Thou shall value holding companies at a discount but not always

Shriram Group announced a restructuring of the group companies on Dec 13, 2021. The restructuring entails merger of listed operating companies Shriram Transport Finance (STFC) & Shriram City Union Finance (SCUF) and an unlisted company Shriram Capital (post the demerger of insurance and other non-lending businesses).

A couple of concerns which have been raised in the media about the restructuring:

1. Holding of Shriram Ownership Trust (SOT)-the promoter in the merged entity would be ~12%, which is considered low by some observers. Low enough that they have contemplated a ratings downgrade by rating agencies. 

I am not well aware about the mechanics of ratings but by simple logic, the number of shares held by SOT pre restructuring and post restructuring remain the same. The trust has not sold a single share in the last so many years. In fact, it has added to its share count by buying shares of SCUF from the open market in 2020 (here), buying shares of STFC in 2019 and infusing additional capital in STFC through preferential issue of shares (here). If the rating agencies were fine with the number of shares held by SOT earlier, why should it create a problem now when SOT has higher number of shares?

We also have a case of HDFC Limited which is a lender with no identifiable promoter. Directors and employees of HDFC Limited own a stake which is in low single digits. The majority shareholding in HDFC rests with institutions and foreign investors. 

If no identifiable promoter and low shareholding of employees is not a concern in the case of HDFC, how should it be a concern for the merged entity of Shriram where there is a clearly identifiable promoter and employees (through a Trust) own a ~12% stake? 

2. The second concern is about the discount which should have been given to Shriram Capital while merging the same in the restructuring. The rationale is that Shriram Capital is a holding company and holding companies sell at a large discount to their intrinsic values, hence Shriram Capital should have been valued at a discount in the restructuring scheme.

It's not a Biblical commandment that holding companies should be valued at a discount. Holding companies sell at a discount because shareholders in them neither get access to the cash flows of the investee companies nor they fully enjoy price appreciation of the investee companies since the investments are never sold /unlikely to be sold. Hypothetically, if a holding company were to announce a scheme where it would be wound up and the shareholders would get their proportional share of the investments which they can freely sell in the market- the discount to the intrinsic value of the holding company would evaporate in no time (ignoring frictional costs and taxation). 

In the case of Shriram Capital, it was a privately owned investment vehicle which held investments in STFC and SCUF. In the merger, the investments are being proportionally allocated to the shareholders of Shriram Capital. I believe it’s a completely fair game and there is no reason for a discount to be present in the restructuring scheme.

3. The third concern is about the challenges which the merger can throw both in terms of HR integration and business integration. This is a valid concern and only time will tell how the dust would settle. However, on a probabilistic basis the odds are higher that the merged entity should be able to handle any such challenge given the strong pedigree of the business and the management.

(This post is not an investment advice. It is meant for discussion purposes only. My clients and I are invested in both STFC and SCUF)

The Art of Playing

While the Olympics are on, I recalled this brilliant obituary of Raymond Poulidor.

Poulidor, a French cyclist, stood on the podium of the Tour de France 8 times but never was on the top step. In 14 tours he lost by a lot of margin.

However, he was the most popular cyclist. 

"The more Tours he lost, the more the crowds liked him and the more he earned. At the height of his celebrity, in the mid 1970s, almost half of respondents to one poll made him their first choice as a dinner guest. In 1974 alone more than 4,000 articles were written about him, besides university theses and sociological studies."

Why? 

You will find answers in the attached article.

Internships 2021-22 : Update

We have sent a set of business cases to all the applicants who had paid the application fee.

In case you had applied & paid the fee but didn't receive the business cases, please check your spam/bulk folder.

If you still don't have it, do write in @ internships.prayaascapital@gmail.com with your details.

Thanks

Internships - 2021/22

Internships- Year 4

PRAYAAS CAPITAL

Year 2021/22

About me

Hello, my name is Ankur Jain and I run an investment management firm, Prayaas Capital (Chennai, India). 

I try to invest in good quality businesses, run by good managements and available at reasonable valuations. This investment philosophy has been beautifully practiced by Buffett and Munger through their investment vehicle: Berkshire Hathaway.

I started internships a few years back. The idea was to share my learnings with people who have embarked on their investing journey and have a deep desire to learn. I offered them for 3 years. After a break, I am opening internships this year again.

Method

We are going to pick up one business case and work through it over 2.5 months. Participants would be expected to work on the case during the weekdays followed by a discussion session every weekend. There would be 10 sessions of upto 90 minutes each.

I would choose a business which I feel covers a lot of ground in terms of the investment aspects- moat around the business, risks, quality of management, valuations, position sizing etc. I would pick up a business which I have already studied. That would allow me an opportunity to discuss the case in depth.

Case Study Method

Let’s read what Li Lu (Himalaya Capital) has to say about learning investment management.

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Do you have any advice for students who are interested in getting into investment management?

The most important thing in understanding the investment business is by doing it. There is no substitute to actually doing it. The best way to do it is study one business inside and out for the purpose of making the investment- you may not actually invest. But having gone through the discipline of understanding one business as if you own 100% of that business is very valuable.

(Li Lu, Himalaya Capital – interviewed by Heilbrunn Center for Graham & Dodd Investing)

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It reminds me of a simple advice to teach cycling to children.

Step 1: Put your foot on the pedal and start pedaling

Step 2: Keep pedaling

Similarly, to learn investment management, nothing is better than reading an actual business. Thus, we will pick up one business and learn about it. Hopefully, you would continue to pedal, there on. 

Batch size and medium of learning

The internship will have 2 batches. The number of participants would be 15 per batch. Sessions would be conducted over Zoom. 

Requirements

This internship will not cover value investing basics. Participants are expected to have read and hopefully practiced value investing for atleast a couple of years. The idea is to polish what you might already know.

The second requirement is that you should have sufficient time at your disposal. If your academic/ professional work is demanding and doesn’t spare you atleast 3 hours a day to work on the internship, it won’t be value accretive.

Thirdly, you should have a basic idea of accounting.

Selection Process

If you are interested, please fill in the google form and deposit an application fee of Rs 100.

Application fee to be paid by UPI to internships@apl

The number of applications is limited to 300. 

Once all the applications are in, I would share a set of business-related exercises to the applicants. You would be required to submit your answers to those exercises. Based on the responses, I would choose the best 30.

The application window is open till June 25^th 2021 or 300 applications whichever is earlier.

 

Pay it Forward 

There is an application fee of Rs 100 to be paid by all applicants.

There is an internship fee of Rs 5000 to be paid only by the selected participants.

This year’s internships are dedicated to Yogyata Education Trust. This trust provides monetary scholarships to meritorious students of Class X studying in the Government Schools. A small reward can act as a powerful incentive for students who are trying to do something meaningful with their lives. Yogyata has been founded by my friend and cousin, Anurag Jain. Knowing him, I know that the trust is ethically run, with bare bone overheads. Your contributions (both application fee and internship fee) will go to this trust.

FAQs 

Ques:    What’s the timeline for the 2 batches?

Ans:      Tentative commencement dates: 

              Batch 1: August, 2021                    Batch 2: November, 2021

 

Ques:    Will all participants work on the same idea?

Ans:      Yes, all participants in the same batch will work on the same idea. However, they will                                           work independently. Research would be individual and discussion would be in a group.

 

Ques:    Do I need to send my resume with the application?

Ans:      No

 

Ques:    When does one pay the application fee and the internship fee?

Ans:      Application fee of Rs 100 is to be paid at the time of applying. If selected, an internship fee of Rs 5000 is to be paid 1 week before the commencement of the respective batch. Fee once paid is non-refundable.

Application fee being a small amount across large number of applicants would first be pooled in an individual account and then passed on to Yogyata. Internship fee has to be transferred directly to Yogyata.

 

Ques:    Do I get income tax benefit on the contributions made to Yogyata?

Ans:      Yes, the trust enjoys exemption under Section 80(G). Tax exemption receipts would be issued only to the participants who get selected and pay Rs 5000. Given the logistical challenges, no tax exemption receipt would be issued for Rs 100 paid as the application fee. 

In case of any other query, please write to: 

internships.prayaascapital@gmail.com

Take the high road- It’s paved with gold

Relaxo Footwears

Relaxo Footwears is a company run on solid corporate governance principles with no instance of wrongdoing. The management has been able to focus fully on the business instead of firefighting and wasting time on distractions. The income statement, balance sheet and cash flows are so clean that they seem to be performing a symphony orchestra. The company's chartered accountants should ideally charge less since they would have to spend so little time auditing the financials of the company.

Relaxo sells at a PE of 96.55

Data extracted from BSE

There would be lot of things that would go into determining the PE- the strength of the business model, growth ahead etc. But most importantly, good companies get rated higher due to the TRUST the shareholders have on the financials - they know 'what they see is what they get'. There is no jhol (mischief) in the financials.

I hope that current and prospective entrepreneurs realize that there is so much money to be made if you take the high road. Even if we keep discussion on morals aside, it makes immense economic sense to keep the books clean because the high road is paved with gold.

(This is not an investment recommendation to buy or sell the company mentioned in the post)

Karm yogis

In the current times when there is so much pain and hopelessness around, 2 obituaries I read come 

across as precious drops of water on the parched landscape.

Obituaries of 'karma yogis', of lives well spent in making oneself, the community and the country better.

Even in their deaths, they leave a fragrance of hope, resolve and inspiration.

From Business Standard

Billionaires like Barbareek, are trying to save the one in doldrums

One of my favourite stories from The Mahabharata is that of Barbareek, grandson of the Pandava warrior Bheema. Once it became clear that the war between the Pandavas and Kauravas was inevitable, Barbareek became keen to participate in it. While leaving, he took a vow that he would join the weaker side and the one in problems.

Once all the warriors assembled for the war, Barbareek saw Lord Krishna sad and weeping in a corner. Staying true to his resolve to help the one in a problem, Barbareek asked him the reason for his sadness. Lord Krishna replied that he was sad because there is one person who stands in between the result of the war. And untold hardship will come to mankind if the war doesn’t end and remains in a stalemate. Barbareek told Krishna to stop crying and resolved to kill that person who had put Krishna in that hardship. He just needed to be told the name of the person. Krishna picks up a mirror and shows it to Barbareek. That person was Barbareek himself.

Why?

Because Barbareek was endowed with untold strength and could single handedly conquer the war for either side. In the beginning, the Pandavas side was weaker, so as per his vow, he would join them. Over time however, he would destroy a big part of the Kauravas’ army, then Kauravas would become weaker and Pandavas would become stronger. To always help the weaker side, Barbareek would have to switch sides and fight from the side of the Kauravas. With time, Pandavas would become weaker. He then would have to leave Kauravas and join the Pandavas again. This would become an infinite loop and the war would never end. Lord Krishna foresaw this eventuality. 

When shown the mirror, as the person who made Krishna sad, as per his vow Barbareek beheads himself and offers his head to Krishna.

Coming to the billionaires now. Newspaper industry was once the titan of the business world. With wonderful economics and political power, it enjoyed a formidable moat around its business castle. But time can erode the most powerful of the moats. Internet has upended this business upside down with the readers moving online. This was quickly followed by advertising and the marketing dollars moving online. Newspapers no longer carry the political, financial and the business muscle. Once a champion of newspapers, Buffett has sold all of his newspaper investments.

However, some billionaires around the world are trying to resuscitate newspapers – some hard-nosed capitalists are seeing opportunities and trying to infuse life into them while making money for themselves at the same time. Another species of billionaires who grew reading up these newspapers are trying to revive them by restructuring them, putting them in a non-profit foundation and endowing the foundation with substantial grants. Like Barbareek, these billionaires are on the side of the weak. Only time will tell, if they achieve their objectives.

These very interesting articles in The Wall Street Journal talks about these developments around the newspaper industry.

Link 1

Link 2

Are wealth and inner-calm mutually exclusive?

Not according to this oil farmer.

His recipie - Go easy, Pause, Consider, Enjoy.

The state of his mind can be best described by the Hindi word "Santosh" and Urdu word "Sukoon".

https://www.youtube.com/watch?v=4qVRYBes6g8

The Bitcoin Dream

The Bitcoin Dream

 

Last night, I dreamt of my friend who always talks and tweets about Bitcoin. For the sake of hiding his identity, I have named him Bittu (for he is a Bitcoin buff). The dream went like this:

Bittu: Hi Ankur

Me: Hi Bittu

Bittu: Did you read my latest tweet on Bitcoin?

Me: No, I am absent on Twitter.

Bittu: Why? You know there’s so much of valuable information available on Twitter.

Me: I know. But I also remember what my teacher Buffett says: “Value is what you get and price is what you pay”. I think, for me, the cost in terms of distraction and time spent on Twitter would be more than the value I would get. It would be a losing trade. Hence, I stay away.

Bittu: As you wish. By the way, did you invest in Bitcoin?

Me: No, I don’t understand it. My teacher Buffett teaches that one should stay within one’s circle of competence. I don’t understand Bitcoin and its dynamics and the chances are low that I would understand it even if I made an attempt.

Bittu: I suggest that even if you don’t understand Bitcoin, you should invest 1-2% of your networth. If it works out, it would make you rich.

Me: But I am already comfortably rich for my lifestyle. My teacher Buffett also teaches that one should not risk what one does have and does need in order to get something one doesn’t have and doesn’t need. More importantly, putting 1-2% might be a relatively small amount but it would break my discipline. Soon enough, I am sure there would be many opportunities which I don’t understand, vying for 1-2% each. I feel it would be a slippery slope- easier to start but difficult to stop.

Bittu: The way the governments around the world are printing money, it’s quite likely that there might be massive inflation. Bitcoin would be a good hedge against inflation.

Me: I don’t understand that part well enough. For the sake of discussion, if we assume that there might be high inflation, I feel that people would still require necessary products and services. And strong businesses would have the pricing power to pass on inflation to their customers. Hence, strong businesses too should serve as a hedge against inflation.

Bittu: People also say that if not a wealth creator, Bitcoin might act as a wealth protector.

Me: By whatever name you call it, ultimately every financial transaction has 2 components: cost and value. You need to have a fair idea of both in order to enter deals which first protect and then create wealth. If you don’t know either of them, you are entering quicksand. I know the cost of Bitcoin but not its value.

Bittu: The narrative around Bitcoin is changing. Even some of the best-known investors are throwing their weight behind it. You would get left behind.

Me: I don’t want to fall for social proof. I have fallen for it earlier and have learnt precious lessons out of it. If other investors understand Bitcoin and make money, they deserve it. The fact that they make money and I don’t, shouldn’t bother me.

Bittu: You are raving too much about your teacher Buffett. Do you know he has underperformed the benchmark for so many years and his investing methods have become a passe?

Me: Underperformance is partly because of the gigantic amount of money that he oversees and not   necessarily because of obsolescence of methods. I manage small sum of money and understand his investing methods. His methods have worked for me in the past and hopefully they should work in the future as well.

Bittu: His methods won’t work forever. Till what point will you follow him?

Me: He has shown the path till $300 bn. Once I reach there, I will see.

Bittu: What’s the path?

Me: Buy good quality businesses run by good quality people and available at a fair price. Buy in sizeable quantities and hold them for a long period of time.

Bittu: Okay Ankur, I need to go. Good luck for creating wealth through investing in such businesses.

Me: Thanks, Bittu. Good luck to you too for creating wealth through Bitcoin.