Value Investing- the real wealth creator in long run

Value investing is an investment paradigm which generally involves buying securities that appear underpriced by some form of fundamental analysis. It is time proven to be the most wealth creating investment strategy.  Few known proponents of value investing include Warren Buffet, Prem Vatsa, Rakesh Jhunjhunwala, Rakesh Damani amongst others. Pics 1

Value investment in a nutshell is a bet on the quantity of margin of safety. Margin of Safety as described by Benjamin Graham is the discount of the market price to the intrinsic value.

Buffett’s investing philosophy evolved from Benjamin Graham and a focus on finding situations in which a company’s value exceeded its market price. He is considered to be one of the most successful investors in the world, and as of January 2018 is the second wealthiest person in the world, with a total net worth of $84.5 billion.

For him, buying stock at lesser than intrinsic value, enjoys high safety of margin during economy turmoil. When economy or global environment is under pressure, all stocks laggard and correct to good level. Even value stocks correct to some extent but built confidence to buy once again in portfolio when everyone is selling.

Few of his success stories include:

Coco Cola – What made Buffet buy Cola Cola?

Pic 2

  • Iconic name and global reach created a moat around the product, so Buffett did not have to worry a competitor would come and take away market share.
  • dominant company in the beverage industry and has large food holdings as well.
  • Attractive valuation with good management.

Buffett bought more than $1 billion of Coca-Cola stock in 1988, following crash in stock market, a stake of 6.2%.

Coco Cola stock price folded 18.7x after Buffet invested in 1988. The stock has produced annualized gains of more than 11% since Buffet first invested. The stock was available at $2.45 in 1988 as against $43.3 (In Feb 2018).

According to the Coca-Cola company, your investment of $1000 alongside Buffett would have bought you approximately 408 shares in 1988. It would now be worth more than $18,725, for a percentage change of just over 1,773%

Investment in Bank of America

In 2011 Warren Buffet invested $5 billion in preferred shares of Bank of America at the time when the company was struggling with large legal bills in the aftermath of the subprime lending crisis.

The key features of the deal were:

  1. 6% dividend annually, or about $ 300million on preference shares.
  2. Convertible preference shares into 700 million common shares at exercise price of $7.14 any time before 2021.

In August 2017, Berkshire Hathaway made good on its plan to convert warrants into Bank of America common stock.

Why Warren buffet converted warrants into common stock?

  1. Bank of America raised its dividend to 48 cents a share annually after the Federal Reserve gave it the go-ahead in June2017.
  2. At 48 cents, the dividend on the common shares pays about $336 million annually.
  3. The share price on the day of conversion was at $23.58, meaning Berkshire’s paper profit on the stake is about $12 billion. The stock is currently trading at $30.33 as on 11.02.2018.

In these current highs is there a possibility to find stocks which are Value Investments?

Here are some studies which we think have the potential to become multibagger while being fundamentally strong:

Pic 3

Market Capitalisation of KG Denim is Rs 156.0 crore (as on 11.02.2018) with Equity share capital of Rs 25.7 crore and Net worth of 104.7crore as on 30.09.2017. Stock is currently trading at Rs 60.9 (FV10). One can look for “trigger brand” -garmenting business as a stock story along with other business dimensions and fundamentals.

The company holds 102acres of land in Coimbatore and 2,155sq. mt in Gujarat. The company recorded decent revenue of Rs 309 crores in H1FY18, but bottom line got impacted because of GST and increase in raw material cost. However, considering FY17 EPS of Rs 9.4, the stock is available at much attractive valuation.

The company manufactures Denim, Apparel Fabric and Home textile.

Pic 7

Have debt of 127.67 cr and cash in-hand of 7.79cr as on 30.09.2017.

Highlights of FY16-17

Pic 8

 Pic 5

In Banking, one can study South Indian Bank. CMP Rs 27.5 Market Cap Rs 4,975crores

South Indian Bank is one of the oldest banks in south India, based out of Thrissur, Kerala. It is leading private bank with one of the lowest recorded Gross NPA and Net NPA. It has total advances of Rs~49,717 cr as on 30.09.2017. It’s loan book exposure is -Kerala 42%, South (Ex-Kerala) 34% and rest of the India 24%.

Break Up for Advances:

Pic 9

As on 30.09.2017 -NIM margin stands at 2.95%, C/I cost to income ratio of 42.6%, CASA ratio of 24.5%, Gross NPA of 3.6% and Net NPA of 2.6% . These key parameters are improving quarter on quarter basis. The company also sold part of NPA to ARC during FY 16-17. 73% of Corporate Loan Book is Investment Grade.

At CMP of Rs 27.5, stock is available at P/BV of 1.08.

Pic 6

In Mining, one can look at NMDC. CMP Rs 136 Market cap of Rs 42,918crores

As steel industry is on shine and Iron ore is feeder for the industry, the lowest cost producer of Iron ore will be key beneficiary. NMDC, a navratna Public sector enterprise under Ministry of steel, is one of the lowest cost producers of Iron ore in the world.  It is India’s largest producer of Iron ore. NMDC has iron ore mining capacity of 46mtpa with utilization rate of ~80% and is expected to improve gradually over the next 2-3 years, as its key customers (JSW steel, Essar Steel and RINL) are all ramping up production. NMDC is well placed to serve them due to its high quality of ore and access to rail infrastructure. NMDC has operating margins above 50% and PAT margins above 30%. Iron ore prices are on rise. It augers well for NMDC.

The above article has been contributed by Hardik Solanki, Investment Adviser, Moneybee Investment Advisors Private Limited.

The artcile is not a equity buy recommendations. The views are of the write alone. For further discussion, you can connect with Hardik on +91 22 4030 2053

 

2 thoughts on “Value Investing- the real wealth creator in long run”

Leave a Reply

Your email address will not be published. Required fields are marked *