Author - Rujuta Tamhankar

Don’t cut it too fine!!

Intelligent investing rests on three tenets- Anand Sridharan reminds investors that intrinsic business value, Margin of safety and Mr Market are three tenets that matter. If we truly understand the essence of Ben Graham’s three tenets, we’re done. There’s nothing else to sensible investing. View stock as a business. Roughly gauge what it’s worth. Since world is all messy, don’t cut it too fine. Keep some cushion. View nutty counterparties as entertainment, unless they offer something actionable based on the above.

Two tenets – intrinsic business value & margin of safety – are inseparable. It wouldn’t even occur to Mr Sridharan to ask the question “What’s the value of this business?”. The actual question that he asks is “Around what buy-price am I fairly sure that I’m getting a decent deal?. The second question blends intrinsic business value and margin of safety to help me reach an actionable decision. My guesstimate of business value will have wide error bars. The range maybe 100 to 150. Whatever be that number, I never do an artificial separation of value and safety margin. At all times, prudent investors don’t fuss about intrinsic business value, apart from being cognizant of a broad range that’s reasonable for a particular business.

This is why simple works better than sophisticated. In any real-world, reliable sense, DCF is nonsense. It is a sophisticated tool for impostors to delude themselves and others. We suck at forecasting and have no way to reduce risk to a number. A mental model that integrates margin of safety and intrinsic business value nudges us to focus on being roughly right, not precisely wrong. It is why the best investors spend a lot of time ensuring that businesses are predictable, and little time making actual predictions. Simple valuation methods suffice for businesses where cashflows and risks are relatively knowable.

Ongoing charade is even more flawed than it seems – What’s helpful to practitioners is a buy-price that offers reasonable certainty of getting more than what we pay for. This goal is achieved through a mindset that views value and safety in unison. Investors get habituated to methods that yield neither value nor safety without such a mindset.

Source- Buggy Humans in a Messy world by Anand Sridharan

AM Comments: –

  • It is tough to establish the true value of a firm. Each investor has their own method of estimating value, which may or may not be reliable. Because intrinsic worth is subjective, it should be assigned a range rather than a single figure. An approximate estimate, say within 10% of the actual value, should be enough. This gives the investor the opportunity to investigate the more subjective components of the valuation process.
  • Investing is done after a thorough examination of the firm and its cashflows, assuring a healthy margin of safety and a reasonable return. Investors don’t have to aim for perfection all of the time. Because we cannot precisely forecast the worth of a firm in the future and discount it at a suitable discount rate, investors must be comfortable with their purchase price.
  • Market frenzy is characterized by heightened emotions. Prices are at an all-time high. As a result, recalling Mr. Howard Marks, one should resist the temptation of participating in a market frenzy.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

Expect higher demand for application modernization, cloud transformation, and digital engineering – HCL Tech

Update on the Indian Equity Market:

On Tuesday, Nifty closed lower at 18,113 (-1.1%) led by REALTY (-2.6%), AUTO (-2.4%), and METALS (-2.2%) were the top losers while there were no gainers.The top losers were MARUTI (-4.1%), TATACONSUM (-3.9%), and ULTRACEMCO (-3.8%) while AXISBANK (+1.8%), ICICIBANK (+0.5%), and HDFCBANK (+0.4%) were the top gainers.

Edited excerpts of an interview with Mr. Vijayakumar, MD & CEO, and Mr. Prateek Aggarwal, CFO, HCL Tech with CNBC TV18 on 17th January 2021:

  • The company’s order pipeline is healthy, with transaction wins increasing by 64% YoY in 3QFY22. Application modernization and cloud computing were driving the growth.
  • Hiring has grown to around 10,500 employees in the 3QFY22E. The management expects greater demand visibility for application modernization, cloud transformation, and digital engineering.
  • The management expects a strong 4QFY22E due to increased booking and order visibility as a result of the services segment’s hiring of over 10,000 individuals. Even if the firm has a flat 4QFY22E, management anticipates the company will expand at a rate of 12.6-12.7 percent in FY22E.
  • The company’s margins were five basis points (bps) higher in 3QFY22 QoQ, while services were a little weaker on the margin. Due to expenditures associated with growth, such as knowledge transfer fees, the IT services margin was lower. The management also highlighted that wage hikes in 3QFY22 and attrition levels, both of which have expenses, had an impact on margins. Management believes that attrition levels have reached a peak and that attrition should begin to decline. The management expects the margin to return to typical levels of approximately 20% by 2QFY23E to 3QFY23E.
  • In terms of fresher recruiting, the company plans to hire 20,000-22,000 freshers for FY22E.
  • The company’s recent acquisition of Hungary-based data engineering services provider Starschema Ltd for $ 42.5 mn is expected to help scale the company’s Eastern European footprint, particularly in Hungary. This is a data engineering consulting organization that offers front-end consulting, which can be a good trigger for a lot of downstream work. In Hungary, the corporation has solid mindshare attracting top personnel. As a result, the firm will be able to develop its Eastern European footprint more quickly, particularly in Hungary. The company will continue to seek assets that can enhance its capabilities, particularly in a high-demand market.
  • When it comes to the products and platforms business, management expects it to increase in the low single digits. The management anticipates that this will be a long-term play that is still getting modernized.
  • In terms of deal wins, the net new TCV in 3QFY22 was $2140 mn, a 64 percent increase from the previous year. The high TCV was due to 8 significant transactions on the services side, another 8 deals on the products and platforms side, and a large number of smaller deals.

 

Asset Multiplier Comments

  • We believe HCL Tech has a solid business model and a track record of successful execution. The company plans to hire at least 20,000 additional freshers by FY22E (with 15,000 already on board) and double the amount by FY23E. This reflects management’s confidence in future deal wins.
  • We believe the company will likely be at the lower end of the 19-21 percent EBIT guidance band in 4QFY22E, but the long-term growth narrative remains intact, bolstered by greater growth in cloud, ER&D, and data modernization.

Consensus Estimate (Source: market screener website)

 

  • The closing price of HCL Tech was ₹ 1,220/- as of 18-January-2022. It traded at 25x/22 x/ 19x the consensus earnings estimates of ₹ 49/ 56/ 63 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,460 /- implies a P/E Multiple of 23x on FY24E EPS estimate of ₹ 63/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

 

#Truths about investing 103- Think differently

This is taken from a presentation by Howard Marks Co-Founder of Oaktree Capital. This is the third article in a series. Mr. Marks makes concise and incisive comments about the art of investing that can help amateur and professional investors alike.

You have to think in a way that departs from the consensus; you have to think differently and better. The price of a security at a given point in time reflects the consensus of investors regarding its value. The big gains arise when the consensus turns out to have underestimated reality. To be able to take advantage of such divergences, you have to think in a way that departs from the consensus; you have to think differently and better. Any time you think you know something others don’t, you should examine the basis for that belief. Ask Questions like- “Does everyone know that?” or “Why should I be privy to exceptional information or insight?”

It isn’t the inability to see the future that cripples most efforts at investment. More often it’s emotion. Investors swing like a pendulum – between greed and fear, euphoria and depression, credulousness and skepticism, and risk tolerance and risk aversion. Usually, they swing in the wrong direction, warming to things after they rise and shunning them after they fall. Technology now enables them to become distracted by returns daily. Thus, one way to gain an advantage is by ignoring the noise created by the manic swings of others and focusing on the things that matter in the long term.

To be a successful investor, you have to have a philosophy and process you believe in and can stick to, even under pressure.

Since no approach will allow you to profit from all types of opportunities or in all environments, you have to be willing to not participate in everything that goes up, only the things that fit your approach. To be a disciplined investor, you have to be able to stand by and watch as other people make money in things you passed on. Every investment approach – even if skillfully applied – will run into environments for which it is ill-suited. That means even the best of investors will have periods of poor performance. Even if you’re correct in identifying a divergence of popular opinion from eventual reality, it can take a long time for the price to converge with value, and it can require something that serves as a catalyst. To be able to stick with an approach or decision until it proves out, investors have to be able to weather periods when the results are embarrassing.

Source- Truth’s about investing by Howard Marks

Asset Multiplier Comments:

  • Investors with a longer time horizon are less likely to make emotional judgments. A properly allocated portfolio has the appropriate mix of equity and fixed-income asset classes to provide an investor with the highest chance of success. This means retiring comfortably without running out of money.
  • A sound investment philosophy is founded on a thorough knowledge of markets. Determine the return you require, the income you will need for your retirement expenses, and the degree of portfolio appreciation you need to achieve that. Selecting a plan and adhering to it is also part of your investment philosophy. Passive investing might just be your investment philosophy.
  • Adhering to your philosophy entails avoiding emotion-driven buy-and-sell choices and sticking to your intended allocation regardless of market movements. The whole objective of allocating according to a strategy is to prevent hopping in and out of assets on the spur of the moment.

 

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

Expect loan book growth of 9.5% in FY22E – SBIN

Update on the Indian Equity Market:

On Monday, NIFTY closed in the green at 18,003 (+1.1%). Among the sectoral indices, PSU BANK (+3.2%), MEDIA (+2.6%), and REALTY (+1.2%) closed higher while none closed in the red. Among stocks, UPL (+4.6%), HEROMOTOCO (+3.3%), and TITAN (+3.1%) were the top gainers while WIPRO (-2.3%), NESTLEIND (-1.0%), and DIVISLAB (-0.9%) were among the top losers.

Excerpts from an interview of Mr. Ashwani Bhatia, MD, State Bank of India (SBIN) with CNBC-TV18 dated 7th January 2022:

  • The management stated that a big part of the stress in the banking system, which mostly consists of the corporate sector, has been reduced and that they are not witnessing any further tension.
  • RBI in their financial stability report talked about some stress buildup on account of COVID, looking at the trajectory of the virus at the moment. But as an industry, the management thinks that things are pretty much in place for decent growth.
  • Management is optimistic about the growth pipeline, the majority of which is expected to result from increased government activity. The national monetization strategy has already taken off, and InvITs are receiving favorable coverage. According to management, more economic activity would benefit the industry. Management expects the loan book to grow at 9.5 percent in FY22E and 7-9 percent in the next 5 years.
  • Mr. Bhatia stated that the retail sector was never a concern. The retail book is generally small ticket, and the housing sector is by far the most important for all banks. In general, delinquencies in the housing industry are quite low. On the personal loan side, some evaluation is done at the backend because the clients are primarily salaried persons or government employees; hence, management anticipates this stress to be managed under 0.5 percent for FY22E.
  • Despite the fact that the RBI has emphasized the stress that the MSME sector is under, as well as the significance of closely monitoring these problematic loans, SBI management, in particular, feels that things cannot get much worse. Today, all public sector banks are well-capitalized, and their high net worth is sufficient to handle loan expansion in the next few years. The bank’s NPA levels are quite constant, and the operating profit and provisions are also adequate.
  • Reliance Industries raised about $400 mn, the biggest issue by any Indian business done overseas, with one of the main reasons being the cheaper cost of financing as opposed to borrowing from a bank. On the subject of whether the trend may lead to a loss of market share for banks, management stated that it is a very beneficial development since it helps local institutions de-risk. Well-managed businesses are gaining access to international funding. After factoring in the hedging cost, the LIBOR, and the spread, the resulting rate would be close to the domestic rate. However, many of the enterprises do not need to hedge since they have a large export book. As a result, the cost of funding is significantly reduced.

Asset Multiplier comments:

  • The asset quality forecast appears to be positive since the worst phase of the corporate cycle appears to be behind the industry. Despite the tough circumstances, it reported good FY21 results. We anticipate that robust loan and deposit growth, as well as continuing recovery, will maintain the earnings momentum.
  • We believe the bank is well-positioned to deliver strong advances and PAT growth on the back of strong retail franchise and recovery in the asset quality, particularly the corporate book. We expect the bank to benefit from economic recovery and recovery of the benign corporate credit cycle.

Consensus Estimate: (Source: Market screener website and Tikr)

  • The closing price of SBI was ₹ 504 as of 10-January-2022. It traded at 1.6x/1.4x/1.3x the consensus Book Value per share estimate of ₹ 300/ 340 / 388 / for FY22E/FY23E/FY24E respectively.
  • The consensus average target price is ₹ 625 /- which implies a PB per share multiple of 1.6x on FY24E BVPS of ₹ 388/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

Mise en Place

This culinary French term translates to everything in its place. Cooking and investing are process-driven activities where greater outcomes can be attained by preparing ahead of time. Growing a Data Base of Companies is Mise en place. Before taking a position in a company, the individual has time to prepare, is relatively stress-free and there is no pressure to act.

Mise en Place and Investing a.k.a Why Process Matters

Failing to prepare when allocating capital can lead to less than satisfactory results and frantic decision-making. Having a well-defined process can take a great deal of the stress out of decision-making. The process of investing boils down to:

  1. Understand what type of investor you want to be: Whether it is outstripping an index, achieving optimized performance, compounding whilst avoiding capital loss, or trade for residual income.
  2. Understand how you want to manifest that investor type: How concentrated the position should be? What investing style best suits your personality? What portfolio turnover are you comfortable with?
  3. Define what opportunities you seek: look for market leaders with a low likelihood of moat erosion, future market leaders with competitive advantages.
  4. Write it down: investment policy statement can be invaluable during times of volatility or uncertainty.
  5. When you have that down, you can more readily identify companies that fit within your investing universe. At this stage, the cooking process has still not begun.

Flow State and how does one achieve a flow state in investing?

A flow state is a state of deep focus, devoid of distraction when an individual is carrying out a task. The decision-making process can become a great deal more frictionless when the investor knows what they intend to do under certain circumstances. After establishing your process for investing, and deciding how you wish to undertake the construction of a portfolio, the next step is to discover the companies that will populate it. Assuming you have discovered a company, and it fits your criteria, it’s important to understand what you might do if things don’t go your way, ahead of time. Extracting the emotion from the investment equation is hard. Outlining a list of reasons that would allow you to sell a position can benefit you as it allows you to remember why you are invested, and why you would sell, and when those events happen, the activity doesn’t require extensive pondering over what to do. Whether that means selling once a certain IRR has been achieved or when there are signs of managerial deterioration, accounting irregularities, thesis creep, or some other red flag factor in the business, you are acting on a pre-defined catalog of responses.

Conviction

The best antidote is simply knowing what you own, knowing why you own it, and knowing what would have to occur to make you lose conviction. Preparation, when pressure is low, is a critical ingredient to ensuring that an investor can more readily focus on the task at hand when the act of investing becomes live. Flow states are impeded by distraction. The contemplation of appropriate response is a distraction best remedied by proactively establishing your catalog of responses, ahead of time. As Ramsay suggests, “time spent getting yourself ready is never wasted”.

Source: – Everything in it’s place by Conor MacNeil

Asset Multiplier Comments

  • It’s all about doing the job ahead of time rather than catching up as needed.
  • This is all about preparation before investing, which includes building company data bases. Maintaining data bases allows you to track the ongoing performance of your company. Based on the information acquired, the performances being tracked serve to indicate where a firm is presently and where the business will be in the future. Understanding what you have results in conviction. It’s a  cycle in which everything boils down to planning.
  • The advantages of planning ahead of time are self-evident. Faster decision-making processes, as a result of preparation, can save us a significant amount of time when making decisions.
  • An investment policy statement serves as a guide for portfolio building and proper monitoring. Assist to enhance focus on the investment objective and preventing mistakes caused by changing market conditions, which is a vital component in investing.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

Double-digit decline to continue in 4QFY22E as well – Bajaj Auto

Update on the Indian Equity Market:

On Monday, NIFTY closed in the red at 17,625 (+1.6%). Among the sectoral indices, PRIVATE BANK (+2.7%), BANK (+2.7%), and FINANCIAL SERVICES (+2.5%) closed higher while PHARMA (-0.5%) and HEALTHCARE (0.4%) closed in the red. COAL INDIA (+6.4%), EICHERMOT (+4.6%), and BAJFINANCE (+3.6%) were the top gainers. CIPLA (-1.3%), DR REDDY (-1.0%), and M&M (-0.8%) were among the top losers.

Excerpts from an interview of Mr. Rakesh Sharma, Executive Director, Bajaj Auto with CNBC-TV18 dated 3rd January 2022:

  • On the demand environment, the company expects volume cutbacks in a variety of categories, including retail, rural, and urban.
  • The industry still facing a double-digit decline. Retail sales have dropped by 15%-17%, which is a big drop. The company does not see any bottom in sight. The management does expect the double-digit decline in volumes to continue, especially in the mass market group, in 4QFY22E as well.
  • The majority of the company’s 2-wheeler demand comes from the lower-income segment of the economy. Since the 2-wheeler industry has been affected during FY20 – FY22, and the economic recovery has not yet trickled down to this sector, the management does not see demand picking up. The COVID issue has receded and the decline in demand is driven by the economic performance.
  • Despite this, the firm has increased its market share by 3% in the previous three quarters. The business anticipates a 20% market share in the motorcycle industry by FY22E.
  • Within the EV space, the company is preparing to shift from ICE to electric with a positive outlook. The company had invested Rs 3,000 million for a capacity of 5,00,000 in their new electric vehicle plant. Their first EV will be rolled out in June-2022 from the company’s Akurdi production site.
  • The company said that the key constraint is related to the supply of EV-specific components. Supply is volatile and uncertain which makes it difficult to boldly plan bigger volumes in the immediate terms.
  • India’s two-wheeler market is still under-penetrated. The country’s demographic division, as well as the pace of urbanization and road penetration, have a direct influence on demand for two-wheelers. When compared to Southeast Asia, India lags in terms of these fundamental characteristics that influence demand. So, the demand components are in place, but there is a problem with purchasing power or the amount of money in the hands of the people. This has an impact on the ultimate demand.
  • Retail financing, which is performing significantly better than cash sales, indicates that individuals do not have enough cash in their pockets. However, as retail lending spreads into rural regions, this will be critical in fuelling demand growth.

Asset Multiplier comments:

  • Commodity inflation and a chip scarcity may continue to have an impact on margins and demand fulfillment in 2HFY22E and FY23E.
  • Strong brand image, product innovation, and expanding market share will eventually fuel Bajaj Auto’s future sales. We anticipate that the firm will benefit from the premiumization trend and export potential. Moreover, the company has the opportunity to build its EV 2-wheeler scooter market.

Consensus Estimate: (Source: Market screener website and Investing.com)

  • The closing price of Bajaj Auto was ₹ 3,274 as of 3-January-2022.  It traded at 18x/15x/13x the consensus Earnings per share estimate of ₹ 177/ 211/ 242/- for FY22E/FY23E/FY24E respectively.
  • The consensus average target price is ₹ 3,976/- which implies a PE multiple of 15x on FY24E EPS of 242/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

 

Disbursement growth is expected to be 38-40% higher than in FY19- Can Fin Homes

Update on the Indian Equity Market:

On Wednesday, the benchmark index NIFTY 50 closed at 17,213 (-0.1%), 20 points lower. Among the sectoral indices, HEALTH CARE (+1.9%), PHARMA (+1.7%) and AUTO (+0.4%) were the gainers and METAL (-1%), MEDIA (-0.9%), PSU BANK (-0.7%) led the losers. Among the NIFTY50 components, EICHERMOT (+3.4%), BAJAJAUTO (+2.9%), and SUNPHARMA (+2.3%) were the top gainers while SBIN (-1.7%), ITC(-1.6%) and COALINDIA (-1.5%) led the laggards.

Excerpts of an interview with Girish Kousgi, MD and CEO of CAN FIN HOMES LIMITED, on CNBC TV18 on 6th December and 27th December 2021:

  • The real estate industry’s sentiment is extremely positive, owing to low property prices, lower mortgage rates, and increased affordability. With economic activity rising up and ample liquidity in the market, the company is optimistic of industry’s overall health and improvement.
  • The management feels the new covid variant, Omicron, is not as dangerous as the preceding variations since the fatality rate is lower. On the demand side, the firm anticipates good results in the 3QFY22E, and the trend is projected to continue.
  • The restructured book expanded by Rs6500 million in 3QFY22E. The firm expects roughly 7% of restructured book to flow into stage 3 in 3QFY22E and 4QFY22E, which is approximately Rs 450 million, and has established a provision of Rs 650 mn against this amount.
  • Aside from the NPA pool, the company expects to recover roughly Rs 550-600 million, thus when looking at NPAs altogether, management believes it would remain very steady.

 

  • The excess provision, which can be utilised to satisfy the RBI’s new NPA rules for NBFCs, has been exhausted. The company will continue to provide provisions based on the quarterly requirement.
  • Because of the RBI’s new policy guidelines, there will be a significant impact on the asset quality and gross NPA levels in the industry as a whole, particularly in the commercial vehicle, MFI, and unsecured pool sectors. Because the EMI begins at the end of the month, the impact on Can fin is likely to be limited. For recovery, an NPA pool has been designed and hence NPAs are expected to remain constant in the next quarters.
  • Almost 75% of loans are extended to salaried class. Even in the affordable housing segment, demand has increased. 3QFY22 is looking extremely well in terms of demand, which will continue in the next quarters notwithstanding the impact of Omicron.
  • For FY22E, disbursement growth is estimated to be 38-40% higher than in FY19; on a steady-state basis, the company intends to expand at a rate of 18-20% on both book and disbursement growth. Because demand is high and growth is robust, sequential growth is estimated to be approximately 4-5 percent.
  • The average loan ticket size stands at Rs 21 lakh, up from Rs 18 lakh a few quarters ago, thanks to the company’s clear focus on the high-value salaried segment, which contributed to the growth in ticket size.
  • The demand is geographically diverse and all the segments are performing well. In terms of profile, self-employed / non-professionals had a slightly lower response for loan demand.
  • The salaried class and the self-employed class used to contribute 70% and 30% to the total loan book respectively. However, the contribution of the salaried class to the total loan book has increased to 74%. It may take another three to four quarters for the self-employment sector to recover to 30% contribution levels. The loan collection efficiency has increased compared to pre-covid levels.

Asset Multiplier Comments

  • 75% of Can Fin’s customers being salaried individuals, and the company being backed by strong brand of Canara Bank, we believe these factors will work favourably for its growth in the near term.
  • We expect disbursements in 2HFY22 to be better than H1, and its margins to remain stable at the current levels.

 

Consensus Estimate: (Source: market screener and Tikr website)

  • The closing price of Can Fin Homes was ₹ 555/- as of 29-December-2021. It traded at 2.7x/2.1x/1.8x the BVPS estimates of ₹ 222/264/308/- for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 760/- implies a P/B Multiple of 2.8x on FY24E BVPS of ₹ 270/-

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

 

 

 

#Truth about investing 102-Efficiency and behavior

This is taken from a presentation by Howard Marks Co-Founder of Oaktree Capital. This is the second in the series of articles. Mr Marks makes concise and incisive comments about the art of investing that can help amateur and professional investors alike.                                                      

Most investors behave pro-cyclically, to their own detriment.

In a rising market, even fundamentally weak companies look great technically. Fear of Missing Out (FOMO) kicks in, making people more optimistic and causing them to purchase at market highs. When the inverse is true, their pessimism grows, encouraging them to sell at cyclical lows. As a result, the retail investor is left with equities with high purchase prices but poor fundamentals.

Cyclical ups and downs don’t go on forever. But at the extremes, most investors act as if they will.

At market extremes, emotions- fear and greed are at their highest levels. People buy at market highs and sell at market lows. When people start believing in trends rather than market cycles, that’s when behavioral mistakes occur. It is usually best to ignore the current market and stick to the fundamentals at sky high emotions.

It’s important to practice “contrarian” behavior and do the opposite of what others do at the extremes.

Market does not trade at extreme ends for a long time. When there is a widespread notion that there is no risk, investors believe it is safe to engage in dangerous behaviour. Acting contrary to the market during phases of soaring emotions might provide us with optimum entry and exit points. As a result, we must sell when others are greedy and purchase when they are fearful.

While not all markets are efficient – and none are 100% efficient – the concept of market efficiency must not be ignored. In the search for market inefficiencies, it helps to get to a market early, before it becomes understood, popular and respectable.

Humans are predisposed to identify patterns and exploit them; however, these patterns and trends are already priced in by the markets. Higher the efficiency of the market the faster are the patterns and trends priced in. In established markets, however, efficiency diminishes the frequency and scale of opportunities to overcome the consensus and identify mispricing or inefficiencies. The sooner you invest in an inefficient market, the easier it is to profit as markets become more efficient. If the other investors are few, inexperienced, or prejudiced, you will have the first mover advantage; as Warren Buffet correctly stated, “First comes the inventor, then the imitator, and last the fool.”

Source: Howard Marks- Truth About investing.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Focus and future is on digital platform: Zee Entertainment and Sony Group

Update on the Indian Equity Market:

On Thursday, the benchmark index NIFTY 50 closed at 17,072 (+0.7%), 117 points higher. Among the sectoral indices, REALTY (+2.3%), PSU BANK (+1.6%), and FMCG (+1.3%) led the gainers. MEDIA (-1.1%) and METAL (-0.2%) were among the losers. Among the NIFTY50 components, POWERGRID (+3.7%), IOC (+3.0%), and ONGC (+2.7%) were the top gainers while DIVISLAB (-1.8%), JSWSTEEL (-1.7%), and BHARTIARTL (-0.8%) led the laggards.

Excerpts of an interview with Mr. Puneet Goenka, CEO and MD, Zee Entertainment (ZEEL), Mr. Ravi Ahuja, Chairman of Global television and corporate development, Sony Pictures Entertainment and Mr. N P Singh, MD and CEO of Sony Pictures Networks India with Business Standard on 22nd December 2021:

  • The deal ensued when Sony saw an opportunity in the high growth Indian media Industry when they bought Ten sports from Zee Entertainment in FY18.
  • Zee Entertainment and Sony both have a foothold in the digital OTT market with Zee5 and Sonyliv, respectively. As the firm has not received any regulatory clearances from the Competition Commission of India, the management does not have any precise operational plans, yet.
  • Invesco had reservations as the existing ZEEL promoters were given an option to increase stake in the merged company to 20%. Management has clarified the promoters will have to buy from the open market and there will not be any preferential allotment. As the matter between ZEEL and Invesco is still sub-judice the management has not shared further details.
  • Management is considering market share, growth possibilities, and profitability to provide strong value to shareholders and customers. The management anticipates the merged business to be in a position of leadership and powerful enough to compete with global competitors by FY25E.
  • The merged entity will be an Indian asset on the portfolio of Sony Pictures Entertainment, and given the size of the Indian market, the entity will be a significant revenue contributor to the multinational media company.
  • Even though digital and OTT platforms are experiencing increase in viewership and broadcasting is under immense pressure, the management believes that it still has a role to play in the dynamic entertainment business. The digital business needs scale. The merged company will have a capital of $ 15.7 mn. This arrangement gives the company advantages which the individual companies would not have.
  • Linear TV will continue for the foreseeable future. The future focus is on the digital as both old and new subscriber base is increasing. The company would invest in content, technology and distribution in this direction.

Asset Multiplier Comments

  • The merger plan would need shareholder approval as well as clearance from regulatory bodies such as SEBI and the Competition Commission of India (CCI). The merger approval is awaited, as is information on the status of the EGM sought by Invesco. If the approvals are not received, the merger will be scrapped.
  • The merger is projected to be beneficial in terms of market consolidation and revenue synergy. As the market leader, the merged company would have pricing power in terms of earning ad revenues. The resolution of channel overlap and OTT platforms would be key areas to monitor.

Consensus Estimate: (Source: market screener website)

  • The closing price of Zee Entertainment was ₹ 338/- as of 23-December-2021. It traded at 25x/21x/17x the EPS estimates of ₹ 13.5/16.5/19.1/- for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 366/- implies a P/E Multiple of 21 on FY23 EPS estimate of ₹ 17.4/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

 

Behavioural Oversight

Anand Sridharan reminds investors that it is unfair to blame a fund manager for something that he/she doesn’t control (i.e. timing & quantum of flows in & out of fund). However, behaviour gap is real and hurts the average equity investor quite badly. Poor returns to the average investor are rooted in the following:

  1. Every investing strategy experiences (cleverly hidden) cycles
  2. Size is enemy of returns
  3. Substantial money tends to pile into a fund/strategy late in an upcycle
  4. Human nature and institutional (mis) behaviour exacerbate the above

Investing strategies witness headwinds & tailwindsOdds are that valuation will be a headwind over next 15 years. As a corollary, future returns will be worse than past. Only question is by how much. Without experiencing an inevitable downcycle for my approach, I cannot eliminate the possibility that I’m just a lucky idiot with a hot hand. Headwinds and tailwinds are often cleverly hidden and can only be deciphered with hindsight after an entire cycle. This is why the #1 criterion for judging an investor is longevity, not quantum, of outperformance. Decades, not years, are required to separate skill from luck.

Size is gravity for returns– Investing strategies don’t scale well, especially when inflows lead to step jumps in fund-size. Factors such as ability to build positions, liquidity, inefficiency or impact cost are very different at $ 1 billion AUM than at $100 million. The only peer-group at that size (pension & sovereign-wealth funds) has delivered single-digit long-term returns. Headlined time-weighted returns usually mix up big returns with small money followed by small returns with big money.

We’re suckers for extrapolating recency– Predictions of asset or commodity prices are severely biased by recent movements. Naturally, those selling funds for a commission pile onto this ride as it’s easier to palm off whatever’s hot. Everyone, fund managers included, starts believing in permanence of recent success. Topical nonsense (e.g. valuation doesn’t matter, this time is different) is extrapolated as timeless wisdom. Between misplaced expectations, inherent mean-reversion of any hot-hand strategy and size-effect, majority of inflows are set up for disappointment.

System doesn’t help investors’ cause one bit– Self-delusional fund managers on premature victory laps. Intermediaries’ mis-selling products with ridiculous return promises. Investors not learning from history. Media cheerleading instead of cautioning. Disregard for fundamentals/valuations being rationalized as new normal. What a fund manager does when one’s strategy stops working is the acid test of investing.

Anand Sridharan concludes that aforementioned factors aren’t independent and feed on each other in unknown ways. What can a retail investor in institutionally managed funds do? Ideally, stick to systematic investment in passive index funds.

Source: Buggy humans in a messy world by Anand Shridharan

Asset Multiplier comments:

  • It is difficult to distinguish the exact role of luck in successful trades or decisions, especially in the near term. As a result, performance of a stock or fund should be assessed over a longer period of time rather than the quantum of performance.
  • Humans are hardwired to place huge importance on recent occurrences than on earlier events. Just because a fund has a track record of outperformance does not guarantee that it will continue to outperform in the future.
  • When it comes to active funds, the only thing that can support an average investor is a suspicious, buyer-beware attitude.
  • One of the most significant impacts in stock markets is the behaviour gap, which is the difference between the rates of return that investments create when an investor makes rational choices and the rates of return that investors actually get when they make emotional judgments.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”