In my earlier post, I had talked about Indian economy being the biggest growth story of the 21st century. This is based on how the most reliable global institutions and global banks are forecasting Indian economy to power ahead of US and China economy by 2050(pl refer to the earlier blog on 25th June). As mentioned earlier, Indian economy would grow 4 times by 2020(in a decade),14 times by 2030(20 years) and 20 times by 2040(30 years) and so on. Potentially,you could grow your wealth by same or better muliples by investing in NIFTY/sensex Index based funds.However,if we want to do better than these multiples,we have to do some homework in stock picking.
Remember, dont invest in stocks as peices of paper , invest in businesses underlying them .The key is to identify the sectors and businesses/ companies who are the best proxies of this future Indian economy growth for decades. Remember that this is a long term story and hence we have to pick the best businesses which has the best chances to grow & survive with Indian economy for atleast 10-20 years.
Lets identify great businesses with following five criteria :-
- Honest and competent management - transparent and shareholder friendly
- Strong financial track record -stable & high profitability/ROE with low debt
These would be my “Hi-Five” principles/ framework of value investing in Indian markets. I would like to quote one example to demonstrate how to deploy this framework/principles
PFC(Power Finance Corporation) – Why PFC?
- Power is the biggest “theme” aligned to Indian growth story
- Power needs investments of $400 Billion in next 6 years(12th Five year plan).
- PFC is best suited to service this huge requirement of funding, given its expertize & domain knowledge
- PFC plays a strategic role in all big govt. power development schemes. For example , its the nodal agency for all UMPP(Ultra Mega Power Projects) – each of 4000MW size & $4 Billion of investment.
- New sanctioned loans pipeline is $40 Billion – twice its current loan book size of about $20 Billion .This ensures great revenue growth visibility for next 3-4 years
- Last 5 years business and financial track record has been fantastic with 22% growth in sales, 15% growth in EPS/earnings and 16% ROE with NPA at 0.03% .
- The current P/E is just at 8.5 due to concerns on slow loan growth(due to power projects execution delays and clearance delays) and SEB(state electricity Boards) health. The fears are exaggerated due to heavy pipeline of already sanctioned loans and very low NPAs.(Non performing assets)
- Bottomline is that it satisfies all the Hi-Five criteria and hence is a strong bet.
You could invest in this scrip now(trading at < Rs.200) with a time horizon of atleast 3-5 years with a target annualized returns of 15-25% over long term, provided there is no terrible market shock. Its a safe and risk free bet with excellent return prospects.
You have to find another such 8-10 companies/ businesses which can land you in a gold mine in next 10 or more years, available at attractive or atleast fair valuation . I have talked about another 2 companies in my yesterday’s blog (9th July)- LIC Housing Finace and Bank of Baroda(pl refer to it). Don’t overdiversify by investing in more than 10-12 companies/ stocks if you want to beat the average market returns.
Happy stock picking and investing.