How HDFC and Other Bluechip - Elephants Can Dance

Apr 20, 2022

Bharti Airtel bought a stake in Lavelle Networks. Asian Paints did so in White Teak. L&T in Help Lightning. ICICI Bank in Thillais Analytical Solutions. Bharat Forge in Tork Motors.

Infosys and TCS each have lists going into a dozen startups.

Should you as an investor take these investments seriously?

Well, let me ask you another question. Have you ever tended to a garden? If you have, you will know that it takes tons of patience and diligence.

Assume you have some seeds that are supposed to eventually grow into 100 foot high plants. Thrilled by this possibility, you dedicate a section of your garden to these 'super growth seeds'. You take great effort to make sure the growth conditions are just right.

You eagerly await results but notice no change in the first few weeks. Before you know it, the months have rolled into a year and that patch looks as bare as before. You begin to worry and doubt yourself.

Years pass by. By now you've moved on to growing other plants and have completely lost hope. Yet, you religiously tend to your barren patch of land.

During the fifth year, you observe small shoots. Startled and confused, you watch the space closely. Believe it or not, within a matter of six weeks, your tiny shoots have sprouted to 90 feet in height!

This is the story of Chinese Bamboo. The truth is those seeds didn't grow in six weeks. The plant kept getting its roots stronger to support its growth. Five years of foundation building paid off within weeks.

Similar is the case with startups. They need years of patience and constant funding as well as guidance. Investors in startups need to have a mindset very different from the usual stock market investors.

Moats, market share and margin of safety in valuations are all great parameters for finding good stocks. Most retail investors and dyed-in-the-wool Buffett fans like me swear by these when looking for stocks.

Unfortunately, these can never allow us to make investments in fledgling startups.

So, should retail investors completely give up on the idea of startup like returns? Does it not make sense to revisit our strategy?

Buffett himself did so when he moved from cigar butt stocks to buying great companies at fair prices. None of his Coca Cola, American Express, Wells Fargo or the recent Apple gains can be attributed to the cigar butt strategy.

With stiff competition, Buffett acknowledged the scarcity of good businesses at throwaway valuations.

But following Buffett's strategy today can, at best, fetch you mediocre returns over a decade. If you want to create huge wealth over long periods, you can't rely on its merits.

Today, the breakneck speed of evolving technology demands constant innovation. Companies that fail to invest in innovation are certain to lag in wealth creation.

Just as you and I are keen to get invested in innovative startups are large corporates.

Turns out that some very well run bluechips are already finding startups to invest in. These aren't random businesses but ones that suit the megatrends they wish to ride.

And there is no denying these large corporates can do far better due diligence of the startups, especially from the technology and R&D perspective, than we as individual investors can.

Rest assured this trend is not new.

Unilever bought Lakme in 1996.

HDFC Bank bought Times Bank in 2000.

Google bought YouTube in 2006.

These startups went on to create huge wealth for the parents over the years.

But why am I referring to this trend now?

Well, I see even a 16-bagger stock fetching even bigger gains over the coming decade!

HDFC delivered gains of 1,663% since 2005. But that's just half the story.

HDFC Bank has gained 2,400% since listing.

HDFC Life has gained 64% since its relatively recent listing.

HDFC AMC gained nearly 100% since its listing, until the recent correction.

The merger of HDFC with HDFC Bank sparked speculations about whether the combined entity can continue to create wealth. Many believe its size will be a constraint for growth.

But interestingly, it's no longer balance sheet size that determines if elephant-like bluechips can dance.

Plenty of behemoths are reinvesting their surplus profits in high potential - high growth startups. The high return on investment from these startups can allow the behemoth stocks to deliver big gains, over time.

HDFC, for instance, has set up a dedicated team to invest Rs 1 bn in startups every year.

Last year, Titan invested in a IoT (internet of things) startup Hug Innovations. The startup allows Titan access to variety of innovation in the wearable space. The gains from it certainly won't come in a few months or quarters.

But as a retail investor you have the comfort of buying a solid bluechip like Titan even while riding prospects of startup-like returns.

Does that sound exciting to you?

Well, then think drone stocks, blockchain stocks, EdTech stocks, semiconductor stocks and the like.

Even if you don't find them listed on the stock exchanges yet, there may be an indirect way to invest in them.

Stay tuned for more on this kind of investing...

Warm regards,

Tanushree Banerjee
Tanushree Banerjee
Editor, StockSelect
Equitymaster Agora Research Private Limited (Research Analyst)

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