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Old 28th March 2019, 15:08   #346
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Default Re: Guide: Investing in shares of the automotive sector

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These are the aspects you need to look at, and then take a call.
I think I posted a wee bit early, I never tracked Hero's sales figures and my oh my, it enjoys an amazing market share.

To the questions you asked, I went through the numbers twice and have a few questions if you can help a noob investor -
1) How is the dividend payout % so ridiculously high? I mean are they really sharing their profits to the extent that the numbers show?

2) Marketsmojo tells me to pick this stock right now if I'm in for the long haul. But PEG Ratio and PE Ratio still seems high. Could I request you to explain both these in Hero's context and with the same dumbed down version as in your opening post, I'd really appreciate it!

Reason is that even with relatively high PE & PEG ratio this stock is highly recommended so what's really the catch when it comes to these two ratios.

3) Lastly, the stock is just going down and the last 3 years have been a little alarming, why really? What's you hypothesis to this and given that you had Hero with you, how do you deal with a stock which is attractive like Hero but just isn't making you the kind of money it should.
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Old 28th March 2019, 17:19   #347
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Default Re: Guide: Investing in shares of the automotive sector

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1) How is the dividend payout % so ridiculously high? I mean are they really sharing their profits to the extent that the numbers show?
As I mentioned before, revenues and profits can be faked but dividend payouts cannot. It is real money paid out to all shareholders. 40 to 50% dividend payout ratio and 35% RoE for a company implies that the company does not need to make huge incremental investments to increase profits every year. Other examples: Hindustan Unilever, TCS, Bajaj Auto etc.

This implies that -

- Hero Motocorp has a huge brand value. New models launched by the company are likely to do reasonably well.
- Old models in their lineup are selling very well (that's why no new major investments are needed)
- There is low competition in the segments Hero operates in. Remember that there are 15 to 20 car companies, but only 3 other serious two wheeler manufacturers - Bajaj, TVS and Honda.


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Marketsmojo tells me to pick this stock right now if I'm in for the long haul. But PEG Ratio and PE Ratio still seems high. Could I request you to explain both these in Hero's context and with the same dumbed down version as in your opening post, I'd really appreciate it! Reason is that even with relatively high PE & PEG ratio this stock is highly recommended so what's really the catch when it comes to these two ratios.
Marketmojo says valuation is attractive (and I agree!)

Guide: Investing in shares of the automotive sector-valuation.jpg

PE ratio below 20 is decent value. Ignore PEG ratio since it is mostly meaningless. That number is based on next year's estimated earnings. Let's say you have been getting a salary hike of 20% per year in the last 5 years. But next year, if your salary hike is estimated to be only 5%, then it does not mean the end of your career!

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Lastly, the stock is just going down and the last 3 years have been a little alarming, why really? What's you hypothesis to this and given that you had Hero with you, how do you deal with a stock which is attractive like Hero but just isn't making you the kind of money it should.
The stock hit an all time high in Aug 2017 and has been drifting down for 18 months now. That is quite "normal".
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Old 28th March 2019, 17:26   #348
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Default Re: Guide: Investing in shares of the automotive sector

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40 to 50% dividend payout ratio and 35% RoE for a company implies that the company does not need to make huge incremental investments to increase profits every year. Other examples: Hindustan Unilever, TCS, Bajaj Auto etc.
In theory there is something called sustainable growth rate (which means how much can the company grow in the future) which is equal to ROE * (1- Div Payout percent).

In the above example it would be like= 0.35 * 0.60 (considering dividend payout is 40%)=14% .
So we can expect the company to grow by 14% every year.
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Old 28th March 2019, 17:51   #349
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Default Re: Guide: Investing in shares of the automotive sector

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In the above example it would be like= 0.35 * 0.60 (considering dividend payout is 40%)=14% .
So we can expect the company to grow by 14% every year.
Well, we can't say that 'we can expect the company to grow by 14%', but what this number means is that company does not need any external source of ₹ to grow upto this rate (or in other words, growth upto 14% is possible from its own internal accruals). To grow beyond this rate it would need money that it itself does not generate ( so likely it would have to be debt or PE funding or something like that)

It's an important number and worth keeping an eye on.
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Old 28th March 2019, 18:27   #350
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Default Re: Guide: Investing in shares of the automotive sector

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Marketmojo says valuation is attractive (and I agree!)
Yet, when we look at similar numbers for HCL the valuation is opposite, why?

Guide: Investing in shares of the automotive sector-capture.png

I was trying to narrow down good large cap stocks which are attractive as of now but for some reason HCL doesn't make the cut.

I'm again going back to your first post where fundamentals can be used to filter good stocks, what other things should be looked at when considering a stock like HCL. In fact PE ratio is much less than 20 for both HCL & Tech Mahindra yet both these stocks are 'Expensive' buy as per Marketmojo.

If I ignore Marketmojo's valuation advice both HCL and TechM are good buys in my opinion, thoughts? I work as a Consultant for an IT major hence usually on top of IT Industry news. I thought why not narrow few down along with Automotive stocks.

Lastly, what are some good reads if someone wishes to get serious about stock markets.

PS: Big thanks again for introducing folks like me to the stock market. I would've never ventured in this territory had it not been for you.
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Old 28th March 2019, 18:42   #351
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Default Re: Guide: Investing in shares of the automotive sector

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I'm again going back to your first post where fundamentals can be used to filter good stocks, what other things should be looked at when considering a stock like HCL. In fact PE ratio is much less than 20 for both HCL & Tech Mahindra yet both these stocks are 'Expensive' buy as per Marketmojo.
I do not agree with marketmojo's assessment of HCL Tech & Tech Mahindra. For companies that have predictable profit growth rate, PE ratio is one of the best metric to check if a stock is cheap or expensive. For large caps, PE ratio below 20 is a good time to enter such stocks.

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Lastly, what are some good reads if someone wishes to get serious about stock markets.
Some good reads:

- The Intelligent Investor by Benjamin Graham
- One Up on the Wall Street by Peter Lynch
- The Thoughtful Investor by Basant Maheshwari
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Old 28th March 2019, 19:18   #352
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Default Re: Guide: Investing in shares of the automotive sector

Smartcat has already mentioned "One Up on the Wall Street by Peter Lynch". In my opinion, this book and "The Five Rules for Successful Stock Investing" by Pat Dorsey are the two best books on Investing. Anyone interested in becoming a serious investor should start with these two books.

Btw its hard to justify the current valuation of Indian market ( Especially for the high quality companies). There seems to be a huge disconnect between the underlying earnings growth and valuation. Of course one can argue that the market is forward looking and earning will come. But that has been the case since 2014. Returns were mainly driven by the PE expansion.

Last edited by adithya.kp : 28th March 2019 at 19:21.
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Old 28th March 2019, 19:47   #353
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Default Re: Guide: Investing in shares of the automotive sector

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But that has been the case since 2014. Returns were mainly driven by the PE expansion.
Betting on PE expansion is one of the safest way of getting a sudden spike in overall portfolio returns. In recent times, IT stocks have seen PE expansion. They were trading between 12 to 15 PE in 2017, but since then, many IT stocks have shot up almost 100%. Certain high growth stocks like Havells, Bajaj Finance & DMart have seen a PE expansion from 30 levels too.

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Btw its hard to justify the current valuation of Indian market ( Especially for the high quality companies). There seems to be a huge disconnect between the underlying earnings growth and valuation. Of course one can argue that the market is forward looking and earning will come.
Insane is the word to describe valuations of most consumer oriented companies. But I'm sticking to my rules. These are my screener.in stock filter settings:

Market Capitalization > 1000 AND
Dividend Payout Ratio > 15 AND
Dividend yield >2 AND
Return on equity >15 AND
Debt to equity <1 AND
Price to Earning <20

There are still some decent quality companies available at reasonable valuations.

Guide: Investing in shares of the automotive sector-screener.jpg

Last edited by SmartCat : 28th March 2019 at 20:03.
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Old 28th March 2019, 20:13   #354
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Default Re: Guide: Investing in shares of the automotive sector

Nice filter Smartcat. But I am not sure if one should give that much importance to dividend. IMO capital appreciation potential should also be considered. I agree dividend payout ratio is a good parameter. But not the dividend yield. Usually if the yield is > 3%, then there is something wrong. I understand that the intent is downside protection. However, most of the time high yield (>3%) is for a reason. If there is a big fall in price, then the whole yield logic will go for a toss. Recent examples are REC and Bajaj Corp to an extent.

Btw I just ran your query. The only interesting names are Hero Motors, Bajaj Auto, Ashok Leyland and VST Tillers. Interestingly all are from the auto sector which hasn't been doing well for more than 6 months now. Sonata is good too. ( Although not much earning visibility). If we remove PE <20 criteria, we will get a few more names. In that list, I like VST Industries, Hawkins Cookers and Swaraj Engines. Frankly these 3 are the only >2% yield stocks that I like in India. I am not saying other companies in that are bad. Its my opinion. As we know, market is all about different opinions.

PS: These names are not recommendations to anyone. Please do your own research.

Last edited by adithya.kp : 28th March 2019 at 20:26.
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Old 28th March 2019, 20:32   #355
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Default Re: Guide: Investing in shares of the automotive sector

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But I am not sure if one should give that much importance to dividend. IMO capital appreciation potential should also be considered. I agree dividend payout ratio is a good parameter. But not the dividend yield.
Couple of reasons:

1) As a "full-time" investor/trader, dividends are a source of income for me. As a matter of fact, yield on my portfolio is almost 5%. That is, if I have Rs. 10 Lakhs invested in stocks, it means I got Rs.50,000 as tax free dividends last year.

2) Dividend yield requirement filters out many stocks. If I remove that filter, screener.in will display even larger list. Since our capital available to invest in stocks is limited, I would prefer to wait till a particular stock is available at prices I like. Also, this filter helps in reducing the number of decisions I take.(Eg: this stock or that stock )

Quote:
Usually if the yield is > 3%, then there is something wrong.
Not to my experience. Swaraj engines and VST industries were available at 4% yield in 2015/2016. I bought Hawkins and Sonata when it was yielding 6%!
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Old 28th March 2019, 21:01   #356
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Default Re: Guide: Investing in shares of the automotive sector

With due respect, I beg to differ :-)
1. What if the yield is high but no capital appreciation?. (I am not even talking about capital erosion which also is a possibility). In that case, why even stocks?. Why not liquid funds?. So in my opinion, we should also add sales growth > 10% and EPS growth > 10% to that query.
2. I meant to say div yield > 3% in the current irrational market :-). You are right that some of those names were at very high yield in the past.

Anyways I dont want to drag this further. I quite liked your filter, except for the yield. Since its working for you, you should stick to it.

Last edited by adithya.kp : 28th March 2019 at 21:03.
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Old 29th March 2019, 13:52   #357
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Default Re: Guide: Investing in shares of the automotive sector

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Smartcat has already mentioned "One Up on the Wall Street by Peter Lynch". In my opinion, this book and "The Five Rules for Successful Stock Investing" by Pat Dorsey are the two best books on Investing. Anyone interested in becoming a serious investor should start with these two books.

Btw its hard to justify the current valuation of Indian market ( Especially for the high quality companies). There seems to be a huge disconnect between the underlying earnings growth and valuation. Of course one can argue that the market is forward looking and earning will come. But that has been the case since 2014. Returns were mainly driven by the PE expansion.

I would second these two books also. First two books I would recommend anyone interested in Equity investing.
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Old 2nd April 2019, 12:04   #358
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Default Re: Guide: Investing in shares of the automotive sector

While things are getting serious this side (two more on the way)

Guide: Investing in shares of the automotive sector-img5367.jpg

How about some tips on monitoring stocks and deciding when to sell?

If I was to take the example of HCL, the stock is at an all time high and for someone who's looking at long-term investment, should we be concerned with temporary falls when the entire stock market is in free fall?

Or should our reasons for selling only get impacted by what's happening with the company instead of the general crashes which take the entire market down?
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Old 2nd April 2019, 13:56   #359
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Default Re: Guide: Investing in shares of the automotive sector

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While things are getting serious this side (two more on the way)

Attachment 1864824

How about some tips on monitoring stocks and deciding when to sell?

If I was to take the example of HCL, the stock is at an all time high and for someone who's looking at long-term investment, should we be concerned with temporary falls when the entire stock market is in free fall?

Or should our reasons for selling only get impacted by what's happening with the company instead of the general crashes which take the entire market down?

Very good question. I think touching all time high is actually a positive sign and in fact I monitor stocks touching all time high for ideas to invest in.



It is always a good idea to average up and buy more if the company continues to do well and valuation are not too expensive.



Selling is a very tough decision and should be done in case the company consistently starts underperforming. Averaging down is not a good idea is the business performance (ROCE, Growth, Margins, etc.) are also declining.



Another reason to sell is when you find a better idea. Typically when market falls sometimes quality companies are available at good valuations and you may want to sell your less attractive picks and buy something better.
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Old 2nd April 2019, 14:26   #360
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Default Re: Guide: Investing in shares of the automotive sector

Giving a try in the stock market as most of my colleagues discuss about this during free time. Being a newbie & as I follow business news both automotive, IT & FMCG, with my instinct on a particular news about PVR, thought of investing in it, which my colleagues turned it down. But PVR is performing better after that. Would like to know from gurus over here about what all details we need to look in before investing ( be it short term, long term ). Currently I do not have any automotive shares, but invested in ITC, BIOCON, Ashok Leyland, SUVEN & SCHNEIDER.

TIA
Venkatesh
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