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Discover the Secrets of Hidden Smallcaps From These AGMs

May 26, 2017
In this issue:
» Rs 1.4 trillion of EPFO Money could come to Markets
» Sensex 40,000 or 100,000?
» Market update
» And more...
00:00
Tanushree Banerjee, Co-Head of Research

Nothing compares to the Berkshire Hathaway and Daily Journal annual general meetings (AGMs). For dyed-in-the-wool value investors, going to hear Buffett and Munger in person is like going on pilgrimage.

But other AGMS too have the potential to inform, inspire...and, yes, entertain.

Apart from the discussion itself, the timing and location of the AGM can be enlightening.

Textile major Raymond, for instance, has sprawling real estate possessions in Mumbai. Its land in Thane can seat several thousand. But for years, the company has held its AGMs at Zadgaon Village in Ratnagiri.

As per Google Maps, a shareholder in Mumbai would have to travel 350 kilometres to get to the meet. Of course, Raymond shareholders probably have plenty of tough questions for the management about its hideous upcoming deals (more on this tomorrow). But the location of the AGM may ensure Raymond has few to answer to.

Hawkins, on the other hand, holds its AGMs at Jai Hind College, Churchgate, Mumbai. I can walk down to the AGM from our office even in bad weather. But that's not the only reason I go! Listening to the chairman discuss his long-term vision is like listening to a professor of value investing (I mean that in the best possible way!). The meeting usually provides deep insights into the company's commitment to creating wealth for minority shareholders.

Large investors like Rakesh Jhunjhunwala are known to pose tough questions to managements at the AGMs. The Lupin, Titan, and Tata Motors AGMs were in the limelight in recent years thanks to some now-famous quips from Mr Jhunjhunwala. Not being able to answer his question, the management of one of these once asked Mr Jhunjhunwala to trust him. To that Mr Jhunjhunwala replied "I'm not your wife!"

Apart from the entertainment value, AGMs can give a good sense of investor sentiment towards the business. Seeing the shareholders bow down to the chairman of a reputed south-based bank years ago was a unique experience for me. All I could do was attribute their reverence to the dividends the bank had been paying for a century.

At the same time, we've seen cases of healthy investor activism at some of the larger AGMs. In 2015, Escorts stopped making outrageous payments to directors thanks to dissent from institutional investors at its AGM. Since then, executive pay has been a heavily debated topic at the meetings.

For us, the AGMs of smaller companies are the true treasure troves. No wonder they're the hunting grounds of India's super investors. It is here that you will find them looking for their next big bet.

In fact, the Hidden Treasure team discovered some of their earliest small caps at AGMs. And till date, the months of May and June are when you're most likely to find the team travelling to the meets.

So do attend the AGMs of the companies you admire. And do not be surprised if you see us there!

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02:30 Chart of the Day

In every stock screening process, the aim is to weed out companies that do not fit the bill. It seems the month in which a company holds its annual general meeting (AGM) could be an interesting screener. As per proxy advisory firm Institutional Investor Advisory Services, return ratios of companies who delay their AGMs till the last minute tend to be poorer.

The firm has data to back this up as well. For four consistent fiscals (FY14 to FY16) companies which delayed AGMs will September had the lowest profits. The delay in AGMs seems to be intentional to camouflage the poor operational performance.

The conclusion is, of course, hardly foolproof and the data should be taken with a pinch of salt. But, we believe the investors should indeed be wary of investing in companies with poor return ratios. And AGMs that are delayed or inconspicuously held could be warning signals.

Companies Holding September AGMs Typically Have the Poorest RoE

03:10

The Sensex touched lifetime highs yesterday. The valuations of the benchmark indices across the board are at their peak. But there seems to be no looking back for the markets as domestic investor money continues to pour in. Mutual funds with their SIP schemes have led the surge in retail investor money coming into markets over the past few months. It now seems the turn of pension money to take the lead.

The bull market returns have finally managed to lure the Employees Provident Fund Organisation (EPFO). After years of debate, the pension body will consider increasing the fund's exposure to the equity market to 15% of incremental deposits. The exposure stands at 10% at present. 15% of its incremental deposits, will mean an estimated at Rs 1.4 trillion enters the stock market. While the decision is expected in a day or two, Rs 1.4 trillion of incremental provident fund money could keep sanity away from the markets for a long time.

03:50

It was a year back when we told you of the possibility of Sensex 40,000. Sentiments were so poor back then that no one really seemed to agree with us. Little did we ourselves know that in barely twelve months the index will be half way there.

But our hypothesis was based on the reversion to the mean theory. And given that the profitability of Indian companies were at an all-time low, the upside in earnings was a given.

We estimated that with better capacity utilization, even if the earnings move to the mean, Sensex could touch 40,000 levels in three to four years.

But as is the case with most bull markets, brokerages are now out with their over the top predictions for the index.

In a recent interview to Economic Times, analysts of Elliot Wave International predicted Sensex to hit the 100,000 mark by 2024.

For the index to achieve this feat, Indian companies would need to touch peak profitability and stay there for the next six years. In fact, nothing less than a compounded earnings growth of about 22% would allow the Sensex to touch six figures in the next six years.

We believe that instead of going by such over optimistic estimates, investors should rather keep their return expectations realistic.

Being extremely selective about the businesses and watchful about the valuations will hold good irrespective of the index levels.

04:00

The Indian markets opened the day on a positive note. Sectoral indices are trading on a positive note with stocks in the metal, telecom and capital goods sectors leading the gains. At the time of writing, the BSE Sensex is trading higher 192 points (up 0.6%) and the NSE Nifty is trading up 60 points (up 0.6%). The BSE Midcap and Smallcap indices are trading higher by 1% each.

04:50 Today's Investing Mantra

"The stock market is a no-called-strike game. You don't have to swing at everything - you can wait for your pitch." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst).

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