Please find below our key excerpts from investor Memos Published in 2020 by one of the well respected Fund Managers in Indian Capital Market - Mr. Viraj Mehta.
Dec 2020 Memo - When to buy undervalued stocks if markets are completely ignoring a particular pocket
"Why now: This is best answered by the following write-up by Mr. Howards Marks in his book ‘Mastering the Market Cycle: Getting the Odds on Your Side.
“At Oaktree, we strongly reject the idea of waiting for the bottom to start buying. First, there’s absolutely no way to know when the bottom has been reached. There’s no neon sign that lights up. The bottom can be recognized only after it has been passed, since it is defined as the day before the recovery begins. By definition, this can be identified only after the fact. And second, it’s usually during market slides that you can buy the largest quantities of the thing you want, from sellers who are throwing in the towel and while the non-knife-catchers are hugging the sidelines. But once the slide has culminated in a bottom, by definition there are few sellers left to sell, and during the ensuing rally it’s buyers who predominate. Thus the selling dries up and would-be buyers face growing competition….Like so many other things in the investment world that might be tried on the basis of certitude and precision, waiting for the bottom to start buying is a great example of folly. So if targeting the bottom is wrong, when should you buy? The answer’s simple: when price is below intrinsic value. What if the price continues downward? Buy more, as now it’s probably an even greater bargain. All you need for ultimate success in this regard is (a) an estimate of intrinsic value, (b) the emotional fortitude to persevere, and (c) eventually to have your estimate of value proved correct.”
"the market is a lead indicator and discounts future cash flows. A dent in earnings for a year may not significantly affect the market, particularly amid expectations of earnings growth in later years. Two, breadth of the recovery may have increased to some extent, with a large dislocation amongst winners and underperformers"
"Outcome: The way a thing turns out; a consequence - Process (our input, tangible) + Luck (external input, intangible) = Outcome (tangible)"
"is the acceptance of the lack of certainty in our knowledge and the development of methods for dealing with our ignorance."
"Positive Luck Playing out - Alkyl Amines: Acetonitrile is a globally traded product, useful in making fibres, lithium ion batteries and as a solvent in chemical processes. Acetonitrile is manufactured in two ways. One, by using Acrylonitrile which is a byproduct of tyre manufacturing. Another through acetic acid and ammonia, which is the process used by Alkyl Amines. o With tyre production down, the acetonitrile production reduced substantially; consequently., its prices skyrocketed. o This came as a huge tailwind for the company and margins improved"
"Negative Luck - TCPL Packaging - RM prices (mainly paperboard) which were expected to be benign, shot up due to global factors. As demand was hit as well, the ability of TCPL to pass on prices was limited. o Competition intensified as one of its prime unlisted competitors received a large fund infusion from a PE fund, giving it deep pockets to sustain low margins"
June 2020 Memo - Focus on Investment strategy suing Polycab as a case study
"We pick Businesses which are among the market leaders in their sectors/niches • Have strong balance sheets and return ratios with growing earnings • Have track record of management integrity and competence • Are available at attractive valuations"
"Polycab is an undisputed market leader with ~12% overall market share and 18% share among organized players in W&C industry. Polycab’s W&C business is larger than that of Havells and Finolex combined! "
"Over the past 5 years, Polycab has seen substantial improvement in its return ratios (RoCE improved by ~1000 bps to ~26%) "
"After touching Rs. 10 bn mark in 2006, has continued its growth path to almost ~Rs. 88 bn as of fiscal 2019-20 which translates to almost 9 times in just 14 years."
"Fast Moving Electrical Goods (FMEG) business focusing on fans, switchgear, lighting, etc. was launched in fiscal 2015-16. As the scale builds up, the operating leverage will kick in and profits will substantially outpace revenue growth. Companies like Havells with large FMEG businesses, trade at a much higher valuations. Hence, FMEG business carries both earnings growth and multiple rerating potential. "
March 2020 - Focus area judging impact of COVID on business valuations
"The value of each business is equal to the present value of their future cash flows. ~40-50% of this value comes from cash flows of next 5-7 years while rest comes from the terminal value (present value of cash flows of all the years beyond 7 years)."
"When the markets of the country fall by ~40% like in March 2020, this means one of two things: - Market are expecting country’s businesses will have no cash flows in next 5 – 7 years or - There is almost no value of business beyond 7 years."
Story of Mr. Market as published by Warren in his 1987 Letter
"Warren Buffett in his 1987 shareholders’ letter explains the analogy of Mr. Market that Benjamin Graham used to explain his students about the irrationality of stock markets: “He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business.
Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.
Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems.
At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains.
At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions, he will name a very low price, since he is terrified that you will unload your interest on him.
"Mr. Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you. "
"But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence.”
Case study of Dow Jone smovement at the time of Spanish Flu
"The best parallel we can draw is from Spanish flu. It hit the world towards the end of World War I in Jan 2018 and infected around ~25-30% of population across the globe. The death toll was between 4-7 cr people according to estimates. What we are seeing with Covid-19 is nowhere close to what happened because of the Spanish Flu. With much better healthcare system and huge advances of technology in last 100 years, we are confident that this pandemic will be brought under control much faster and with significantly lower deaths. Since the start of the Spanish Flu, Dow Jones cracked by a third and made a bottom almost 10 months before the actual number of deaths peaked. By the time, the number of deaths peaked, Dow had recovered ~35% from the bottom"