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Microcaps-When will value.be unlocked?
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basant
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Quote basant Replybullet Topic: TheEquityDesk and Consumer stocks - Perfect fit
    Posted: 12/Oct/2011 at 7:07pm
This caption was conceptualized with a lot of happiness and a little bit of arrogance. The ability of human nature to feel proud and happy on success is natural. Hence the kind of success that TheEquityDesk has generated for all its members through their collective debate and reasoning especially relating to the investment potential of consumer stocks is extraordinarily phenomenal. Most of the consumer names here have been up by four to twenty times over the last 2 years even while the broad market has done almost nothing!

Taleb would call this a random event and if it is that so be it. As someone mentioned that given an option in between being lucky and smart he would rather be lucky then be smart, the same logic applies for all the members of TheEquityDesk who have made a ton of money in the great Indian consumer boom.

In my relentless endeavour to interact with money managers and analysts I have seen no one being bullish on consumption stocks. Most of them have found it expensive and a few of them were courageous enough to admit that they missed it while a small percentage of the others were waiting for a fall to buy it. It is strange that people always want to buy a stock a in a recurring infinite loop 20% cheaper then what it quotes at.

So this story repeated itself with many of the consumption stocks where most of the Ted members made money while the world waited to buy it at a lower scale the believers pyramided with incremental salary cash flow thus creating a portfolio of multibaggers.

Most analysts argue against consumer stocks on the basis of a relatively high PE ratio. Quality growth stocks have to be bought with the thought that if the growth continues for a couple of more quarters the stock would become cheap. They are seldom available at absolute levels of cheapness (whatever that means) and when they are as in March 2009 the others trade at PE ratios of three and five with an yield greater then the PE ratio and many of them generating returns of 20%+ on invested capital. So relatively speaking, quality is always expensive.

The general market consensus is that everyone else has bought consumer names and are hiding in them so it can crash but no one says that he has bought it himself, so it is a case of no one buying this in bulk but still assuming that everyone else has bought it.

Another argument is that if you add the market cap of the top best performing consumer stocks (TTK Prestige, Page Industries, Jubilant Foodworks, Hawkins Cooker Bata etc) the total market cap is less than US$ 5billion. If you add Titan to this list then it moves closer to US$ 10 Billion. This is certainly not the sign of a bubble in an economy where private final consumption could hit US $ 3.4 trillion over the next ten years.

Over the past couple of years as these consumer stocks moved ahead there is a case of not even a single consumer oriented mutual fund being floated. How many did we have before the infra and real estate sectors went bust? I guess around three dozens and a few more.

But, here comes the important but, like all sectoral rallies this one will also collapse and to counter that we have to keep our eyes and ears to the ground both in terms of what the companies are doing as also as how the market participants are thinking. Both are equally important and also amongst the consumer names one has to keep getting out of the relatively expensive ones and buying more of the relatively cheaper ones something that is easy in hindsight and almost impossible in foresight but investing is about making educated guesses and we keep doing that.

However even when this music stops most of us will keep dancing as has happened in every boom over the last four hundred years and so it is important to stop and make sure that we have to dance as long as the music plays rather than assume that the music will keep on playing till we dance!

For the moment though there does not seem to be any signs of the drums stopping though depending on the beats one has to keep evaluating and switching the dance steps.


Edited by basant - 12/Oct/2011 at 7:47pm
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Jaishrikrishna
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Quote Jaishrikrishna Replybullet Posted: 12/Oct/2011 at 7:13pm
Keep writing Basantjee, Every bit you write on TED, is a learning experience for us.
Don't Buy and Hold, Buy and Homework / Fish see the bait,but not the hook; Men see the profit, but not the peril.
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subu76
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Quote subu76 Replybullet Posted: 12/Oct/2011 at 7:35pm

Great Article Basant Sir.

 
I think not enough research has gone into what's driving the huge consumer stock boom. While power and infra companies have engaged fund managers with gutso with statistics like per capita power usage consumer companies have not taken the lead in that aspect. I doubt anyone has done indepth analysis of the effect NREGA or trickle down effect has had on consumer companies.
 
Another aspect has been the relatively low market cap and low liquidity of consumer companies has not encouraged fund managers to participate.
 
I also think there is a huge disbelief about the entire consumer sector boom. For example what explains the huge sell off on Bajaj Electricals (a huge price warrior) to 1500 cr market cap when it a an extremely high ROE business that does 150 cr profit.
 
Another aspect is that tradition value measures like PE, BV can't be applied to measure immensely cash generating abilities of consumer stocks.
 
One more neglected aspect is that a lot of these consumer stocks have arrived now. While sales growth has been pushing up the topline the bottom line has been bolstered much more by economies of scale and that has caused the surge in profits and PE rerating. What is very heartening about a lot of consumer companies is that they were struggling a few years back. If you look Bajaj Electrical, Prestige, Hawkins, Whirlpool ... all of these companies were in a bad shape around 2000-2002. The huge economic growth and internal startegy changes they've made has resulted in a rich haul.
 
I think we have 2 consumer focused mutual funds only at this point (Read this in moneylife sometime back). However, we haven't see the huge "King without any clothes" IPO in this segment. Perhaps because investment bankers can't create a consumer company out of thin air unlike say power companies, brokerage houses or IT firms.
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Quote subu76 Replybullet Posted: 12/Oct/2011 at 7:41pm
Originally posted by subu76

Great Article Basant Sir.

 
I think not enough research has gone into what's driving the huge consumer stock boom. While power and infra companies have engaged fund managers with gutso with statistics like per capita power usage consumer companies have not taken the lead in that aspect. I doubt anyone has done indepth analysis of the effect NREGA or trickle down effect has had on consumer companies.
 
Another aspect has been the relatively low market cap and low liquidity of consumer companies has not encouraged fund managers to participate.
 
I also think there is a huge disbelief about the entire consumer sector boom. For example what explains the huge sell off on Bajaj Electricals (a huge price warrior) to 1500 cr market cap when it a an extremely high ROE business that does 150 cr profit.
 
Another aspect is that tradition value measures like PE, BV can't be applied to measure immensely cash generating abilities of consumer stocks.
 
One more neglected aspect is that a lot of these consumer stocks have arrived now. While sales growth has been pushing up the topline the bottom line has been bolstered much more by economies of scale and that has caused the surge in profits and PE rerating. What is very heartening about a lot of consumer companies is that they were struggling a few years back. If you look Bajaj Electrical, Prestige, Hawkins, Whirlpool ... all of these companies were in a bad shape around 2000-2002. The huge economic growth and internal startegy changes they've made has resulted in a rich haul.
 
I think we have 2 consumer focused mutual funds only at this point (Read this in moneylife sometime back). Accounting standards is "relatively" clean. However, we haven't see the huge "King without any clothes" IPO in this segment. Perhaps because investment bankers can't create a consumer company out of thin air unlike say power companies, brokerage houses or IT firms.
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nikrod12
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Quote nikrod12 Replybullet Posted: 12/Oct/2011 at 7:48pm
Originally posted by subu76

However, we haven't see the huge "King without any clothes" IPO in this segment. Perhaps because investment bankers can't create a consumer company out of thin air unlike say power companies, brokerage houses or IT firms.
 
 
Very relevant point Subuji. You can't drag a million fools with tagline "COOKER ON INDIA ON" Smile
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Quote subu76 Replybullet Posted: 12/Oct/2011 at 8:02pm
Originally posted by nikrod12

Originally posted by subu76

However, we haven't see the huge "King without any clothes" IPO in this segment. Perhaps because investment bankers can't create a consumer company out of thin air unlike say power companies, brokerage houses or IT firms.
 
 
Very relevant point Subuji. You can't drag a million fools with tagline "COOKER ON INDIA ON" Smile
 
Yeah , just look at our collective skepticism about Actlife or Bajaj Almonds.
I remember during the dot com boom a kid wearing shorts could come to investors on his cycle could make a speech about eyeballs raise 500 million dollars just like that and then get stone drunk.
 
We're definitely not at such a bubbly state as far as consumer companies go.
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kumarn
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Quote kumarn Replybullet Posted: 12/Oct/2011 at 8:07pm
From a very macro perspective the consumption story looks self sustaining for the next 30 years. That is a long, long time. The question is whether it translates to the same kind of growth in the companies we are targeting and in their prices in the stock markets.
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Quote S.Varghese Replybullet Posted: 12/Oct/2011 at 9:12pm
Great Article Basantji, Subuji and other esteemed members of TED. I feel a bit ashamed to say that I never knew the power of the Indian consumption story. My first multibaggers were in the Power sector - Tata Power and BSES - and I was lucky to enter in mid three digits and exit at almost their peak. I am very ashamed of my investments methods then.
 
I used to invest based on the capex of various companies. More the capex, more of my capital got deployed. Now as far as capex is concerned, I have taken a complete about turn.
 
After that I made some serious multibagger losses in the IndiaBulls, DLF, Bharti Shipyards of the world. After that I made some serious money in high quality commodity producers like Sesa Goa and Tata Steel after the 2008 crash.
 
Despite all this Titan, Hawkins, TTK, Page never crossed my path because these stocks are not in the front pages of business newspapers - unlike their distant flashy cousins like BSES, RIL, da da da..
 
The best thing to happen in my investment journey was visiting TED. I dont know how it happened, but it happened and things have started moving up slowly but steadily. I have no "castles in the air" dreams, but I know along with other TED memebers I am in good company and in a reasonablly good path.
 
Hats off to Basantji, TED and other esteemed members of this great forum.
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