Kenneth Andrade – Peter Lynch of India?

Updated as of 29th June,2014

One can argue whether he deserves the tag or not or its too early to attach the tag. Hence the Question mark in the title.

Kenneth manages popular fund IDFC Premier Fund. Premier Fund’s AUM has grown from around 200crs in 2006 to around 4400crs currently. Fund has delivered 20%+ CAGR since launch and 15%+ over last 3 years. Had he not went overboard on PSU stocks in 2012, his fund would have been in top quartile now.

Let’s look at some of the portfolio’s holdings. I tried to find out the avg. purchase price through bulk deals and avg. qtrly price found earliest in the shareholding pattern.

Strides Arcolab -» Had first acquired 4.38 lac shares @ 63 in Feb’09. Almost 15 bagger now. Exited.

Bata India -» Avg. price of 100 during the Dec’08 Qtr. That’s around 12 bagger in 5 and half years!

Page Industries -» Avg. Price of 400 during the June’07 Qtr. 18.5x now. 10%+ dividend yield on top of that.

Kaveri Seeds -» Avg. price of Rs 50 (adjusted for split). Around 14.5x since first entered.

VST Industries -» Acquired 2.22 lac shares @ 575 during Oct’10. More than 3x now. Exited.

Blue Dart Express -» Acquired 1.82% stake at an avg. price of 650 during the June’08 quarter. 6x now.

MRF ->> Avg. Price of Rs 10,000 during the Sept’12 Qtr. 2.3x now.

Coromandel International ->> Avg. Price of Rs 75 (adjusted for split) during Sept-Dec’08 Qtr. Around 3.5x now.

Doubled his returns in Hexaware and e-clerx. Both exited.

Other holdings like Asian Paints,GSK Consumer and STFC have delivered steady returns.Exited.

Pantaloon and IRB Infra are among the few stocks which didn’t played out for the fund.

P.S. Fine. We will attach the tag after the next bear market!

Disclosure: Have vested interest in the fund.


MT Educare : Quality Education Franchisee

You can read about the business model from here

What I like about the company :

1) Scalability. The company has grown at a revenue CAGR of 21% and Profit After Tax of 68% over the last 4 years. I believe they should continue to grow at the same pace in terms of revenues while earnings should be lower at around 40% over the next 2 years. They just have to increase capacity utilisation and some growth should come from new centers, pre-university tie-ups and IIT-JEE preparation courses.

2) Return ratios (ROE/ROCE) are impressive at around 30% though it should be lower this financial year due to the dilution of IPO.

3) The management has announced 50% dividend payout with dividend to be declared half-yearly.

4) Negative Working Capital as you can see in the investor presentation

5) Management wants to be asset-light as far as capex is concerned as one can read in this interview of the promoter Mahesh Shetty.

6) Coaching is a competitive business in Mumbai (Company derives major revenues from here) but still I observe most of the “branded” coaching institutes in Mumbai are able to increase fees by Rs 500-2000 per student every year depending on the stream/course.

At CMP of Rs 103 (Market Cap of 400crs), it trades at 16x FY14 earnings so not cheap from any perspective for its size but for a company with above features, it won’t come cheap. If it does, load on!

Importance of ROE

Kiran (@_kirand) wanted me to do a post on my fascination with the ROE ! I hope this post benefits other retail investors too.

Return on Equity (ROE) basically is Profit after tax/Shareholders Funds * 100 OR EPS/Book Value * 100. Numerator is a part of P&L statement and denominator part of Balance Sheet.

In DuPont analysis which breaks the component of ROE,

ROE = Net Profit Margin*Asset Turnover*Equity Multiplier

i.e ROE = (Net Profit/Sales) * (Sales/Assets) * (Assets/Equity)

In other words, it is a function of profitability,operating efficiency and financial leverage.

A Company cannot grow its earnings over the long term greater than its ROE. Either it has to raise debt or dilute equity. One reason why banks keep raising money through equity every 3-4 years. Even the retailers and most of the infrastructure players.

ROE can be boosted by debt taken at lower interest rates. Textile Companies get loan at subsidised rate of interest of around 7% or companies with forex loans. So the narrower the gap between ROE and ROCE, the better it is for shareholders. Even better would be ROCE > ROE which will be possible if a company doesn’t have any debt and/or negative working capital.

Small Equity base also helps to enhance ROE (Hawkins Cookers is a case in point, 0.5cr shares and payout of 60% so addition to denominator is minimal). All other things remaining constant, a Company doing buyback will result in ROE expansion.

ROE should always be looked in conjunction with dividend payout ratio. Higher the payout ratio, higher the ROE, higher the probability of PE re-rating and hence higher the stock price! Money would be made from earnings growth but wealth created from PE re-rating. Many stocks continue to be cheap inspite of high ROE simply because of low payout. Markets tend to doubt the genuineness of numbers if the payout is low.

PE re-rating (P/BV in case of banks) doesn’t necessarily come from ROE expansion. Scarcity value can also help in PE Re-rating. Look at HDFC Bank or for that matter consumer facing companies stock performance over the last few years. As they say Good things are rare and they don’t come cheap in life.

PE ratio can expand to a certain level after which stock price track earnings growth. So to assume HDFC Bank can deliver more than 18-20% returns from here would be unrealistic.

Companies having strong ROEs tend to fall less compared to others in a bear market. One would have seen ITC,Nestle and Infosys falling 18-20% while the index fell 50% in 2008.

I always admire management focused on ROE/ROCE. Blue Star, Crompton Greaves, Kotak, Titan to name a few (Read the Chairman’s letter of these co’s in their Annual Report to know why).

P.S. Special thanks to Mr. Basant Maheshwari from whom I learned the importance of ROE.

Geometric MD’s Letter to the Shareholders

Dear Shareholders,

Last year, we began a journey to Transform Geometric. I would like to spend most of this note talking about what this means for the Company and its shareholders,especially how this will play out in the current fiscal.

When I was asked to take up the responsibility of leading Geometric again on the 8th of April,2011, I spent a considerable amount of time meeting customers to understand their needs and expectations, while assessing how Geometric met these needs.

What became apparent is that our Company is blessed with a growing market. The engineering space has traditionally been a laggard when it came to outsourcing. Much of engineering was considered ‘core’ to any manufacturing company, and hence, not open to ‘outsiders’. This is changing slowly but surely. Companies are being driven to consider newer approaches by macro factors such as demographics, demands of markets in emerging economies, competition and technology. Indeed, the major PLM technology providers themselves, barring calendar 2009, have had stellar years with growth in double digits. So the addressable market is doing well and growing.

The question therefore is why has Geometric been unable to grasp this opportunity in its entirety. My analysis is that as a Company, we were unprepared to meet these growing needs. Our approach was based on “tell us what to do and we will do it.” Our cost structure was not competitive enough and we were too internally focused in terms of our organisation structure. Finally, our approach did not take into account the growing demand by customers for vendors to support them globally and not just in one country. 

We therefore sought the services of a leading management consultant to help us benchmark ourselves with respect to competition and global needs, at the same time helping us prepare a focused action plan. The exercise began in earnest in Oct’ 2011 and will continue throughout this year. The initial part of the exercise focused on costs, a necessary element to build momentum for change, while creating a pool of savings, which we could invest to fund our future growth.

In FY12, we sought to better integrate our software services and engineering services businesses with a view to enabling greater collaboration within the organisation and offer end-to-end services to our customers. I’m glad to say, this has led to an increase in cross-selling. While we saw continued growth in our key verticals, viz: automotive and industrial; last year also witnessed increased traction in other industries like aerospace,ship-building and oil and gas.

So what should shareholders expect at the end of FY13? I thought it important to laydown certain specific expectations for Geometric excluding our joint venture so that you can better judge how we, the management have performed in the next twelve months.

  1. Cost of Revenue (%) : In constant currency terms, we need to see that cost of revenue continues to see an improvement,despite increases in salary. This will signify continued improvement in pyramid management and more importantly, improvement in quality/productivity.
  2. G & A Costs: As a % of revenue these should decline by atleast 2% points, despite increase in space occupied due to an expansion in manpower.
  3. Scalable growth: We must see atleast 15% growth YoY on an average from our existing top-10 clients (excluding 3DPLM). By our fourth quarter, the run rate on the growth YoY for the comparable quarter should have exceeded the average signifying we have improved our traction.
  4. Target accounts: While we may not be able to share the names of new or very recent accounts, we have targeted for growth, ten key accounts from which we will generate dollar revenues of several million in the current fiscal. 
  5. Attrition: We have been losing talent at a rate slightly above that of the industry. By the last quarter, the attrition should be atleast 1-2% lower than the industry average as widely circulated.

There is however one caveat. Today, the uncertainty caused by the economic environment continues. For example, the Euro Zone remains a cause for concern and it is very clear that any upheavel in Europe will have global consequences. While, in my view, such a calamity will not affect the long term trend, it certainly will affect our performance in the current year. Nevertheless, the approach we follow will help us build a scalable enterprise, and will, therefore, be important over the longer term.


Manu M. Parpia

Managing Director & CEO

My view: If the management delivers on the above, then I think earnings should grow by atleast 25% in the current year which means at around 6.2x with 40% ROCE (in FY12) and improving payout ratio, the stock looks cheap. 

Uday Kotak’s letter to Shareholders

Dear Friend,

As I write this note, the world is on the edge about the future of Euro zone. ”Grexit” is the new terminology. A global bank has announced a US$ 2 bn treasury loss on trading credit derivatives. Facebook is having trouble with its post IPO phase. The business of money is truly “fragile, handle with care”.

I am reminded of my early days, when I was taught the first principles of finance: if you put in ` 10 of equity and borrow ` 100, you can lend out ` 110. However, if just ` 5 of loans out of the ` 110 go bad, you lose 50% of your equity, and it takes just ` 10 of assets going bad to bankrupt you!

It is quite surprising how global finance had missed this basic principle, their vision blurred perhaps by the jargon of risk weights, tier II capital, et al. We have seen financial institutions with less than 2 to 3 % equity, i.e. effective debt equity ratio of 40 and 50 times, positioning themselves as masters of global finance. And that is what has brought the financial sector down on its knees. It is important that banks focus both on “return on equity” as well as on “return of equity”.

It is only now that the importance of an “Arjuna’s eye” kind of focus on risk and risk management is gaining centre stage, along with the importance of “Financial Stability” as the core of what the financial sector and financial institutions need to focus on and be evaluated for.

Also, over the years, I have found banks focusing more on the P&L than on the Balance Sheet. In fact, particularly for banks, the Balance Sheet is more important, and P&L is only a derivative of the Balance Sheet.

It is through this lens that we look at the Indian economy, financial sector and Kotak.

The Indian economy has valid reasons to complain about the global economy and policy. Global financial policy of easy money is leading to unintended market outcomes, that too without achieving the intended economic outcomes. In terms of market outcomes we are seeing bubbles in bond markets and commodities. Both need to burst, and my view is that they will, sooner rather than later.

But India’s macro challenges are more than just global headwinds. High oil and high gold imports, combined with a relatively high-cost and inefficient domestic sector impacting commensurate export competitiveness have caused a high current account deficit of 4% of GDP.

Second, the inability of the fisc. to pass on higher oil costs is one of the main reasons for a higher fiscal deficit of 5.9% at the centre and around 9% for India consolidated.

And third, the much debated governance deficit challenges. It is critical to get the balance right between good politics and good economics.

The outcome for India macro is 20% more depreciation of currency in less than a year, and slowdown in growth to between 6 and 7%. While, this leads to short term challenges, I feel that some of the pain is priced in and with a little wind from the policy front, India has the ability to bounce back in due course of time.

That brings me to India’s financial sector. One of the most important challenges in the banking sector is its ability to define and price risk. The sector very often takes equity type risks for debt level returns. Also, a few large companies particularly in sensitive sectors like infrastructure, have a disproportionate slice of banks’ balance sheets. Therefore, concentration risk is real for Indian banks. Further, a well intended measure of smoothening cash flows through restructuring runs the risk of becoming a tool for ‘ever greening’.

Against this backdrop, how are we at Kotak running the firm?

First of all we have ensured higher equity to absorb potential shocks. We are at about 16% core equity excluding any Tier-II etc. Further, we are doing our best to imagine potential risks and have a game plan to manage them.And we are continuing to build. The big focus is on building a stable and low cost liability base. We have embraced the policy measure on savings deregulation and are seeing a positive customer response. We intend to make progress on Government accounts which are now open for all banks to pursue.

On the advances side we grew at about 30%, and would like to continue a good growth trajectory. But if we spot red lights, we will not hesitate to step on the brakes as well.

Our non-financing businesses like securities, investment banking, asset management and life insurance are going through their structural and cyclical challenges. But, we believe that their time too will come, and we are positioning ourselves to become internally stronger in this interim period.

The other internal focus is around technology, quality, lower people churn and continuity, superior customer experience leading to excellence, and all this at reasonable costs. On the external side, we are more open to inorganic growth opportunities than we have been in earlier times.

I look forward to building a stable and long term institution, focused on customer delight. Of course, if I may paraphrase Robert Frost just a bit, we have “miles to go before we sleep”.

Best wishes,

IDFC MF’s Expectation for 2012

Domestically we believe 2012 will be a year of consolidation and slow growth with low visibility on pickup of the investment climate and demand pull waning due to a non supportive fiscal. A lot needs to be seen how political order is restored and the budget session would be a pointer to the government’s stance on fiscal deficit and growth.

Our themes for 2012 would be currency depreciation (continuation of risk off trade), growth slowdown (political and policy), NPA scare in the banking system, likely falling commodity prices, and a declining inflation and interest rate scenario. In this capital starved economy where availability and cost of capital are issue for sustaining normal operations, investment pickup is unlikely and asset / capital light businesses should do well. That would entail IT, pharmaceutical, consumer business and the services part of the economy to do well. We believe it is too early to play financial leverage or operating leverage as a large part of India Inc will struggle with a weak demand.

My view: I have observed that its not easy to forecast for the whole year. Be it any smart investor! I think its better to divide 2012 into first half and second half. I believe 2Ps (political and policy) would both be favourable for India Inc in the second half while first quarter of first half should be a consolidation period. Remain long on consumption.

We hope the year 2012 is a great one for India and all of us. Wish you all a very happy and prosperous New Year!!

Akash Prakash’s Amansa Capital Portfolio

Amansa Capital, run by Akash Prakash, having assets under management of around $300mn with a focus on midcap companies in India. In an interview with FinanceAsia, Akash Prakash mentioned that they have invested in around 25 companies with investment size of $8mn-12mn each though I can only find out 13 of them with market value of $110mn.

Cholamandalam Investment and Finance Ltd (market value of around Rs 53crs)

Max India (Management mentioned they will recover all losses of previous 3 quarters and end FY11 in the black. Major beneficiary of reforms in Insurance if and when it happens )

Whirlpool of India (MV of Rs 50crs) . I had posted about Whirlpool last year in my blog.

Greaves Cotton (Manufacturers of engines for Piaggio, Tata Motors and Mahindra & Mahindra’s three-wheeler vehicles. Also manufactures Construction equipment. I have a vested interest in this stock)

Rallis India (Stock had a dream run over the past 2 years. Still it should do well in the long term)

Entertainment Network of India Ltd (ENIL) (Owners of Radio Station “Radio Mirchi” )

Gujarat Pipavav Port (Anchor investor in IPO last year)

Blue Star (See recovery in earnings only in H2 of FY12)

Kirloskar Oil Engines Ltd (market value of around Rs 32crs)

Edelweiss Capital (I have not seen any industry as competitive as broking)

Carborundum Universal (The company targets a Return on Capital Employed of 25% from 21.5% currently over the next few years)

OnMobile Global (Beneficiary of 3G)

Tube Investments of India ( It seems like some sort of obsession with Muruguppa Group companies! )

I think (from the few companies I track) the portfolio is very well diversified across sectors with companies known for maintaining high standard of corporate governance. Since Akash Prakash appears on business channels frequently and writes a column for Business Standard with no mention of his fund’s holdings anywhere, I thought why not find out from the BSE!