Let me start this post by quoting Munger & Buffett quotes on Earnings potential.
“Over the long term, it’s hard for a stock to earn a much better return than the business
which underlies it earns. If the business earns 6% on capital over forty years and you hold
it for that forty years, you’re not going to make much different than 6% return – even if
you originally buy it at a huge discount. Conversely, if a business earns 18% on capital
over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with one hell
of a result.”
- Charlie Munger, Vice-Chairman, Berkshire Hathaway
“Long-term competitive advantage in a stable industry is what we seek in a business. If that comes
with rapid organic growth, great. But even without organic growth, such a business is
rewarding. Markets love steady earnings growth sustained over long periods in time.
- Warren Buffett in his 2007 letter to Berkshire Hathaway shareholders.
No matter what the overall market condition was. Let it be Bear, Bull, Sideways. Markets always highly reward the companies which have the high Earnings potential. To prove this point,
Let’s take the case study of 2 companies which fit in this aspect.
Please note: Unlike my previous posts, this study is not about discussing the valuations fundamentals of the company. This post is not to find the intrinsic value of the stocks. Kindly note.
With the help of this case study let us try to:
1) Reaffirm the fact that identifying Value Creators early leads to significant Wealth Creation.
2) It also helps arrive at a possible methodology for identification of Value Creators and riding it for longer periods of time.
Case Study #1: Eicher Motors:
Why is Eicher Motors the king of Auto stocks?
The simple answer to this question is, Extraordinary profits in companies tends to Extraordinary wealth creation in markets. In other words, empirical evidence suggests that companies generating abnormal Profit (i.e. Value Creators) invariably outperform benchmark returns over the medium- and long term.
Let’s look at the back-end to understand why the front end (Price) is behaving like that.
What makes this company to trade at this levels?
Krishna, this is PAST. The rear window. I am not interested in it.
Same with me. Let’s try to dig deep to know the better future. What is happening in the company NOW ?
1) VECV’s volumes have witnessed better than industry growth across segments. They have grown 3.7% at 11,300 units for
Q2CY14 as industry has declined ~2.5%.
2) The bus segment has witnessed a stellar quarter with market share gains of 2.2% to 19.4%, sold 3300 units.
3) The growth momentum continues to remain strong for RE, with the demand situation robust and nearly five months of waiting
4) Margins for RE continued to climb beyond and clocked ~25%, on account of increasing operating leverage and benign input costs
5)The management expects volume growth to clock in excess of 300,000 for CY14E, 420,000 for CY15E.
6) The management has guided for capex of | 600 crore over CY14E-15E in order to boost capacity at the Oragadam facility.
7) The management has highlighted that they are contemplating investment in a new facility that would be needed from CY16E onwards.
8) The company continues to work towards dealer expansion to the tune of ~70-80 dealers annually. The management remains
confident that a strong inherent demand play remains from the Tier-2/3 cities and towns which is yet to play out.
Case Study #2: Page Industries:
Recently I have attended it’s AGM meeting in Bangalore. I know it sounds little strange because, most of the investors, Invest first and attend the AGM later. Now, its other way in my case. I bought 1 share of Page for the only reason to attend its AGM and to analyse whether this company can sustain the amazing valuations the market had given to it.
Me with Basant Sir at Page AGM in Bangalore.
Why is it the darling stock of many ?
Again, Krishna for God’s sake don’t show me rear window. What is NEXT for Page ?
Page has the ability to deliver high revenue CAGR in a market For any firm to deliver in the excess of 25% revenue CAGR consistently over a longer period, its competitors need to be capable of scaling up their business accordingly and hence sustain or gain market share for Jockey.
Page can outperforms against its peers with:
- a) The widest distribution network (over 23,000 retail stores).
- b) A range of SKUs which is wider than that of its peers.
- c) The lowest debtor days (20 days vs peer group average of ~60 days).
- d) The ability to scale up at a high pace of growth, which can be observed in its revenue growth being faster than the peer group average.
Before completion, I know what is going in your mind.
Is is still a good buy at current levels ? Or have we missed the Bus ?
If we are buying the companies that have Quality, Growth & Longivity, they tend to stay in the race track for many years to come.
Let me tell you a small analogy.
Raamdeo Agrawal of Motilal Oswal is a well renowed investor in Indian markets. One of his famous picks was “Hero Honda” which he bought it at Rs 11.40/-. Let’s say you figured it at Rs 200/- and thinks, this stock has already raised 20 times. What is left in it ? After few years, Now (Hero Motor Corp) is trading at 2800 levels with a dividend yeild of 2.5%. The story hasn’t finished for Hero. Infact, it is just in the middle of its jouney with 55000 Cr market cap in a 1.2 billion country (Now add the Export part of Hero Motor Corp).
We can extend this case study with few other scrips as well like Mayur uniquoters, Astral poly technik ltd, Atul Auto, Kaveri seeds etc. The outcome will be the same.
Disclaimer: Please do your own analysis before taking any decision. This post is entirely based on my view and can be biased. Please note.