A definite multi-bagger...

Jun 6, 2009

In this issue:
» A simple business that's resilient to slowdown
» Stocks in India on a roar
» America's big headache getting bigger
» See who's the most corrupt of all
» ...and more!

This would have been a definite multi-bagger stock, only if it were listed! We are talking about the largest food brand in India and the world's largest pouched milk brand with an annual turnover of Rs 67 bn. Well, the people involved know it as Anand Milk Union Limited. We call it 'Amul'...a brand name managed by the Gujarat Co-operative Milk Marketing Federation Ltd. (GCMMF), and jointly owned by some 2.6 m milk producers in Gujarat.

----------- Equitymaster Research -----------
Small Caps Remain One Of The Surest Ways To Multiply Your Wealth...
Read On...

From a humble start in 1946 to now being the largest dairy co-operative in India, Amul has continued to taste success year after year. In the year FY09, for instance, when the entire Indian economy was feeling the heat of slowdown, Amul managed to grow its sales by 28% YoY - faster than the 23% YoY growth recorded in the previous year.

Amul's sales over the years (Rs bn)
Source: Amul's website

This performance also comes at a time when the international dairy markets are facing slump in demand. A very simple business model and focus on domestic market has insulated Amul from the turbulence in global dairy trade. Over the years, not only has it grown its business several fold, it has also been able to shield its members - the farmers - from all the turbulence in global dairy trade. The co-operative has helped to appropriately diversify the rural economy, thereby protecting rural India from the worst impact of the current economic crisis. It is already providing the best employment option for displaced workers from urban manufacturing sector, who after losing their jobs due to recession, have started reverse migration from cities back to villages.

Following its core philosophy (provide products at an affordable price), it continues to enhance the product mix through introduction of higher value products. At the same time, it has maintained the desired growth in existing products. The company has targeted revenues of Rs 270 bn by the year 2020. And given the pace it has been growing over the years, this seems quite achievable.

But the fact is that, you need to contend yourself by consuming the quality products that the company has to offer. Amul is not listed on the stock exchanges. But if it were, it would have definitely been among our top picks for all kind of market situations.

Asian markets had a wonderful past five days as they posted their third weekly gains amidst optimism of an economic recovery. China led the pack with 4.6% gains, followed by India which was up 3.3%. Stocks from the mining and energy sectors were the best performers as prospects of a global recovery fueled optimism that demand for commodities will increase.

Within India, where the broader markets have seen 13 straight weeks of gains, stocks from the capital goods sector and metal sector lead the rally this week. The benchmark index - BSE-Sensex - has in fact completed its longest weekly wining streak since August 2005, this time fueled by hopes of fast track reforms from a stable government. The Sensex has moved by up 85% since its lows of March 9, and around 57% since January, thereby being one of the best performers among all global markets.

BSE-Sensex weekly gains...up 13 week on a trot
Source: Prowess

Now, the fact is that Sensex is trading at 20.4 times trailing 12 months earnings of the companies that make the index. This is almost double the 11.6 times that it was trading at in March and makes a case for caution. The fact is that Indian markets are so shallow that spurts of fund inflows, especially from the FIIs, have led to skyrocketing share prices at the speed of thought. While one can still make a case for picking up good quality stocks at fair valuations, those eyeing gains in the short term might be in for a shock.

Gains in Sensex stocks since March 9
Source: Prowess

While a P/E of 20.4 times might make the Indian Sensex seem a tad expensive, what do you call an index that is trading at 41.2 times reported earnings? Very expensive? Outrageously expensive? Or ready for a crash types? Well, the Japanese Topix index is the one we are talking about, and some experts believe that it is ready for a 50% crash given that its rise is not justified by the fundamentals of Japanese companies! As a matter of fact, Topix - Tokyo stock Price IndeX - along with the Nikkei is an important stock market index for the Tokyo Stock Exchange in Japan.

While the world is hooked on to the rally in stock markets, even oil is making its presence felt. The commodity, whose further spike can really raise eyebrows for policy makers, has touched US$ 70 a barrel. Apart from a general improvement in sentiment, yesterday's reports that the US saw fewer job losses in May further fueled the rise in prices.

The US Labor Department has confirmed what many economists have been saying the past few days - that they are not seeing any green shoots of economic recovery. As per the Department, the US economy shed 345,000 jobs in the month of May and the unemployment rate in the country spurted to 9.4%. Still, it was better than what experts predicted, and the US government was quick to take the credit saying that the economic stimulus package that it had implemented was starting to show results.

The fact remains that although the free fall that accompanied the collapse of the Lehman Brothers has definitely subsided, any expectations of an economic recovery will have to be quickly quashed as there still existed a nationwide distress and millions of households still wrestled with unemployment and lost income.

Now, as crude and stocks rise, gold has taken a hit as the price fell 2% yesterday. The yellow metal, also known as a safe-haven commodity, is now trading at US$ 950 an ounce. The commodity is now up by just around 3.6% since the time the rally in stocks started in March 2009.

Bill Gross of Pimco, the world's largest bond fund manager, is concerned over the US' ability to fund its massive deficit, which already stands at around US$ 1.5 trillion or 10% of its GDP - a number never approached since the Great Depression. In a note to Pimco's investors, he asks - "The immediate question is who is going to buy all of this debt? It is obvious that the Chinese and other surplus nations cannot fund the deficit even if they were fully on board - which they are not. Someone else has got to write checks for up to $1.5 trillion additional Treasury notes and bonds."

Gross' concerns are very valid given that China, by far the largest purchaser of US government bonds, has cited its concerns in recent times that large bulging US deficit due to excessive spending from the government could impact the prices of bonds that it holds - around 82% of China's US$ 2 trillion of foreign reserves are in US government bonds.

The equation in simple terms is like this - excessive spending by the US government will lead to high inflation in the future which will then result in higher interest rates. And when interest rates rise, bond prices fall. That is China's concern.

'Political parties are the most corrupt in India' was the conclusion of a recent survey conducted at the 2009 Global Corruption Barometer. More than half (58% to be precise) of the participants felt this way. Second in line was bureaucracy (13%), followed by the parliament and legislature (10%), business and private sector (9%) and judiciary (3%). But isn't this already a well known fact? As the Prime Minister said in a speech in 2006, "I firmly believe that we must set personal standards of integrity as public servants and the message should flow from the top downwards and not the other way round." Amen to that!

 Weekend investing mantra
"The fact that people will be full of greed, fear, or folly is predictable. The sequence is not predictable." - Warren Buffett

Today's Premium Edition.

Today being a Saturday, there is no Premium edition being published.

Recent Articles

All Good Things Come to an End... April 8, 2020
Why your favourite e-letter won't reach you every week day.
A Safe Stock to Lockdown Now April 2, 2020
The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
A stock with strong moat is currently trading near 5-year lows.
Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

Equitymaster requests your view! Post a comment on "A definite multi-bagger...". Click here!

6 Responses to "A definite multi-bagger..."

Sameer Surkund

Jun 8, 2009

I have become a addict and fan of the 5 minute wrap-up.I hope you continue to give us this crisp and insightful information always.

Like (1)


Jun 7, 2009

Would like to know how much foreign reserves of India are in US Bond Market. What could be the implication of it for the economy of India.

Like (1)


Jun 6, 2009

This clearly demonstrates that investment is an art wherein patience and god's grace are most essential for success

Like (1)

Prakash Hegde

Jun 6, 2009

Agreed that AMUL's sales are growing fast, but before we say it is the best investment, we need to see how profits are growing and how profitable is it (Return on Equity). Or are they just growing by pumping more money into business?

Like (1)

kamal kr das

Jun 6, 2009

Yes absolutely.I agree with your views.In fact the brand "Amul"is the most familiar as well as reliable to the people of India since its inception.

Like (1)


Jun 6, 2009

Broad in coverage, yet pithy and moderate. Peg to core valuations ensures that investors dont lose either their heads or an opportunity.

Like (1)
Equitymaster requests your view! Post a comment on "A definite multi-bagger...". Click here!