EQUITY WEDNESDAY

Issue #6

Hello EveryFinions!

Moderna's COVID-19 vaccine results came out this week and they were more encouraging (94% efficacy) than Pfizer's results (90% efficacy). Even more - Moderna's vaccine does not require storage in Arctic weather conditions which Pfizer's does (-70 degrees). We wrote about both Pfizer and Moderna on the 31st of October here. Since then, Pfizer's stock is up 5% and Moderna's stock is up 42%. If you'd bought stocks in one of these companies, you'd have made a windfall. If you hadn't, perhaps next time!

IN TODAY'S EDITION

• Q2FY21 results update
• That's what they said - Soundbites
• The crackdown on internet giants
• The NEXT BIG THING - Community group buying
• The secrets to Buffett style investing - 1958

RESULTS UPDATE

We have been looking at the Q2 FY21 financial results and comparing it with how companies performed in the same quarter a year ago.

How to read this graph?

• Horizontal axis represents sales growth year on year in %
• Vertical axis represents profits growth year on year in %.
• The center point at the graph where the 4 different quadrants meet is origin (0%, 0%). By virtue of it, Quadrant A (top right) represents positive sales growth & positive profits growth. Quadrant C represents negative sales growth & negative profits growth and so on.
• The size of the bubble represents market cap. Bigger the bubble, bigger the firm.
• Companies in some industries are highlighted with different colours. 

886 companies are in our coverage list as of now. Some of them are off the chart, so you won't see them all.

Stating the facts

1. Both revenue and operating profit moderated at the primary dealer PNB Gilts (off the chart) this quarter since interest rate movements stabilised in Q2. But keep an eye on them as they will stand to gain in case interest rates go down even further. The stock is still trading at a dividend yield of 7%.
2. Glass manufacturer for solar panels, Borosil Renewables (off the chart) posted record operating profits this quarter. Revenue came in at double what it was last year. They are a monopoly and are operating at 90% capacity utilisation!
3. We are starting to wish we were selling cements (yellow dots), because that pack has done quite well. We had earlier spoke about Sagar cement. The others like Dalmia Bharat, Ultratech, Shree, JK, Udaipur, KCP, Ramco and Hil have all done well too.
4. Healthcare companies (blue dots) have delivered mixed results. Apollo hospitals & Narayana Hrudayala for instance have seen profits declining, while Lal path labs, Metropolis and Thyrocare have had a bumper crop. That tells us the obvious - More revenue from COVID tests and fewer hospitalisation & prescriptions. Pharma companies are also in blue on the chart.
5. Those who said last year that hotel stocks (off the chart) in India are waking up after a decade long slumber caused by over-capacity, are waking up to the crude reality that life is. Listed hotel companies in our watchlist (there are 7 of them) have all made losses this recent quarter.

THAT'S WHAT THEY SAID

Soundbites from last week

• "CPSEs are advised to strive paying higher dividends, taking into account relevant factors like profitability, capex requirements with due leveraging, cash/ reserves and net worth,” the government in an “advisory” to public sector enterprises asking them to shell out more dividends, more frequently.
• “Based on the discussions, initiated by SSAB Sweden, regarding a potential acquisition of Tata Steel’s Netherlands business, we will undertake a due process and move to the next stages” – Tata Steel’s CFO Koushik Chatterjee made that statement while reporting results.
• "The good news is, given the last four, five months of experience, all those really bad scenarios are off the table” – Ronojoy Dutta, CEO of Indigo during an analysts meet earlier. The airlines is currently in talks to buy engines to power 150 new Airbus A320 neo-jets worth over $10 Billion.
• “In the tempos where wholesalers were stocking goods for sale, they also bought three to five cartons of Relaxo slippers, to be sold through their own channels.” – Ramesh Kumar Dua, MD of Relaxo on how his company’s footwear were considered ‘essential goods’ at the peak of India’s lock down.

TREND WATCHING

The crackdown on internet giants

Last week, India announced that all digital content including news, audio & video content will be brought under the gamut of the Ministry of Information and Broadcasting (MIB). This was on the back of the government's move to cap maximum FII ownership on web-media companies to 26% in an effort to provide ‘level-playing field’ to large legacy news organisations in the country. But don’t get all worked up about Bharat Sarkar just yet. We are starting to witness this trend of increasing regulatory purview on internet-only companies across the world – not just in India.

For instance, after pulling the plug on Ant Financial’s IPO two weeks ago, China last week introduced a draft antitrust policy to curb ‘monopolistic, anti-competitive behaviour’ designed to send a bazooka towards Chinese internet-only companies. While the intent is different, the idea is the same - To rescue legacy businesses. To give you an example, China’s legacy banks are struggling to compete with Ant Financial which enjoys easier regulations (on capital reserves against loans). And they have been shouting for ‘level-playing field’ conditions for a long time. Almost identically, in the European Union, companies like Google have been brought to court for violating competition laws and causing harm to legacy businesses. It got quite messy for Google in the EU where it was fined over $1.75 Billion.

The unlimited freedom enjoyed by Big-Tech is probably coming to an end. But is that necessarily a bad thing? Depends on which side of the fence you are sitting on. If you are a thriving, PE funded, online-only media company in India, you are probably quite cross. But if you are an equity investor in domestic media companies that have caused significant capital erosion over the last few years, you are probably saying – “Yes, level-playing field. Totally makes sense!”

TREND WATCHING

THE NEXT BIG THING - Community group buying

We’ll admit it, we picked-up this trend quite late. But it is THE NEXT BIG THING for India’s e-commerce. Drums roll…Say hello to Community Group Buying! What is it and how does it work?

Let’s start with Group Buying - It is where a number of people get together and buy things they need to get better prices. The concept has been around for hundreds of years. For example, farmers buy fertilizers by organising themselves as co-operatives. In the e-commerce world though, everybody buys their own stuff and that is the end of it. But this is changing. Chinese e-commerce giant Pinduoduo took the group buying model to the web. The company offered low prices to ‘Teams’ of online buyers, encouraging customers to recruit friends and family to buy together. Now that is clever. But something else has come up which is even cleverer.

An improved version of it called ‘Community group buying’ is making rounds in China now. What is it and how does it work? It is a location-based group buying service where large numbers of people living in an apartment complex come together to pool their shopping lists and buy them at a massive discount. The community has a leader who coordinates with the other inhabitants and makes sure that the orders are all placed together. Delivery happens at the same time for everybody. Customers get better prices, e-commerce companies save on delivery costs, the community leader gets a commission and like that everybody is a winner!

There is fierce competition now arising in this space in China, especially in the fresh-produce area. Most people buy vegetables, fruits and groceries on an almost daily basis. In India, COVID-19 has made the shift in buying behaviour from Kirana stores to e-commerce (read as bigbasket). But competition in this space is yet to heat up in India. And when it does, this model of group buying will come too. Are you the community leader your community will need? 🙂

THE SECRETS TO BUFFETT STYLE INVESTING - LETTER 2

Annual letter to limited partners – 1958 – Warren E. Buffett

Have you heard of the phrase ‘people with mercurial temperament’?  It is reserved for people who undergo sudden and unpredictable changes in mood. More or less those with an unstable mind. In the 1958 letter, WB says that the market is filled with such people more than ever. He says, “during the past year almost any reason has been seized upon to justify “Investing” in the market.” And by saying that, for the second year in a row, WB states that the markets are overvalued and it may come down crashing sooner or later.

1957 RETURNS

WB continues to forecast in this letter too that the results from the partnerships will be above average in a declining market, but it will be “all we can do” to keep pace with a rising market. Read our previous issue to find out why he says that.

Commonwealth Trust Co. – 60% return in 2 years

The Buffett partnerships at that time had a near 20% stake in a bank called Commonwealth Trust Co. of Union City. It was about half the size of one of the biggest banks in Omaha at that time. The intrinsic value of Commonwealth Trust, according to WB, was about $125 at the time the partnerships started acquiring shares in the business. The stock was trading at $50 apiece while the business was earning $10 per share. (PE of 5X).

Why did WB invest in Commonwealth Trust? - Two reasons.

1. The stock was undervalued compared to its intrinsic value
2. More importantly, there was a potential merger in the cards between the bank and another bigger bank which owned about 25% of Commonwealth. This merger had the potential to unlock massive value.

But the merger just wasn’t happening due to ‘personal reasons’ and Buffett believed it would have to happen sooner or later. The stock of Commonwealth was very thinly traded and hence buying a substantial quantity without letting the price run up was a challenge. And this is why Buffett says that it is important to make sure there is no ‘leakage’ of information.

In the year 1958, while the merger still hadn't happened, the price of Commonwealth’s stock had run up to $80/share. The partnerships sold out its holdings making 60% gains. They sold out NOT because the price had run up, but because Buffett had identified another more promising opportunity where the partnerships could take up a more substantial position with a higher certainty of being able to unlock value. And this is such a key trait to adopt. People often buy in and sell out of stocks on the basis of price movements. But there should really be only 2 reasons to sell out of a stock

• The fundamental thesis on the basis of which the investment was made has changed
• There is another opportunity which offers a higher return/more certainty of value unlocking.

Let's keep that in mind!

At the end of the letter, Buffett says, that given the extremely high valuations in the market, he will struggle in finding attractive investment opportunities. This is because his investment style, value investing, requires him to find stocks that are significantly undervalued compared to the business’ intrinsic value. And that is a hard thing to do when markets have run up.

To be continued...

From the writer in me, to the reader in you ♥

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