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abhishek

11 Nov, 10 tweets, 2 min read

On Valuing Banks

Approximate MCAP/Deposits (adj. for subs):

AUBANK: 98%
Kotak: 90%
HDFC: 58%
ICICI: 30%
IndusInd: 28%
IDFCFIRST: 28%
Axis: 25%
RBL: 19%
Federal: 7%
SBI: 6%

1/

For banks first assess the strength of the liability franchise. Not just CASA ratio but total deposits to total liabilities.

A bank can have a low deposit share in liabilities and a high CASA.

Wholesale funding is not good.

Granular deposits are good.

2/

Liability side determines the cost of funds. Lower your cost of fund the lower risk you need to take in lending for the same NIMs (profitability).

Some banks can’t even compete in prime Housing Loans (one of the safest segments) due to high cost of funds.

3/

For most businesses growth is an output of your strategy and quality of service/product.

In lending growth is an input. You decide it (after all you are giving money).

The output is credit cost. That is quality of your underwriting.

4/

In general be wary of anything showing very high credit growth. That’s the easy part.

Historical underwriting performance is only indicative. Look at what segments the banks is lending to.

Secured/MSME/Salaried/BB & below etc.

5/

Loan customers who are also have a liability relationship are usually better.

Asses how frequently the bank will to dilute.

There is reflexivity here. A bank that can dilute at 4X will increase BV per share. One that has to do it at 0.3 will impair it.

6/

Also what according to you are the strongest franchises today?

Would your view have been different 10 years ago?

How many BFSI names have beaten these over that period?

How much capital could you have allocated to these few vs the established franchises?

Think.

7/

I don’t hunt for the next X. I buy the damn X.

8/

Now people will say this bank will be able to follow a certain template (because of new CEO, new strategy etc) and the X valuation will become Y. Hence just buy it.

Don’t.

Businesses & Valuations are more nuanced.

Compare to existing ideas. Assess the opportunity cost.

9/

If you ever have to resort to high growth argument in BFSI you are probably heading for a trap.

Dis: Inv/Biased

10/10

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More from @abhishec_s

abhishek

@abhishec_s

12 Nov

On Deceptiveness of Investing

👇

Terry Smith says buy quality companies (you could have bought L’Oréal in 1973 at 240X and beaten the Index).

Munger says pay fair value for wonderful businesses.

Howard Marks is quality agnostic.

So which is it? What do you do?

2/

Terry’s example: You can buy a company with 20% ROIC at 4X and sell 40 years later at 2X book value and still beat another company with 10% ROIC which you buy at 2X and sell at 4X.

He fleetingly mentions that for simplicity all earnings are retained and reinvested.

3/

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abhishek

@abhishec_s

11 Nov

Italy & Coffee

Italy is the spiritual home of coffee.

The vocabulary of coffee (espresso/cappuccino/barista/macchiato/latte) is Italian.

1/

Coffee was introduced to Italy by Arabic travellers in 15th/16th century.

Wine sellers threatened by its popularity made an appeal to Pope Clement VIII to banish it.

Pope after tasting the coffee declared it to be delicious & quipped that it should be baptised.

2/

After the Papal blessing cafes proliferated across Europe.

The 2nd oldest cafe in Italy today, Caffè Greco was opened in 1760. It was frequented by Byron/Keats/Shelly/Goethe/Wagner among others.

It still has the couch of Christian Anderson who lived upstairs for a while.

3/

Read 8 tweets

abhishek

@abhishec_s

9 Nov

MARS: 4th largest privately held company in US.

It’s the largest pet care company in the world. Confectionary/Chocolates, technically, is not their primary business.

Bought Wrigley’s in 2008 for $23 BN.

1/4

MARS paid $11 BN itself. $ 5.7 BN debt was raised from Goldman.

Buffett invested $4.4 BN in bonds at 11.45%. And $2.1 BN in Wrigley’s preferred stock at 5%.

2/4

Buffett’s total returns on the bonds alone was 72% when MARS repurchases the bonds at a premium (15.45%) 5 years later.

MARS also bought the regular stock at $4.5 BN (Investment of $2.1 BN). It had already paid $840 MN in dividends.

3/4

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abhishek

@abhishec_s

22 Sep

What’s your claim on alpha?

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@passivefool

I don’t know any endeavour where the difference between how easy something looks & how difficult it actually is, is as wide as in Investing (in the context of stock picking).

@passivefool says this is a “Blood Sport”. Apt.

2/10

People across the income/wealth spectrum feel it is easy to pick stocks & multiply their savings. They fall for every racket out there - High Risk-High Return/Small Caps Outperform/Divinations by Drawing Lines/Tips from TV Experts/Option Seminars/Leverage….

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abhishek

@abhishec_s

9 Sep

When to sell:

👇

1/ The key to knowing when to sell is knowing ‘why you bought it in the first place'.

— Peter Lynch

Either the story has played out or the thesis has been violated or you have found something better.

Let’s examine the case where the stock is performing first.

2/ When you sell depends on what kind of investor you are.

The traits that makes you seek high margin of safety & deep value in your buy decisions will often make you sell early. Those decisions are driven by similar mindsets.

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abhishek

@abhishec_s

5 Sep

How to track stocks/sectors:

(for the justifiably endangered retail active investor)

👇

1/ To have 10 stocks in your portfolio you probably have to track a 100 companies. These include competitiors of your holdings and potential inclusions.

Every company is telling a story not just about itself, but also about its peers, its customers, its vendors - the economy.

@Tijori1

2/ Quaterly results are where you start. Maintain a sheet for each sector with important parameters (value drivers) for each stock and update it quarterly. Some website (@Tijori1)track some of this data, but maintain your own sheet. (“Quarterly Data Sheet”).

Sample:

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