If stocks are quoting at the same P/E as they were 25 years ago, how are they “expensive“?
Saurabh Mukherjea has been facing relentless criticism from the Pundits of Dalal Street ever since he formulated the theory that there is no valuation bar for buying high-quality stocks (see If You Buy Quality Stocks Even At 100 PE, You Will Still Make Money: Saurabh Mukherjea Stays Defiant & Rubbishes Fears Of Bubble In Valuations).
Saurabh has been fobbing off the criticism by pointing out that high-quality stocks have such valuable franchises and impenetrable moats that it is impossible for them to be valued using the traditional norms of P/E etc.
He has also argued that the P/E ratios of the stocks haven’t changed in the decades that have gone by and so it is a misnomer to describe them as “expensive“.
“20 years ago or 25 years ago, Nestle was on similar PE multiples. The stock has compounded by around 20 per cent since then. So if you compound at 20 per cent you make around 50 times in 20-odd years around 70 times in 25 years,” he explained.
“At current PE multiples if you buy Nestle, I can say with a high degree of assurance or high degree of probability, you will end up with somewhere in the high teens,” he added.
Saurabh also explained that Nestle’s “compounding engine” with around 20 per cent compounding earnings is very strong.
“It stood the test of time. It has moated that 20 per cent compounding, and it has very strong moats around it,” he said.
“If you look at PE multiples, it does not give you a sense of how powerful the compounding franchise is,” he emphasized.
He also pointed out that if investors had blindfolded themselves and quietly bought “powerful compounding franchise” stocks like Nestle, Titan, Asian Paints, HDFC Bank, etc despite their alleged steep valuations, they would have effortlessly made mega multibagger gains of 50x to 75x over the years.
High-quality companies snatch market share away from low-quality counterparts
Saurabh pointed out that the fact that Asian Paints’ volume growth every quarter has been around 12-17 per cent, even though the Indian economy is not growing at the same rate, means that the company is snatching market share away from the informal sector.
He opined that something very similar is happening in adhesives and jewellery stocks like Pidilite and Titan.
“These companies are massive beneficiaries of formalisation of the economy which is happening very fast,” he said.
“People don’t realise how quickly the country is formalising. This entire discretionary consumption gamut will have an immensely profitable run over the next 10 years, as they formalise through and further benefit from that 15 per cent tax rate that the FM has offered if you set up a new plant under a new subsidiary,” he added.
InfoEdge alias ‘Naukri’: Dominant franchise with Himalayan barrier
Saurabh fondly described InfoEdge alias ‘Naukri‘ as a “dominant franchise that has a Himalayan barrier around the cash generation machine“.
He pointed out that Naukri has become the go-to website for recruiters and employees.
Employees are coming in droves and uploading their CVs on Naukri, making it easy for recruiters to short-list them.
He described it as an “immensely simple model” which has created giants like Monster, LinkedIn, etc.
“The ability to generate cash from Naukri is the fulcrum of our business case around InfoEdge,” he stated.
Saurabh also complimented Sanjeev Bikhchandani, the visionary promoter of InfoEdge, for showing rationale capital allocation in the ecommerce area when their foreign venture capital company saw a loss.
It is notable that Sanjeev Bikhchandani was recently awarded the coveted ‘Padma Shri‘ title, in recognition of his entrepreneurial achievements.
— 99acres.com (@99acresIndia) January 25, 2020
Sanjeev has revealed the entire game plan of how he achieved this spectacular success in a video on youtube.
There is also a bestseller book titled ‘Stay Hungry Stay Foolish‘ by Rashmi Bansal which explains the modus operandi of successful entrepreneurs like Sanjeev Bikhchandani.
InfoEdge also owns a number of other valuable internet websites such as Zomato, PolicyBazaar, 99acres, Jeevansathi, Shiksha etc.
While these websites are loss-making at present, the day may not be far when they will also gushing out free cash like Naukri.com.
There is also expectation that InfoEdge may be ushered into the prestigious Nifty 50 constituency.
Obviously, if that happens, the stock will be catapulted into new highs.
Eicher Motors: A fortress franchise
Saurabh heaped rich praise upon Eicher Motors, the makers of the world famous ‘Royal Enfield‘ motorcycles.
He described it as a “fortress franchise” and opined that neither the foreign motorcycles or other domestic challengers would be able to take on Royal Enfield in the Rs 1.5 lakh segment.
Saurabh pointed out that the company and its CEO, Siddhartha Lal, have high standards of governance and the impeccable track records.
“This is the world’s highest margin auto OEM, 25 per cent operating margins for Royal Enfield is the world’s highest margin auto OEM, strong balance sheet,” he stated.
He also described Eicher as “the most insulated company from a disruption perspective” because of the sheer quality of the Royal Enfield franchise and the fact that it has already launched new BS-VI compliant bikes.
Saurabh also pointed that youngsters buy the ‘Bullet motorcycle‘ because they want to make a statement of their aspirations in life.
“Given the way the product is positioned, Eicher Motors looks like the most appropriately positioned auto company going into a potentially a very disruptive period for Indian auto OEMs,” he said with a big smile on his face.
Divi’s Labs: Cash machine with high RoCE & world’s largest makers of 70% of World’s painkillers
Divi’s Labs is a fail-safe powerhouse stock earning a hefty RoCE of 37-38 per cent.
It is the world’s largest maker of nearly 70 per cent of the world’s painkillers.
“APIs for 70 per cent of the world’s painkillers are made by Divi’s, it has complete lock on four of the largest APIs in the world and an immensely powerful reputation with big western pharma, which relies on Divi’s to make several critical medicines,” Saurabh explained.
He also pointed out that Divis boasts of marquee clients like GSK, Mylan, etc.
“Divi’s has higher return on capital, higher operating margins among Indian companies, which are selling their own medicines in the western world,” he added.
He described it as a “CCP-type franchise with strong moat, strong compounding engine which will stand the test of time“.
great time to plug my write up on Divi's a month ago. stock https://t.co/dLHAxq2dyr
— Ekta Batra (@ekta_batra) October 29, 2018
Insurance stocks have enormous growth runway
Some pundits on Dalal Street have written off insurance companies because the Budget 2020 has proposed to withdraw the benefit of section 80C benefit.
Saurabh rubbished this thought process.
He pointed out that insurance stocks have an enormous growth runway which will be unaffected by the withdrawal of section 80C deduction.
“The real growth blastup in life insurance is ahead of us,” he stated emphatically.
He also opined that insurance stocks are today in the same position as where private sectors banks were in the late 1990s, all set for a 20-year blastup.
“There are high quality life insurance and general insurance companies in our country. It makes sense to buy them, sit on them for long periods,” he advised.
The top stocks in the insurance sector vying for our money are HDFC Life, ICICI Pru, SBI Life etc.