March 19, 2012

The value of a buy list

update 23/03

I have rarely received as  many comments and complaints about the customer service and the overall business model of a company as mahindra holidays.
 
I picked two companies randomly from my list to illustrate the investment process of maintaining a list. The purpose of the list is to track stocks after they pass an initial filter and dig deeper when the price is right.

The first pass analysis in case of Mahindra holidays, clearly failed in my case and has highlighted (to me) the danger of superficial analysis. I am glad that i learnt an inexpensive lesson and any damage was mainly to my pride and not to my wallet.

If you were thinking of purchasing any of these stocks based on this post, i hope it has highlighted the risk of buying something based on someone else's analysis.

Thanks all for your comments !
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I am usually looking for new ideas on a regular basis. It is not difficult to find a good company, but the challenge is in getting a good price. High quality companies with competitive advantage and good management usually sell at or above fair value, unless these is an industry specific issue or a macro scare which causes the price to drop below the fair value.
As one cannot know in advance (at least I cannot) when the market will throw up bargains, I tend to analyze a company and then park it in my buy list. I use this list to track the price to fair value and to evaluate the fundamentals of the company on a regular basis.
Let me give two examples to illustrate how I track these companies. The notes below are my rough notes and thoughts.
Mahindra holidays
Intrinsic value : 410
Company description: The Company is the no.1 vacation service company with 70% market share. Company has 125K time share customers. In addition company also has travel and is now catering to corporate customers too.
Reason for buying:
1. Company has an ROE in excess of 25%, 0 debt and net margins of 20%+
2.Company has grown topline at 30%+ and profit @ 50%+. Likely to grow at 20%+ levels in future
3. Company has been in biz for 15 yrs, has a well know brand, extensive distribution/ sales network and also 35+ properties
4. Company is adding new properties and adding new products too.
5. Good growth is likely as domestic tourism is growing rapidly and company has captured only a small piece
Reasons for not buying:
1. Valuations are high @ 20 times earnings
2. Company slowed down in 2011 to improve process and business (need to dig into it). Also customer churn not clear - could be high (10%?)
Current thoughts (as of 4th Jan)
Not creating a position mainly due to valuations
Suprajit engineering
Company description : The company is the no. 1 mfg of automotive and non- automotive cables. It has the highest market share in the domestic market.
Reason for buying
1. The company has maintained an ROE above 20% for the least 10+ years.
2. The company has compounded topline and bottom-line by 20% in the last 10 years (although the growth has been in spurts)
3. Company is sole supplier to companies such as Hero Honda, Bajaj and also supplies to companies such as maruti suzuki, GM, BMW and other global companies
4. Competitive advantage from scale, good customer relationship and smart management.
Reason for not buying
Company has had periods of low and high growth. Auto business is slowing down and we could see slowdown in growth and margins in the next few quarters. Should evaluate in the next 2-3 months
Current thoughts (of 17-June)
Check Q2 results and then take decision. Risk is the company would continue to do well and the price may run away (less likely as auto smaller auto companies do not get high valuations).This is unlikely to be a PE re-rating idea and more a EPS expansion idea
Why do this ?
I started maintaining this list in the last 2-3 years.  There are multiple reasons for it.
The first reason is that I don’t have a very good memory and cannot remember the analysis of a company after some time. I could always delude myself, but think that accepting my limitations is a much better alternative. Once I have analyzed a company, I keep rough notes in this buy list and can refer to it regularly. This helps me in tracking multiple companies and allows me to benefit from my past work.
The second reason for keeping these notes is that the price may not be right at the time of analyzing the company. As a result, if I keep a note of the company, I am able to act quickly when the price drops below my target range. A lot of times such a window opens up for a short period  and it makes sense to act quickly at that time. For ex: financials and banks in Dec 2011. It is difficult for me to analyze a company in depth in a short period of time and all the work done in the past is very useful at such times.
The final reason is that this list is a repository which  will keep building with time as I analyze more and more companies. This should help me in tracking companies and acting on them quickly at the right time. It’s like my personal gold mine :)

Stocks discussed in this post are for educational purpose only and not recommendation to buy or sell. Please read disclaimer towards the end of blog

28 comments:

Vikas said...

Hi Rohit,
Excellent post.
Your approach is same as legendary Sir John Templeton, who says that you should be ready with such watch-list in bull markets itself so that you can buy in bulk in bear market.
He explains that in bear market you will be fearful as others, but if you have such list, you van get the daring to buy them.
Regards,
Vikas

Kishor Barhate said...

what shall be right entry price for these...

Abhishek said...

This is great. I was watching a Mohnish Pabrai interview on youtube yesterday and he does something very very similar. I was thinking of doing something like this and your post, sort of helps me make up my mind to do it.

Abhishek
http://valueinvstr.blogspot.com

Sarang said...

Mahindra Holidays is interesting... especially from value-investing point of view.
I tried to research Mahindra Holidays as a customer when I was approached by them for their holiday package. On checking reviews, I found excessively negative reviews online for their service. And not just online, I got absolutely negative reviews from some of the friends as well who were their member.

One more interesting fact I read was that their total rooms inventory was less than their total customers! It means, if each of their customer asks for reservation on mutually exclusive days, even then they will fall short of their rooms-inventory! Let alone the scenario of festive seasons when many customers ask for reservations!
That means they guarantee pathetic (not just poor) customer service.

Now, I am not their customer but knowing all these details left a very bad taste!

So want to know your views about such a situation, where a company's numbers show a very promising picture but if you talk to their customers, they show an absolutely different picture about the company.

I personally never buy such stocks but having said that I am not as good an investor as you are! :)
RComm is another such stock where I personally had absolutely pathetic customer service experience repeatedly so I never bought that stock under the ground of 'not so decent management'! (It's price was at 600+ at that time!)

Just wanted to know your thoughts!

Anonymous said...

Great post ! I too maintain a "wish list" for the same reasons you have mentioned. Also, Google spreadsheets are great for automatically updating the price quotes....

Gopal

Anonymous said...

This is a very good habit to keep track of a company for along period and keep asessing news item/financials that you keep getting in this period. I do one more analysis before I start all this. I search in internet to find about the company (particulalry the management). Many a times you get some horrible feedback about the company or its promoters. For comapnies like jet airways, Mahindra holidays, automobiels, etc, you get very good amount of feedback. Why i am saying this is, when I searched for "review of mahindra Holidays", I got thousands (yes, thousands) of comments where the members have mentioned how the company has cheated them to buy their packages for hefty amount and then not allowed them to use the holiday resorts. Does the company have future if it has such 'customers' ??

Anil Kumar Tulsiram said...

Hi Rohit

Mahindra holidays revenue recognition is little complicated because of its business model. At the time of sale of membership it receives upfront payment for next 25 years but the entire amount is not recognized in the first year but some amount is deferred over the life of membership period. In the consolidated BS you can see amount of INR 950 crores for FY11 being shown as advance. Because of the same reason profits will fall as addition of new members declines and the entire PAT of any year does not translate into cash and much of the cash is already received upfront. If rather than advance, we treat it as company own funds, the total size of BS will be around INR 1,450 crores compared to market cap of 2,400 crores. On PB basis valuation is not high. But my main concern is that unless they increase their room inventory they cannot get more members. I am a club mahindra member and can tell with confidence that they have oversold their inventory. It's difficult to get booking even 3 months in advance.

As per their latest presentation their total room inventory is 1,745. Now if all of their room is occupied through out the year, only 90K members can get the room. But their total member size is more than 138K.

Tom L said...

To add a different perspective, here is why I don't keep a buy list.

Like you, I don't have a great memory and forget my analysis of a company after some time. However, this can be a great advantage because it allows me to look at a company with fresh eyes. Sometimes major changes occur at a company that make it much more or less valuable. In this case, a major revision in my thinking may be necessary. If I had a buy list with a price, or a summary, then I think I'd be much more likely to stay stuck in my old way of thinking about the company and might not be as likely to incorporate new information.

Just my two cents.

Cheers,
Tom L

Anonymous said...

Even my view is also same as Sarang. They are hard selling to naive customers and customer churn must be very high.I haven't seen one happy customers.

But they are able build this pyramid..means able to customers though many are not happpy.

Kannan

Sachin Purohit said...

Searching the internet for reviews is a good idea but not a great idea, I believe. The bias is always on the negative side. Let me ask myself - when did I bother to give a good review on the internet of something I really liked? But I am sure whenever I am really frustrated about some service, I would make it a big deal. This human nature would get reflected even on the internet reviews. I don't know about the specific cases - Mahindra Holidays and RComm since I have not been a customer of either. But in general, I think negative reviews will far outweigh positive ones, I guess.

Rohit Chauhan said...

Hi vikas
my approach of keeping a buylist is not original :) i am always learning from other investors including sir john templeton.

i started maintaining this list as i saw other great investors do it.

rgds
rohit

Rohit Chauhan said...

hi kishor
i usually buy at 50% to fair value ..but in the two example i have not decided whether they are worth buying. so dont take them as a buy recommendation. they are just an example to illustrate a point

rgds
rohit

Rohit Chauhan said...

hi abhishek

where do you think i got this idea from :) ...from the likes of mohnish and other successful investors

rgds
rohit

Rohit Chauhan said...

Hi sarang
you make good points. i have looked at the company only from an investor standpoint and not as a customer.

if customer are unhappy then one has to look at churn ...which again could be low due to long lockin

on top of this the timeshare industry does not have a good image. i have know a lot of these company really cheat their customers, so i cant comment on mahindra on that

i will keep in mind before i decide to invest in this company. as of now it is just on my radar and have not bought it yet

Rcom is a bit different ...even the financials have been a mess from 2008 ...so it was an easy miss

rgds
rohit

Rohit Chauhan said...

Hi gopal
true ...good to keep these lists around so that one can avoid emotional decision at the right time

rgds
rohit

Rohit Chauhan said...

Hi anon
mahindra holidays is an example and not an actual pick :)

you make a good point ..i do an internet search too when i have done a more detailed analysis. if mahindra is upto these tricks then it is a concern

rgds
rohit

Rohit Chauhan said...

Hi anil
you are correct ..the revenue recognition is different. actually the company does not even recieve cash ...it is shown in debtors. the advance is booked as a liability and accrued over the life of the contract.
the debtors need to convert to cash, but the company finances the payment and make interest charges on it.

frankly i am not worried about this. what is concerning me is the negative sentiment of the customers ...that is not a good thing. also the overbooking of vacation property shows aggressive selling on thier part

rgds
rohit

Rohit Chauhan said...

Hi tom
you make a very good point. thats a downside i did not think of

but then you know what ..i have such a weak memory that when i look at the company, most of the times i have forgotten about it :)

but this bias is important to remember

rgds
rohit

Rohit Chauhan said...

sachin
valid point ...at the same time a few disgruntled customers are likely. ask any bank customer ...we have all had bad experience one time or another

however the time share industry has had a bad reputation and also the lockin is a very long. so if the customer is unhappy, he or she will get real mad !

rgds
rohit

Rohit Chauhan said...

Hi kannan
if they are building a pyramid then it is going to be an issue in time.i have not looked the qualitative aspects and have looked only at the numbers which look fine. but if the customer are dissatified then the company will face problems in due course of time

rgds
rohit

Kannan said...

http://capitalmind.in/2010/12/mahindra-holidays-too-many-members-too/

Analysis by Deepak

Kannan

Rohit Chauhan said...

Hi kannan
the analysis is correct ..mahindra holidays has a fundamental issue with their customer service and also with their accounting.

after recieving couple of emails on the accounting, i dug deeper and realised that the accounting is too aggresive.

rgds
rohit

Kishor Barhate said...

Dear Sir,
What are your views on Titan Ind. If someone holding from very long (10 years+), is it a time/price for investment sell. OR titan can still give reasonable return for couple of more years from here onward. ( From CMP)

Regards
Kishor

sameer said...

if there is midterm lok sabha poll do u see 20-30% fall in nifty??? that could be then great opportunity to buy

Anonymous said...

Timeshare selling and customer review.



It is true that more of negative feedback get written on net then the positive one, But how many reputed company' customers are as abusive as of Mahindra Holidays?



Also look this ..  how management looks at customer!

Mahindra Holidays admits their staff did not follow company’s ethics policy

Club mahindra fined for misleading customer.



Rooms Vs Inventory ..



From last few years they have been adding ~16k to 20k members every year but resort addition is not in pace with it.  It require 315 - 400 rooms per year to support these numbers.



see this post : Mahindra Holidays: Growth in membership Vs. inventory or Investor Presentation Updated Qtr 3 FY11 results



Continious deficit of 7% for each of 5 years in this chart, that means 7% of of total members ( ~7000 each year, 1/3 rd of new addition?) get dishartned, forget their money and does not return back to them?



Valuation and Growth : That' what matter to most of the investor!

Top line is highly dependent on their ability to sale new membership.

Annuity Income: this just gives visibility to one of top line component not the growth factor.

Re-use of inventory at the end of membership term : Upkeeping resort with changing time require a good investment. Also finding a new member on over existing target is liability compared to benefit of utilizing existing inventory.

Rosy picture potraid at the time of IPO of continued high growth did not hold good in tough time.

Marriott Vacation Club operates in developed market with high vacation awareness has more than 400,000 membership in 25 years of existence in the industry.


mukesh said...

Hello Rohit.
Just wanted to know how do you copy and paste charts from moneycontrol on your blog. (technology...u can't live wid them...n u can't live widout 'em)

Arvind Kumar Bhardwaj said...

Hi Rohit,
I need some information about how do you do research on any company. I know some sites like moneycontrol.com, edelweiss.in etc. But my question if I want to find all the companies whose margin has been more than 20% in last ten years and average dividend yield say like more than 10% in last ten years and many such complex queries about the market. So how you do perform research for it? Could you please share the site/sources where we should look for such information? I would appreciate if you could make a post the way you perform your research. It would be great help for who want to learn.

Dev said...

Hey...
Can you share your buy list and its structure with us??
Thanks