Investing as I see it - Part 2
Beware of Amazon.
Amazon is a gorilla with a crazy track record of disrupting businesses in India and the US. Can Amazon come tomorrow in your industry and replicate your business within Amazon by pouring billions of dollars and sell similar products like you and then gradually attack your margins and take away your customers by giving insane discounts?
If the answer is YES , this means the business does NOT have a MOAT or a competitive edge. Remember, if the business you own has high profit margins ie high Returns on Capital Employed ROCE %, it is a natural sequence of events that some or other giant corporate group is going to find it, attack your business and strip your margins. Amazon’s tag line in the last decade was “Your margin is my opportunity”.
Can Amazon open a bank - Unlikely RBI will grant it a license.
Can Amazon open a soft drink or burger or tiers business - maybe .
Can Amazon owns ports in India - highly unlikely
Can Amazon open a new Naukri or Tips Music - but where will it all the data from that Naukri has built over 2 decades .
Can Amazon open an NBFC lending personal loans . maybe in JV but where will it get the loan book that Bajaj and Chola have spent last 2 decades to grow and polish. Where will it get the risk culture in lending from ? So Amazon will never open a successful NBFC in India directly in my view. But see Jio did. Remember, a simple rule - The faster a Bank / NBFC / lending institution grows, the riskier decisions its taking to achieve that growth. VERY HIGH GROWTH is a RED FLAG in lending Banks or NBFCs. So, IDFC is riskier than HDFC ? Yes it is . Even AU Small Finance is riskier because it lends to HIGH RISK customers. This is a risk reward thing. Higher the risk , higher the reward.
There is a great company called Arman Financial. Its a microcap lending to highly risky customer with NO CREDIT ratings. Even though it’s a great management and a great opportunity, there is extreme RISK in this business model. The chances of Default are very high. So, the chances of investor’s capital going to ZERO is very high. MICROFINANCE and SMALL FINANCE BANKS is a strict NO as an industry to invest. WHY? Because I do intend to reap the rewards of my invested capital one day. And HIGH RISK means HIGH VOLATILITY means HIGH Blood Pressure. I would be very happy and peaceful owning HDFC and ICICI giving me 10-12% share price appreciation over the next 10 years.
A moat simply means having a competitive advantage which other businesses don't have not now and extremely hard to replicate in the future even with huge bags of money. Which ensures that your business becomes better with time , consistently better sales , consistently better margins and consistently better earnings growth in the future. This will drive share price appreciation in the next 3 to 5 years which is why we are all here : )
A competitive advantage can be a BRAND , BANKING LICENSE , US FDA APPROVAL. It can even be great person with decades of experience running the business. Example - Where in the world will you get the MD of Bajaj Finance Mr. Rajiv Jain , the Champion of Champions 🏆. Where will you get an honest bank like HDFC Bank. A governing body like RBI which makes sure no bank does any sort of hanky panky like Yes Bank did or the Indusind Bank did in 2025. Where will you get ethics like the Tata Group , the Gold loan expertise like the Muthoots from Kerela. The integrity of the Murugappas. These kinds of Competitive advantages CAN NOT be ever replicated.
Most importantly a business with a competitive advantage has PRICING POWER, which essentially means that your business is able to sell its products at higher prices every year - increasing profit margins and in turns earnings growth for your company. If a company is able to increase the prices of its products without losing its customers to competition - you are sitting on a gold mine . But my friend make sure to buy it at a fair price with a margin of safety so that you survive if it's a wrong decision. No one is going to buy Nestle India , Titan and HUL at the ridiculous valuation it trades and make huge money. Maybe in Titan if lab grown diamonds risk is averted somehow but at your own risk. Best of Luck 🍀.
The most important metric to look in a business is that if a Mukesh Ambani / Gautam Adani / Jeff Bezos comes with billions of dollars to replicate your business model within Amazon, will the business be able to protect its margins?
The financial ratios to track to check if a company has some kind of competitive advantage are ROCE(should be north of 30%) , ROE (should be north of 25%) and Terms of Trade.
If a business has very strong terms of trade like Negative Working Capital Cycle, then its a great business. A negative working capital cycle is great. In some industries, like grocery retail, this is common. For example, a grocery store might receive cash from customers immediately upon sale but have a longer period to pay its suppliers for the goods. This is excellent. In comparison to an IT employee who first works the whole month and then receives the salary.
If a business does not have a moat or competitive advantage, it will also be treated like an IT employee - Night Deployments, Work from Home, Work from Office, OK now work 2 days from home 3 days from office , Now 5 days from Office. Ok now attend calls till 10 pm in the night - no f****ing pricing power at all ! 🤓
All Jokes.
High Dividends Equals Low Growth.
High Dividends is a BUG not a FEATURE. If the company gives huge dividends like 1% of share price, it simply means company does not have any levers of future growth. It also means company management is honest and respects Minority Shareholders. But Remember, Stock Market rewards businesses which have levers of high earnings which comes from Growth. If you want your money to grow like north of 15% CAGR YOY, you have to allocate your capital prudently with market leading businesses which can execute Earnings growth north of 20% year on year . ROE and ROCE 25% min for the last three and five years. This ROE and ROCE tells me that company is working prudently and has some kind of moat.
Berkshire Hathaway gives 0 dividends. Why ? Because the management is great. It feels if it gives dividends, government will eat some of shareholder money as taxes. It does not want that to happen. Instead of returning money back to shareholders, they prudently invest in new lines of businesses around the world which makes the Berkshire stock go up and the shareholders are rewarded handsomely. This does not mean that if a company does not give dividends, it is a great company. No, not necessarily. It can very well be a fraud. Don’t assume anything in the stock market.
HDFC Bank gives 1% as dividend every year. Means if you put 1000 rupees in HDFC Bank, it will send back 10 Rs every year till your lifetime as dividends. Why so much dividend because now it grows lesser than the 1990s and 2000s avatar of HDFC Bank. Here , it deems fair to give back as dividends.
Chola gives 0.30% dividend and Bajaj Finance gives 0.50% dividend. Why ? Because the managements see new avenues of growth and can open new lines of businesses with shareholders capital . This is the Nirvana you are seeking. 2x Share price appreciation in the next 5 years. F**k dividends. Growth is Life.
If you can get high conviction managements like the Murugappas and the Divis and the Bajaj in sunrise industries with earnings growth north of 15% for the next 5 to 10 years. You are set for life assuming you did not overpay a lot for the stock. This is the meaning of Buy a wonderful business at a fair price.
And above all, NEVER EVER COMPROMISE WITH MANAGEMENT QUALITY FOR HIGH GROWTH. Better is to look for a company with relatively less growth like a 15% earnings growth, a good moat and 15% Sales growth YOY but run by an HONEST and CAPABLE management team in an industry/ business model you believe in. If you keep for 10 years in the portfolio (dividends reinvested) with PATIENCE will also make you 4x of your invested capital. And it will be a very peaceful journey.
In summary, the Stock market rewards good decisions both by you (investor) and your company’s management team (operator). You primary responsibility as an investor is that you have to wait under the right tree. Patiently. Very Patiently.
As in life and in stock markets - Don't do anything what you don't understand.
CASHFLOW - The life blood of any business
Cashflow is extremely important to tell if the business model is good and will survive the test of time.
The most important thing for a business to survive any black swan event is CASHFLOW . There are two financial ratios to check here -
Cash Flow from Operations (CFO): This measures the cash generated by a company's normal business activities. It reflects the company's capacity to generate enough cash to sustain and expand its operations. A high and stable CFO indicates a healthy and financially stable business model.
Free Cash Flow (FCF): This represents the cash remaining after a company pays for operating expenses and capital investments to support and grow the business. It signifies the company's ability to generate surplus cash beyond its day-to-day operations and capital needs.
Bye 👋 from Aadhar
