Strategy on how to find winning stocks:
(i) The first thing to look for in a stock is its track record and how it has performed in the past several years. This will give you a clue of the management’s ability;
(ii) The most important thing is whether the company is a sector leader. Past history shows that if you buy a sector leader, you will ultimately recover your money even if the market crashes. Examples are those of ACC in 1992 during the Harshad Mehta boom, Infosys in the 2000 boom and Larsen and Toubro (L&T) in 2007. While Nagarjuna Construction is still 80 percent below its highs, L&T has recovered;
(iii) After ensuring that the company is a sector leader, focus on return on equity, management and other financial issues to short-list the stock;
(iv) Look for a big sector tailwind. There has to be a tailwind. It can be a great company but if it doesn’t have a tailwind there is very little it can do in life;
(v) As regards valuations, in the stock market you can’t buy mangoes at the price of bananas. So, if a stock is valued at a certain percentage the market is paying you for the consistency of growth;
(vi) If you are buying an illiquid stock, you have to have the protection of dividend yield which acts like a life jacket to an illiquid stock. An illiquid stock without dividend yield is like going into water if you don’t know swimming;
(vii) Look for companies which don’t use too much of capital and still grow. Over a period of time, that capital translates itself into dividends for shareholders and the stock price doesn’t fall in bad times. In bad times, you need the protection of dividend yields for a stock to remain at that price.
So, what investors have to look for is the sector tailwind, management, whether the company is the number one in the sector, high ROEs and dividend yield.
Page Industries – dominant monopoly with high ROE:
Page Industries is a dominant monopoly in its segment. It has a stellar track record. In the last 18 years, Page has a sales CAGR of 35-40 percent. The management executes well and the revenue has gone from Rs 2 crore to Rs 1500-1600 crore this year. Page Industries is also a sector leader.
Its valuations are high but it is worth it because the market is paying for the consistency of growth.
Repco Home Finance – leader of the bull market & perhaps the next Page Industries:
The leaders of the present bull market are housing finance companies. There are so many housing companies in India but the real trick is to get into the low-ticket housing finance companies because if you are servicing a housing loan for Rs 20 lakh, you compete with an HDFC with an LIC Housing and you compete with the big guys out there but if you are servicing for 4-10 lakh people then there is no competition; those guys don’t have documentary evidence to show that they are making money.
Repco is basically a Tamil Nadu-based company. GRUH is Gujarat and Maharashtra. Maharashtra is 33 percent of India’s mortgage market and Tamil Nadu is 18 percent of India’s mortgage market; that is a CRISIL study. So, if you bought Repco at a market cap of Rs 4000 crore and GRUH at a market cap of Rs 9000-10,000 crore you are playing 50 percent of India’s mortgage market with these two companies. However, if you go to Can Fin, what happens is again you compete with an LIC Housing. If you go to LIC again you compete with a HDFC. Those are the big boys; they won’t let you make money; the borrowing costs are very low.
Dewan Housing is also good but it doesn’t lend at 12 percent yield. Repco lends at 12 percent, GRUH Finance lends at more than 12 percent. So, that is the trick. You got to take more, if you have a home loan how much does it cost you? 10.5-10.6 percent so if you have got a guy who is lending it at 12 percent and whose borrowing structure is the same obviously your net interest margin would be making more money.
I am as bullish on Repco as I was on Page about five years back.
Hawkins – focused with high ROE:
Hawkins is a focused company. It has very high return on equity. It has got capital efficiency of 80-85 percent return on equity. It gives 80 percent of capital back to shareholders. So, in spite of the problems that you have in Hawkins and the fact that it is a very illiquid stock, the stock price will never fall because the dividend yield protects the stock.
In contrast to Hawkins, Prestige is spreading itself very thin and wide. In the last four or five years, Prestige has brought in so many products. Hawkins is more focused. Also, while TTK Prestige has grown well at 20-25 percent, it has used too much of capital.
Titan – compounder stock with 15-20% growth:
Titan will do well but size is the biggest enemy of any company in this world. Titan in 2008 was a smaller company and at that time you didn’t have Tribhovandas Bhimji Zaveri (TBZ), you didn’t have a Joyalukkas lurking around in Kolkata. Titan was the only national brand at that time and people used to say I want to buy jewellery from Tata’s shop. So that concept has changed. I have got two TBZ stores in Kolkata right now, Joyalukkas has come right from South India to Western India, North India, PC Jewellers is going into South India so the dominant theme of a single nationalised jewellery retailer that is going down. With the government theory of gold on lease, take it back give it again that is a problem. However, Titan will grow at 15-20 percent, no problems there but I normally prefer to look at companies that grow at 25-35 percent.
HDFC Bank – consistent compounder stock:
Though the stock is expensively valued at 4-6 times book for the last 15 years, it is a consistent performer and has gone up 100 times with small 10 percent incremental upsides.
Other leaders of the bull market – all companies associated with housing:
Housing finance is definitely there. Other stocks associated with housing such as Symphony, Whirlpool, Kajaria Ceramics, Cera etc will also do well.