Sunday, 7 May 2017

Wealth Creation in Growing Large Cap Businesses

Does Size of a Company really matter? Can Large Cap companies create wealth for shareholders? Are they boring? Read on...


Dearest investors and friends,

The overall market is moving up higher and higher and I am very hopeful that all your stocks must be giving very good returns. I am sure that you would have experienced a beautiful run up of quality stocks which were dormant for a long period of time. 

Today's article is purely and purely out of experience. Before we begin let us understand Market Cap. For this, please read my article - Click here..

A large cap company is one whose Market Capitalization is more than 10000 Crore. Most of the investor friends of mine are experts in picking mid and small cap stocks which are cheap. Whenever, I used to talk about a Large Cap, their interest was low, since the thought process was that it cannot move up much. How can a Large Cap create wealth for shareholders? Is it worth? Can we make money in Large Caps? I have encountered these questions innumerable times in my investing journey.

For the first time, I am opening up in my blog, company names which I bought long back and still proudly own. They are not recommendations and I request readers to read my article and take the message only. This is Stock Market. Stocks fall. Stocks Rise. Stay Wise :-)




Let me share with you three stories which are my experiences.

Experience 1:
It was in June 2016 when my dear friend MidcapMantra spoke to me about a company called Rural Electrification Corporation (REC). The company was quoting at around Rs 80 at that time (ex bonus Rs 160) and was having Market Cap of around 15000 Crores. It was trading at around 2.6 times earnings at that time and the dividend was around Rs 17.1 per share. Yes. Dividend was more than 10% of the market value of Rs 160 at that time. It was looking so cheap. These were the thoughts in my head:

- The Price to Earnings is already below 3. Can it go lower?
- The dividend is more than 10% (tax free). Wont investors put money atleast for dividend?
- Even if Price to Earnings go up 50 - 100% from here, the capital will move up

I discussed this story with a few friends, but it didn't have many takers. It was a Large Cap which was on downtrend. I gathered all the courage in the world and bought a good solid chunk of REC in June 2016 and holding on tight.

My friend, Midcapmantra also recommended REC in this link. Click here.

Experience 2:
It was September 2016 when another dear friend of mine Rishithegreat (MMB ID) introduced to me a conglomerate company Piramal Enterprises. I was fascinated by the enormous track record of the company and the integrity of the management. Having 3 fantastic solid verticals - Pharma, Financial Services and Data Analytics, the thought process was that enormous value can get unlocked in longer term. The prowess of Ajay Piramal further deepened my conviction and I knew that money invested would not be wasted. It was quoting at around 1800 at that time and the Market Cap was around 30000 Crore. Again a Large Cap!!! 

I remember the number of times Rishithegreat, Midcapmantra and myself valued the company on phone calls to see if really there was juice in the stock.

Once we put our valuations clearly on excel sheets, we felt that this company should move up sooner or later. The intuition was that the capital will not be lost. I took a small position at 1800 levels. In November 2016, Demo happened. Piramal plunged to 1400 levels. It was available at 25000 Crore Market Cap. I shifted a large part of my funds from another stock to Piramal at that time. I started discussing the enormous value of this Large Conglomerate with some friends but again, not many takers. Why? Because it was a 25000 Crore company. How can it move up swiftly was their question. A few friends still took positions at slightly higher levels since I forced them to :-)

I took a huge leap of faith in PEL at 1440 and continue to hold it tight.

Midcapmantra recommended also in this link. Click here.

Experience 3:
It was a night of November 2016 when my friend Midcapmantra called me on my phone when I was just leaving my office. It was one of our usual discussions and I realized that he was an expert in Financial Services. Midcapmantra introduced me to the world of Housing Finance.

I was fascinated by the Housing Finance business. I had constantly tracked a company called Indiabulls Housing Finance right from 2012 onwards but never took position since I had a feeling that it was always expensive. I never knew how the business works, how NIM or leverage impacts valuations, how its books were etc. 

That phone call was a game changer. It gave me a solid foundation and a new perspective of the business. I understood that a well run Housing Finance company would grow every quarter. Even a small cut in operational cost could create enormous wealth for shareholders. I learnt about their transparency, the dividend policy and went through their annual reports and presentations. I was enchanted by their growth and their guidance.

It was in December 2016 that I decided to own Indiabulls Housing Finance. It was available at a market cap of 27000 Crores. This time I was very very convinced and discussed with friends with most conviction. But the Market Cap was a huge barrier for many friends again. I added IBHFL at 630 levels and holding on so tight now.

Today 
REC is at 42000 Crore MCAP (165% gain). 
PEL is at 43000 Crore MCAP (70% gain). 
IBHFL is at 46000 Crore MCAP (70% gain).

These experiences have taught me these valuable lessons:

1) Do not close your minds to companies which are Large Cap. 
2) Large Cap Growth companies when bought cheap, can create huge wealth with Peaceful state of mind.
3) If a Large Cap company is growing but available at discount due to some macro factors, it can provide enormous downside cap risk viz. Downside will be limited.
4) If dividend is more than 7-8% of the Market Value, have a second and third look and see if the investment is worthy. Sometimes, the downside will be capped due to dividend payout.
5) Have the right friends !!! Listening with open mind to any story always helps. Choosing to own or not is anyway in our hands. We have to listen and give a chance.

I wanted to pass on the message that if a company is aggressive and growing, even a Large Cap company can make huge money for all of us. Let us be choosy and compound our money.

Enjoy the markets friends. 

Here is the link to all my articles.


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Good luck,
Fundamental Investor

10 comments:

  1. Amazing write-up my friend. Really humbled. Let's keep compounding money in right,safe,sound way...Cheerio.

    ReplyDelete
    Replies
    1. Thanks my friend. Keep guiding and let us compound for a long long time !!!

      Delete
  2. excellent write up FI....
    the bottom line is if market provides any correction chances, pick right lage caps, so that sleep properly!!!
    can you please provide your view on below stocks for longterm
    1)intense technology
    2)Rupa and company
    3)Ujaas energy
    4)Krbl...
    Thanks in advance...

    ReplyDelete
    Replies
    1. Dear Anonymous. I only track Intense and I am positive on the company in long term if they are able to manage their expenses and collect their receivables with efficiency. Also, as they grow, customer acquisition will be there. Their product is fantastic no doubt. Will be keen to see how they grow in the next few quarters.. Take your time and invest.. Rest not tracking my friend. Sorry..

      Delete
  3. Great tutorial thanks looking forward for more

    ReplyDelete
  4. Dear FI, Nice article. I had bought REC at 161 and Piramal at 1500s as per the recommendation by Chilax (mmb) and still holding..

    ReplyDelete
    Replies
    1. Dear JA!SE bhai.. So nice to see your response on this.. Chilax is a great boarder on MMB. You should read about him in MMB Profile section :P :P :P.. You will love it my dear friend.. Have a look.. Dont miss..

      Delete
  5. Dear FI, Great articles ..... keep going

    ReplyDelete

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Our aim should be to learn and share the art of investing in the Indian Stock market. With right perspective, understanding of stock market basics and a sound attitude, we can all identify Multibaggers and evolve towards Wealth Creation. Are you ready to own businesses? Welcome aboard !!! Lets learn, serve and grow together !!! 
- FI