Value Investing In India And South-East Asia

[Guest ajc]

The Bamboo Innovator gives his perspective on investing in India and South-East Asia, as well as listing a heap of businesses that he likes and a few that he really doesn't.

 

Among other things, mention is made of:

Value investor Hemant Amin, various important entrepreneurs and fraudsters over the years, Infosys chairman Narayana Murthy, compounders vs extractors, ways to avoid losing money in the Indian market, why reputational advantage matters, and a fair amount more on what to look for and what to avoid.

 

Well worth a read for anyone thinking of investing in the region.

 

http://www.beyondproxy.com/grey-world/

 

 

 

From the post, some of the companies he views as frugal innovators include:

 

Tata Consultancy Services

HDFC

Bosch India

Britannia

Mahindra & Mahindra

Nestle India

Hero Motocorp

[one-foot-hurdles]

Thanks ajc

[Guest ajc]

 

A new value investing blog focused on Indian companies from Ishaan Gupta

 

Recent write-ups include HDFC Bank, Tata Consultancy Services, Bayer Cropscience and Muthoot Finance.

 

http://www.igvalue.com/

 

 

[PJM]

 

A new value investing blog focused on Indian companies from Ishaan Gupta

 

Recent write-ups include HDFC Bank, Tata Consultancy Services, Bayer Cropscience and Muthoot Finance.

 

http://www.igvalue.com/

 

I read just one article on HDFC bank on this blog and it is interesting the blog echoes the same aspect of rich valuations for HDFC Bank as common investors. The interesting part is that I've been talking to people for years and it was the same concern 10 years ago, 5 years ago and now. I dont see any reason for the valuations to come down given the extraordinary performance of this bank. It is one of the only 10 companies that has consistently been ranked as the top 10 largest wealth creators (in terms of the increase in stock prices and market cap) every year for last 10 years. Uncommon profits in companies = uncommon wealth creation in stock markets.

 

The average ROE from 2003-2013 is 18% and the price CAGR is 26%.The bank has one of the highest CASA and lowest NPA as a percentage of total loans. It is the second largest private bank, national footprint and ample room to grow.

 

Given the strong management and growth potential of this company (operating in a country which is growing at >5%), I've no doubt that it will continue to grow at a very healthy rate. So why should it trade at lower valuations?

[Palantir]

^I agree, performance has been excellent, and I don't think this firm will ever be "cheap". But I am curious though, how would you account for inflation in your valuation? It seems to me that inflation alone would explain a reasonable part of the firm's increase in equity, but hopefully I am wrong. :)

[gjangal]

Sharing some information which i found a while ago researching this company

 

http://www.thehindubusinessline.com/features/investment-world/macro-view/we-will-continue-to-grow-above-industry-average/article4935423.ece

 

"The overall banking system as such is a function of the growth in the gross domestic product (GDP). The loan growth has been 2.5-3 times the real GDP growth in the past. And HDFC Bank has grown around 5 per cent higher than the industry average"

 

"We expect GDP growth to range between 5.5 per cent and 5.7 per cent in 2013-14. The overall credit growth in the banking system can move up to around 17 per cent."

[PJM]

^I agree, performance has been excellent, and I don't think this firm will ever be "cheap". But I am curious though, how would you account for inflation in your valuation? It seems to me that inflation alone would explain a reasonable part of the firm's increase in equity, but hopefully I am wrong. :)

 

To be honest I've never understood how inflation impacts stock prices and returns, especially for banking and financial services industry. Yes growth in GDP will foster faster credit growth and higher interest rates should help interest margins for all banks, but beyond that ROE and underlying profits is a factor of good management, operating/lending practices and competitive advantage of the company. Higher input costs should net off higher revenues due to inflation.

 

A high CASA ratio, extremely low NPA, increasing interest margins and growth even during crisis is a clear sign that HDFC bank has sustainable moat versus peers, and most of that is attributed to a very strong management and really good business practices.

 

 

[frommi]

From my understanding when you look at foreign numbers in $ over a longer timeframe you already have the same inflation "base". So you only have to account for inflation when you look at the numbers in the foreign currency, because normally the inflation should reduce the currencies value. But there are exceptions like china, and its possible that my theory is flawed. :)

[randomep]

^I agree, performance has been excellent, and I don't think this firm will ever be "cheap". But I am curious though, how would you account for inflation in your valuation? It seems to me that inflation alone would explain a reasonable part of the firm's increase in equity, but hopefully I am wrong. :)

 

To be honest I've never understood how inflation impacts stock prices and returns, especially for banking and financial services industry. Yes growth in GDP will foster faster credit growth and higher interest rates should help interest margins for all banks, but beyond that ROE and underlying profits is a factor of good management, operating/lending practices and competitive advantage of the company. Higher input costs should net off higher revenues due to inflation.

 

A high CASA ratio, extremely low NPA, increasing interest margins and growth even during crisis is a clear sign that HDFC bank has sustainable moat versus peers, and most of that is attributed to a very strong management and really good business practices.

 

This may be a digression but inflation is a very important indicator of economies and stock market performance.  I think economists were puzzled in the 70's because stocks performed so badly during inflation. Then Buffett went on to explain (see below) why inflation will erode stock values. That's why when during the 80's after inflation was tamed the stockmarket took off.

 

Regarding what you said about rising sales offsetting rising input costs, there is a problem with that. The business has to buy the raw materials before it is sold. The business uses money from earlier sales which appears smaller now with inflation taken into account. So it is hard for the business to pay the bills.

 

I focus on what inflation is good for the economy and stockmarket, it seems like 2% is a good number (hence the fed's target) too much inflation will doom a economy and deflation will also doom us to a Japan scenario.

 

 

 

http://features.blogs.fortune.cnn.com/2011/06/12/warren-buffett-how-inflation-swindles-the-equity-investor-fortune-1977/

 

[jouni1]

"buffett says inflation is bad for stocks" doesn't work with a company that's constantly growing it's USD book value while returning money to shareholders despite operating in a high-inflation country, does it? (i'm not that familiar with banks but this one is among the few i like)

[Palantir]

Ignoring Buffett, I think the issue is that their main value driver is increasing BV, which is denominated in an inflationary currency. So how much of that growth is really organic vs inflation inflated....?

[PJM]

First of all, i'm looking at the books of the company in local currency, so valuation is in local currency because HDFC is a domestic bank. Secondly I'm not looking just as expanding BV, but also growth in revenues, net profits and ROE. Some important metrics

 

•  10 years (2004-2013) CAGR Net Income – 34%

•  5 years (2008-2013) CAGR Net Income – 18%

•  ROE greater than 15% consistently for last 10 years

•  NPA (Non-Performing assets) less than 1% of gross advances

•  NIM (Net Interest Margin) greater than 4% consistently over the last 10 years

•  Retail deposits and net interest income has increased consistently over the last 10 years

•  CASA (Current and Savings Account) ratio greater than 40% consistently, meaning the company is able to get capital at a cheap rate

•  A very strong and reliable management

 

On Inflation - Rising rates acts as a monetary constraint that slows both the economy and loan demand. Rising inflation puts more pressure on bank earnings and valuations given declining NIM and no offset to higher operating costs. So for a bank to be able to increase its deposit base, loan book, increase NIM and keep NPA low is extremely positive in an inflationary environment.

[PJM]

HDFC Bank continue to do extremely well. The financial results combined with positive momentum on Indian stocks gave HDFC stock a huge boast. ADR up 32% ytd.

 

Latest FY 2014 results

Deposits up by 24.0% to INR3,673 Bn

Gross advances increased by 26.4% to INR3,050 Bn

Net Interest Margin at 4.4%

Cost-to-income ratio at 45.7%

Profit before tax up by 31.2% to INR34.9 Bn

Net profit up by 23.1% to INR23.3 Bn

Gross NPA / gross advances at 1.0%

Net NPA / net advances at 0.3%

Capital adequacy ratio (CAR)** - Total 16.1% of which Tier I at 11.8%