A wonderful business is coming cheap as market is valuing it for a short term, there are various voices being raised without knowing the true value of this business.
After September 2019 results where ITC declared a 35% growth in its profit, slow down in its mainstay cigarettes business. FMCG business showing nominal growth & having overall growth of 8% in its sales. ITC remains a dividend play, 500% dividend to continue as profits so far are meeting the requirement. Being an Innovation machine, ITC has always surprised the markets, this time with its FABELLE premium segment chocolate launch, priced at 4.31 lakhs a kilo, it creates world records and enters the Guinness Book of Records.
ITC has also become a fund manager’s favourite stock, has made its presence in 309 out of 700 mutual fund schemes. It has the potential to quadruple in 10 years. ₹250 investment today will be ₹1000 in the next 10 years, in between enjoy big dividend income.
Dividend from investments into listed companies forms one of the passive income streams. Whenever this concept of dividend as income is talked, that too from shares, the immediate thought is that, it will be very less returns and the next one is, how to rely on a company for a longer period. Because every person who has a fairly good period of exposure to stock investing will know in their memory itself, many companies have vanished from their business.
Whereas, on the other side, there are people who are having dividend as a regular income stream. A couple of years back when the Tata Sons board had a thought of reducing dividends, there was big concern raised by elderly people who said that, they had commitments in their life based on the dividends and reducing it will impact their lifestyle.
What this shows is that, there is a possibility to have dividend as regular income which can take care of our livelihood expenses. In that case, how is it sustainable if a company gives ₹5 as dividend for a stock that is quoting ₹250. The dividend yield comes to only 2% of the investment.
Yes, most of the good, familiar and companies that have long track record of existence generally pay out about 2% of their prevailing value of the stock as dividend. While these are companies that are growing in their business consistently and that growth takes the stock price higher as time passes.
So, today if we buy a stock for dividend the return will be lesser, whereas holding on to that stock for a longer period increases the value of the stock as also its dividends. A ₹250 stock will become ₹2000 over a period and at the time the 2% dividend will work out to ₹40. So you will be getting ₹40 as income from your original investment of ₹250, which becomes attractive.
Only criteria here is to chose a stock that has been there in the market for a fairly long period and also continue to be in existence for an even longer period. Do we have businesses like that in our country?
Yes, there are many. Like ITC, BATA, TITAN, Hindustan Lever, Godrej, Bajaj Auto, Maruti to name a few. Look at these names, most of them or producing daily use products that you and I consume. When will we stop consuming and these companies can run out of business? For example, ITC has been there for more than a century now. In almost every corner of your city you will find Bata store, probably you will be using a Bata product too.
Investing in these kind of businesses will help get a good dividend income over a longer period and these investments will become legacies which you can leave for your children. If not to have all your income coming from dividends, one can look at having a portion of his or her income from dividends.
This is passive, because you are not required to put any kind of effort in making these investments work, people consume & growth these companies. So long the consumption continues, your investment grows and keeps giving you returns.
I did a working on ITC to find if it is viable. The stock price of ITC was about ₹850 in 2000. Over the last 18 years ITC has given many bonuses and splits in its stock price. If someone had bought 100 shares of ITC in 2000 by investing ₹85000. His dividend in 2001 was only ₹1000. It is just a little above 1%.
After all the splits and bonuses, today the 100 shares have grown to 4500 shares and the stock is priced at ₹300 today. The value of ₹85000 invested in 2000 is now ₹13.50 lakhs. The dividend that came for these shares in 2018 is ₹23500.
₹85000 investment in 2000 is now fetching 23500 per annum which is close to 30% of the investment & it will keep increasing.
If you have thoughts of having dividend as one of your sources of income in your retirement years, you can think of accumulating stocks like ITC to create a legacy. One more advantage is that, the feeling that you own a part of the countries economy. As you go across town in your older days, as you keep seeing brands across and people consuming, your mind will say, “I own a part of these businesses and every minute it is earning me income.”
What a feeling right?
Start-ups have become the word of mouth of almost every person in town, at least in Bangalore which has become the hub of activity for new ideas. Students coming out of college come with a dream, ‘work for a couple of months, along with that work to become a start-up entrepreneur’. With so much activity, thoughts and money flowing into this segment, how good is this Start-up culture for our economy?
In the past 2 decades tech employees had the advantage of getting paid more than they could dream off, apart from the luxuries and indulgences which they experienced, which brought our economy fame & money along with cultural shift, they still had a lot of money un-used, which got poured into real estate, people bought 3 homes, more number of cars. Culture had such a dramatic shift that it is said in some segments of our country, the “K” in BHK is being taken off, apartments are sold as 2BH, 3BH etc., because cooking has become a past thought, eating out is the way of life today.
Now with real estate taking a back seat, where phenomenal returns are also a past history, the excess money that got saved by these Hi-flying tech employees has now got channelled itself into the economy in form of Start-up funding. The start-up industry is so lucrative, that few of them among the lots of thoughts and ideas that are in the market and would come in the future is going to become a Google or a Facebook, which makes the wealthy individuals take a bigger bet even at risks that does not have any fundamentals. Each one offering to fund at higher and higher valuations which none would have dreamt off.
Most of the start-ups today are loss making, for example – one of the top stories of India, Flipkart has declared a loss of 2000 plus crores in FY 2015 on sales of 10000 plus crores, and they are still boasting that they have tripled their turnover from 2800 crores last year, while the losses too have nearly tripled in the same period. Why so much losses and whose money is it that is making its rounds here?
The losses are mainly due to discounts allowed on product sales to capture market share & employee cost. If this company has lost 2700 crores in the last 2 years, how are they going to recover these loses, what is their capital? If the losses continue at the same pace, next year the total loss should be 15000 crores.
Why is this done?
To have analytics numbers that shows they are market leaders and when the company launches its IPO, poor investors will throng to buy the company’s stock. And why is this required?
Only then can the wealthy investors who have pumped in money into the company with very high dreams, make big profits.
It is a like this, I am a fool to make an investment into a loss making company, while I am confident that I will find an even bigger fool to whom I will offload and make my profits. The final losers will be the general public who are expected to invest into the IPO’s of these businesses.
Employee cost is another area where these start-ups are exorbitantly high, every student joining his or her higher education, when asked about their ambition, have only one company in their mind, “FLIPKART”.
The fight to have the best talent has become so severe that employees are getting paid in crores along with super lenient employment rules; they get paid holidays for every other silly reason. How can they be productive for the company? That is the requirement now, just that I need to have the best talent, keep them so happy that, if they just stay with the company, the competitor will lose his edge to become more competitive. Same like killing the brick and mortar businesses through massive discounts, this employee hoarding is one more method.
There are so many similar businesses offering the same services and still get funded. Most of them, many users have begun to complain of poor quality in their services. Pepper Tap, Swiggy, Tiny Owl and many others have already been in the news for poor quality of products and services.
The next target on sales for Flipkart is 10 billion dollars for FY16, which will be 65000 crores. One of India’s top FMCG company ITC, a century old company having presence in various segments of the economy, having brands that have prominent place in the country’s population has a turnover of close to 40000 Crores and is reporting a profit of close to 10000 crores. This company is 100 years old. If 2016 sales is going to be 65K crores for Flipkart, even at a modest 1 multiple growth it should have a sales number of 130K crores in 2017, which means every citizen of India buys product worth a Rupee from Flipkart, can this be a reality?
And this numbers are only for Flipkart, while there so many similar businesses looking to have equivalent growth or at least that is what the investors in them are expecting them to do.
All of it shows one clear sign; it is bad that we have got the hint of it so early in a period where Indian economy is pegged to be the world’s best destination for investment at the moment. The start-up bubble is going to get burst far earlier that it is anticipated to.
Let’s look at why the start-up funding is required? The thought of start-up funding is to support a business that is just in a thought stage, which requires huge funds before it can even launch its products or services, while it does not have a good revenue of its own yet, to payback for the financial support. Due to which the business cannot get funded by the banks in the traditional way and no bank will fund a loss making company. To get such kind of financial support the investor is given a small stake in the company, so that, he stays in wait till the business begins to generate revenues and the company gets listed through an IPO, where the investor gets his exit route by offloading his holdings in the company to the new investors. In some cases the new investor comes in the form of another venture capitalist, who pays a higher price and buys the same stake from the existing investor. Whatever is the level of entry the final exit route for these investors is through the Equity markets?
Now, it gets a little clear, as to why there is so much awareness getting created about the start-up companies in the form of discounts, publicity and sponsorships. Only then will the name be registered in the minds of common investors, who by then will be craving to have a share of this investment frenzy. Off late I have been getting one out of every 20 investment suggestion requests on how a small investor can participate in the OLA or a Big Basket.
At present it is not at all easy for the common man to invest in start-ups, while soon when the IPO is launched all these aspiring investors will throng to get a pie and that is good enough for the company to issue its shares at a mind boggling premium.
Promoters or in these cases the founder or the conceiver of the idea, how much does he make from his idea finally.
The other day it was published on the newspapers that Big Basket has got 800 Crores of funding, this follows the recent 300 crore funding the company had received. With some number crunching it is assumed that the original promoters or founders will have about 20-25% of the equity in the company after about 3 or 4 rounds of funding. In Flipkart it is said that the Bansals hold 7.50% stake in the company. All the rest of the stake is sold at lower valuations, while the advantage they have again is the hefty salaries the founders get after giving away their stake in the company.
A start-up conceives the idea, sells 30% of the company without even knowing how much he is worth, further to that if the idea looks to be interesting, funding keeps happening and he keeps losing stake, he never gets any benefit from the funds that comes in, while his salary and investor commitment makes him stick to the company.
A question I got to answer recently from an aspiring startup….
“How do you decide how many shares to offer in a company, and how do you determine the price per share?
Can you please tell me what to do in this case?
If a company has 1mn Rs (INR) as paid up capital. Now if this company is getting fund from foreign let’s say $100,000. Now, how to price per share. What other things I should keep my eye on. If you can point me to the right direction that would be of great help.”
At the end of the tunnel if the public issue of the company gets blown out, finished, the founder has peanuts from the company. The sad part is that the founders of these start-up companies don’t invest their earnings in a different asset. All the big salaries they earn are again pumped into funding similar start-ups down the line. How many of these businesses will reach the end of the tunnel is anybody’s guess.
The present start-up mind-set.
The other day I happened to be in a conference organized by one of the start-ups. The program was to promote a training product for new entrepreneurs. The program will teach about how to become a successful entrepreneur in 15 weeks and it charges 50k for the course. Even if 100 aspiring entrepreneurs take up the course, the company makes 50 lakhs, and from there even if they grow 10X, which is a normal reach these businesses have at least in the beginning, they are looking at about 5 plus crores of business. Whether they make profit or not in this business, these statistics will be good enough to sell the company for a couple of 100 crores and exit. Once the start-up euphoria dies, this business will also go down, while who cares, the founders or the investors who took the initial stake make a killing.
In that conference during the question hour, a girl asked this question. “How early can a start-up make its exit?”
The moderator asked, “Of all the reasons, why do you want to exit your business? Is that the reason for which you want to become an entrepreneur?”
Then the girl says, “At least that is what the serial entrepreneurs want, exit at the earliest.”
Then the next question from the moderator, “Who is this serial entrepreneur? I have heard only about serial killers, who kill every other day. Do these serial entrepreneurs too, do the same, kill businesses?”
Looks like it is true to some extent, kill the business and move on to the new one? In reality they are killing businesses. They fund some one’s idea, take it to a high level and get out, then go out finding another such opportunity. How many great opportunities can a fund find on a regular basis? For the fund that looks for early and smart exits it will for sure find opportunities on a regular basis because it is said that India will have about 11500 start-ups by the turn of the decade, of which about 2-3% will reach the IPO Stage. So, for the later investor, there is going to be only about 20 to 30 companies that will give good growth on the capital invested, which are those companies? At present those companies may or may have not even been conceived.
After a business gets funded, the founder becomes a slave; he does not have any other task in his life, no family, no vacation and at times even no time to take care of himself, apart from slogging it out to meet the super-fast valuations the investors want from the company. Just about the time the founder losses all his stuff on the ideas about the business the investor takes exit by off-loading his stake to an investor who comes in at an even higher valuation. The new investor comes in with expectations to crush the founders even further, of their ideas. Where the steam left is much lower and the business goes down. Already there are many cases of new start-ups finding it difficult to get next level of funding and are closing down operations.
One of the Venture capital firm’s head had recently disclosed about the prevailing thought among the new entrepreneurs. A real experience she had recently.
A student just out of college comes up with an idea and approaches a VC for funding and requests to have $ 1 million, when he was told that his idea could not be funded. His reaction is that, “Ok, I will find a new idea that can be funded.”
People are approaching the idea of funding in a different manner and not in the real sense of having a business. They think that they can pop up ideas on the go, get the funding, sell the business and look for a new idea. There is no passion on the idea to make it a big business, they just want to come up with an idea that they think is the pain point in the economy, find an investor who can fund the idea, sell the business to them and move out to get a fresh idea. Is that so easy to get an idea, make it into a business and get out making a killing out of the idea? It never was and will not be so anytime in the future.
The benefits this start-up culture will bring to our country.
At present India is the number one investment destination, the most sort after by all the investment communities around the globe. Start-up is one of the lucrative activities which are expected to be worth pushing huge capital. The benefits from this frenzy are tremendous. Whether the investors will make it big or not is unknown for now, while there is going to be a lot of opportunity for the citizens of India from this Start-up euphoria in the country.
Some areas which can benefit are employment, a real lot of employment opportunities are going to be generated and the salaries are going to be unrealistic for the talented ones, money flow will be high. Media will get tremendous business due to advertisements and promotions, infrastructure will grow rapidly and above all the Indian citizen will benefit the most. Commercial as well as residential real estate will sky rocket as there will be a lot of disposable income in the hands of the public and the companies will gobble office space. Assume that each of the business gets a minimum funding of 100 Crores, 11500 companies would mean that we will have about 12 lakh crores of funds moving in India in the next 5 years. It is 2.50 times the total sales of Indian Oil Corporation, the company with the highest revenue in our country. Taken by the numbers that these companies loose in the form of discounts to capture market share, which is at 20% now, it means the Indian public has a chance to get 2.40 lakh crores of money. The distribution of funds is going to be very big; our economy will thrive due to this flow of funds. As most of these investments will be in the technology space, the country will become a super developed one by the turn of the decade.
If a person has to be smart, he should just consume all the discounts and be pretty sure to not invest into the IPO’s of these loss making businesses once they hit the markets. Need not worry about the losses these business are going to make once the bubble gets burst, after all whose money is it. It is the excess money that the ultra-wealthy investors who have become rich overnight not knowing where to park the money, that is being thrown into our economy in the name of capturing market share and building numbers in the thought that they can fool the common investor through the IPO and make a killing.
By the turn of the decade when the bubble is burst, India will be super rich as all of its infrastructure will be world class and its people having a wonderful life, while the losers will be the super-rich who will not mind the losses because after all it is the money that is in real excess for them. We will be witness to one of the classic cases of wealth distribution happening in the next five years. Enjoy the run and get rich.
One good question on Quora that interested me and for which I wrote a lengthy answer, it can be helpful to many small investors who think Mutual funds are not good investment assets.
Hi Deiva Ramesh, Today you answer my question 25 years IT employee from middle class family investment. One of my friend suggest me this, Kotak Mahindra Bank (3 in one) Savings Account cum Trading Account. It has a good research team. Every month save some amount from your salary and deposit in Kotak Mahindra Bank. Slowly buy 4 SBI shares every month. Later if you get a promotion you can start investing in Mindtree and ITC. L&T is also a good stock. Do not invest in Mutual Funds.
At first, thank you very much for your compliments.
Why do we invest, any investment for that matter?
To grow our money right?
We go to stocks assuming that we will be able to grow it much faster and know that there is a little higher risk involved to attain this goal.
Now comes the quantification of the risk. How much risk you are willing to take?
At the most about 10% of your capital or a little stretched up to 15%. Assume that you have invested 25k on a slow process and you find your investment value is 20k, will you still have the same enthusiasm to put the next month’s investment into the same stocks?
Mind will naturally check to see other alternatives, probably another stock or maybe even other asset class. Once a person reaches this stage, his tracking of the previous investments will fade and over a period, it will be junk investments.
And in case of employed people, no one can guarantee that they can give the same attention to the events in their life as they give at any particular period.
Again even this is pretty much natural for any human being.
After a certain period, you will lose interest and the investment will be losing more due to loss of time value.
One can just not park money into something without knowing how it will be 6 months down the line, a year from now etc., if there is no clarity, he will end up losing the investment.
I have a client of mine; he is emotionally connected to investing in L&T and SBI. For the past 8 months, he has been buying both these stocks; L&T from it was 1850, now it is 1450. SBI from 280 and now it is 240.
Of all the stocks why these two?
On the back of the mind, there is a thought, these are pretty good companies, even if India has to collapse, these companies won/t collapse.
He used to regularly put 10K each month, now he has slowed down.
Having investment in few companies is more higher risk, and in today’s context there are retail investors coming to the markets to buy large cap stocks, just because they feel that the valuation is pretty low than what they had seen just a few months ago.
For some companies that have good fundamental strength it is true, they are available cheap now. While it is not the same for many front line companies.
Why did we get freedom?
For 3 centuries prior to our independence India’s resources have been used by the colonial powers, exploiting them and carrying the profits to their country. After getting our freedom & being independent, have we changed?
India is a country that is diverse not only in its population; it has diverse natural resources in such abundance that it can support any kind of growth. Not many countries have resources like what have, take for example the United States & Japan, which are known to be the top 2 economies in the world. The US mostly manufactures weapons of destruction. Always wants or creates disturbance across the globe to keep their business growing by selling weapons of destruction to both the fighting countries, many a times in the guise of protecting mankind, they involve themselves in doing more damage. But, they are dependent on the whole world for the supply of their regular basic requirements. The global economy feeds their requirement of basic necessities, providing them credit as well as buying ammunition from them in the fear of protecting themselves and making the US grow abnormally at their cost.
Japan is dependent on the world for almost every need of theirs, but, they are pretty smart to have created such high value in their products that, the world has almost thronged to give them business by all means.
We got freedom……
We fought for our freedom to ensure that all the resources we possess will be used by us to help in our growth. 67 long years have passed since our independence, are we really free? Do we use all the natural resources available to us for our growth?
Our natural resources, including the talent pool in which we have an edge in the global market, are used by the industries of our country to produce products and services for our citizens to consume. In turn these companies generate profits and grow their businesses.
Out of the industries spread across our country, about 6000 companies are listed companies. Their shares are traded in the stock exchanges helping investors to take a share of profit from their growth. These companies contribute to more than 90% of our GDP.
By listing their shares in our stock exchanges these companies have provided an opportunity for every prospective investor to invest and get a share of the profits they earn. The shares grow in value as the companies grow their businesses. As these companies grow, their share prices increase, thereby increasing the value of the companies. This value creation is called Market capitalization.
The combined market capitalization of all the companies listed in our country is 83.25 lakh Crores. As citizens of our country, do we own these companies? The latest available statistics show that 50% of the market cap of our country is owned by foreign institutional investors. Indian retail participation is just above 20%. This means 50% of the profits generated through the talent pool and natural resources of our country are taken away by these investors to their respective countries.
So, what has been the change both pre and post independence. Either way most of the synergies of the country which has the world’s second largest population, a terrific advantage not many countries have, have been utilized mostly not by the people of the country. We are still the same, giving our resources to other countries. Earlier it was by force and now it is with all willingness.
If this continues how will our economy grow? We are only making other global economies to grow from our potential. Why have we not participated to own our economy? Indian household savings as on Dec-13 is 221.14 lakh crores, while we have invested only 17 lakh crores in Equity to own the companies that form our economy. As a natural process we shy away from Equity investments due to fear of losing or not having belief that the companies in which we invest will provide growth to our savings.
As human beings we have to fulfill our basic necessities in order to live and experience life. You can see logos in this article of some brands that have been part of our life and will continue to be so for generations to come. We have not feared using them; we have had very strong belief in them. Then why did we not believe and invest in the companies that manufacture the very products which are required for our survival?
One of the reasons is, when we consume the products, we experience it, while we cannot experience growth of these companies physically. Then there is fear that our judgment might go wrong and we will lose our hard earned savings.
Many of the investors though have the eagerness to invest in equities do not have the expertise to identify companies that are good. They can seek help from professional investment advisors; Bravisa Templetree can help you in identifying the best growth companies of our country.
When we are investors in the companies that produce the products of our consumption, we have a lot of advantages.
- Every time we buy and consume the products, we pay ourselves a share of our expenses as profits on the holdings that we have in the company.
- We will be more interested in promoting the products word by mouth, which will bring more business to the company and in turn increase our investment.
- The profits that we earn from our investment is ploughed back again into the economy either by consumption or through investment. Both of it help the economy to grow.
- Equity investments provide the highest return, currently it is at 15.10%.
- Long term capital gains advantage, which makes your profits tax free.
- By investing in our companies, we ensure the money keeps circulating within our country, growing our economy. If all of us work together, in a decade we will have individual income levels at par with the developed countries.
- We will eradicate poverty and increase standard of living.
The immediate thought that will go round in our mind will be, my consumption is so small, how would it be of use in growth? As one person it is really very small, but, what if all of us have the same thought. Maybe half the population, the potential for growth will be extraordinary.
How you will be paying yourself?
Assume you own shares in ITC, every time you buy Ashirwad Atta, Sun feast biscuits, stay in ITC hotels. Buy a Fiama Di Wills or Vivel soap; you pay yourself a small percentage.
If you own shares in Maruti, the next time you want to buy a car, you will explore possibilities of buying a Maruti, because you know a part of your expense is your profit too.
The next time you wind a week with a drink, you will prefer to have a Kingfisher, if you own shares in United Breweries. Like this we can benefit from every purchase of ours, because all the products we use in our daily routine are produced by companies listed in our stock markets.
List out the products that you consume in your daily life and invest in the shares of those companies. It can be Raymonds, Bata, Titan, Voltas, Eveready, Colgate, TTK Prestige, Sobha Developers etc., the list can be big. It gives you diversification as well as lesser risk coupled with growth. In case you would require any help, we at Bravisa Templetree are glad to lend you a helping hand in making your choice.
An example of a stock that has grown 6 fold in the last 4 years. Page Industries, the company that manufactures “JOCKEY” brand of lingerie. This company has grown at more than 30% every quarter since 2009, would that mean our people are buying so much lingerie? Don’t know whether it is right, but, if you pass though the roads, in about a kilometer you can find at least 3 outlets of “JOCKEY’. With such high presence, it is common sense that the growth is tremendous. If you are a consumer of this product, go ahead and buy the stock, it is one of the best growth stocks in the market today.
Be invested in our economy, India is the economic super power of the world for the next 10 years. If you have not participated, you have wasted a life of being born in a country as diverse as India. Be proud of being an Indian.