30-year manthan, 1 mantra: qglp...30-year manthan, 1 mantra: qglpthink equity think qglp contest...
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30-year manthan, 1 mantra: QGLPThink Equity Think QGLP Contest 2019 : Backdrop
For more details & clarifications, email [email protected]
This Contest Backdrop Deck gives you an
overview of the QGLP stock selection criteria,
along with a few case studies
The manthan
4
The manthan – Knowledge churn
Wide-range of readings on business & investing
5
The manthan – Knowledge churn
Rich learnings from 23 years of Wealth Creation Studies
6
Warren Buffett’s investing process
a) A business we understand;
b) Favorable long-term economics;
c) Able and trustworthy management; and
d) A sensible price-tag.
— 2007 Annual Letter
The mantra: QGLP
8
QGLP in a nutshell
“QGLP – Quality, Growth, Longevity, reasonable Price”
Quality of business x Quality of management• Stable business, preferably consumer facing
• Huge business opportunity
• Sustainable competitive advantage
• Management team with integrity & competence
• Healthy financials & ratios
Growth in earnings• Volume growth
• Price growth
• Mix change
• Operating leverage
• Financial leverage
Longevity – of both Q & G• Long-term relevance of business
• Extending competitive advantage period
• Sustenance of growth momentum
Price• Reasonable valuation, relative
to quality and growth prospects
• High margin of safety
QGLP
9
Q – Quality
High quality business x High quality management
Quality of business
• Large profit pool
• Size of opportunity(eg IT, Pharma, Financials)
• Competitive landscape– Monopoly (Bosch), Oligopoly (OMCs)
– Dominant market share
(Maruti, Asian Paints, United Spirits)
• Niche / Strategic opportunity(Eicher, Page Industries)
• Favourable demand-supply
Quality of management
• Unquestionable integrity
– Impeccable corporate governance
– Concern for all stakeholders
– Preferably paying full tax and a well-articulated dividend policy
• Demonstrable competence
– Excellence in strategy & execution
– Sustaining competitive advantage
• Growth mindset
– Long-range profit outlook
– Efficient capital allocation
10
Q – Quality
Competitive Landscape is key to Quality of Business
TAKEAWAYS:
• Vertical axis determines
value created in a sector
• Horizontal axis determines
how that value will be
shared in the value chain
• The more competitive the
sector, the sharper the
company strategy must be
Porter’s 5 Forces
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Q – Quality
Porter’s 5 Forces – Sample scoring
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G – Growth in earnings
• Understanding short-term Growth is a science
but Understanding long-term Growth is an art
• Growth is a lollapalooza of C, V, P, M
i.e. Cost, Volume, Price, Mix
(lollapalooza is a big effect from large combinations of factors)
13
G – Growth in earnings
High earnings growth situations
• Value Migration – flow of value (profit & market cap) from
outmoded businesses to superior businesses (e.g. wired
telephony to wireless, public sector banks to private banks, etc)
• Sustained industry tailwind
• Small base with large opportunity
• New large investment getting commissioned
• Inorganic growth through M&A
• Consolidation of competition
• Operating & Financial leverage
• Turnaround from loss to profit
14
L – Longevity
Longevity of both Quality and Growth
• Long-term relevance of the company’s products & services
• No breakdown of the business model in the foreseeable future
• Extending competitive advantage period:
— maintaining edge over peers through innovation, strengthening
of brands, deepening distribution, etc
• Sustenance of growth momentum:
— huge opportunity size
— periodic new product launches / capacity expansion
— non value-dilutive inorganic growth
15
P – Price
Reasonable Price i.e. well below intrinsic value,
leaving good Margin of Safety
• Several valuation approaches possible
• Some proprietary formulas –
1. Payback ratioLess than 1x is almost a sure shot formula for multi-bagger
Payback ratio = Market Cap
Next 5 years PAT
2. PEG (Current PE divided by Future growth)Less than 1x improves chances of huge wealth creation
QGLP: Case Studies
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QGLP Case Studies
1. Bajaj Finance
2. HDFC Life Insurance
3. Alkem Laboratories
Disclaimer
The companies discussed here are for illustrative purposes only, and should not be construed as investment advice.
Bajaj Finance
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Company background
• Bajaj Finance (BFL) is one of India’s largest and fastest growing NBFCs
• BFL focuses on six broad verticals:
(1) Consumer lending
(2) SME lending
(3) Commercial lending
(4) Rural lending
(5) Deposits and
(6) Partnerships & services including life insurance, health insurance,
co-branded credit cards, etc
• As of March 2019, BFL’s consolidated AUM was over INR 1.15 lakh crores
• Its market cap is INR 1,90,000 crores
20
RBL Bank – QGLP in a nutshell
QGLP – Quality, Growth, Longevity, reasonable Price
Quality of business x Quality of management• Pioneer of consumer durable financing
• Continuous product introduction and/or innovation
• Robust, technology-based risk management system
(net NPA at 0.63% is amongst the lowest
in the NBFC industry)
• Robust RoTA and RoE
• Flawless track record of
corporate governance
Growth in earnings• Multi-pronged growth strategy for AUM
and revenue, incl. sustained new customer
acquisition and aggressive cross-sell
• Expect FY19-22 AUM CAGR of 32%
• Higher credit cost to be offset by operating
leverage; PAT CAGR to track AUM CAGR
• EPS CAGR should be slightly lower at 30%
Longevity – of both Q & G• Longevity of Quality – High focus on
Effective Risk Management and Asset
Quality
• Longevity of Growth – Capital-starved India
is a multi-decadal opportunity for well-run
NBFCs
Price• Valuations rich – TTM P/E 45x, P/B 9x
• Expected high EPS CAGR of 30% over FY19-22 will
ensure no significant valuation derating
• 3-year stock return of 20% demands FY22 exit
multiple of 36x, which is highly plausible; BUY
QGLP
21
Q — Quality
Quality of Business• Pioneer of consumer durable financing in India
• Continuous product introduction and/or innovation e.g. extended
funding for medical procedures; co-branded credit cards with RBL Bank
• Aggressive cross-sell to existing customers
• Extensive geographic expansion (47% 5-year CAGR in number of locations)
• Robust, technology-based risk management system (net NPA at 0.63% is
amongst the lowest in the NBFC industry)
• Effective cost control
NBFCs: Porter’s Five Forces – Moderately favourable competitive landscape
Force Comment Sector Score (0 to 1)
1. Inter-firm rivalry High 0.0
2. Bargaining power of customers Medium 0.5
3. Bargaining power of suppliers Low 1.0
4. Threat of new entrants Medium 0.5
5. Threat of substitutes Low 1.0
TOTAL 3 out of 5
QGLP
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Q — Quality
Quality of Business (continued)
• BFL’s return ratios are robustQGLP
23
Q — Quality
Quality of Management
Unquestionable Integrity• Promoted by Bajaj Group with 55% stake held by Bajaj Finserv
• Flawless track record of corporate governance
• Steady dividend payout of at least 10%
Demonstrable Competence• Gold standard among NBFCs for most performance metrics – product
innovation, customer acquisition, cross-sell, risk management, cost control, etc
• Internally, the management works and thinks like a bank – especially, when it
comes to raising funds at cheap cost
• Strong board and professional team
Growth Mindset• Relentless search for new business opportunities is on e.g. floated housing
finance subsidiary in FY18 and securities business subsidiary in FY19
QGLP
24
G — Growth in earnings
• BFL has a multi-pronged strategy for AUM and revenue growth –
Sustained new customer acquisition e.g. 8 million customers
added in FY19, taking the total customer base to 34 million
Widening geographic presence – present in almost 1,900
locations, up from 650 in March 2016
Aggressive cross-sell strategy – share of existing customers in
total AUM up from 42% in FY13 to 65% in FY19
High growth in new business segments – housing finance and
securities
• BFL is combining revenue growth with –
Ever-tightening risk control e.g. the number of risk variables tracked
per month is up from 650 in 2013 to over 3,000 currently
Effective cost control e.g. Opex to NII ratio down from 46% in FY14
to 35% in FY19
QGLP
25
G — Growth in earnings
• We expect 32% CAGR in AUM over FY19-22
• Slight increase in credit cost should be offset by operating cost
leverage
• Thus, BFL’s FY19-22 PAT CAGR should track its AUM CAGR of 32%
• With some equity dilution, EPS CAGR should be marginally lower at 30%.
QGLP
26
L — Longevity
Longevity of Quality
• High focus on Effective Risk Management and Asset Quality
Longevity of Growth
• Well-managed NBFCs have a long growth runway in a
capital-starved economy like India
QGLP
27
P — Price
Valuation rich, but defendable considering robust growth
• Current P/E 45x and P/B 9x
• Expected high EPS CAGR of 30% over FY19-22 will ensure no significant valuation derating
• 3-year stock return of 20% demands FY22 exit multiple of 36x,which is highly plausible; BUY
QGLP
INR crores FY18 FY21 E CAGR
Total assets 1,16,000 2,64,000 32%
Average assets 99,000 2,34,000 33%
ROTA 3.8% 3.7%
PAT 3,995 9,135 32%
EPS (INR) 69.3 150.6 30%
Exit P/E (x) 45 36
Stock price (INR) 3,100 5,420 20%
Mkt Cap 1,90,000 3,29,000 20%
28
P — Price
Expect BFL’s stock outperformance to continue
QGLP
29
Risks & Concerns
• Significant economic slowdown will have a double whammyon BFL —1. AUM growth will be slower than expected; and2. Default rate will be higher than expected.
HDFC Life Insurance
31
Company background
• HDFC Life Insurance is a JV between HDFC Ltd, India’s leading housing
finance company (51.5% stake) and Standard Life Aberdeen (24.7% stake),
a global investment company headquartered in Scotland
• HDFC Life is India’s largest private sector life insurer by market cap
and third largest by new business
• It offers products which can be categorized in following segments:
1. Long-term savings and investments
2. Mortality
3. Morbidity
4. Longevity
• HDFC Life issued 1.05m new policies in FY19 with a total sum assured
of INR 6,06,000 crores
• HDFC Life’s market cap is around INR 1,00,000 crores
32
HDFC Life – QGLP in a nutshell
QGLP – Quality, Growth, Longevity, reasonable Price
Quality of business x Quality of management• India’s life insurance density at $55 compared to
$225 for China and $6,756 for Hong Kong
• Value migration from LIC to private insurers
• HDFC Life’s 13th month persistency at 87%
is amongst the best in the industry
• HDFC Life’s new business margins
and return ratios are on an uptrend
• Rich pedigree of HDFC Group
Growth in earnings• HDFC Life’s growth strategy is multi-
faceted – from product innovation to
distribution strength to calibrated risk
management
• Expect FY19-22 EVoP CAGR of 22%
• EV CAGR of 20% over next 3-5 years
Longevity – of both Q & G• Longevity of Quality – High focus on
effective risk management
• Longevity of Growth – Multi-decadal
opportunity for private insurers in India
Price• Current P/EV of 5.5x is rich but defendable
given HDFC Life’s RoEV of 20% and expanding
• 3-year target price of INR 905 at exit P/EVoP of 30x
• Robust 22% return CAGR; BUY
QGLP
33
Q — Quality
Quality of Business• Life insurance in India is underpenetrated with increasing share of
private players
– Under-penetrated: Life insurance density at $55 compared to
$225 for China and $6,756 for Hong Kong
– 5-year CAGR: New business premium 24%
• Value Migration from LIC to private insurers
Porter’s Five Forces – Highly favourable competitive landscape
Force Comment Sector Score (0 to 1)
1. Inter-firm rivalry Medium 0.5
2. Bargaining power of customers Low 1.0
3. Bargaining power of suppliers Low 1.0
4. Threat of new entrants Low 1.0
5. Threat of substitutes Low 1.0
TOTAL 4.5 out of 5
QGLP
34
Q — Quality
Quality of Business (continued)
• HDFC Life has grown its number of life insured by almost 2.5x in last
three years
• HDFC Life’s 13th month persistency at 87% is amongst the best in the industry
• Share of protection has grown from 7.8% in FY17 to 16.7% in FY19 based on NBP
• RoEV is on a steady uptrend
QGLP
35
Q — Quality
Quality of Management
Unquestionable Integrity• Rich pedigree of the HDFC group
• High quality of underwriting and disclosure
• Independent board with an empowered team of top executives
Demonstrable Competence• HDFC Life has one of the most dynamic management team over last 10 years
• Ms Vibha Padalkar took over as CEO in 2018
• Demonstrated capability to manage a top performing company in difficult
environment when HDFC Bank, the main distributor, decided to partner with
two other life insurance companies
Growth Mindset• Consistent track record of innovative product launches
e.g. in retiral space as well as guaranteed product space
QGLP
36
G — Growth in earnings
• HDFC Life’s growth strategy is multi-faceted –
Product-innovation e.g. credit protect (a product that covers
the loan liability of households) and annuity (a product that
covers longevity risk by providing lifetime guaranteed income)
Distribution strength e.g. besides bancassurance, it has 260+
partnerships (with NBFCs, SFBs, MFIs, etc); it is also strengthening
its agency and direct channels (including online)
Customer-service focus – leading to high persistency levels
(i.e. low policy lapses)
Calibrated risk-management
• Throughout, the overarching principle is “profitable growth”
monitored via metrics such as –
– EV (Embedded Value)
– NBM (New Business Margin)
– Operating Return on EV (Embedded Value Operating Profit ÷ EV)
QGLP
37
G — Growth in earnings
• New business profits to more than double between FY19 and FY22
• Expect FY19-22 EVoP CAGR of 22%
• Expect Embedded Value CAGR of about 20% over next 3-5 years
QGLP
38
L — Longevity
Longevity of Quality
• HDFC Life enjoys sustainable competitive advantage in the
life insurance business
Longevity of Growth
• Multi-decadal opportunity for private sector life insurers in India
• Unpenetrated retiral market offers very long term opportunity and
HDFC Life is one of the most innovative insurers.
QGLP
39
P — Price
Valuation rich, but defendable considering robust EV growth
• Current P/EV 5.5x and P/EVoP 30x
• FY22 P/EVoP 16x and P/EV 3x
• 3-year target price of INR 905 at exit P/EVoP of 30x
• Robust 22% return CAGR; BUY
QGLP
INR crores FY19 FY22 E CAGR
EV 18,296 32,409 21%
NBP 1,540 3,013 25%
PAT (EVoP) 3,060 5,536 22%
EPS (EVoP) (INR) 16.9 30.2 22%
Exit P/EVoP (x) 29.5 30
Mkt Cap 100,000 182,184 22%
Stock price (INR) 500 905 22%
40
P — Price
Expect HDFC Life’s stock price recovery to sustain
QGLP
41
Risks & Concerns
• High exposure to guaranteed business
• Fast growth in annuity business where the risks are higher
• Attracting and retaining human capital will remain a challenge
Alkem Laboratories
43
Company background
• Alkem is one of India’s largest domestic pharma companies
with market share of 3.1%.
• Currently, it has 14 manufacturing facilities across five locations in India
and two manufacturing facilities in the US.
• Over time, Alkem has built a strong capabilities in R&D, marketing and
distribution. Currently, it has one of the best reach in urban and rural
India.
• Its strong R&D capability has led to its 13 brands now featuring among
top 300 brands in India (a feat not many companies have achieved).
• Using India as the cash cow, Alkem has successfully adopted the M&A
route to venture into the US market in 2011. Since then, US revenues
today are sizeable at US$ 270 mn (26% of total revenue).
• Alkem’s current market cap stands at INR 21,300 crores.
44
Alkem Labs – QGLP in a nutshell
QGLP – Quality, Growth, Longevity, reasonable Price
Quality of business x Quality of management• Alkem has a strong domestic franchise:
7th rank in India Pharma Market
• MR productivity is one of the highest in India
• Zero leverage with last 5-year
average RoE of 18.5%
• High skin in the game –
promoters hold 66% stake
Growth in earnings• India, US and Rest of World all in
growth mode
• Improving MR productivity driving
EBITDA margins, up 200bp over
FY14-19 to 18%
• Expect 3-year PAT CAGR of ~20%
Longevity – of both Q & G• Indian Pharma Market has the potential to
grow at 8-10% for long; Alkem has the
ability to grow faster than the market given
its distribution moat (Tier II, III areas)
• Enough headroom to improve margins
— US business has just broken even
Price• P/E of 27x FY19 is defendable considering
20% earnings CAGR, rising RoE and near-zero debt
• Target Price of INR 3,200 (28x FY22E EPS)
• Expect 3-year return CAGR of 20-25%
QGLP
45
Q — Quality
Quality of Business
Porter’s Five Forces – Fairly favourable competitive landscape for pharma
Force Comment Sector Score (0 to 1)
1. Inter-firm rivalry Medium 0.5
2. Bargaining power of customers Medium 0.5
3. Bargaining power of suppliers Low 1.0
4. Threat of new entrants Low 1.0
5. Threat of substitutes Medium 0.5
TOTAL 3.5 out of 5
• Strong domestic franchise: 7th rank in India Pharma Market
• High penetration in the rural market
• MR productivity one of the best in industry at INR 6.5 mn per year per MR
(excluding 1,500 MRs added recently)
• This has helped the company to clock higher-than-peer volumes in the Acute
segment (85% of India revenues) — 16% revenue CAGR in the India business over
the last 5 years (600-800bp industry outperformance).
• Healthy Balance Sheet: Zero leverage with last 5-year average RoE of ~18.5%
• Low asset intensity: FCF generation is robust at 45% of PAT
QGLP
46
Q — Quality
Quality of Management
Unquestionable Integrity
• Healthy track record of corporate governance
• High skin in the game – promoters hold 66% stake in the company
• Concern for minority shareholders: Steady dividend payout of 15%
Demonstrable Competence
• 7th largest company in the Indian pharma market with
market share of 3.1% v/s no. 1 ranked Sun’s market share of 5.4%.
• 13 brands feature among the top 300 brands in India – best-in-class
• Company has also embarked on acquisitions in the US and India,
and has been managing them well to address future growth
Growth Mindset
• With India as a cash cow, the company has successfully transformed its US
business through investments in well thought-out areas of R&D and M&As
• The US business achieved EBITDA break-even in FY18
QGLP
47
G — Growth in earnings
• FY15-19 CAGR: Sales 18%, EBITDA 28%, PBT 21%;
PAT CAGR 19% in spite of lower other income (INR 88 cr in FY19 v/s 181 cr
in FY15) and higher taxation (19% in FY19 v/s 13% in FY15)
• Improving MR productivity: In spite of hiring of 1,500 MRs over
the last 2 years, EBITDA margins are up 388bp over FY15-19 to 15.5%
• Expect 12-15% revenue CAGR over next 3 years led by –
– India business (70% of revenues) well placed to grow at 12-15%
– US business (25% of revenues) set to grow at 15-20%
• Expect EBITDA margins to expand 250bp minimum over the next 3 years,
led by operating leverage from India and US business
• As a result, expect Alkem to clock 20% PAT CAGR over the next 3 years
QGLP
48
G — Growth in earnings
49
L — Longevity
Longevity of Quality
• Indian Pharma Sector should remain attractive for a long time,
given both domestic and global opportunity
Longevity of Growth
• Indian Pharma Market has the potential to grow at 8-10% for long;
Alkem has the ability to grow faster than the market
• Alkem’s continued investments in building manufacturing/technology
assets imply sustained growth visibility
• Enough headroom to improve margins — US business has broken even in
FY18 and has the potential to clock 10-15% EBITDA margins in next 3 years
from 2% currently
• Lean balance sheet ensures continued free cash generation to handle
adversities, if any
QGLP
50
P — Price
• P/E of 27x FY19
• We believe the valuation is defendable considering:
— 20% Earnings CAGR over FY19-22E
— Expansion in RoE by 200-250 bps over the next 3 years
— Lean Balance Sheet with net debt-equity almost zero
• Target Price of INR 3,200 (28x FY22E EPS)
• Expect 3-year return CAGR of 20-25%
INR Crores FY19 FY22 E CAGR
Revenues 7,357 10,310 12%
EBITDA Margins 15.2% 17.8%
PAT 773 1,353 21%
EPS (INR) 64.7 113.2 21%
Exit P/E (x) 27 28
Mkt Cap 21,300 38,300 22%
Stock price (INR) 1,750 3,200 22%
QGLP
51
P — Price
Expect Alkem’s underperformance to reverse
QGLP
52
Risks & Concerns
• Near-term threat to earnings –
— Regulatory risks in the US and
— Price-cap initiative from the Indian government
• Higher than anticipated rise in prices of key starting materials
sourced from China
Best wishes for your participation in the
Think Equity Think QGLP Contest 2019
For more details & clarifications, email [email protected]