30-year manthan, 1 mantra: qglp...30-year manthan, 1 mantra: qglpthink equity think qglp contest...

30-year manthan, 1 mantra: QGLPThink Equity Think QGLP Contest 2019 : Backdrop

For more details & clarifications, email [email protected]

mailto:[email protected]

This Contest Backdrop Deck gives you an

overview of the QGLP stock selection criteria,

along with a few case studies

The manthan

4

The manthan – Knowledge churn

Wide-range of readings on business & investing

5

The manthan – Knowledge churn

Rich learnings from 23 years of Wealth Creation Studies

6

Warren Buffett’s investing process

a) A business we understand;

b) Favorable long-term economics;

c) Able and trustworthy management; and

d) A sensible price-tag.

— 2007 Annual Letter

The mantra: QGLP

8

QGLP in a nutshell

“QGLP – Quality, Growth, Longevity, reasonable Price”

Quality of business x Quality of management• Stable business, preferably consumer facing

• Huge business opportunity

• Sustainable competitive advantage

• Management team with integrity & competence

• Healthy financials & ratios

Growth in earnings• Volume growth

• Price growth

• Mix change

• Operating leverage

• Financial leverage

Longevity – of both Q & G• Long-term relevance of business

• Extending competitive advantage period

• Sustenance of growth momentum

Price• Reasonable valuation, relative

to quality and growth prospects

• High margin of safety

QGLP

9

Q – Quality

High quality business x High quality management

Quality of business

• Large profit pool

• Size of opportunity(eg IT, Pharma, Financials)

• Competitive landscape– Monopoly (Bosch), Oligopoly (OMCs)

– Dominant market share

(Maruti, Asian Paints, United Spirits)

• Niche / Strategic opportunity(Eicher, Page Industries)

• Favourable demand-supply

Quality of management

• Unquestionable integrity

– Impeccable corporate governance

– Concern for all stakeholders

– Preferably paying full tax and a well-articulated dividend policy

• Demonstrable competence

– Excellence in strategy & execution

– Sustaining competitive advantage

• Growth mindset

– Long-range profit outlook

– Efficient capital allocation

10

Q – Quality

Competitive Landscape is key to Quality of Business

TAKEAWAYS:

• Vertical axis determines

value created in a sector

• Horizontal axis determines

how that value will be

shared in the value chain

• The more competitive the

sector, the sharper the

company strategy must be

Porter’s 5 Forces

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Q – Quality

Porter’s 5 Forces – Sample scoring

12

G – Growth in earnings

• Understanding short-term Growth is a science

but Understanding long-term Growth is an art

• Growth is a lollapalooza of C, V, P, M

i.e. Cost, Volume, Price, Mix

(lollapalooza is a big effect from large combinations of factors)

13

G – Growth in earnings

High earnings growth situations

• Value Migration – flow of value (profit & market cap) from

outmoded businesses to superior businesses (e.g. wired

telephony to wireless, public sector banks to private banks, etc)

• Sustained industry tailwind

• Small base with large opportunity

• New large investment getting commissioned

• Inorganic growth through M&A

• Consolidation of competition

• Operating & Financial leverage

• Turnaround from loss to profit

14

L – Longevity

Longevity of both Quality and Growth

• Long-term relevance of the company’s products & services

• No breakdown of the business model in the foreseeable future

• Extending competitive advantage period:

— maintaining edge over peers through innovation, strengthening

of brands, deepening distribution, etc

• Sustenance of growth momentum:

— huge opportunity size

— periodic new product launches / capacity expansion

— non value-dilutive inorganic growth

15

P – Price

Reasonable Price i.e. well below intrinsic value,

leaving good Margin of Safety

• Several valuation approaches possible

• Some proprietary formulas –

1. Payback ratioLess than 1x is almost a sure shot formula for multi-bagger

Payback ratio = Market Cap

Next 5 years PAT

2. PEG (Current PE divided by Future growth)Less than 1x improves chances of huge wealth creation

QGLP: Case Studies

17

QGLP Case Studies

1. Bajaj Finance

2. HDFC Life Insurance

3. Alkem Laboratories

Disclaimer

The companies discussed here are for illustrative purposes only, and should not be construed as investment advice.

Bajaj Finance

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Company background

• Bajaj Finance (BFL) is one of India’s largest and fastest growing NBFCs

• BFL focuses on six broad verticals:

(1) Consumer lending

(2) SME lending

(3) Commercial lending

(4) Rural lending

(5) Deposits and

(6) Partnerships & services including life insurance, health insurance,

co-branded credit cards, etc

• As of March 2019, BFL’s consolidated AUM was over INR 1.15 lakh crores

• Its market cap is INR 1,90,000 crores

20

RBL Bank – QGLP in a nutshell

QGLP – Quality, Growth, Longevity, reasonable Price

Quality of business x Quality of management• Pioneer of consumer durable financing

• Continuous product introduction and/or innovation

• Robust, technology-based risk management system

(net NPA at 0.63% is amongst the lowest

in the NBFC industry)

• Robust RoTA and RoE

• Flawless track record of

corporate governance

Growth in earnings• Multi-pronged growth strategy for AUM

and revenue, incl. sustained new customer

acquisition and aggressive cross-sell

• Expect FY19-22 AUM CAGR of 32%

• Higher credit cost to be offset by operating

leverage; PAT CAGR to track AUM CAGR

• EPS CAGR should be slightly lower at 30%

Longevity – of both Q & G• Longevity of Quality – High focus on

Effective Risk Management and Asset

Quality

• Longevity of Growth – Capital-starved India

is a multi-decadal opportunity for well-run

NBFCs

Price• Valuations rich – TTM P/E 45x, P/B 9x

• Expected high EPS CAGR of 30% over FY19-22 will

ensure no significant valuation derating

• 3-year stock return of 20% demands FY22 exit

multiple of 36x, which is highly plausible; BUY

QGLP

21

Q — Quality

Quality of Business• Pioneer of consumer durable financing in India

• Continuous product introduction and/or innovation e.g. extended

funding for medical procedures; co-branded credit cards with RBL Bank

• Aggressive cross-sell to existing customers

• Extensive geographic expansion (47% 5-year CAGR in number of locations)

• Robust, technology-based risk management system (net NPA at 0.63% is

amongst the lowest in the NBFC industry)

• Effective cost control

NBFCs: Porter’s Five Forces – Moderately favourable competitive landscape

Force Comment Sector Score (0 to 1)

1. Inter-firm rivalry High 0.0

2. Bargaining power of customers Medium 0.5

3. Bargaining power of suppliers Low 1.0

4. Threat of new entrants Medium 0.5

5. Threat of substitutes Low 1.0

TOTAL 3 out of 5

QGLP

22

Q — Quality

Quality of Business (continued)

• BFL’s return ratios are robustQGLP

23

Q — Quality

Quality of Management

Unquestionable Integrity• Promoted by Bajaj Group with 55% stake held by Bajaj Finserv

• Flawless track record of corporate governance

• Steady dividend payout of at least 10%

Demonstrable Competence• Gold standard among NBFCs for most performance metrics – product

innovation, customer acquisition, cross-sell, risk management, cost control, etc

• Internally, the management works and thinks like a bank – especially, when it

comes to raising funds at cheap cost

• Strong board and professional team

Growth Mindset• Relentless search for new business opportunities is on e.g. floated housing

finance subsidiary in FY18 and securities business subsidiary in FY19

QGLP

24

G — Growth in earnings

• BFL has a multi-pronged strategy for AUM and revenue growth –

Sustained new customer acquisition e.g. 8 million customers

added in FY19, taking the total customer base to 34 million

Widening geographic presence – present in almost 1,900

locations, up from 650 in March 2016

Aggressive cross-sell strategy – share of existing customers in

total AUM up from 42% in FY13 to 65% in FY19

High growth in new business segments – housing finance and

securities

• BFL is combining revenue growth with –

Ever-tightening risk control e.g. the number of risk variables tracked

per month is up from 650 in 2013 to over 3,000 currently

Effective cost control e.g. Opex to NII ratio down from 46% in FY14

to 35% in FY19

QGLP

25


• We expect 32% CAGR in AUM over FY19-22

• Slight increase in credit cost should be offset by operating cost

leverage

• Thus, BFL’s FY19-22 PAT CAGR should track its AUM CAGR of 32%

• With some equity dilution, EPS CAGR should be marginally lower at 30%.

QGLP

26

L — Longevity

Longevity of Quality

• High focus on Effective Risk Management and Asset Quality

Longevity of Growth

• Well-managed NBFCs have a long growth runway in a

capital-starved economy like India

QGLP

27

P — Price

Valuation rich, but defendable considering robust growth

• Current P/E 45x and P/B 9x

• Expected high EPS CAGR of 30% over FY19-22 will ensure no significant valuation derating

• 3-year stock return of 20% demands FY22 exit multiple of 36x,which is highly plausible; BUY

QGLP

INR crores FY18 FY21 E CAGR

Total assets 1,16,000 2,64,000 32%

Average assets 99,000 2,34,000 33%

ROTA 3.8% 3.7%

PAT 3,995 9,135 32%

EPS (INR) 69.3 150.6 30%

Exit P/E (x) 45 36

Stock price (INR) 3,100 5,420 20%

Mkt Cap 1,90,000 3,29,000 20%

28

P — Price

Expect BFL’s stock outperformance to continue

QGLP

29

Risks & Concerns

• Significant economic slowdown will have a double whammyon BFL —1. AUM growth will be slower than expected; and2. Default rate will be higher than expected.

HDFC Life Insurance

31

Company background

• HDFC Life Insurance is a JV between HDFC Ltd, India’s leading housing

finance company (51.5% stake) and Standard Life Aberdeen (24.7% stake),

a global investment company headquartered in Scotland

• HDFC Life is India’s largest private sector life insurer by market cap

and third largest by new business

• It offers products which can be categorized in following segments:

1. Long-term savings and investments

2. Mortality

3. Morbidity

4. Longevity

• HDFC Life issued 1.05m new policies in FY19 with a total sum assured

of INR 6,06,000 crores

• HDFC Life’s market cap is around INR 1,00,000 crores

32

HDFC Life – QGLP in a nutshell


Quality of business x Quality of management• India’s life insurance density at $55 compared to

$225 for China and $6,756 for Hong Kong

• Value migration from LIC to private insurers

• HDFC Life’s 13th month persistency at 87%

is amongst the best in the industry

• HDFC Life’s new business margins

and return ratios are on an uptrend

• Rich pedigree of HDFC Group

Growth in earnings• HDFC Life’s growth strategy is multi-

faceted – from product innovation to

distribution strength to calibrated risk

management

• Expect FY19-22 EVoP CAGR of 22%

• EV CAGR of 20% over next 3-5 years

Longevity – of both Q & G• Longevity of Quality – High focus on

effective risk management

• Longevity of Growth – Multi-decadal

opportunity for private insurers in India

Price• Current P/EV of 5.5x is rich but defendable

given HDFC Life’s RoEV of 20% and expanding

• 3-year target price of INR 905 at exit P/EVoP of 30x

• Robust 22% return CAGR; BUY

QGLP

33

Q — Quality

Quality of Business• Life insurance in India is underpenetrated with increasing share of

private players

– Under-penetrated: Life insurance density at $55 compared to

$225 for China and $6,756 for Hong Kong

– 5-year CAGR: New business premium 24%

• Value Migration from LIC to private insurers

Porter’s Five Forces – Highly favourable competitive landscape


1. Inter-firm rivalry Medium 0.5

2. Bargaining power of customers Low 1.0


4. Threat of new entrants Low 1.0

5. Threat of substitutes Low 1.0

TOTAL 4.5 out of 5

QGLP

34

Q — Quality

Quality of Business (continued)

• HDFC Life has grown its number of life insured by almost 2.5x in last

three years

• HDFC Life’s 13th month persistency at 87% is amongst the best in the industry

• Share of protection has grown from 7.8% in FY17 to 16.7% in FY19 based on NBP

• RoEV is on a steady uptrend

QGLP

35

Q — Quality


Unquestionable Integrity• Rich pedigree of the HDFC group

• High quality of underwriting and disclosure

• Independent board with an empowered team of top executives

Demonstrable Competence• HDFC Life has one of the most dynamic management team over last 10 years

• Ms Vibha Padalkar took over as CEO in 2018

• Demonstrated capability to manage a top performing company in difficult

environment when HDFC Bank, the main distributor, decided to partner with

two other life insurance companies

Growth Mindset• Consistent track record of innovative product launches

e.g. in retiral space as well as guaranteed product space

QGLP

36


• HDFC Life’s growth strategy is multi-faceted –

Product-innovation e.g. credit protect (a product that covers

the loan liability of households) and annuity (a product that

covers longevity risk by providing lifetime guaranteed income)

Distribution strength e.g. besides bancassurance, it has 260+

partnerships (with NBFCs, SFBs, MFIs, etc); it is also strengthening

its agency and direct channels (including online)

Customer-service focus – leading to high persistency levels

(i.e. low policy lapses)

Calibrated risk-management

• Throughout, the overarching principle is “profitable growth”

monitored via metrics such as –

– EV (Embedded Value)

– NBM (New Business Margin)

– Operating Return on EV (Embedded Value Operating Profit ÷ EV)

QGLP

37


• New business profits to more than double between FY19 and FY22

• Expect FY19-22 EVoP CAGR of 22%

• Expect Embedded Value CAGR of about 20% over next 3-5 years

QGLP

38

L — Longevity


• HDFC Life enjoys sustainable competitive advantage in the

life insurance business

Longevity of Growth

• Multi-decadal opportunity for private sector life insurers in India

• Unpenetrated retiral market offers very long term opportunity and

HDFC Life is one of the most innovative insurers.

QGLP

39

P — Price

Valuation rich, but defendable considering robust EV growth

• Current P/EV 5.5x and P/EVoP 30x

• FY22 P/EVoP 16x and P/EV 3x

• 3-year target price of INR 905 at exit P/EVoP of 30x

• Robust 22% return CAGR; BUY

QGLP

INR crores FY19 FY22 E CAGR

EV 18,296 32,409 21%

NBP 1,540 3,013 25%

PAT (EVoP) 3,060 5,536 22%

EPS (EVoP) (INR) 16.9 30.2 22%

Exit P/EVoP (x) 29.5 30

Mkt Cap 100,000 182,184 22%

Stock price (INR) 500 905 22%

40

P — Price

Expect HDFC Life’s stock price recovery to sustain

QGLP

41

Risks & Concerns

• High exposure to guaranteed business

• Fast growth in annuity business where the risks are higher

• Attracting and retaining human capital will remain a challenge

Alkem Laboratories

43

Company background

• Alkem is one of India’s largest domestic pharma companies

with market share of 3.1%.

• Currently, it has 14 manufacturing facilities across five locations in India

and two manufacturing facilities in the US.

• Over time, Alkem has built a strong capabilities in R&D, marketing and

distribution. Currently, it has one of the best reach in urban and rural

India.

• Its strong R&D capability has led to its 13 brands now featuring among

top 300 brands in India (a feat not many companies have achieved).

• Using India as the cash cow, Alkem has successfully adopted the M&A

route to venture into the US market in 2011. Since then, US revenues

today are sizeable at US$ 270 mn (26% of total revenue).

• Alkem’s current market cap stands at INR 21,300 crores.

44

Alkem Labs – QGLP in a nutshell


Quality of business x Quality of management• Alkem has a strong domestic franchise:

7th rank in India Pharma Market

• MR productivity is one of the highest in India

• Zero leverage with last 5-year

average RoE of 18.5%

• High skin in the game –

promoters hold 66% stake

Growth in earnings• India, US and Rest of World all in

growth mode

• Improving MR productivity driving

EBITDA margins, up 200bp over

FY14-19 to 18%

• Expect 3-year PAT CAGR of ~20%

Longevity – of both Q & G• Indian Pharma Market has the potential to

grow at 8-10% for long; Alkem has the

ability to grow faster than the market given

its distribution moat (Tier II, III areas)

• Enough headroom to improve margins

— US business has just broken even

Price• P/E of 27x FY19 is defendable considering

20% earnings CAGR, rising RoE and near-zero debt

• Target Price of INR 3,200 (28x FY22E EPS)

• Expect 3-year return CAGR of 20-25%

QGLP

45

Q — Quality

Quality of Business

Porter’s Five Forces – Fairly favourable competitive landscape for pharma


1. Inter-firm rivalry Medium 0.5

2. Bargaining power of customers Medium 0.5


4. Threat of new entrants Low 1.0

5. Threat of substitutes Medium 0.5

TOTAL 3.5 out of 5

• Strong domestic franchise: 7th rank in India Pharma Market

• High penetration in the rural market

• MR productivity one of the best in industry at INR 6.5 mn per year per MR

(excluding 1,500 MRs added recently)

• This has helped the company to clock higher-than-peer volumes in the Acute

segment (85% of India revenues) — 16% revenue CAGR in the India business over

the last 5 years (600-800bp industry outperformance).

• Healthy Balance Sheet: Zero leverage with last 5-year average RoE of ~18.5%

• Low asset intensity: FCF generation is robust at 45% of PAT

QGLP

46

Q — Quality


Unquestionable Integrity

• Healthy track record of corporate governance

• High skin in the game – promoters hold 66% stake in the company

• Concern for minority shareholders: Steady dividend payout of 15%

Demonstrable Competence

• 7th largest company in the Indian pharma market with

market share of 3.1% v/s no. 1 ranked Sun’s market share of 5.4%.

• 13 brands feature among the top 300 brands in India – best-in-class

• Company has also embarked on acquisitions in the US and India,

and has been managing them well to address future growth

Growth Mindset

• With India as a cash cow, the company has successfully transformed its US

business through investments in well thought-out areas of R&D and M&As

• The US business achieved EBITDA break-even in FY18

QGLP

47


• FY15-19 CAGR: Sales 18%, EBITDA 28%, PBT 21%;

PAT CAGR 19% in spite of lower other income (INR 88 cr in FY19 v/s 181 cr

in FY15) and higher taxation (19% in FY19 v/s 13% in FY15)

• Improving MR productivity: In spite of hiring of 1,500 MRs over

the last 2 years, EBITDA margins are up 388bp over FY15-19 to 15.5%

• Expect 12-15% revenue CAGR over next 3 years led by –

– India business (70% of revenues) well placed to grow at 12-15%

– US business (25% of revenues) set to grow at 15-20%

• Expect EBITDA margins to expand 250bp minimum over the next 3 years,

led by operating leverage from India and US business

• As a result, expect Alkem to clock 20% PAT CAGR over the next 3 years

QGLP

48


49

L — Longevity


• Indian Pharma Sector should remain attractive for a long time,

given both domestic and global opportunity

Longevity of Growth

• Indian Pharma Market has the potential to grow at 8-10% for long;

Alkem has the ability to grow faster than the market

• Alkem’s continued investments in building manufacturing/technology

assets imply sustained growth visibility

• Enough headroom to improve margins — US business has broken even in

FY18 and has the potential to clock 10-15% EBITDA margins in next 3 years

from 2% currently

• Lean balance sheet ensures continued free cash generation to handle

adversities, if any

QGLP

50

P — Price

• P/E of 27x FY19

• We believe the valuation is defendable considering:

— 20% Earnings CAGR over FY19-22E

— Expansion in RoE by 200-250 bps over the next 3 years

— Lean Balance Sheet with net debt-equity almost zero

• Target Price of INR 3,200 (28x FY22E EPS)

• Expect 3-year return CAGR of 20-25%

INR Crores FY19 FY22 E CAGR

Revenues 7,357 10,310 12%

EBITDA Margins 15.2% 17.8%

PAT 773 1,353 21%

EPS (INR) 64.7 113.2 21%

Exit P/E (x) 27 28

Mkt Cap 21,300 38,300 22%

Stock price (INR) 1,750 3,200 22%

QGLP

51

P — Price

Expect Alkem’s underperformance to reverse

QGLP

52

Risks & Concerns

• Near-term threat to earnings –

— Regulatory risks in the US and

— Price-cap initiative from the Indian government

• Higher than anticipated rise in prices of key starting materials

sourced from China

Best wishes for your participation in the

Think Equity Think QGLP Contest 2019

For more details & clarifications, email [email protected]

mailto:[email protected]

30-year manthan, 1 mantra: qglp...30-year manthan, 1 mantra: qglpthink equity think qglp contest...

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