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Identifying Multibaggers
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basant
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Quote basant Replybullet Topic: Multibaggers and scale of opportunity.
    Posted: 02/Sep/2006 at 1:52pm

Multibaggers and scale of opportunity

In my endeavor to look for multibaggers I have discussed two piquant features that all multibaggers possess small market capitalizations and first generation promoters. In this section I wish to present the importance of the scale of opportunity. The following table indicates the sectors which did well because of the presence of scale of opportunity and the ones where it did not.

Scale of opportunity existed

Did not exist

Software

Aquaculture

Retail Banking

Granites

Telecom

Mini Cement Plants

Retailing

Movie Production

Construction

 

Insurance

 

Media

 

Internet and Education

 

Software: In the year 2000 the Indian software industry was worth US $ 10 billion. While US $10 billion does not look that big it was comparably very large when viewed in relation to the market caps of the leading software companies Infosys, Wipro and Satyam which were less then US $ 300 million. So we had a situation where the market capitalization of the sector leader was not even 3% of the Industry size two years down the line.

While software has already given its share of multibaggers the following sectors could still throw up multibaggers.

Private Banking: This was the easiest to spot but we missed because we used complicated methods. Customers were fed up with the beurocratic approach of nationalized banks and looked for alternatives. For years investors thought that signing up new customers with a minimum balance of Rs 5000 and under the fear of hidden charges would be impossible but HDFC bank rolled on or shall we say roared on. This sector was easy since the market was already there all these private banks needed to do was shift the customer from one segment (PSU banks) to another (Nationalized banks).

Telecom: The Indian Telecom story was quite similar. Mobile Telephony had to happen after all what happens globally will happen in India. Initially there were a lot of govt. regulations and restrictions suddenly the market expanded as new players entered the fray and Bharti  Airtel which traded at a market cap of US $ 1.5 billion against a total market size of US $ 100 billion two years down the line was a no brainier but the external smoke had prevented investors from looking beneath the surface.

Retailing. The Indian Retail market is presently worth US $ 300 billion and the collective market cap of the leaders in the listed space was less then 1% in 2003 and is at a similar level currently. The total share of organized retail has gone up from 2% in 2003 to 3% in 2006 and is estimated to hit 10% by 2010.

Company

Market Capitalization

Pantaloon Retail

US $ 1 billion

Titan

US $ 756 million

Shopper Stop

US $ 358 million

Trent

US $ 263 million

Total market cap of listed Retail players

US $ 2.37 billion

Total size of the Retail market

US $ 300 billion

Percentage to the total Retail Market

0.79%

Proposed Valuation of Reliance in 2009 at a Sale Rs 90,000 crores

US $ 18 billion

Construction: Rakesh jhunjhunwala says that India is like a runner without shoes  The Indian construction sector got its first boost when the NDA Govt., announced the golden quadrilateral project. Chandra babu Naidu the former Chief Minister of A.P was also responsible for the development of this Industry. The kind of reforms he carried out in the 1990ís created the most valuable construction companies in India Nagarjuna, IVRCL and ERA construction are some of them, Here also the size of the opportunity (Rs 200,000 crores) was huge compared to the market cap of these companies.

Company

Market Capitalization

Larsen and Toubro

33980

Nagarjuna Construction

2984

Punj Lloyd

3899

IVRCL

2552

Hindustan Construction

2778

Gammon India

3005

 

 

Private Insurance plays: The total Insurance premium to be collected in  2007  would be close to Rs 100,000 crores. The share of the state owed LIC is decreasing and the private insurers are generating higher growth rates. Max India (Market capitalization Rs 2542 croes) is the only pure play available in this sector. Other surrogate plays are HDFC, Aditya Birla Nuvo  and ICICI.

Media: Globally media properties are huge. In India media is yet to evolve. With addressability (CAS and DTH) stress on intellectual property rights and increased consumer spending the path ahead could throw up a lot of multibaggers. The ones that come to mind are Zee TV, Sun TV, TV 18 and ENIL.

Internet and Education: There is a huge opportunity here. The growing middle class will like to get their children educated. Broadband penetration is expected to go up from 1.3 million to 20 million by 2010. This could drive up valuations of internet companies. Over the last 12 months NASDAQ listed Indian internet companies have been in demand. Internet advertising is more target oriented and reaches the right audience. Advertisers know the kind of traffic that would visit particular sites for instance wealthy people could be looking at finance sites whereas a younger crowd could be accessing the sites that have online chat rooms.

Also it is not possible to show the entire material on TV Print and Radio but on the internet relevant users could go directly into the site from the link.

Unfortunately there are no choices for the investor here. Educomp is a good solid education play but for the internet part investors will have to look at TV 18 only.



Edited by basant - 20/Sep/2006 at 9:54am
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Quote PKB2000 Replybullet Posted: 02/Sep/2006 at 4:58pm
Dear Mr. Basant
I always appreciate your writing for giving us valuable information in the most interesting way and in the simplest possible form. Even a bad student like me can also get the ideas properly.
Now one sector I am interested to learn is AUTOMOTIVE
The gradual influence of globalisation and the availabilty of bought out components in lower processing cost with quality make this market very favourable to the AUTOMOTIVE Industries. I have found that global automobile majors are exploring the possibilty of coming India or already in existance.
Especially the automotive component manufacturer in the level of TIREI has a chance of increasing their business over the years to come.
I wish to get a write up from you in this sector and particularly if possible with special emphasis of company like
1. Federal-Mogul Goetze (India) Limited
2. Sundaram Fastener
3. Gabriels India Limited
Best regards
 
 
I am always doing that which I cannot do, in order that I may learn how to do it. ~Pablo Picasso
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Quote basant Replybullet Posted: 02/Sep/2006 at 5:10pm
Never researched auto components but yes this iindustry could become very big. the extrenal scale of opportunity is huge.
 
You know a few months back all the auto comp. stocks in US were crashing because analysts feared that outsourcing would crush the foreign (Non Indian) companies. Why I have not included Auto component in the above write up is because I wanted to put in industries and sectors that have a domestic influence and would not be affected by US ecnonomy.
 
ANother inteersting bit ENAM (India's best research house) had been bullish on auto component for over 10 years. But they started getting their reqards only from 2003.As they say "Time and not Timing" is the key to making money.
 
 
Would try and provide detailed views on the companies you mentioned above.
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Quote Ajith Replybullet Posted: 02/Sep/2006 at 6:25pm
Mirza Tanneries-the adressable opportunity is huge and the management is  truly entrepreneurial.Red Tape Shoes have  a fairly strong brand equity in India. Recent stagnation in performance may be an opportunity.

Edited by Ajith - 02/Sep/2006 at 6:45pm
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Quote basant Replybullet Posted: 02/Sep/2006 at 7:34pm
How would you rate the managementof Mirza? Heard that they were involved some where a few years back. Is there any truth to this story.
 
How about Liberty Shoes?Market cap of rs 250 crores, PE of 8 times trailing, pays Rs 6 as dividend their tie up with pantaloon should generate revenues from this year?Financials are very much comparable to Mirza which also looks cheap at less then 10 times; market cap rs 260 crores but Isn't Mirza exporting a lot that could be putting it under the global economy scanner?


Edited by basant - 02/Sep/2006 at 10:31pm
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Quote reetesh Replybullet Posted: 02/Sep/2006 at 8:21pm

I think Mirza  management is good, I own this stock but it has done nothing since year and half yes you are right that they are mainly into export but now they are changing there focus to domestic market, they recently merged their sister company which is into making of ladies shoes and they recently expanded their capacity and now I think they are getting there act togeather.

One sector that you missed which is emerging is Food processing their we need to find some good companies that can expand with retail and dont you think that we shifting to organised retail then their supplier like Mirza,Liberty,Zodiac etc can benifit more.
 
Dont need to tell you that RJ holds Vadilal & Agro Tech Food in this sector.
Do you think that Vadial can expand the way RJ talks about business with scalability?
 
Regards,
 
Reetesh.
When going gets tough, thatís when tough (people) gets going.
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Quote basant Replybullet Posted: 02/Sep/2006 at 8:52pm
Yes food processing is another big area but then here the problem is about finding the big listed player. Some how MNC'S never go up 20 - 30 times. The moment tha parent sees the business traction coming they go in for a buy back. You could argue with Lever, Nestle but they have been slow and steady compounders of 25 - 30% rather then having rewarded shareholders with an Infy kind of return.
 
Agrotech could become big and with the parent's backing there is no downside risk but on the other hand the waiting period is long and uncertain. EVen If we assume that the parent Con Agra which is a multi billion dollar company would start taking more interest into India the problem is they could open up a subsidiary and start putting in the new products from there.Established MNC managemnts have been known of doing this before. But if we are looking at options from this industry then Agrotech is the company to be in. Act -II pop corn is hit though.
 
Vadilal is no more an Ice cream player and has diversified into frozed foods, vegetrables processed foods etc. But I am suspicious of managements who do not do anything for decades and suiddenly wake up to the world. IN all the multibaggers that you will recall the management tried becoming big right from day one.
 
Also the company's net profit margin is 1.33% and with an abysmaly low RoE at less then 7% for a company in the processed food industry something seems out of place.
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Quote Ajith Replybullet Posted: 02/Sep/2006 at 10:24pm

I do happen to have a very reliable source( though not in touch for 2 years),and the management moves slowly but agressively.Mirza is at a higher level on the value scale and in international penetration,I think.Liberty is undervalued and having some temporary passing problems.

        In any case I  bought some Mirza last week.Mirza,last quarterly was good yet the results were ignored.Perhaps,retail foray is not looked at positively by the market.


Edited by Ajith - 02/Sep/2006 at 10:59pm
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