Are you looking for the next HDFC Bank?

There is no dearth of stock market stories about the next HDFC bank or the next Page Industries or the next Dixon Technologies.  In the recent IPO boom, this comparison went to the next level – comparing Indian companies with global giants.

But this kind of chasing the next big multi bagger, has seldom yielded rich dividends for investors. This is because it is not easy to understand what market rewards a stock for. Is it for being in a booming industry or for its superior financial performance? We will try to find answers to these questions in this article.

We will take stock examples to highlight how markets believed that some emerging companies will emulate pioneers and winners and what happened next.

Are you looking for the next HDFC Bank?

#1 Chasing the next HDFC bank

Whenever a new bank comes into the market with few quarters of stellar growth or a high growth strategy, a comparison starts to shape up with multi decade compounders like HDFC Bank. 

Banks that were touted as the next HDFC bank include DCB bank (Development Credit Bank), RBL Bank (Ratnakar Bank), Yes bank and IDFC First Bank. One of the things that led to this perception was the re-shaping and re-branding of some of these old institutions under a new leadership of CEOs from global or international financial institutions. 

So, a fresh lease of energy and new strategy from high-profile CEOs was expected. This combined with a strong growth take-off in early years further built the perception of new winners. Hence, valuations moved up sharply, close to that of HDFC bank, in terms of price to book, leading to more investors jumping in. But the end results in these cases – a series of disappointments.

So, let’s go back to our question of what do markets reward a stock for? In this case, let us first get into the core economics of a banking business.  Banking is not a lucrative business when it comes to capital requirement and return on equity (RoE). It needs a lot of capital for growth while there is a limit to the RoE the business can generate (highly fragmented deposit pool, low market shares) unlike consumer companies.  

In the below table, we can see that the peak RoE is around 20% for some and that too for a short period. Otherwise, it has hovered around 15-18% for the best ones while some of the others saw a sharp dip in bad years. Consider this with the cost of capital of 10-12% – essentially, the wealth creation for investors lies in a narrow band.

So, in this business, the only way for wealth creation is not to lose moneywhen the potential to enhance RoE is limited. This is where HDFC bank stands as an exception – it made money without losing money across time frames, as reflected from the NPA chart below for the last 15 years.

Banking as a cyclical business is attractive only during growth cycles, which is characterised by growing loan book, declining NPA, expanding RoA and expanding valuation (price to book value). 

On the other hand, the downcycle is characterised by higher NPA, declining loan growth, fresh capital raising to compensate for NPA write-offs and declining valuation. 

If any one of these go wrong for a financial stock, it hurts the investor and the Yes bank episode is a reminder of this. The bank had to raise additional share capital to write-off the losses and in this process, the share capital went up over 10 times as shown in the table below.

What did the above mean to Yes Bank shareholders? While market capitalisation fell only by 50-55%, the share price crashed 95% to life time low as 10 times additional share capital came in.

Are you looking for the next HDFC Bank?

This explains the magnitude of disaster that can happen with financial stocks. YES, DCB and RBL lost their market charm!  

The bottom line is that every stock deserves to be valued based on its own performance and lending discipline. Comparison with the successful stories may result in wrong signals and if that does not transpire, the loss can be painful. This is especially true in a business with limited RoE potential.

#2 Chasing the next L&T

In the height of the infrastructure boom during 2007-08, one of the most echoed sentiments was to find out the next L&T. Infrastructure sector was seen as a sun-rise sector and so investors wanted to grab a share of every stock that could become the next L&T. Orders were pouring in for new companies and stocks were hitting new highs every month.

But, as we look back after a decade, many of the popular companies either don’t exist or have shrunk to the size of penny stocks. Even worse,other than L&T, there is only one other stock (GMR Airport Infra)  that managed to enter the space of the top 250 companies by market-cap (which are  large caps and mid-caps). Others have just shrunk to small caps or even penny stocks.

If you have a question on how GMR survived, it is one of the few companies that managed to sell non-profitable assets and retain its relatively better assets – airports. Others like J P Associates and GVK got rid of their most profitable assets such as cement plants and airports to reduce their debt and were eventually left with non-profitable assets. A popular stock, touted to become the next L&T was Punj Lloyd. It is a penny stock now.

What exactly went wrong here? The market was valuing the infrastructure companies on the perception that every order they win would get executed and after every execution, payment would be received.

But neither of these things happened.  Stuck projects due to regulatory issues, payment delays and arbitrations led to ballooning of debt and eventual collapse of these companies. Only a handful of small companies like KNR Constructions and Ahluwalia Contracts managed to survive for longer periods without landing into much trouble, although they still remain small caps.

L&T still stands tall and lone with a market cap of Rs.2.5 lakh crore as the next L&T just didn’t happen.  Thanks to its successful IT business comprising LTIMindtree and LTTS that were also adding meaningfully to market cap. 
This sector may be a pointer to the worst experience of chasing the next L&T for investors without understanding the risks involved in a less understood order book and high debt driven business.

#3 Chasing the next Page Industries

Page Industries, the franchise for Jockey in India, was another fascinating stock listing (in hindsight) that happened in the last 15 years. It has become over a 100 bagger ever since its IPO at Rs 395 in early 2007.

The stellar performance of Page Industries has time and again caught the attention of investors to find out the next Page Industries. Investors started looking at companies in similar lines of businesses with the same optimism and opportunity.
Again, let’s go back to the basic question of what do markets reward a stock for? In the case of Page Industries, it delivered one of the best return ratios in the listed space, during the last 15 years, since listing. 

Below is a comparison of RoCE and RoE of some of the best-known quality listed companies with that of Page Industries.

Page Industries clearly demonstrated that the market rewards a company for its superior financial performance, in the long run, and not for being part of any sector or group or an industry. It would likely have delivered the same returns with similar financial metrics had it been in some other business also.  

While we may be seeing some of its peers doing reasonably well of late with good financial metrics, sustaining it over a longer period of time will be key to wealth creation.

One of its peers, Lux Industries, after a sharp rally in 2021, took a hit in its share price on governance issues. 

So the next Page Industries is yet to happen for well over a decade and a half now! All its peers remain below Rs.5,000 crore in market capitalisation compared to Rs.52,000 crores market capitalisation for Page Industries!

#4 Chasing the next Dixon

One of the latest episodes of chasing the next big stock has been that of Dixon technologies vs. Amber enterprises. While both the companies came into the market at a similar time through IPO in late 2017 and early 2018, with similar levels of optimism, they are poles apart on stock price returns now.

While Dixon delivered 13X returns in the last 4 years, Amber barely doubled since listing. But the stocks have been bucketed in a similar category of “electronics manufacturing” and those who missed Dixon were chasing Amber as there are few stocks to play this manufacturing opportunity.

But what led to outperformance of one over other can be explained by the superior financial metrics of Dixon as seen in the Du Pont Analysis below.

Here, you can see that both the companies have similar net profit margin (PAT/Sales) and leverage (Assets/Equity), but there is a material difference in the Assets Turnover (Sales/Assets). This is the key reason behind superior financial metrics of Dixon as elaborated further in the graph below.

In our article on 3 ratios to pick winning stocks in manufacturing space, we have emphasised on the key things to look out for and the factors leading to superior RoCE 

From the Du Pont Analysis, it is clear from the time of IPO itself that these two companies showed distinct financial metrics (Asset turnover and RoE) while both were getting similar investor attention for being in the same industry. Eventually, it showed up in the returns with one significantly out-performing the other. 

While Dixon had its own challenges during the last two years due to Covid and the complex supply chain mainly comprising of imports, the company has managed to come back on earnings while demonstrating significant scalability in revenues. From Rs 2,500 crore in FY17, revenue surpassed Rs.10,000 crore in FY22. The management remains optimistic of RoCE expansion, beyond the current levels 30%, in the next few years as majority of capacity expansion is done with. 

On the other hand, Amber has been struggling with financial performance while its stock price has halved in a year even as the scalability gap is widening with Dixon.

The next Dixon may or may not happen and the daunting task for anyone would be to achieve the level of scalability in this low margin business that Dixon has achieved.

Starting from Xiaomi as its client in LED TV, lesser known Gionee in mobiles and Godrej in washing machines, it has expanded its clientele to comprise of Samsung, Panasonic, Motorola, Nokia, Acer, Lenovo, Bosch, Panasonic, Havells, Phillips, JIO, Croma, etc as its clients across different verticals.
Coming  to our key question on what markets reward a company for, this is another case of how markets reward a company with superior financial performance over the other despite being in the same industry.

#5 New-age IPOs – Going beyond boundaries

The most recent example of chasing a stock has been the new age start-ups. The comparison  now has gone beyond boundaries to look at the valuations of US and Chinese tech companies in this space.

The fact that all new-age technology companies performed well globally until 2021 also gave a feeling that fin-tech, food delivery and e-commerce are the businesses of  the future and investors wanted to lap up the Indian counterparts of such globally popular businesses. But in 2022, they all fell down – together. 

How markets reward stocks

There are some key takeaways for investors when they try to chase the next big stock. 

  • Don’t take a prejudicial approach to investing with an eye on the ‘next X stock’.  Each company will be rewarded by the market for its own financial performance and there will be only a very few outlier stocks in the market.
  •  It makes sense to look at every company from its own ability to deliver financial performance and what valuation market is likely to give it for such a performance. Superior performance will result in superior valuation given by the market. 
  • It is even more important to understand the risks and challenges involved in every business and whether the management is capable of navigating those risks. Sometimes, the ‘rising tide lifts all boats’ phenomenon lifts all stocks in a particular sector, but that will not sustain. As Benjamin Graham said - In the short run, the market is a voting machine but in the long run, it is a weighing machine.
  • To know what are the key attributes of a multi bagger and how to identify them  read our article: The magic formula to identify multi-baggers. We also recently published two articles on Smallcap investing where we have highlighted the odds of scaling up of companies from small to mid and large caps.

While the 100th company is only Rs. 48,000 crore in market cap, only very few companies that started as mid-caps or small-caps in the last 15 years have graduated to become large-caps such as Avenue Supermarts (D-mart), L&T Infoteh, Mindtree, Page industries and Varun beverages (Pepsico franchisee). At the same time, the retail sector from which D mart comes from is also well known for big failures such as Subhiksha and Future Retail. This also throws up the limited probability of success by chasing a stock because there was a success story in that sector. 

NOTE: The stocks mentioned here are not recommendations. These stocks may also be priced to perfection 😊.  In such stocks, the only possible approach , where you decide to make an entry, is to do so during market declines with lower initial allocation and build up over time. Even then, you need to make sure that such companies still address the huge opportunity size, growth and in-turn the potential to generate compounded returns of 15-20% over other reasonably valued stocks in the market.

General Disclosures & Disclaimers

More like this

4 thoughts on “Are you looking for the next HDFC Bank?”

    1. The article seeks to highlight what markets look for in a stock, by using different examples of what worked and what didn’t work. The intention is not to give a stock recommendation. – thanks, Bhavana

  1. Superb Article .Great NVC- well researched and well written.. Ideal article for students of Finance ( MBA , ACA or ACMA , CFA) .
    Good learning for all Investors in Stock Market looking for Multi-baggers.
    RAVINDRAN

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General disclaimers: The recommendations made herein in the Research Services are expression of views and/or opinions and should not be deemed or construed to be advice for the purpose of purchase or sale of any security, nor a solicitation or offering on any investment/ trading opportunity on behalf of the company, AMC, insurance company, or issuer of security referred to herein.

The content and research reports generated by the RA does not constitute or is not intended to constitute an offer to buy or sell, or a solicitation to an offer to buy or sell financial products, units or securities.

The information/ opinion/ views mentioned in research reports or by the RA are not meant to serve as a professional guide to the client or recipients of this Report. The research report, recommendation, or any other content published by the RA do not assure or guarantee any minimum or fixed returns to the client or recipients of the reports/ recommendations/ content.

Use of this information is at the client’s own risk. The client must make his/ her own investment decisions based on his/her specific investment objective and financial position and using such independent advisors as he/she believes necessary. The services rendered by the RA are on a best-effort basis. All information in the content or research report of the RA is provided on an as is basis. Information is believed to be reliable but the RA does not warrant its completeness or accuracy and expressly disclaim all warranties and conditions of any kind, whether express or implied.

While due care has been taken to ensure that the disclosures, information, and opinions given are fair and reasonable, PrimeInvestor Financial Research Pvt Ltd and/or none of its officers, directors, partners, employees, agents, subsidiaries, affiliates or business associates shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way whatsoever from the information/ opinions/ views contained in the research report and recommendations that form part of the Research Service, and/or mails, social media or notifications issued by PrimeInvestor Financial Research Pvt Ltd or any other agency appointed/authorised by PrimeInvestor Financial Research Pvt Ltd. Returns and performance figures mentioned in the research report represent past performance and should not be constituted to be future returns or guaranteed returns.

Any agreements, transactions or other arrangements made between the client and any third party named on (or linked to from) the Website are at your own responsibility and entered into at your own risk. Any information that you receive via the Website, whether or not it is classified as “real time”, may have stopped being current by the time it reaches you. Market price information may be rounded up/down and therefore may not be entirely accurate.

The purpose of these disclosures is to provide essential information about the Research Services in a manner to assist and enable the prospective client/client in making an informed decision for engaging in Research Services before onboarding.

History, present business and background: PrimeInvestor Financial Research Private Limited is registered with SEBI as Research Analyst with registration no. INH200008653. The Research Analyst got its registration on August 19, 2021 and is engaged in offering research and recommendation services.

Disciplinary history: There are no pending material litigations or legal proceedings against the Research Analyst. As on date, no penalties / directions have been issued by SEBI under the SEBI Act or Regulations made thereunder against the Research Analyst relating to Research Analyst services.

Details of the RA's associates: No associates.

Usage of Website Content: This Website is controlled and operated by the RA. All material, including research reports, recommendations, portfolios, ratings, lists of financial products, illustrations, statements, opinions, views, photographs, products, images, artwork, designs, text, graphics, logos, button icons, images, audio and video clips and software (collectively, “Content”) are protected by copyrights, trademarks and other intellectual property rights that are owned and controlled by the RA or by other parties that have licensed their material to us.

Except where otherwise agreed in writing with the RA, material on the Website is solely for the client’s personal, non-commercial use. Except as provided below, the client must not copy, reproduce, republish, upload, post, transmit or distribute such material in any way, including by e-mail or other electronic means and whether directly or indirectly and the client must not assist any other person to do so.

Without the prior written consent of the RA, modification of the materials, use of the materials on any other web site or networked computer environment or use of the materials for any purpose other than personal, non-commercial use is a violation of the copyrights, trademarks and other proprietary rights, and is prohibited. Any use for which the client receives any remuneration, whether in money or otherwise, is a commercial use for the purposes of these Terms.

The client may occasionally distribute a copy of a research report, or a portion of the same, from the Website in non-electronic form to a few individuals without charge, provided the client includes all copyright and other proprietary rights notices in the same form in which the notices appear, original source attribution, and the phrase “Used with permission from PrimeInvestor Financial Research Pvt. Ltd.”

While the client may occasionally download and store research reports or information from the Website for his/her personal use, he/she may not otherwise provide others with access to the same. The foregoing does not apply to any sharing functionality we provide through the Website that expressly allows the client to share Content or links to Content with others. In addition, the client may not use Content he/she has downloaded for personal use to develop or operate an automated trading system or for data or text mining.

The client agrees not to rearrange or modify the Content available through the Website. The client agrees not to display, post, frame, or scrape the Content for use on another website, app, blog, product or service, except as otherwise expressly permitted by these Terms. You agree not to create any derivative work based on or containing the research products and Content. The framing or scraping of or in-line linking to the Services or any Content contained thereon and/or the use of webcrawler, spidering or other automated means to access, copy, index, process and/or store any Content made available on or through the Services other than as expressly authorized by us is prohibited.

The client further agrees to abide by exclusionary protocols (e.g., Robots.txt, Automated Content Access Protocol (ACAP), etc.) that may be used in connection with the Research Services. The client may not access parts of the Research Services to which he/she is not authorized, or attempt to circumvent any restrictions imposed on your use or access of the Services.

As a general rule, the client may not use the Content, including without limitation, any Content made available through one of our RSS Feeds, in any commercial product or service, without our express written consent.

The client may not create apps, extensions, or other products and services that use our Content without our permission. The client may not aggregate or otherwise use our Content in a manner that could reasonably serve as a substitute for a subscription to the Website.

The client may not access or view the Services with the use of any scripts, extensions, or programs that alter the way the Services are displayed, rendered, or transmitted to you without our written consent.

The client agrees not to use the Services for any unlawful purpose. We reserve the right to terminate or restrict the client's access to the Website if, in our opinion, the client's use of the Services may violate any laws, regulations or rulings, infringe upon another person's rights or violate these Terms.

Prohibited content: The Website includes comments sections, blogs and other interactive features that allow interaction among clients and between clients and the RA. We call the information posted by or contributed by users “Contributed Content.” In the course of availing of the Research Services or uploading any post or comment on the Website, the client shall not post any Contributed Content that (i) contains nude, semi-nude, sexually suggestive photos, (ii) tends or is likely to abuse, harass, threaten, impersonate or intimidate other users of the Website and/or Research Services, (iii) is lascivious or appeals to the prurient interest or if its effect is such as to tend to deprave and corrupt persons who are likely to use or have access to the Website and/or Services, or (iv) otherwise violates, is prohibited or restricted by applicable law, rule or regulation, is offensive or illegal or violates the rights of, harms or threatens the safety of other users of the Website and/or Services (collectively “Prohibited Content”).

We reserve the right to cease to provide the client with the Research Services or access to the Website, or terminate your subscription, with immediate effect and without notice and liability, for violating these Terms, applicable law, rules or regulations and reserves the right to remove Prohibited Content which is in violation of these Terms, or is otherwise abusive, illegal or disruptive. The determination of whether any content constitutes Prohibited Content, violates these Terms, or is otherwise abusive illegal or disruptive, is subject to the sole determination of the Firm.

Changes to Research Services: We are constantly endeavouring to improve the quality of Research Services provided to our clients. Due to this, the form and nature of the Research Services provided may change from time to time without any prior notice to the client. We reserve the right to introduce and initiate new features, functionalities, components to the Website and/or Research Services and/or change, alter, modify, or discontinue existing ones without any prior notice to the client.

Warranty and liability disclaimer: The Website, Research Services, and all the materials and services, included on or otherwise made available to the client through this Website is provided by the RA on an “as is” and “as available” basis without any representation or warranties, express or implied except otherwise specified in writing. Without prejudice to the foregoing paragraph, the RA does not warrant that:

  • This Website and/or Research Services will be constantly available, or available at all;
  • The information on this Website or provided through the Research Services is complete, true, accurate or not misleading; or
  • The quality of any products, services, information, or other material that you obtain through the Website or Services will meet your expectations.

The RA, to the fullest extent permitted by law, disclaims all warranties, whether express or implied, including the warranty of merchantability, fitness for particular purpose and non-infringement. The RA makes no warranties about the accuracy, reliability, completeness, or timeliness of the Website, Research Services, Content, Contributed Content, Services, software, text, graphics and links.

The RA does not warrant that this Website, Research Services, information, content, materials, or any other material included on or otherwise made available to you through this Website, their servers, or electronic communication sent by the RA are free of viruses or other harmful components.

Nothing on this Website constitutes, or is meant to constitute, advice of any kind.

Indemnification: The client:

  1. Represents, warrants and covenants that no materials of any kind provided by him/her will:
    1. Violate, plagiarise, or infringe upon the rights of any third party, including copyright, trademark, privacy or other personal or proprietary rights; or
    2. Contain libellous, Prohibited Content or other unlawful material;
  2. Hereby agree to indemnify, defend and hold harmless the RA and all of the RA’s officers, directors, owners, agents, customers/clients, information providers, affiliates, licensors and licensees (collectively, the “Indemnified Parties”) from and against any and all liability and costs, including, without limitation, reasonable advocate’s fees, incurred by the Indemnified Parties in connection with any claim arising out of any breach by the client of these Terms or the foregoing representations, warranties and covenants. The client shall cooperate as fully as reasonably required in the defence of any such claim. The RA reserves the right, at its own expense, to assume the exclusive defence and control of any matter subject to indemnification by the client.

Applicable law: This Website, including the Content and Contributed Content and information contained herein, and the provision of Research Services shall be governed by the Securities and Exchange Board of India, laws of the Republic of India and the courts of Chennai, India which shall retain exclusive jurisdiction to entertain any proceedings in relation to any disputes arising out of the same. As such, the laws of India shall govern any transaction completed using this Website.

Information gathered and tracked: Information submitted or collected on the Website or pursuant to the use of the Services is stored in a database. Specifically, we store the username, name, e-mail address, contact number, as submitted or collected on our Website or through the provision of the Research Services. We may use such information to send out occasional promotional materials, including alerts on new Services available, or other promotional and marketing material relating to our clients and customers.

In accordance with the Information Technology Act 2000, the name and the details of the Grievance Officer at PrimeInvestor is provided below:

Mr. Srikanth Meenakshi
PrimeInvestor Financial Research Pvt. Ltd., Registered office: 659, 4th Avenue, D-Sector, Anna Nagar Western Extension, Chennai 600 101.
Email: [email protected]

11. Mandatory notice:

Clients shall be requested to go through Do’s and Don’ts while dealing with RA as specified in SEBI master circular no. SEBI/HO/MIRSD-POD-1/P/CIR/2024/49 dated May 21, 2024 or as may be specified by SEBI from time to time.

12. Optional Centralised Fee Collection Mechanism:

SEBI has operationalized a centralized fee collection mechanism for IA and RA. Under this mechanism, clients shall pay fees to IAs/RAs through a designated platform/portal administered by a recognized Administration and Supervision body. This is an optional mechanism for the registered entities. At this time, PrimeInvestor has opted out of this fee collection mechanism. Therefore, all subscription payments for the Research Services will be through the modes as specified in Clause 5 of these Terms.

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