We Rejected this 1000-bagger... Here's Why - The 5 Minute WrapUp by Equitymaster
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We Rejected this 1000-bagger... Here's Why

Jan 25, 2018

Tanushree Banerjee, Editor, The 5 Minute Wrapup

If you are, by any chance an investor in Vakrangee Ltd, you must be clapping your hands in glee.

The stock crossed Rs 500 billion in market cap on Monday. That's huge!

It has surpassed the market cap of the pharma heavyweight Lupin (market cap of around Rs 424 billion) - a much bigger company with sales and net profits more than 4 times that of Vakrangee...

What is so amazing about Vakrangee that makes the market think its value should be higher than Lupin?

More importantly, did we miss the boat by not recommending the stock? Were we wrong? Does the business have some kind of moat that we failed to notice? Is this an error of omission?

Incidentally, we had met Vakrangee in the past.

And here's the thing...We didn't think it was amazing.

Primarily present in the e-governance domain, Vakrangee's business involves bringing together all the hardware, software, and ground activation required for the launch and management of e-governance initiatives. It is also involved in the business of Vakrangee Kendra, e-Governance projects.

So basically the company provides basic government related services in rural regions. In that sense, growth seems largely volume driven - and dependent on poor and low-income people going to these kendras repeatedly for services. But the thing is, once people's incomes start increasing, there won't be any reason for them to visit these kendras. For us this is by no means a sustainable moat.

Further, the company has hardly had free cash flows and its working capital requirements have jumped substantially.

Lupin is clearly a far better company - with a robust and established pharma business not just in India but also in the US and other overseas markets. And the short term hiccups in the form of US FDA issues have not really eroded the inherent strength of the business and its healthy financials.

The way Vakrangee's stock has zoomed in the last nine years, one would think it has all the makings of a great bluechip stock. Heck, I might even come across as a fool to question the so-called 'moat' of the business.

But I am not perturbed, dear reader. My aim is to recommend the safest bluechip stocks.

This means companies with sustainable moats, great business models, and strong management quality.

The Indian stock market can be a funny place. You will see good companies see their stock prices rise and the bad ones see their prices fall - which is how it should be. But you will also find good businesses that are undervalued and the not-so-great ones hogging all the limelight. To us, this simply means that the market is not always right. The trick is to take advantage of such anomalies to recommend the best possible stocks.

So I am not going to fret about 'missing out' on Vakrangee. And if you too have missed the Vakrangee boat, neither should you.

Bitcoin is Not the Only Game in Town

2017 was undoubtedly a phenomenal year for bitcoin. It not only appreciated by over 1300% in the year, but also has two new futures markets luring a number of traditional Wall Street players into the nascent cryptocurrency.

Still, in one respect bitcoin is far worse off now than it was at the start of 2017.

Its dominance in the crypto world is slowly but surely fading.

According to coinmarketcap.com, bitcoin was the leader of the crypto space by a long shot and commanded over 88% of the cryptocurrency market at the beginning of 2017. But the number fell off a cliff in March 2017, to 65%, after which it shortly rebounded as bitcoin price soared to eye-popping new highs.

Since then, bitcoin's dominance in the crypto world been steadily declining and stands at a mere 34% of the cryptocurrency market as of 25 January 2018 - partly due to the pullback in price, more so because of rising interest in other cryptocurrencies such as ethereum, ripple and litecoin, among others.

Coinmarketcap.com lists over 1,400 cryptocurrencies and with new ones added every day. With alternative cryptos (called alt-coins) seizing more market share, and new ones being created every day, are bitcoin's days as market leader numbered?

Here is someone who can help you understand this ever-developing scene.

Prasheel Vartak and his guru Tama Churchouse, who have been researching cryptos for years, will keep you on the top of the crypto world's comings and goings. Join them here.

Domestic Air Traffic Crosses 100 Million Mark in 2017

India's aviation industry is on a high-growth trajectory. India's domestic air traffic has seen a prolific growth of 20-25% during 2015 and 2016. And in 2017, it tapered to 17.4%. However, for the first time, domestic air traffic crossed an important landmark of 100 million passengers in a calendar year.

Indian Aviation Spreading its Wings

Air travel has recorded double-digit growth for 40 consecutive months, thanks to low fares, the addition of new flights/destinations, and overall growth in the economy.

What's foreseeable for India's aviation traffic in 2018 is some pressure on the back of the consistent rise in crude oil prices. Earlier this month, Brent crude oil briefly breached US$70 per barrel and touched its highest level since December 2014. Crude prices have been driven up by production curbs in OPEC nations and Russia, as well as by robust demand on the back of healthy global economic growth.

Oil prices are closely monitored by the Indian air carriers, as aviation turbine fuel is their single largest input cost. A sharp rise in the cost of fuel puts pressure on margins, and consequently an increase in air fares.

Although air travel is becoming the new normal, investors need to understand the industry dynamics before buying up aviation stocks.

IMF Forecasts India's GDP Growth at 7.4% for FY19

In its latest World Economic Outlook update, the International Monetary Fund (IMF) projected India's GDP growth rate at 7.4% in FY19 and 7.8% in FY20. With this, India is set to regain the title of the fastest growing economy in the world. China, during the same period, is expected to grow at 6.8% and 6.4% respectively.

In the current fiscal, India's GDP growth slipped below China because of the disruptive demonetization and the GST implementation initiatives. However, there are signs of a revival with industrial production growth having touched a 25-month high of 8.4% in November. Similarly, previous two months saw a healthy growth in exports.

Automobile sales have been robust during December. The government has also announced a reduction in the extra borrowings it had planned in the January-March quarter, after it witnessed a better-than-expected tax collections. Not to mention, unlocking of credit and private investment growth post the implementation of its bank recapitalisation programme could lead to a spurt in growth.

That said, there are some key risks to watch out for. Higher fuel prices will trigger broader inflation, which pressurises the monetary policy. This may also lead to the widening lacuna of the current account deficit. In the near term, the government will have to do some tightrope walking as it seeks to address the challenges of job creation and rural distress, as well as concerns about fiscal slippages given the additional borrowings and GST collections falling short of the target.

What the Markets Look Like Today

Indian equity markets opened the day in the red. At the time of writing, BSE Sensex was trading lower by 75 points and NSE-Nifty was lower by 16 points. Both the mid cap and small cap indices are trading up by 0.2% and 0.1%, respectively. Stocks from the capital goods and metals are among the few gainers.

Happy Investing,

Tanushree Banerjee
Tanushree Banerjee (Research Analyst)
Editor, The 5 Minute WrapUp

PS: The crypto world is a wild ride - one that every investor should watch (from afar) just for the thrill of it. Click here to get the best seat in the bitcoin house...

Investment Mantra of the Day

"Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market." - Warren Buffett

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5 Responses to "We Rejected this 1000-bagger... Here's Why"

Ajit

Feb 3, 2018

At one point Tanushree says, "Further, the company has hardly had free cash flows and its working capital requirements have jumped substantially". I was looking at the financial statements of Vakrangee in Moneycontrol. I cant see any cash-flow issues over the last few years. Am I missing something? Could someone help with the analysis. I think it will be a good case study.

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Surendra Manna

Jan 31, 2018

Hi Tanushree,

Thanks for the article, when I do agree with the fact that this company shouldn't be valued at a market cap and P/E much exceding the valuation of an established company, but probably its because of the growth prospect of e-governance and the rate it has grown. Definatly we have missed the stock in terms of gain as its not a spike scenario , its has grown over a span of 9 years. We have got amy stock recommendation from EM different services which has even gone down to much ower level, lets take example of Lupin, when you guys wrote the clumn about divis Lab when it crashed because of the same USFDA warning probably you didn't con sider Lupin can also have the same fate.

But I will tell you one thing, if you see Divis has recovered most of its loss and trading in much higher level as of today, because they have shown enough initiative and action to mitigate the risk( which each and evey pharma company has ). But Lupin did not. So may argument is probably you need to stop justifying the miss, rather accepting it, because we don't expect you to recommend each and every muti bagger, but we expect what you give should work and don't lose money for us.

Having said all the above we do have trust on your team as you probbaly spend 80% of your awake time about thinking stocks.

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Hari Gopal Sharma

Jan 28, 2018

Of course! No regrets for not recommending Vakrangee but recommendation of early closure of Voltas and Ashok leyland is not easily digestible ,wish equity master should have done some more home work.

Like (2)

Nikhil Shah

Jan 26, 2018

In all humility I endorse your view. However, I do want to tell you that if we pay attention to valuation, valuation and valuation all the time, we miss multi-bagger even in safest of the safe 'A' group stocks.

For example, Asian Paints, Eicher Motors and even Maruti Suzuki. All these stocks were part of your coverage in Value Pro but for valuation concerns they were not recommended. And look at them now. These are well known companies and even if valuations were not favourable, where will you find the moat that these companies enjoy. And naturally because of their moats in their respective field, they are never ever going to be available based on the valuation matrix! Another example, is HDFC. Why it was not recommended in Value Pro two year back when I think it was available at around 1,100 or so. Another stock with good track record.

Nevertheless, this are my views and above comments are in no way to discredit the job you guys are doing. I remain a great fan of Equitymaster and its team of loyal (to the subscribers) analyst, specifically you, Radhika (haven't heard from her lately), Rahul (subscription to his service is very expensive - like Eicher Motors)and Kunal. You guys are doing a fabulous job! Keep up the good work!! All the Best and God Bless U All.

Like (2)

Harit Shah

Jan 25, 2018

Interesting read on Vakrangee. While I agree with your point about not needing to 'fret' over missing out on Vakrangee, a little more humility would have been appreciated. The fact is, you have gone wrong on the stock! Its not as though the stock has given these returns over a short term time frame. It has gone up over a period of 9 years! 9 years can by no stretch of the imagination be called a short or even medium term time frame!

What it seems is instead of admitting you have gone wrong on the stock over such a long period, you prefer to bash the company and write negative issues about its business. It is besides the point as to whether what you have written about the lack of a "moat" for Vakrangee is correct or not - the bigger issue is your unwillingness to admit you went wrong. You would realise that probably hardly anyone else also has recommended the stock, incidentally, and very few analysts even cover it! So you are actually in line with consensus views on this stock! But as I said, some humility in accepting you are wrong would be better. I believe the same issue is with Avenue Supermarts (D Mart). Despite apparently high valuations, the stock has done brilliantly post its IPO and it has posted excellent results as well. Superior businesses like D Mart will always command a premium.

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