Jimeet Modi

CEO SAMCO se­cu­ri­ties

Dalal Street Investment Journal - - COVER STORY -

What as­pects should be looked into while in­vest­ing in shares of com­pa­nies that are the only listed en­ti­ties rep­re­sent­ing the in­dus­try?

There are sev­eral as­pects which should be looked into while in­vest­ing in such shares, such as the size of the in­dus­try, scal­a­bil­ity, ex­tent of com­pe­ti­tion, growth prospects of the in­dus­try and the mar­ket share that the com­pany is cur­rently en­joy­ing vis-a-vis its un­listed com­pe­ti­tion. The main fac­tor, nonethe­less, is the growth that the com­pany is likely to achieve and how ef­fi­ciently it can do so will be the ba­sis for in­vestors’ wealth cre­ation.

What are the risks while in­vest­ing in such stocks?

Such com­pa­nies face the risks of re­duc­tion in scarcity premium due to more com­pa­nies com­ing out with IPOS as can be seen from the past ex­am­ples. Dur­ing the bull mar­ket phase from 2004 - 08 there were very few real es­tate com­pa­nies listed on the ex­changes, DLF, Sobha, Oberoi Re­alty etc were not listed and, there­fore, few com­pa­nies like Unitech and BF Util­i­ties Ltd got su­per high val­u­a­tion mul­ti­ples. Sim­i­lar was the case with the IT boom of 2000, re­sult­ing in shrink­ing val­u­a­tion of en­tire top IT com­pa­nies. It is of­ten dif­fi­cult to judge the per­for­mance of the com­pany as fig­ures of its un­listed peers are not avail­able for com­par­i­son.

What as­pects should be looked into while in­vest­ing in shares that are the only listed en­ti­ties rep­re­sent­ing the in­dus­try?

When a com­pany is the only one listed in an in­dus­try, the in­dus­try data and peer com­par­i­son on var­i­ous per­for­mance met­rics be­comes that much more dif­fi­cult. How­ever, from a fun­da­men­tal anal­y­sis per­spec­tive, the process would re­main the same. We would fol­low the Busi­ness-man­age­ment­val­u­a­tion (BMV) fo­cus on the busi­ness, the man­age­ment abil­ity and the val­u­a­tions.

What are the risks while in­vest­ing in such stocks?

When the com­pany is the only one listed in the space, it would be that much more dif­fi­cult to get the to­tal in­dus­try data and mea­sure the per­for­mance of the listed en­tity vis-a-vis peers, right from growth, prof­itabil­ity, strat­egy, mar­ket share and so on. In such cases, one may have to dig out ROC fil­ings of the un­listed en­ti­ties, do chan­nel checks and pull out data from in­dus­try con­sul­tants to get com­plete in­for­ma­tion in or­der to eval­u­ate the com­pany.

De­ter­min­ing fair val­u­a­tion is tricky for these com­pa­nies. If they have mo­nop­o­lis­tic or oligopolis­tic po­si­tions, they tend to en­joy higher price to earn­ings mul­ti­ples. Usu­ally, com­pa­nies in rapidly grow­ing but nascent in­dus­tries are not listed. The first com­pany that gets listed among them ‘’usu­ally’’ has a size ad­van­tage over their peers.

How much weigh­tage will you give to busi­ness mod­els while analysing such type of stocks with no listed peers?

A very high weigh­tage. Sur­vival is key and the fact that the com­pany has grown large enough to get pub­licly listed val­i­dates that the busi­ness model has been sus­tain­able so far. In­vestors will have to fore­cast the fu­ture po­ten­tial of its busi­ness model con­sid­er­ing how things might evolve. The busi­ness model and com­pet­i­tive ad­van­tage de­ter­mines how the com­pany can grow in the fu­ture. For in­stance, CDSL has a very pre­dictable busi­ness model. Since it op­er­ates in a du­op­oly mar­ket struc­ture, there is al­most no scope for dis­rup­tion. If the in­dus­try grows, it is easy to fore­cast fu­ture earn­ings.

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