Via a recent report from Amit Anwani of (Kantilal Chhaganlal Securities AKA KC Securities), Amit is the winner of “The Wall Street Journal’s Asia’s Best Analyst: INDIA” 2012 Award…… Value Investing as we all know is a much used phrase which simply means buying something for less than what it is worth and having potential to create long term value. Benjamin graham popularly known as the ‘father of value investing’ focused on the concept to determine intrinsic value of the stock and buying the stock lesser than its intrinsic value to give yourself a satisfactory margin of safety.
Value investing principles by a few of the greatest value investors in the world:
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- The future value of a stock is a reflection of its current price
- An investor must always build a “margin of safety” into the decision to buy a stock. The margin of safety is a buffer that you build into your investment decisions to protect yourself from investment mistakes.
- “Quality management” which can be demonstrated by characteristics like Stable earnings, High growth, low risk and modest dividends.
- “Economic Moats” are Moats the competitive advantage that allow companies to keep the competition away and irrelevant and also helps in keeping its margin and returns high by improving the quality of their growth.
- The stock should be available in the market at lower than its “Intrinsic Value”.
We have studied the whole domain of Listed Indian Stocks by applying the best possible value investing techniques and principles (including the ones mentioned above) to identify the “Value” for “Investing” in Indian equities for the next decade.
While crafting KC-Value Investing Portfolio, we have applied various qualitative, quantitative and economic factors which are important for Value Investing. In this phase of utmost volatility and fear in the stock market and painful economic slowdown across the globe, we present you the KC- Value Investing portfolio with the best 20 stocks for the next decade (next 10 years from now) value creation.
In the following pages in this report, you will discover the application of value investing techniques, principles and methodology to identify best 20 Value stocks in our KC- Value Investing portfolio and the expected returns from them, for next 2 years.
KC Value Investing Portfolio: Methodology
In a quest to present you the best long term portfolio which not only creates wealth but also value which is the ultimate goal for any investing, we present you the KC- Value Investing Portfolio. In a process to identify long term quality wealth creating stocks based on value investing principles, we have applied following steps & criteria as follows;
All the listed companies are screened with historical data of at least 5 years and upto 10 years, we identified ~3700 companies. The companies with market capitalization more than Rs. 20 bn are considered (to eliminate the small cap and penny companies). Further to identify the real value creators, the following criteria are applied.
- The companies having positive EPS for at least 8 out of past 10 years (or for Available data).
- The long term debt of the company should be paid off from its net earnings in less than 5 Years, which means long term debt to net earnings ratio should be less than or equals to 5 (for the past 5 Years).
- The companies further filtered for 10 Year Average Return on Equity (RoE) (%) >=20%.
- The 10 Year average Return on Capital Employed (RoCE) (%) >=15%.
- Free Cash Flow of the company should be positive for at least 3 out of past 5 years (Ex-Banks).
- The 10 year Average return on retained earnings (retained earnings means net earnings after dividend distribution) should be greater than or equal to 12%. This criteria is mainly used to access management performance and ability of management to utilize retained earnings for shareholder’s wealth creation.
- The Promoter shareholding in a company should be Greater than equal to 40%.
- Pledged shares should be less than 20% (one exceptional considered: Zee Ent.).
Further, We shortlisted companies with greater market share in their respective sectors and companies receiving overwhelming response for product and services they offered; which allows more room for incremental market share and are dominant players in their sectors.
We identified 20 stocks across diversified sectors to craft our value investing portfolio.
Other Criteria’s carefully evaluated to look upon the quality, consistency and wealth creation by this 20 stocks and which creates the base for future potential in this stocks are as follows:
- 10 Year Revenue CAGR (%) ( Compounded Annual Growth Rate)
- 10 Year Net profit CAGR (%)
- 10 Year Market Price CAGR (%)
- 10 Year Average P/E (Price to Earning) (x)
- Analyst Consensus Estimates for EPS, Book Value Per share, Valuation Multiple for FY14E, FY15E.
We have carefully considered the Portfolio Weighting for selected 20 stocks in our Value Investing Portfolio.
Note: The best 20 stocks have delivered 10 year average dividend yields between 0.5% to 3.5%.
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Warren Buffett Criteria