This presentation sent me down a deep dive. I'm glad it did. Worth a watch as @pcordway and @manualofideas add value! https://t.co/gp7nKQXSQe
— William Brewster (@BillBrewsterSCG) March 15, 2018
A beautiful, visual statistics textbook: "Seeing Theory – A visual introduction to probability and statistics.”https://t.co/JoSw4LznVM
I shared this a year ago, when it was already very cool.
But the page now got a major upgrade by the authors and is now just incredibly cool!— Max Roser (@MaxCRoser) March 15, 2018
A New Phase: Transitioning to Portfolio Manager
March 15, 2018 in Asia, Asian Investing Summit, LettersThis article is authored by MOI Global instructor Soumil Zaveri, managing partner of DMZ Partners, based in Mumbai, India. Soumil is an instructor at Asian Investing Summit 2018, the fully online conference featuring more than thirty expert instructors from the MOI Global membership community.
Since 2011, my father (Sanjay) and I have been solely focused on managing personal and family capital at our family investment office. I like to think that we have been fantastic “absorbers” of wisdom in learning from our success and mistakes; and in establishing and identifying the source code of fantastic investment opportunities among listed equities in India and to a smaller extent, around the world.
We have been able to better identify the limits of our capabilities and have been successful in broadening this circle ever so slightly. Above all, we have come to realize that while we likely possess below-average intelligence, we find strength in our unusually high emotional resilience — a component we view far more critical to sustained success in investing over multi-decade and multi-generational horizons.
The essence of our philosophy in evaluating opportunities and allocating capital has always been best captured by the following Warren Buffet quote from the Owner’s Manual: “I’ve never believed in risking what my family and friends have and need in order to pursue what they don’t have and don’t need.”
From here onward, we intend to replicate our success with personal and family capital to a slightly broader footprint. We have come to appreciate and have been humbled to realize that our deep insights on select opportunities combined with our unusual combination of emotional resilience and rigorous research-backed conviction can be of substantial service to our broader network of family and friends.
While we were entirely content managing our own capital through perpetuity, a combination of factors have nudged us in the direction of setting up a separately managed accounts platform (what is commonly referred to as a portfolio management service or PMS) – and we are enthused by the idea of replicating the underlying qualities of certain investment management companies which we have come to admire in places ranging from Prague to Palo Alto over the past several years.
Importantly, this new structure is an enabling platform through which we can advise foreign institutional entities – an opportunity we will build on gradually and selectively subject to alignment of philosophy and conducive regulations. While the underlying tenets of our approach and philosophy will only get further entrenched, I’d like to highlight a few key differences compared to traditional investment management companies you might be more familiar with:
1. We will only accept capital from people we have known for a meaningful period of time and in some situations from well thought out referrals of people within our ecosystem. To put it bluntly, we want to continue enjoying the intellectual challenge of finding interesting investment opportunities through rigorous research while recognizing that we are in the company of people we trust and admire. We have no interest in building a large, mass-market business. We are far more interested to curate the right kind of relationships with people who fundamentally understand our approach and find our approach to be a meaningful way to grow and preserve capital. In fact, in the early phases of our operations we will stop initiating new relationships once our investor base reaches 40 individuals/ entities.
2. We have only one investment approach — identifying companies run by honest and capable management teams which are building businesses with exceptional economic characteristics (as measured by long-term returns on capital and sustainability of competitive advantages) which have substantial scalability prospects and which are likely to do well in a wide variety of future scenarios. Upon occasion, such companies can be bought at meaningful discounts which allow for very high rates of capital growth over the long haul — such opportunities are very rare. When such rare opportunities manifest themselves we seek to build meaningful positions as opposed to dipping our feet. This combination of diligent underwriting in terms of security selection and portfolio concentration if done correctly can lead to meaningful outperformance relative to broader indices when measured over decades.
As dad often says, “If a product fails people question your capabilities but if ‘money fails’ people question your integrity.” We will proceed cautiously with his concern in mind. I invite your comments (soumil@dmzpartners.in)
Disclosures: DMZ Partners Investment Management LLP is a SEBI registered Portfolio Manager (SEBI Registration No.: INP000005944). Positions held by DMZ Partners Investment Management LLP (DMZ Partners) and its partners, employees, clients and associates may be inconsistent with views mentioned herein. DMZ Partners or its associates accept no liability for any errors or omissions in the given content. The material presented herein does not constitute a recommendation or offer for the purchase or sale of any securities and is provided solely for informational purposes. Unauthorized usage, alteration or distribution of this information is prohibited.
This article by Jim Roumell is excerpted from a letter of Roumell Asset Management.
Liquidity Services (LQDT) reported fourth quarter numbers significantly better than what investors anticipated, sending its shares materially higher. It was a quarter marked by double-digit revenue growth in the two divisions on which RAM has hinged its investment thesis – GovDeals and Retail. The company’s Capital Assets Group (CAG) declined as a result of the loss of the Department of Defense (DoD) surplus and scrap contracts. LQDT was outbid for a DoD contract in the fourth quarter as it was unwilling to accept pricing terms it deemed wholly uneconomic. We applauded the company’s willingness to walk away from its DoD business and focus on the areas in which it has clear competitive strengths – GovDeals and Retail.
GovDeals’ revenue grew 27% year-over-year, while maintaining a 93% gross margin. This is a particularly attractive business – it’s growing rapidly and it has increased its operating margins over the past two years (the best of both worlds). We continue to reach out directly to the company’s GovDeals clients and have thus far been unable to find one rating their satisfaction at less than an 8 on a scale of 1 to 10, with 10 being the highest. As a reminder, GovDeals is the leading online auction site (by a factor of 2x) for municipalities throughout North America to sell no longer needed hard goods. Recently, RAM contacted twelve customers, including ones in Utah, Alabama, Georgia, South Carolina, Arkansas, and six of them rated GovDeals a 10.
We believe LQDT’s GovDeals platform is worth more than the company’s total enterprise value, i.e., at $7/share, the market cap is $225 million, less $106 million (cash and ST Note), leaves an enterprise value of $119 million. GovDeals is a pure commission model at roughly 10% of gross market value (GMV) of goods sold, with no logistics overhead, and 90% plus gross margins. At a current revenue run rate of $30 million, growing at over 15% annually, we believe the value of this one asset is likely to be $150 million.
LQDT just recently rolled out a self-serve commercial platform mirroring its GovDeals offering for corporate clients. Like GovDeals, this platform will be a pure fee commission model without all the heavy logistics expenses associated with its traditional liquidation model. We believe the company’s commercial self-serve platform is the most exciting free option buried inside our LQDT investment.
LQDT’s retail division grew GMV by 17%, but revenue was down slightly. The tailwinds for retail are strong as more goods are purchased online, and as a result, more goods are returned and need to be placed with a reverse supply chain company. To be clear, this is a very competitive business with modest margins. We consider it a reasonable free option.
We remain highly suspect of the company’s Capital Assets Group’s ability to generate profits and have made our concerns clear to management. It will be important for LQDT to allocate capital to business lines with demonstrated success while resisting the urge to be in markets that, while sizable, remain elusive in terms of profitability. We are cautiously optimistic that Bill Angrick, Founder and CEO and the company’s largest shareholder at roughly 16%, will be disciplined in his spending. The company’s willingness to walk away from two separate DoD contracts are good signs.
Disclosure: The specific securities identified and described do not represent all of the securities purchased, sold, or recommended and the reader should not assume that investments in the securities identified and discussed were or will be profitable.
This article is authored by MOI Global instructor Amey Kulkarni, founder of Candor Investing, based in Pune, India. Amey is an instructor at Asian Investing Summit 2018, the fully online conference featuring more than thirty expert instructors from the MOI Global membership community.
The Indian stock markets have been performing well in the recent past and the benchmark Sensex Index reached an all-time high of 36,443 on 29th Jan-18.
Though the consensus is that India is the economy and the stock market to invest in, for the next decade investors are also worried about the fact that the Sensex is trading at historical valuations. Trailing P/E ratio is around 25 and P/B ratio of the Sensex is more than 3.
Worse is the BSE SmallCap Index which is trading at a trailing P/E of a staggering 112.
So, most investors are excited to invest in the India story, but are either not finding compelling enough investible ideas or are scared that a quantitative tightening or a global trade war or rising inflation/interest rates in the developed world may result in a valuation melt-down in India.
In such a scenario, individual investors are typically faced with either of the following questions
a) I have investible savings and I want to invest more in stocks/equity But, is this the right time to put more money in stocks?
b) With stock markets at an all-time high, should I remove some of the money already invested in stocks?
I will try and attempt to provide some pointers which might help in making an informed decision
Differentiating Business Cycle with Stock Market Cycle
Though it is true that stock markets are at an all-time high, the business environment in India is also probably at its best.
Oil prices are low and with the electric car disruption, expected to stay low in the medium to long-term, Indian fiscal deficit is under control, reforms like GST (Goods & Services Tax), bankruptcy laws (Insolvency & Bankruptcy Code 2016) have been put in place, the median age of Indian population is around 27 years, monsoons have been good for 2 years in a row, inflation is at historical lows for more than a year and interest rates are falling.
Thus, if the economy does better in the next 3 years than in the previous 3 years, the stock markets will end up much higher than what they are today.
What is risk?
The financial world defines risk in terms of volatility ie price movements (up/down) However, in my opinion, risk is the chance that one will permanently lose money in the stock markets. When will this happen?
If one makes a mistake in buying ie the companies one bought go bankrupt. To avoid this, one should invest in highly profitable companies with a history of good performance of at least a decade. This results in a low downside risk.
Also, one may invest in about 8-10 such well-managed companies.
There is a nuclear war or government nationalises the entire industry and we are back to being a Socialist State; chances of this happening is remote and one will have to live with it.
Investment time horizon
Indian economy is growing by an average of 7% with average inflation of 5%. In 6 years, Indian economy will be 2 times its current size.
If one invests with a time horizon of at least 6 years, the chances of losing money in the stock markets dramatically reduces.
Investing in Individual Companies
The companies that one has invested into do not necessarily have a correlation with the benchmark Indices which comprise of only 30 companies (in case of Sensex) out of the more than 5000 listed companies.
As an illustration, take the case of Vinati Organics. The company has given phenomenal returns (250 times) over an 11 year period; the interesting part is that it has also given great returns if one had invested 4-5 years back (11 times).
Between 2006 and 2017, the markets have crashed and gone up several times, however the company performance has sent the stock price higher and higher.
One should buy into such companies at as cheap a price as possible and then hold for as long as the company is delivering good business performance.
“Stock prices follow business performance – ie prices rise when profits rise and vice versa” If one stays true to the above philosophy, then a temporary downturn in the stock markets does not cause any problems to the investor
Is the market currently over-valued? – some companies are definitely expensive.
Will the market crash further? – Maybe yes, but when – 2 months from now, 6 months or 3 years is what nobody can predict. Maybe stock markets will fall by 20%, but how long will they remain there? Stock markets fell by 10% just after demonetisation in Nov-16, but ended up 30% above previous highs just 15 months after demonetisation.
The more relevant point is whether the companies one has invested in are increasing profits year after year.
Berkshire and Buffett star and dominate Part III of my new article about the making and meaning of contracts, available free here: https://t.co/tFf3a0qvBR
— Lawrence Cunningham (@CunninghamProf) March 14, 2018
This article is authored by MOI Global instructor Rohit Chauhan. He is an instructor at Asian Investing Summit 2018, the fully online conference featuring more than thirty expert instructors from the MOI Global membership community.
“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
This is a quote about gold from legendary investor Warren Buffett.
Gold has been called an unproductive asset and a barbaric relic. The reality is that gold produces no cash flows of its own and hence its price depends on what others are prepared to pay for it.
Indians Love Gold
While its commonly accepted that Gold is an un-Productive asset, in the Indian context, it’s different.
Irrespective of the views held about gold, Indians have always loved the yellow metal. Indians have been buying gold for a long time and this demand continues to grow irrespective of the price.
Source: IBEF, Gems and jewelry industry analysis.
By various estimates, Indians privately hold around 24000 tonnes or roughly 800 Bn dollars of the yellow metal (35-40% of GDP).
Although economists and policy makers consider gold as an unproductive asset, it is not an irrational purchase for the majority of buyers in India. Gold is seen as a store of value, especially in rural India where banking and other financial services are not available.
Gold also functions as an asset against which one can borrow in absence of access to a formal credit channel.
The Gold Loan industry
Let’s try to understand what a gold loan is – It’s a short-term credit extended to a borrower with gold serving as a collateral. This form of lending has developed in India due to the lack of credit data and verified personal details of the vast majority of the population. The following shows the features of this product.
Source: KPMG – India’s gold loan market: Is the glitter fading.
The Gold Loan Market can be divided in to a big unorganized market and a growing Organized one.
Unorganized Gold Loan Market
The gold buyer understands the value of this asset and its role in managing liquidity needs. The traditional method has been to pledge a portion of gold holdings to the local pawn broker for short periods of time ranging from 3 to 12 months.
The downside of using this channel is the high rate of interest in the region of 40-100% per annum. Inspite of the steep price, the local lender provides convenience, fast service and minimal documentation.
There are no precise estimates available for this market, but its size is in the order of billions of dollars.
Organized Gold Loan Market
The organized sector is split between banks, non-deposit taking entities such as the NBFCs and cooperatives.
Share of organised gold loan market – 2016
Source: KPMG – India’s gold loan market: Is the glitter fading.
The organized sector has now started expanding in this space by increasing the number of customer touch points, providing high levels of service at lower interest rates and finally by providing security of the collateral backed by a known brand.
The Organized market is almost 25% of the total gold loan market and around 3-4% of the total gold holding. The organized segment continues to grow at 10%+ levels and has a long runway ahead of itself as it has barely scratched the surface.
Value of organised gold loan market in India
Source: KPMG – India’s gold loan market: Is the glitter fading.
Players in Gold Loan Industry: Advantage Gold Loan NBFCs
There are two gold loan focused NBFCs in this space – Muthoot finance and Manappuram finance.
The two companies have grown faster than the rest of organized sector due to higher focus on this segment leading to better product design and wider distribution. In order to understand the value proposition from the customer’s viewpoint, we can compare the unorganized sector with the banks and the NBFC.
Source: Manappuram finance Q3 2018 investor presentation.
Banks provide a low-cost product compared to the other channels but is limited in terms of their service levels and need a much higher level of documentation, which is often not available with the borrower.
The local money lenders provide a high level of convenience but charge a much higher rate of interest.
The gold loan NBFCs provide a product which can combine the cost advantage of the banks (to a certain degree) with high service levels and flexibility of the unorganized sector. Thus, these companies have been able to create a niche for themselves in the market by being focused players and developing products which fit the needs of the market much better than the other players.
Manappuram Finance: A history of profitable growth
Manappuram finance was started by the current MD & CEO – Mr. VP Nandakumar as a single store in the state of Kerala in India. The company expanded to around 70 stores in the first ten years of its operations.
The turning point came in the mid-2000s, when the company was able to raise around 5 Billion rupees from Temasek holdings, Singapore. With access to capital, the company has been growing rapidly in the last 12 years and now has a pan India presence with 3318 branches.
It has grown its loan book at a CAGR of around 38% over the last 11 years as shown below.
The company has maintained an average ROE of 20% during this period and has thus been quite profitable during this growth phase.
Source: Manappuram finance annual report.
The misperception around gold loans
Lending to low income borrowers at the bottom of the pyramid may appear to be risky, but the numbers show a very different reality. Manappuram finance has had an average NPA of less than 1% for the last 10 years in spite of all sorts of macro and regulatory shocks
The actual loss given default is even lower as the average LTV is 70% and due to the short tenure of the loans (less than a year with average being 3-6 months), the company is usually able to recover almost 100 cents on the dollar.
The gold loans business is thus quite profitable with interest spreads in the range of 13-15% and these companies have been able to earn 20%+ on equity with much lower leverage than other financial institutions.
What does not kill me, makes me strong
The journey for the company has not been a smooth un-interrupted one. The period from 2012 to 2014 stand outs for the de-growth in business and drop in profitability due to multiple shocks to the gold loan segment as shown below.
Source: Manappuram finance Q3 2018 investor presentation.
Inspite of the regulatory shocks and drop in gold prices, the company continued to be profitable during this period.
The management changed its operating model during this period by reducing the LTV ratios, dropping the tenure of the loans to 3-9 months and finally enhanced its marketing effort to reach more customers.
This resulted in normalization of the business till Nov 2016, when demonetization of high value currency caused a disruption in the SME sector which in turn accounts for a majority of borrowers for these companies. As a result, the gold loan growth was again impacted over the last one year.
In addition to the above macro events, the company was hit with several store level thefts in early 2017, which resulted in loss of the customer gold. Although the losses were insured, a repeat of such incidents could result in loss of trust in the long run.
The company increased the security at the branch level at the cost of 1600 Mn rupees or almost 20% of the profits. The management is now planning to migrate to technology led solutions and thus reduce this cost in the next 1-2 years.
A return of growth
The shocks from the demonetization event have now dissipated and the borrowers are returning back as can be seen from the growth in disbursements in the recent quarters. The loan book has started growing and the company expects to grow the gold loan portion at low double digits.
Source: Manappuram finance Q3 2018 investor presentation.
At same time, Manappuram is no longer a single product – gold loan company, but slowly evolving into a multi-product firm to leverage its brand and distribution network.
It is now expanding into vehicle financing, housing finance and micro finance via its subsidiary -aashirvad finance. These products are targeted to the same customer segment as the gold loan business. This portion of the loan book is growing at 20%+ and is being targeted to reach 25% of the total loan book in the next 1-2 years.
If we combine the low double-digit growth of the gold loan book and 20%+ growth of the other products, it is easy to see the company growing its revenue line in excess of 15%+ for a long time.
The company has earned an ROE of 20%+ in the past and this is likely to continue, if not improve as the new products mature and reach scale.
Valuations
The macro shocks and misperceptions about the economics of the gold loan business means that the company has been mispriced relative to other financial services companies.
A combination of topline growth from new initiatives, normalization of macro conditions and finally reduction in security expenses means that the company should be able to double its profits in the next three years. A company growing at 20% + rate with an ROE of 20%, cannot continue to sell at 13 times earnings when comparable firms sell at 20 times or higher.
We can expect above average returns from the stock even if the company delivers sector level growth. We do not have to make any heroic assumptions in the case of manappuram finance to see a material upside.
U.S. Airline Industry: A Rorschach Test for Investors
March 14, 2018 in Audio, Best Ideas 2018, Best Ideas 2018 Featured, Best Ideas Conference, Equities, Featured, GARP, Ideas, Industry Primers, Mid Cap, North America, Small Cap, Transcripts, TransportationPhil Ordway of Anabatic Investment Partners discussed the dynamics of the U.S. airline industry and highlighted selected companies, including Alaska Air (NYSE: ALK), at Best Ideas 2018.
Thesis Summary:
The U.S. airline industry has changed but old biases still rule the day. Airlines made more money in 2015-2017 than in the prior thirty years combined and have posted eight consecutive years of profitability. Four major (and often troubled, loss-making) carriers disappeared in the last decade, and four carriers now control 80+% of capacity – American, Delta, Southwest, and United. New entrants have a hard time, as it is not possible to fly new routes in many of the best markets: JFK, LGA, and DCA are “slot constrained”; EWR, ORD, SFO, and LAX are effectively slot constrained; and many airports (ATL/Delta, MDW/Southwest, DFW/American) are so dominated by one carrier that competitors face severe challenges. Industry balance sheets are strong, and leverage and fixed-cost coverage have never been better. Airlines used to get very little of the interchange fees reaped by banks from valuable airline-branded credit cards. Airlines command a large share of the economics: billions of dollars per year at very high margins. Over the past four to five years, American, Delta, United, Southwest, and Alaska have reduced their share counts by 35%, 16%, 24%, 21%, and 15%, respectively.
Alaska Air has a good culture and happy customers. It reaps advantages from costs/margins, customer loyalty, and attractive routes. Alaska has industry-leading operating margins (≥15-20%) and ROIC (≥15%). The shares recently traded at a ~10% earnings yield (at a market cap of less than $9 billion), with profitable growth ahead. Alaska has a cost advantage versus Delta (and American and United) and a revenue advantage versus Southwest (and the other U/LCCs).
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About the instructor:
Philip Ordway is Principal and Portfolio Manager of Anabatic Fund, L.P. Previously, Philip was a partner at Chicago Fundamental Investment Partners (CFIP). At CFIP, which he joined in 2007, Philip was responsible for investments across the capital structure in various industries. Prior to joining Chicago Fundamental Investment Partners, Philip was an analyst in structured corporate finance with Citigroup Global Markets, Inc. from 2002 to 2005, where he was part of a team responsible for identifying financing solutions for companies initially in the global power and utilities group and ultimately in the global autos and industrials group. Philip earned his M.B.A. from the Kellogg School of Management at Northwestern University in 2007 and his B.S. in Education & Social Policy and Economics from Northwestern University in 2002.
This article is authored by MOI Global instructor Anish Jobalia, a private investor based in Mumbai, India. Previously, Anish was an investment analyst with Jeetay Investments from March 2012 to February 2018. Anish is an instructor at Asian Investing Summit 2018, the fully online conference featuring more than thirty expert instructors from the MOI Global membership community.
The period from 2003 to 2008 saw some of the highest GDP growth rates for India and bank credit as a proportion of GDP doubled from 25% to 52% during the similar period, driven by the nationalized banks. With the advent of the global financial crisis, the GDP growth rate slowed down and consequently the growth in corporate profits started slackening from FY11 onwards. When the cycle turned, the nationalized banks were left holding the can and today accounts for ~68% of the gross non-performing assets of the system. At a time when the credit growth to the industrial sector has turned out to be a risky proposition for banks and is on a declining trajectory, it is the retail credit that is driving growth in the near future.
Karur Vysya Bank (KVB), a solid franchisee based in South India, is a regional bank which started its journey in 1916 in Karur, a textile town in Tamil Nadu. KVB primarily started as a Small & Medium Enterprise (SME) bank and continues to position itself as a comprehensive player to cater to the needs of SME customers. The bank has been focusing mainly on SMEs and retail financing in its 100 years of existence, which today constitutes ~68% of the total advances of the bank. KVB has an unmatched presence in the states of Tamil Nadu, Andhra Pradesh and Telangana, which constitutes ~75% of the branch network of the bank. The bank’s majority presence in semi-urban and rural locations places it at the heart of SME financing.
The bank’s core strength lies in SME financing, wherein bank and customer relations span 2 or 3 generations. KVB’s model of working capital finance has always ensured lower leverage for the borrowing units. This has helped many units tide over the situation even in the face of poor cash flows as the servicing liabilities were lower. KVB’s core philosophy of nurturing its customers through times, thick and thin, is what has earned it respect among customers and peers, through its 100 years of existence, resulting into a sticky customer base.
The seed of the bank’s success was sown in 2009 when it embarked upon a seven-year transformational plan ending in the bank’s centenary year – 2016. Over the past seven to eight years, the bank has substantially rebalanced its loan book with corporate book coming down from 43% to 33% and retail book increasing from 8% to 15%. The banks clear cut strategy is to granulize its portfolio by shunning large ticket corporate lending and focusing on low ticket SME, retail loans and corporate loans. The management believes that its 7.5 million customer base provides them an opportunity to grow the retail book without significant competition. Historically, the growth has been tepid in the retail segment and the management is restructuring its sales force, changing its processes, creating a digital environment and aims to double the retail book in 18 months time. This granulation strategy will also support recoveries in the future since the portfolio would be highly collateralized.
During the period from 2010 to 2018, the banks’ Net Interest Margins (NIM’s) has expanded from 2.95% to 3.7% driven by an increase in CASA ratio from 23% in March 2011 to 28% in Dec 2017. The bank enjoys a very stable deposits portfolio with retail deposits constituting ~90% of the portfolio. KVB’s CASA ratio out-performs its closest peer, City Union Bank, a Tamil Nadu focused bank having a CASA ratio of ~22%. One of the unique strength of KVB’s business model is that 80% of its advances are working capital loans which enables it a quicker repricing of loans, protecting it from a rising interest rate environment. A stable retail deposit portfolio and high proportion of working capital advances is expected to help the bank to protect its NIM’s in the future. An increase in the CASA ratio over the last few years will help the bank to tide over a rising interest rate environment better than during the last cycle from 2011 to 2015.
The bank has traditionally enjoyed a high average ROA profile of ~1.7% as observed between the years 1999 to 2013, which has currently shrunk to 0.6%. This is because the average credit cost which was ~0.3% between the years 1999 to 2014 has increased to an average of 1.7% between the FY15 to FY18 and is expected to increase to 2.7% by FY18. The credit cost is expected to decline from FY19 onwards because most of the chunky NPA’s has already slipped and the required provisions on them has been addressed. The incremental slippage ratio is expected to come down and hence the incremental provisions are also expected to come down. With this tailwind in place and an incremental focus on granularization of the loan portfolio, the credit cost is expected to revert to its long term average of ~1% across all cycles.
There has been a recent management change in the bank with the hiring of Mr P Seshadri, a very competent CEO. Mr Seshadri, an alumnus of IIM, Bangalore, one of the best B-Schools in India, is a senior banker with over 25 years’ experience and started his banking career with Citibank in early 1992. He has served in various capacities including Managing Director of Citi Financial Consumer Finance Ltd and Citi Financial Retail Services India Ltd till 2005. He moved to Singapore in 2005 as the Managing Director and regional head of the bank’s retail banking and lending businesses for Asia Pacific region. Mr Seshadri’s extensive experience in the retail lending sector is expected to aid the transformation of the bank’s retail strategy. The company is in the process of transforming its management team and is currently looking at hiring a Chief Risk Officer. The change in management provides confidence in the ability of the bank to return back to its long term growth rate in advances in the range of 15-20% and simultaneously granulize the portfolio with an increase in share of retail loans.
The slippage ratio is expected to reduce going ahead because in a recent clean-up drive, Mr Seshadri increased the watch-list of stressed asset guidance from INR 650 cr to INR 1200 cr and as per the management, this is the tail-end of recognizing stressed assets. The current watch-list stands reduced to ~INR 650 cr after NPA recognition of 700 cr in Q3FY18. Mr Seshadri’s aggressive clean-up drive and low slippages in the non-corporate portfolio provides certainty and confidence of a decline in incremental stress in the standard asset book in the near term.
KVB has historically traded at Price to Adjusted Book Value in the range of 1 to 2 times on 1-year forward basis and is currently trading at INR 100, implying a multiple of ~1.3 x, which implies an attractive risk-reward ratio of ~2.3 x. KVB also currently trades at Price to Normalized Earnings of 9 times, while in the past the average Price to Normalized Earnings band for the bank is ~8 to 15 times, which once more indicates an attractive risk-reward ratio. The retained earnings test for KVB suggests that whenever an investor buys KVB at close to 1.2 x Adjusted Book value, the bank has created roughly 2 times the market value of the cumulative retained earnings over a 5 year period. KVB has recently raised 760 cr through rights issue at a price of INR 76 per share and hence the Capital Adequacy ratio stands at 13.92% as of Dec 2017, with Tier-1 ratio of 13.36%. This gives the bank the ability to grow at a high rate since the minimum Capital adequacy ratio requirement is 9%.
KVB’s faces the risk of high credit cost in the near to medium term, which will keep the profitability of the bank suppressed and will subsequently limit its ability to grow and snatch market share from government owned PSU banks. The bank also faces the risk of high cost to income ratio due to expansion in the number of branches, wage hike revisions, expensive management hiring and equity dilution due to ESOP’s. In the medium term, KVB faces the risk of increase in slippage from the non-corporate sector book in an increasing interest rate environment. KVB faces the risk of competition in near, medium and long term, which would be a threat to the NIM’s.
Walgreens Boots Alliance: Owner-Operator-Run Pharmacy Retail Leader
March 13, 2018 in Audio, Best Ideas 2018, Best Ideas 2018 Featured, Best Ideas Conference, Consumer Staples, Deep Value, Equities, GARP, Health Care, Ideas, Jockey Stocks, Large Cap, North America, Transcripts, Wide MoatElliot Turner of RGA Investment Advisors presented his in-depth investment thesis on Walgreens Boots Alliance (Nasdaq: WBA) at Best Ideas 2018.
Says Stefano Pessina, “Many people say that I am a dealmaker, which is probably true. But I am always very cold when I do a deal. A deal must have a strategic logic, and it must create value.” Since William Thorndike’s The Outsiders captured investor imaginations, everyone has been searching for the “ninth chapter”. According to Elliot, Stefano Pessina might be a worthy nominee. Pessina is a nuclear engineer who turned his father’s struggling drug wholesale business into a series of 1,500 acquisitions, leading to a 14% stake in Walgreens.
Walgreens Boots Alliance had a rough year in the stock market in 2016, thanks to repeated threats of Amazon’s entry into the pharmacy business and a protracted attempt to take over Rite Aid. 2018 begins with Pessina’s first truly blank slate in order to execute his vision of a global scale player in wholesale and distribution with a unique focus on front-end optimization.
Walgreens has a long history of fulfilling customer needs amidst a dynamic backdrop. Early in its history, most of the company’s profitability came from the front end, while now the pharmacy drives the bottom line. Change is really the only constant, and Pessina is the ultimate leader steering the ship, with his interests aligned. The combination of a business that fills an essential life need, a cheap valuation, and a focused owner-operator makes WBA a “best idea” for 2018.
About the instructor:
Elliot Turner is a co-founder and managing director at RGA Investment Advisors, LLC. RGA Investment Advisors runs a long-term, low turnover, growth at a reasonable price investment strategy seeking out global opportunities. Elliot focuses on discovering and analyzing long-term, high quality investment opportunities and strategic portfolio management. Prior to joining RGA, Elliot was managed portfolios at at AustinWeston Asset Management LLC, Chimera Securities and T3 Capital. Elliot holds the Chartered Financial Analyst (CFA) designation as well as a Juris Doctor from Brooklyn Law School. He also holds a Bachelor of Arts degree from Emory University where he double majored in Political Science and Philosophy.
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