Investing in a ‘hard to meet’ company
Jan 13 2013 , Mumbai
Though it is very easy to ignore them on your portfolio of investments, the fact remains that a large number of stocks that are well managed and have given consistently good returns on the market. This makes you realise that it maybe better to find and know more about these companies and invest in these stocks.
Saurabh Mukherjea, head of equities at Ambit Capital, reckoned it is worth reconsidering high quality small cap players in India as economic recovery gathers steam. Particularly interesting are “hard to meet” companies, he wrote, in a recent note.
“Such companies usually do not find a place in institutional investors’ portfolios because investors feel uneasy about the lack of visibility vis-à-vis corporate strategy. However, a glance at some of the hard to meet companies suggests that investors are losing out by staying away from names. These include Bayer Cropsciences, Torrent Power, Wabco, Greaves Cotton, Bata, VST and MRF,” he wrote.
The performance record of these companies is spectacular – in absolute share price terms most of them are compounding over one, three, five and 10 years at 30-40 per cent per annum. Such spectacular share price performance is accompanied by equally impressive delivery of EPS (earnings per share) and ROE (return on equity) over long periods of time.
Sandip Sabharwal, CEO-PMS at Prabhudas Lilladher says investors and analysts can get a broad picture of these so-called ‘hard-to-meet’ companies by looking at peer group companies, whose business dynamics are well-known. For instance, studying the tyre industry and business environment going for and against through Apollo Tyres, a widely-tracked company, to get a picture on MRF Tyres, which is indeed a ‘hard-to-meet’ company.
There are also several stocks in the MNC space too, which are doing well both in terms of earnings and as well as stock performance, but inaccessible for the analysts community. Sabharwal sees these companies could also be analysed through peer comparison and industry research.
As a rule, Sabharwal said, he resists investing in companies that are not accessible and information is hard to come by.
Mukherjea of Ambit points out that stocks, such as Bayer Cropscience, Wabco India, Bata India, VST Industries and MRF are 15-20 baggers over a decade. “When companies deliver performance like that, I don’t think investors should mind whether the CEO spends time at broker conference or an endless ‘non-deal roadshows,’” he writes.
Furthermore, it is not as if these returns are delivered due to operators ramping the stock up. If you look at the fundamentals of these companies – EPS growth, BVPS growth and ROE over one, three, five and 10 years – the reason for their spectacular share price performance becomes abundantly clear, he says, and adds: “I agree it would be great if these companies could meet investors and explain the secrets of their success, but the fact that they don’t is not a good enough reason not to invest in them,” he says.
Alex Mathews, head of research at Geojit BNP Paribas Financial Services, explains that there are enough data available for investors to analyse and take a call on whether or not to invest in a stock. Also, the latest move by Sebi on informing company-related developments first to stock exchange will make price discovery more efficient on the stock markets, he says.
It is also not true, at least from past experiences, that companies meeting analysts paint a correct picture always; or there are no negative surprises on the way, Mathews points out.
Mukherjea also mentions this fact. “I am yet to meet an Indian company, which gives investors forward looking views when there is bad news to reveal. Has Infosys done so at any stage in the past two years as its franchise has eroded? (Of course, for the just-concluded quarter, Infosys has given a positive surprise). Did Crompton Greaves do so before its 500 bps operations margin crack in its Q3FY13 results? Did Crompton Greaves do so before it began its post-(Sudhir) Trehan descent? Three years ago, did Crompton give investors any advance indication that Crompton’s money would be used to see Avantha Power? For that matter, did Exide give investors advance warning that Exide’s money would be used to buy a state in ING’s life business,” he asks.
The point remains that Indian companies do not give investors advance warning of adverse results or of shareholder unfriendly capital structure changes. “If that’s the case then why obsess about access to management?” he writes.
A fund manager at a mid-sized Indian mutual fund said they avoid companies, which are difficult to “understand” as supposed to companies that are “hard to meet”. Without revealing firms, he says there are companies, which are also on Sensex, but difficult to understand in terms of transparency or their numbers. “As a strategy, we avoid such firms,” he said.
It is also a fact that many investors stay away from companies that do meet investors, as it is very difficult to know what they are up to.
But as Mukherjea points out in his report, the “neglect” by institutional investors of the “hard to meet” companies is costing investors dear in terms of foregone returns. zz