would check their prices every few months.
My father told me that I could buy pieces (shares) of businesses which featured in list of stock quotes provided in the newspapers.
Being a kid, I felt excited to be able to buy part-ownerships in companies without having to setup any infrastructure or factories!
Second thing which got me excited was the constant flow of dividend cheques, which used to arrive in our mailboxes from these MNCs.
I just loved the concept that you are being paid to hold pieces of paper (physical shares). It was the concept which I am still happy to quote every now and then.
You should not work for money. Rather the money should work for you. I really liked the system of getting a regular flow of passive income (cash flow) without going to work for somebody else.
SN: What would you say is one of the most important lessons you learned early on?
Dev: I don’t know how this concept found its way into my head, but I always feel that it is very important for an asset to generate regular cash flows.
Most people focus solely on capital appreciation. But I think that though capital appreciation is important, it is actually the regular, dependable and sustained incoming flow of cash, which changes one’s decision making with regard to building long-term wealth.
Suppose, one purchases a property (ex: land) to sell after a few years at higher prices. This would require a person to wait for years to sell the property and lay his hand on the cash, which can then be used elsewhere.
In contrast, if one purchases a flat or a commercial property, which generates monthly rent, then this constant flow of monthly rents can be used to purchase more cash generating assets.
One can use this rent for payment of EMIs on loan taken to create more assets. It’s once again an example of your money working to create more assets for you.
SN: How would you describe your investment philosophy?
Dev: I don’t look at my stock portfolio in isolation. I have investments in stocks, mutual funds, PPF, bank deposits & precious metals.
I always try to look at the bigger picture. Being young, I should be (theoretically) investing close to 100% in equities & mutual funds. But I consider myself to be a balanced investor and have resorted to diversification across multiple investment vehicles.
I invest regularly in mutual funds, individual stocks, PPF and bank deposits.
Mutual fund investments allow me to create a growing corpus to fund my retirement or my entrepreneurial ambitions.
The amount I invest in PPF is generally equal to the difference in annual premium amounts between term and endowment plans of LIC. Though I made the mistake of buying a few endowment plans of LIC some years back, I have corrected those mistakes by selling them (at a loss) and buying plain term plans.
These plans do not pay anything in case I survive, but are incredibly cheaper than endowment ones. Insurance is not an investment and hence, I treat the two of them differently.
I use bank deposits as war chests to fund further asset purchases or expenditures in short term (less than 5 years). If I am sure about a future cash outflow (expenditure), I start an online recurring deposit which would provide me with lump sum money at maturity to provide for the expenditure.
I use fixed deposits as emergency funds and to park cash when I cannot find any investment opportunities.
But all this does not mean that I don’t invest in individual stocks. I have been investing in them as and when I feel comfortable with their valuations or future growth prospects.
I generally follow the Core-Satellite approach for individual stock portfolio (discussed later).
SN: How do you typically find ideas and what is your selection process before an idea gets added to your portfolio?
Dev: I would say that I am an amateur and it is not I who finds an idea. It’s rather the idea which finds me.
By this I mean that I invest only in those ideas which appeal to common sense, which don’t require knowledge of rocket science to simply look profitable.
An idea should be so ‘obviously’ good on few important parameters that it must just jump out of a list of stocks which I regularly track.
For example, In March 2009, buying any large cap stock was the ‘most-obvious’ way of making money. But this required one to have the knowledge to judge the overall market valuations.
So, if the index was trading close to P/E multiples of 12-14 and a large cap stock was available close to its multi-year lows, and there was enough evidence that company was not going to go bankrupt or stagnate in years to come, then it made perfect (obvious) sense to buy that stock.
It is same as waiting to buy clothes, shoes, etc. in annual sales where discounts are close to 50%.
If a person is ready to buy clothes at a discount, why shouldn’t one buy beautiful assets like stocks in a discount sale?
I stick to Buffett’s philosophy of operating within my own circle of competence. I have been an oil-man in past. Hence I understand this sector better than any other sector.
So it makes sense for me to look at all companies within this sector and to stay updated about the news and latest developments in this sector.
Though I consider myself to be a long term investor, I must confess that I do look for trends in long term data.
History may or may not repeat, but it does rhyme at times. Share price valuations are generally bound by irrational exuberances (highs) and graveyard like pessimisms (lows).
If I am able to understand these boundaries for a particular sector, then I think I will be able to make a well-educated guess about the good time(s) to enter stocks in this sector.
I also had a very short stint in steel industry where I learnt a lot about the business, its cycles and customers. I have recently started devoting some time to analysing steel businesses. But considering the complexities of this cyclical industry, I think it would take me a few more years to completely understand it.
And as already mentioned, I seemed to be programmed to appreciate the concept of dividends. And I am on same page as my self-appointed mentor John D. Rockefeller, when he said – “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”
Dividends give cash to be used for buying more assets. I understand that most people prefer going for growth stocks offering lower dividends. But as far as I am concerned, I prefer keeping a balance between dividend and growth stocks.
I follow a core-satellite approach where I try to maintain a core of a few dividend stocks and satellite of few growth stocks (& few short term investments).
At first, this may seem a bit difficult because dividend produced initially may only be a trickle. But as a not-so-well-known private investor Joshua Kennon* once mentioned, being a long term investor, I can wait.
And if I can wait then this trickle can become a drip. A drip can become a flow. A flow can become a stream. A stream can become a torrent. A torrent can become a deluge. That is the very nature of compounding.
*Joshua Kennon is a very capable private investor. You can follow him here.
So, when I buy stocks for the core of my portfolio, I am looking at buying cash-generating machines, which provide me with regular dividends to fund my other stock purchases rather than trying to make money by capital appreciation.
I am not looking for multi-baggers now. As Buffett says, “I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.”
SN: How do you take care of ‘risks’ while investing?
Dev: As an investor, I know that I can never eliminate the risk of being wrong.
At the most, what I can do is to be well diversified so that my one wrong investment decision does not wipe out my entire net worth.
This issue of diversification reminds me of a quote by Shelby Davis – “We feel a portfolio is like a flower garden. As portfolio managers, our job is to plant a few seeds every year and weed out a few mature plants. It is not to uproot the garden. We have a portfolio mix where we hope that something will be in bloom all the time, but we do not expect everything to flower at once.”
I personally prefer accumulating stocks on a regular basis rather than going for lump-sum investments.
In this way, I get time to judge my stock picks. In case, I am not convinced with the business, I can exit the stock.
In case I am convinced, I can keep on accumulating them.
SN: What have been the most challenging investment lessons you have learned?
Dev: It is really tough to be greedy when others are fearful. Really tough!
But with time and experience, one can become more comfortable with this approach.
Though people (and myself) would want a smooth, artificial upward line as returns on portfolio, the world doesn’t work like that.
We can do hours and hours of analysis and pick a stock which we feel is undervalued. But the market doesn’t know that we have put so much effort in our stock picks.
Markets are driven by fear and greed. Period.
Hence, we can never eliminate the risk of being wrong.
SN: How has your approach toward investing changed over the years?
Dev: I have been investing in stock markets for more than 10 years and I still consider myself to be an amateur and a student of the markets.
Earlier, markets seemed more like gamble. But after getting a taste of common sense based investing i.e., sticking with good companies and buying them in hard times, I have more or less remained loyal to this approach till date.
I still try to handle my stock portfolio as a whole rather than as a set of individual stocks.
I stick with dividend paying, boring and predictable businesses for the core of my portfolio.
As far as the satellite part is concerned, I try to buy companies having at least an average growth potential and a decent, predictable management.
Every now and then, I do take up some short-term positions. But these are limited to less than 5% to 10% of my total stock portfolio.
Earlier, due to my unpreparedness to handle the market madness, I used to feel a lot of pressure to buy or sell stocks. But, now I maintain a hand’s distance from the market and don’t feel the pressure to buy or sell anything.
If I can’t find anything attractive enough to buy, I continue hoarding cash in anticipation of finding something useful (this does not include my regular mutual fund investments).
Also, now I don’t feel the urge to show any activity in stock markets for the sake of activity. Though being active in stock markets is considered glamorous, I prefer my own passive ways of building long term wealth.
And to quote Joshua again, “I will only exchange cash for ownership when the price and terms put the probability of a highly successful outcome overwhelmingly in our favour.”
SN: In your personal portfolio how many stocks and mutual funds do you own on average at any one time?
Dev: I have made a conscious decision to hold less than 15 companies in my portfolio. At present, I hold investments in 13 companies, with none being more than 15% of size of the stock portfolio.
As far as mutual funds are concerned, I am presently invested in 3 schemes focusing on large-caps and multi-caps.
I follow the SIP route to invest in these schemes every month. I chose dividend payout options in the two large cap oriented schemes, as these schemes invest in stable, mature & large businesses capable of sharing their profits (in form of dividends) with shareholders.
These dividend payouts can be used to buy good quality stocks for individual stocks portfolio.
I am also planning to go for another multi-cap and a mid-cap fund. This would take my total number of schemes to five, which I consider apt for my current investment-comfort levels.
I also plan to increase my monthly contribution in at least 2 of these 5 schemes every year, till the time I retire (or join Benjamin Graham in heaven).
SN: As investors, one of the most difficult decisions we must make is with respect to selling stocks. What factors help you make “sell” decisions?
Dev: Now this is tough. I would rather say that this is a big weakness for me. Being a self confessed long term investor, it is tough to sell something when you ‘want’ your holding period to be ‘forever’.
But nevertheless, I try to bring some structure in my sell decisions.
The primary reason to sell a stock would be if I am in need of money. So, selling of stocks would be used as a last resort because I do have my funds parked in emergency funds, bank deposits etc.
Another big reason could be a negative change in the fundamental reason for which I initially bought the stock. This may be because of change (fall) in margins, rise of competitors, or a black swan event (for example, there is no point holding shares of a company managing its only asset, a toll road, which is destroyed by a freak earthquake in the region).
SN: What is the best investment advice you have ever received?
Dev: Compounding is the eighth wonder of the world. Have patience & give it a chance.
SN: What is the worst investment advice you have ever received?
Dev: Take a (personal) loan charging interest in excess of 15% and invest in IPOs. IPOs are sure shot way to double your money in a few days.
Like Graham, I feel that IPOs are an acronym for “It’s Probably (or Permanently) Overpriced.”
SN: What has been your favourite investing-related book and why?
Dev: It is got to be The Intelligent Investor.
For those who have already read the book, I think I can add nothing substantial to the list of its praise. For those who haven’t, I can only say that you are really missing out on something really worth reading, at least once in the life of an investor.
I personally like the book and regularly read parts of it because it is one of those books which are grounded in reality.
It does not tell you that you can get astronomical returns in markets. It tells you that in market, you can be successful if you are able to take care of the controllables, i.e., your own emotions, actions and reactions.
One of the key ingredients of stock market success is to avoid making huge mistakes and manage at least average results. And this book lays down a framework which reduces the risk of making big mistake in markets.
The book had such an impact on me that I immediately adjusted the way I managed my money and equities portfolio.
SN: If you had one piece of advice to share with other tribesmen, what would it be?
Dev: I have three.
One, reinvest your dividends and interest incomes. It is only when you reinvest your passive earnings that the magic of compounding begins.
Two, always be prepared. You never know when the market might offer you some great opportunity. It really does pay to show some COURAGE by using CASH in times of CRISIS.
Three, while calculating future returns from stock markets, don’t use figures like 15% or 20% in your calculations. A number around 10-12% is more saner and no-nonsense one.
SN: Thanks a lot Dev! Your insights have been amazing, and especially for someone who is starting out on his/her investing career.
A reader aged 45 had the following query. Though he asked the question on Stable Investor’s Facebook page, I thought it would be a good idea to share it with loyal website readers to know their views.
So here is his question:
“I am 45 years old and wish to invest in equities for long term. My goal is to create a corpus, which I may use when I’ll cross 65. Hence in which Indian companies should I invest? I plan to buy stocks of the chosen companies regularly in small quantities in “buy-and-forget” mode. I don’t want to be bothered about daily price fluctuations or viability of company’s business. Please recommend a few companies which you think would keep performing well for years to come. I assume that at whatever price I buy these stocks, I would eventually have significant capital appreciation over the next 20 years.”
Now this is what I think:
I am assuming that you are adequately insured and have sufficient money in your emergency funds. With this assumption, I would say that it is always advisable that one should invest in multiple asset classes, so that there is no concentration risk. I am assuming that since you plan to invest in the so-call-risky asset class, you already have decent positions in less risky ones like PPF, PFs, NSCs, bonds, FDs & RDs etc.
Now Buy and Forget kind of investing requires that you pick companies which you are sure are going to survive for next 20 years. These are companies which essentially, have a greater ability to suffer than other listed companies.
Once you have taken care of survival, you need to shortlist those which have a good probability of flourishing in next 20 years. Just these 2 filters would reduce the list of probable companies to less than 10-15. And that in itself is a pretty manageable number.
But having said that, I would digress a little from this topic of direct equity investment. You can, or rather should consider routing a substantial part of your planned monthly investments through index funds. You might argue that investing in index funds would eliminate the probability of picking up multibaggers, even when considering a 20 year time frame. That’s correct. But this would also eliminate the possibility of ending up with stocks of companies which might be very close to being shut down at end of 18-19 years of your stock accumulation period.
Now no one would want to accumulate shares of a company for 19 years, only to find that when he requires that money in 20thyear, share prices have crashed down and business is about to close. 🙁 So, I would suggest that you should give index fund investing a serious thought.
Sometime back, I had suggested a similar approach to two young readers who also intended to invest for next few decades! You can read those discussions here and here. But if you still want to go ahead with a Direct-Equity-SIP sort of a program where you buy few shares of companies every month for next 20 years, you should stick to companies which pass the following criteria –
Provide products and services which would have increased demand in years to come and are ideally placed to benefit from India’s demographic profile over next 20 years.
To meet this demand, these companies should depend as little as possible on debt and should be able to fund their expansion through cash flows itself.
The companies should be run by trustworthy and proven management. You don’t want to handover your hard earned money to companies which are not run by people whom you would personally not like to interact with. Isn’t it?
So once you have shortlisted companies according to these criterias, you would have very few companies which you would like to invest for next 20 years.
One such company which comes to mind is ITC. You can create your own list of such companies.
It is always better to have a framework (structure) before you go ahead picking specific stocks. Hopefully, this post will help you in coming up with a correct framework to pick stocks worthy of long term investments.
This is what I feel should be done by the reader. What do you all think?
The markets are falling. Experts all over are painting the picture of India’s economic future with dark colors. People around you are selling shares and stopping SIPs in mutual funds.
So what exactly is happening? We tried answering this question in one of our previous posts titled What’s happening to stock markets, economy & your portfolio. Many people known to us are exiting markets because markets have not produced any return for last 5 years. In fact, it has gone into negative territory in this 5 year period. But this very fact should have forced a sensible investor to think rationally and stay put in market. We did a small study some time back and came up with a conclusion that “If returns in last 5 years have not been great, chances of making higher returns in next 5 years are quite high.”
So we decided to see where exactly are Indian markets placed in terms of PE multiples when compared to historical levels.
As of now, Nifty (a benchmark index) has a P/E Ratio of 15.7. Now when compared with past data, this is not expensive at all (considering growing nature of Indian markets). But this time around, problems surrounding us (& lack of solutions) are forcing us to question the very nature and sustainability of India’s growth. Therefore, this PE Ratio of 15.7 cannot be considered to be cheap either.
So does it mean that markets will go down more? Does it mean that Indian markets are going to be re-rated soon? Frankly, we don’t have answers to such speculative questions. But yes, times ahead do seem to be tough and only tough and robust businesses will survive.
Nevertheless, we ran up some calculations and found that there is some correlation between overall market PE levels and return which you can expect to earn over a 3 or 5 year period. Table below shows the same and is quite self explanatory –
15 year Analysis of Indian market’s P/E Ratio (1999 – 2013)
To summarize, lower the overall PE levels of market, greater would be your return over a 3 year or 5 year period.
Assumptions – This analysis is based solely on Nifty’s past data. Same may not be repeated in future. But chances of repetition are quite high. Returns offered by individual stocks may wary quite a lot from this data.
From a high of 185 in January 2013, IDFC has grinded down to 128. That’s a fall of close to 30% for a large cap financial institution.
We like IDFC as a good long term portfolio pick. So this 30% correction has tempted us to do an analysis of the company. And with Banking Licenses being the hot topic, we give our two cents that it is quite possible that IDFC may get one by next year. But what we just said is mere speculation. Don’t believe us. 🙂 This is because there is a high probability that someone on the inside knows something about the licenses and hence the stock has corrected so much(!)
So, for the time being, we keep aside IDFC’s banking foray and look at its existing businesses and valuations compared to historical averages.
IDFC is an infrastructure finance institution providing end to end financing and project implementation services. The company also provides advisory, PE and AMC services to name a few.
Company grew at a fast pace during the last decade. Its sales have increased from 424 crores in 2003 to around 6100 crores in 2012. That’s a CAGR of around 34%. Company came out with its IPO in 2005 at Rs 34 per share. Since then, sales have increased at a similar rate of 35% per annum.
IDFC – Net Sales (2003-2012)
During the same period, profits have grown from 180 crores to 1600 crores at rate of 27% plus.
IDFC – Net Profits (2003-2012)
EPS & Dividends
Earnings (per share) have moved up from 1.8 to 10.3 in 2012. In line with EPS, dividends have started increasing in recent past and now (in 2013) stand at Rs 2.6 per share. In last 5 years (barring 2009), company has continuously increased its dividend per share (1.2, 1.2, 1.5, 2.0, 2.3, 2.6).
Earnings & Dividends Per Share (2003-2012)
The dividend payout ratio has also stabilized in the band of 20-23%, which is decent considering the high growth rate of company’s business. A detailed comparison between EPS, DPS and their respective growth rates can be found in table below-
Detailed EPS & DPS Data – Growth Rates & Assumptions
IDFC is a financial institution and hence it makes more sense to analyze company’s Price to Book Value to gauge how over- or undervalued the company is.
Price/Book Value & P/E Ratio Analysis
Company has grown its book value from 16 to 81 in last ten years. That’s a CAGR of more than 20%.
Book Value Per Share (2003-2012)
We analyzed historical data to check the P/BV multiples at which IDFC has traded. Average P/BV after listing (in 2005) for IDFC stands at close to 2.3. Also it has oscillated in a P/BV range of 1.0 to 5.0. At present, the stock is available at a P/BV of 1.6. That itself points to a 30% undervaluation from historical averages perspective.
If you look at Price to Earnings multiple too, average PE commanded by IDFC is close to 16. The stock currently trades at a PE of less than 11 (TTM). And if you are enterprising enough to consider future earnings, then stock is available at a forward PE of 9.2 (FY 14) & 7.7 (FY 15)! And a PE of 8 is considered apt for a no-growth company. 🙂
Below graphs show how IDFC is currently positioned on parameters like P/E & P/BV when compared to its historical averages and FY 14 & 15 estimated figures.
P/BV Comparison – Current, Historical Average & Estimated (2014, 2015)
P/E Ratio Comparison – Current, Historical Average & Estimated (2014. 2015)
The company, though well managed and growing at a decently fast pace, seems to be undervalued. We have not analyzed management, business, etc as this post was more to do with valuations based on simple historical parameters. But being headed by Deepak Parekh and his team, it is assumed that management would be doing a decent job. In case you are interested in understanding more about the business, management and other factors, we suggest a simple Google search. It will throw a plethora of brokerage reports analyzing the same. You can also access company’s latest Annual Report here.
Now with a sustained ROE of close to 15%, a business like IDFC’s should command a multiple higher than what it currently trades at. And though we love dividends, we don’t expect IDFC to dole out generous dividends to its investors due to its fast growth. Even then the stock is currently available at a decent yield of 1.8%. And with dividend growing year on year, this Yield-On-Cost is bound to increase in future.
But remember one thing, IDFC is interested in getting a banking license. And there are high chances that it might get it. But we cannot be sure of this unless we are in RBI’s decision making committee. 😉 So if you do invest in the company, be ready to accept volatility in its share prices due to negative or positive news flow.
It’s been a while since we last posted. This gap is because of some prior commitments and also because of laziness on our part. Nevertheless, we are back. But it seems that since beginning of this month, everything has started looking downhill. The Rupee is celebrating its senior citizenship. Markets are grinding lower and lower. FIIs are pulling out money from the markets. Your portfolio is bleeding. Many short term traders (you know) are making a killing in the market. 🙂
So, what should you do in such times?
The markets are slowly (but definitely) moving below their long term average valuations. So, should we consider these as signs of a coming crisis? If you listen to some of the experts, they are of view that one should not be surprised to see 20% correction from these levels. We don’t know whether these experts are correct or not. But the question which concerns us is what are we doing right now? Are we selling our stocks and booking loses? Or are we preparing ourselves for the Crisis? There is no question about whether a CRISIS will come or not. It’s only a matter of time. Sooner or later, a fall is bound to come [pardon our speculative statements]. So when the CRISIS actually comes, would you have the COURAGE? Courage to go out and buy when everyone else is selling? Now, courage comes from knowing what to do when situation gets worse. That is, you should be prepared for the crisis. It is only when you are adequately prepared, will you be able to take a rational decision in hard times.