Part 3- Inflection point
This part will cover the main point of change which happened in 2018. What would you do in 2018, will define the return for next 3-5 years.
Let us assume the date today is 30th July, 2018.
This year the growth in Loan Book is 18%, while the ROA has increased by few basis points.
Let’s first look at the ROA side, The lending rates have fallen signifying increasing competitiveness, while the borrowing rates to have fallen. However, the fall in lending yield is more sharp vs the others.
In terms of growth there has been a slowdown, there are two factors pointing to the same:
1) The growth in number of branches has slowed down
2) The 10 year interest rates have started to rise 6.5 to 7.9%, similar has been the trend in repo rates
Last year we discussed we have no information regarding the new management or way of judging how they will perform in such a scenario. This risk still stands today.
The growth in Book value has been 38%, while the growth in share price has been -50% resulting in Price to book value contraction from 8 to 2.69. Mr. Market seems to have derated the earning potential of the sector back to 2015 levels.
What we will do today, will mainly distinguish us, this is the main decision point. As per general probabilities, most of the companies stop growing after 3-5 years. There are very very few which continue to grow beyond that for 10 years.
Two main questions need consideration?
1) What are the odds that the company will outperform its competitors (Any competitive advantage)
2) What are the chances of growth for the industry and company in future?
While we think the chances of company having any sustainable competitive advantage as of now are very less and there does not seem to be no sign regarding the same. The chances for slow growth seem to be still intact and the company is poised to take advantage for the same. However, the sector seems to have matured in terms of growth of the industry.
We think trimming some position may be fine here.
You may think differently and we would love to know why?
The purpose of these case studies is to practice such cases and help all of us develop patterns to take similar decisions in future and avoid mistakes of both omission/comission. Its like practice before the main match. We may have made some mistakes or you may not agree with us. However, we would love to know why you think so or what you may have done differently? So that we may all learn together.
Before Going further it would be better if you Analyse the case or do the valuation or allocation according to your own Method. That way it may help you to do better with the case further and sharpen your mind for future.
Pick Parts of the case study and use it as it may be helpful to you.
May we all learn and progress together.
This is what has happened in terms of share price till now. While in terms of business the loan book has grown from 16,000 crore in 2018 to 22,000 crore in 2021.
We leave it upto your judgement, regarding what you could have done in terms of your strategy.