Basant Maheshwari of Basant Top 10 fame is a staunch believer in the philosophy that one should not be wary of investing in stocks quoting at a high P/E because the high growth rate and dividend payout ensures that the stock will continue to remain in demand.
This is the logic based on which Basant Maheshwari has publicly recommended for investment high P/E stocks like Page Industries, HDFC Bank and Hawkins Cooker.
However, what happens to the high P/E stocks if the expected high growth rate and dividend payout does not happen?
Basant has contemplated this scenario. In his bestseller “The Thoughtful Investor” and also in his talks, Basant has explained that in a scenario where the growth appears to be faltering, the high P/E stocks will normally not crash. Instead, the stock price will stagnate and wait for the earnings to catch up. There will be no “price correction” but there will be a “time correction” Basant advised, implying that even in the worst case scenario, investors stand a good chance of getting their money back.
Basant’s theory is proved correct in the case of HDFC Bank. In the past, the Bank used to consistently churn out a 30% growth rate. However, this has dipped to 20-25% over the past several quarters. This low growth appears to be the “new normal”.
The result is that HDFC Bank’s stock price has nearly stagnated while waiting for the earnings to catch up with the high P/BV of 4.86. Over the past one year, HDFC Bank has given a return of about 28%, which is on par with the Bankex’s return of about 25%. However, it has severely underperformed its peers in the private banking space like Kotak Mahindra Bank (63%), IndusInd Bank (62%), Yes Bank (61%), Axis Bank (56%) etc.
Sadly, Basant’s theory has come undone in the case of Hawkins Cookers. The stock price has not just stagnated but has crashed.
Over the past six months, the stock price is down a whopping 40%. The return on a YOY basis is (-) 11% while over two years, the stock has given a miserable return of 1.25%.
Today, the stock slumped nearly 11% in the wake of heavy selling by investors.
The reason for investors’ deep disappointment with Hawkins is that the company not only reported pathetic results but also slashed the dividend percentage from 600% to 450%. So, the dividend yield which has so far insulated the stock and protected the downside is also eroded.
| Particulars (Rs cr) | Mar 2015 | Mar 2014 | %Chg |
|---|---|---|---|
| Net Sales | 157.27 | 141.87 | 10.86 |
| Other Income | 0.63 | 1.02 | -38.24 |
| Total Income | 157.9 | 142.89 | 10.5 |
| Total Expenses | 141.42 | 121.93 | 15.98 |
| Operating Profit | 16.47 | 20.96 | -21.42 |
| Net Profit | 9.65 | 13.13 | -26.5 |
| Equity Capital | 5.29 | 5.29 | – |
With the benefit of hindsight, we can say that Basant ought to have known better than to have recommended Hawkins for investment. In fact, in January 2015, when Basant sent out the buy call, the stock was already in the doldrums owing to problems with the labour and the pollution control authorities. It was quite clear that the management had lost its mo-jo. There was no talk of new products being introduced, there was no plans for expansion, there was nothing.
Hawkins’ management is in fact notorious for maintaining a studied silence at all times. Its CMD, Brahm Vasudeva, hates interacting with the press or even the shareholders. They stonewall most questions. In fact, this trait of Hawkins’ management probably irked Dolly Khanna and that is why she dumped the stock.
However, Basant was not deterred by any of the negatives. He recommended the stock on the basis that it is “the classic proxy to the evergreen Indian middle-class boom story”. Basant also dismissed fears that the stock is expensive (then quoting at a P/E of 49x) on the logic that the comparison of its market cap (then Rs. 2000 crore) with the potential consumer base of 125 crore middle class Indians made the stock dirt cheap.
The worrying part is that despite the steep fall, Hawkins is still quoting at a whopping P/E of 37x. Worse, the management is still maintaining a studied silence and there is no commentary on what is going on and what is being done to revive the flagging sales and profitability. Also, the cookers market is extremely competitive with a number of players in it like Prestige, Tefal, Butterfly, Pigeon, Apple, Vijayalakshmi, Pristine, Royal, United, Greenchef, Doniv, Polo, HomeKing, Sunrise, Saral, Ensis, Polo, Virat, Vital, Kumkum etc. So, those days of high margins may be gone.
What one should do in such a situation is not clear. Whether Hawkins will ever go back to its glory days, and if so, when, is the million dollar question.
Basant maheshwari has sold all his Hawkins holdings by the end of January 15. Wonder if he gave the sell call to his followers? Doubt it.
Basant always spoke of punters who speak to boost up a stock artificially and then disappear when it crashes. But where is BM now when Hawkins is being thrashed. He should atleast accept he is wrong. Did not expect this from BM.
If anyone has any idea on what the ever ‘thoughtful’ BM has said on this matter. Please share.
for now, even Gruh, BM’s original pick is in cold storage, thanks to provisioning requirements that dented the sheen off Gruh’s numbers. From 320, it is now loitering around 230s. The disease is slowly catching up with Repco (another eternal fav of BM) but not as bad as a fall in Gruh..ugh
Every bull market produces a theme – IT in 2000, Infra in 2008 and Brand in 2015. Every bull market also produces guru(s) who by chance identified that theme.
BM should stick to his conviction of buying high PE stocks and we will all see how he performs in next 5-8 years. Best luck to all his followers/subscribers.
One should NEVER go against the ancient basic theories of market. Never buy high PE stocks. Benjamin graham always adviced to buy stocks of below 15 PE.
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why no mention of page in this article ? its at 35 pe, then 50, then 80, now 100. page has taken care of Hawkins, so no need to worry. BM has clearly mentioned div yield and growth will determine the floor. in Hawkins case they slashed div, so price has to correct. so his theory still holds good. problem with Hawkins is lack growth, they missed the bus 3 years back when demand was at peak
Problem with high value stock is that earning growth has to keep up with its valuation. If stock is 30pe means it has to grow its earning at 30% or more specially when it is small or madcap stock If earning is missed then PE need to crash and hence stock price too
Before we criticise Basant, please note that his concentrated portfolio of 4 stocks (including hawkins) has given 47% between Jun 2010 to Jun 2013. And from June 2013 to 2015, it is 58% despite Hawkins fall yesterday. This is excluding dividends. One has made at least 8 times in 5 years in entire portfolio. Now, how many can claim this over 5 years for the entire portfolio?
His concentrated portfolio of 4 stocks (including hawkins) has given 47% between Jun 2010 to Jun 2013. And from June 2013 to 2015, it is 58% despite Hawkins fall yesterday. This is excluding dividends. One has made at least 8 times in 5 years in entire portfolio. Now, how many can claim this over 5 years for the entire portfolio?
Then why did he sell Hawkins? After pumping it up on television?
Yes, looks he sold heavily and even at the time when he was recommending this to his followers.
But I am not sure about this 100%. Jan – Do you know when did he sell?
January 15. He was completely out. Confirmed it with a senior investor.
Jan, do you have any data or bulk deal that he sold. it will be nice if you share.
It is unfair to target only BM. Prof. Sanjay Bakshi is invested in Relaxo with PE 60+. Many others were invested in Cera and Symphony – both if which crashed 30%+. And I am sure you can find low PE stocks which crashed even worse.
The only takeaway is that earnings are needed to support any PE – high or low does not matter.
If Jan is right, there is a big difference in Bakshi and BM. BM kept on insisting that his followers buy Hawkins when he was selling at all time high. Highly unethical. I am deeply saddened.
i think its a steal at current price. overall opportunity size also huge. because customers have to keep buying cookers no matter what. once they launch induction cook top, it will sell like hot cakes. i wont be surprised if there is a huge waiting list and customer will get the product only after a month or so.
They are late to induction cookers, too many brands now, besides, Hawkins and Prestige are on their way to have been brands now, management living in the past glory, and more and more New companies offering similar products at lower prices.
not to be blamed if basant has still hawkins in his portfolio, in coming time investor community will know that when he exit from hawkins & people will know his honesty as when he invest, he say on every business channel to invest in hawkins , when he exit , did he say to exit others too on same business channel ?or there was time difference from his exit & his say to exit on media
How about his recommendations reg Granules India?