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Finnacle Shah Classes

@finnacle_shah_classes
4 years ago ~80 views
Business Analysis Post 2: Historical Return Analysis to settle the question of whether ONLY quality companies provide great returns?
6 Case Studies Explained: PSU index, Balrampur Chini, Steel Authority of India, HUL, Infosys, Castrol
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Finnacle Shah Classes

@finnacle_shah_classes
4 years ago ~10 views
We explained here why a good business should have a 10-year average ROIC>12.5% & 10-year average Sales CAGR of>10%

When we used this filter on screener ONLY 197 Companies out of Total of 4789 listed companies came into the list of good businesses. Check the List below (2/n)
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Finnacle Shah Classes

@finnacle_shah_classes
4 years ago ~10 views
To stricken the criteria for quality we increased ROCE>20%. The no. of companies meeting these criteria came to JUST 123. Hence some investors say investable basket for long term buy & hold in India is very shallow. (PS: we don’t agree with this) (3/n)
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Finnacle Shah Classes

@finnacle_shah_classes
4 years ago ~10 views
An interesting insight was returns are clustered. Almost 57% of companies from the above filter is broadly from 7 sectors. Check the list below: (4/n)
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Finnacle Shah Classes

@finnacle_shah_classes
4 years ago ~10 views
But there are 2 more angles in which you can analyze this list.

A) If a single company is coming into filter from an entire industry, it’s truly standing out & will attract all the stakeholders seeking an exposure to that industry. (5/n)
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Finnacle Shah Classes

@finnacle_shah_classes
4 years ago ~20 views
Case in Point: From approx. 10-11 listed footwear companies only Relaxo comes in the list of 123 quality companies.
b) Industry quality ratio = No. of Quality cos. of an industry/ No. of listed companies in that industry. (6/n)
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Finnacle Shah Classes

@finnacle_shah_classes
4 years ago ~10 views
Ex: 2 out of total of 3 listed Life insurance companies make the cut in the Quality list. 67% of life insurance businesses make the cut. (7/n)
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Finnacle Shah Classes

@finnacle_shah_classes
4 years ago ~20 views
But is a good business always a good investment? To check this, we analyzed what kind of returns these businesses have provided over long term as generally these trade at high valuations. (8/n)
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Finnacle Shah Classes

@finnacle_shah_classes
4 years ago ~10 views
Results: Out of 123 companies 79 companies were able to generate 20% + CAGR for their shareholders which means an outstanding strike rate of 64% (79/123). (9/n)
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Finnacle Shah Classes

@finnacle_shah_classes
4 years ago ~10 views
Total Quality companies:123
Out of these beating cost of capital:93
Out of these beating cost of capital (i.e., 12.5%) but generating less than 20% CAGR:14
Out of these generating >20% CAGR:79

Check the List below of 93 companies which have beaten cost of capital: (10/n)
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Finnacle Shah Classes

@finnacle_shah_classes
4 years ago ~10 views
Now even the bigger questions are does only quality companies provide high returns and can a bad business be also a good investment? (11/n)
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Finnacle Shah Classes

@finnacle_shah_classes
4 years ago ~10 views
To answer this let’s see total no of companies with stock price CAGR of > 20%. 620 companies out of 4789 listed companies generated 20% + CAGR over past decade. out of 620 companies approximately only 13% (79/620) of companies were quality companies. (12/n)
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Finnacle Shah Classes

@finnacle_shah_classes
4 years ago ~10 views
Now lets look at some of the case studies where quality companies did not turnout to be great investments whereas bad businesses ended up providing extraordinary returns: (13/n)
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Finnacle Shah Classes

@finnacle_shah_classes
4 years ago ~10 views
HUL: 6 Years of consolidation (14/n)
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Finnacle Shah Classes

@finnacle_shah_classes
4 years ago ~20 views
Infosys: 16 Year only approx. 3.5-4x (15/n)
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Finnacle Shah Classes

@finnacle_shah_classes
4 years ago ~10 views
Castrol India: 6-7 years of Negative return & 11-12 years of very narrow consolidation (in 100-150% return range) (16/n)
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Finnacle Shah Classes

@finnacle_shah_classes
4 years ago ~10 views
Now let’s look at some of the so-called bad businesses.

Balrampur Chini lot of 3x & 4x periods: (17/n)
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Finnacle Shah Classes

@finnacle_shah_classes
4 years ago ~30 views
SAIL: (18/n)
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Finnacle Shah Classes

@finnacle_shah_classes
4 years ago ~30 views
1999-2008 (Period when PSU shares did well): PSU Index 10 Year CAGR: 26% CAGR beating Sensex CAGR.

Even Buying Junk in a sector rally makes sense when quarterly results are improving and there becomes a huge valuation gap between sector leaders and Junk stocks. (19/n)
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Finnacle Shah Classes

@finnacle_shah_classes
4 years ago ~10 views
Hence, we need to adapt slowly and steadily with different investment practices & not excited by 1 investment philosophy. Never enter in a debate. Every type of investment philosophy makes money if we stick with basic principles of investing consistently. (20/n)
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Finnacle Shah Classes

@finnacle_shah_classes
4 years ago ~10 views
Every strategy that is out of flavor today will return back and every strategy that is darling of today's market will time consolidate or correct. (21/n)
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Finnacle Shah Classes

@finnacle_shah_classes
4 years ago ~10 views

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