Utpal Sheth is a born stock picker. His father was Shri. Hemendra Sheth, the legendary stock investor.
The notable aspect of Utpal Sheth is his clarity of thinking. He carefully analyzes all aspects of the stock in an objective and dispassionate manner. If he is convinced about the prospects of a stock, he backs it up will full conviction.
We chanced upon a transcript of an interview with Utpal Sheth by Chetan Parikh of capitalideasonline.com taken sometime in the year 2005. At that time, Utpal Sheth was working with Insight Asset Management. He explained why he was bullish on two stocks – Colgate Palmolive & United Breweries. Since then both stocks have been super-duper multibaggers. What is interesting is that the anlysis done by Utpal Sheth several years ago is still very relevant.
Utpal Sheth’s first stock pick was Colgate Palmolive (India) Ltd, the toothpaste manufacturer. Interestingly, Colgate, at that time, was quoting at Rs. 230 and it was the cheapest stock in the FMCG sector on an EV / (EBIDTA + Ad spend). Colgate has been badly beaten up by Hindustan Lever in the market place and its market share was snatched away by HLL. Colgate was very much in the doldrums due to the high price paid for the acquisition of Cibaca, complacency in the market place, lack of adequate product support or brand support etc.
However, what Utpal Sheth saw, which others did not, was that Colgate was slowly but steadily putting its house in order. The top management team had been revamped, right from the CEO to the head of marketing. It was planning a slew of new product launches and it was spending heavily on advertisements with a view to regain market share.
Utpal Sheth was also deeply impressed by Colgate’s parent company which is one of the most shareholder friendly companies in the World, having created enormous value in the past with its fantastic product portfolio and dominant market share.
Utpal Sheth also knew that despite intense competition from Hindustan Lever, Colgate was operating in a market where toothpaste was a non-negotiable necessity. Better still, only a fraction of the Indian population was using toothpaste which meant that the opportunities for growth were simply enormous.
Utpal Sheth rationalized that Colgate’s top-line would grow by 15-20 percent and bottom line could grow at 25-30 per cent on a compounded basis for the next five years. He also explained that all of this would be free cash flow as it had no need for any more capex or working capital. Colgate’s turnover would double in the next four years without requiring any additional capital and a substantial amount of earnings would be distributed to shareholders, Utpal Sheth said.
Utpal Sheth cautioned that investors should never focus not on the current EPS but on the future earnings power. He pointed out that Colgate’s strong brand, superior product and dominance in the market place would mean increased earnings for the company in the long term.
In retrospect, Utpal Sheth was very conservative about Colgate’s prospects because when he was asked to place a fair value on the stock, he opined that it was worth Rs. 500 as against the then prevailing market price of Rs. 230. Well, at today’s market price of Rs. 1,224, investors who had heeded Utpal Sheth’s advice would have taken home fabulous gains of nearly 400%!
Utpal Sheth’s second stock pick was United Breweries, which has performed even better.
Utpal Sheth showed enormous foresight in his understanding of the spirits and beer business. He pointed out that United Breweries was, at that time, an “inferior” business owing to a number of factors that favoured spirits over beer but explained that all of that was set to change in the foreseeable future given India’s demographics and the huge purchasing power of the youth in India. There is a “huge opportunity” in the beer business, Utpal Sheth said with confidence.
Utpal Sheth also pointed out that the market had completely forgotten to value several aspects of United Breweries’ assets. United Breweries had real estate valued at approximately Rs.3 billion in its balance sheet, it had equity investments exceeding rupees Rs.10 billion in addition to the beer business. Its aggregate debt were only Rs.1.40 billion. However, at the then price of Rs.130, the market Capitalisation for the entire company was only Rs.6.40 billion, which meant that the purchaser would get a large part of the real and financial assets business plus the beer business for free.
Utpal Sheth also pointed out that while United Breweries had close to 60 percent market share in the lager beer segment, it was virtually straddling the lager beer segment and that its No. 2 competitor (Shaw Wallace) was fighting with one hand tied behind its back. So the scope for UB to increase its market dominance is really very, very high, Utpal Sheth said.
Well, we wish we had been there when Utpal Sheth made that analysis and had bought truck loads of UB stock because since that day in 2005, UB has given its shareholders a return of 1300%. Now, if that is not a super-duper multibagger, what is?