For a layman, what would be the right way to approach the investment horizon if one wants to pick up stock in any company?
Vivek Karwa Instead of giving a lot of jargons, EBITDA, PE ratio etc, the easiest way for a layman to actually pick up a company and still not go wrong is to check the date. Today, most of the data is available online. The first thing I would look at is how long the company is in business. In fact, in the last 22 years I have been in the market, I have seen that many companies keep changing their names, business profiles and the cyclicality of businesses. So, if there is an IT boom today, they might become an IT company. If there is an infra boom, they might again become an infra company. There are many instances wherein people have got caught in this mess. So, look at how long the company is in business. That would really help. And then the basic numbers. Finally, keep in mind that the market rewards EPS. Market rewards profits the company is earning and nothing else.
So, even in the bad market, if the company is going to make good profits, the market would finally reward the company. That is the reason even during bad phases, we see some companies doing very well. There are data available. In fact, on the BSE and the NSE site, you can always download that and look at companies’ performance over the last three to five years.
One need not go into other numbers in the balance sheet and profit and loss statements because that would be confusing for laymen. But you can just look at the net profit the company is making. If there is an increase of at least 12 to 15 per cent, it will mean the company grows at least at 7-8% and another 6-7% accounts for inflation. If the company is growing net profit at a rate of 15%, that would be an ideal company to invest in.
There have been instances in the past where the company makes money but does not pay taxes. So, there could be reasons. The books might be doctored, even inflated. If a company is making money, they have to pay taxes. Check whether the company has actually paid taxes. If the company is making profits and paying taxes, it means the profits are genuine. So, these are the first three things. Lastly, look at the shareholding pattern of the company. If a company is well-researched, well-tracked, you will find that a lot of FIIs are invested in that company. A lot of mutual funds have been investing. A lot of other DIIs also are investing in that company.
Also, there might be big names who have invested in these companies. And hence, indirectly, as a layman, as a small investor, I might not be able to ask questions to the company or really question them if there is something wrong. But if FIIs, DIIs and big names are invested, these companies are doubly cautious. So, always look at the shareholding pattern. Sometimes you will find that some promoters are either increasing the shareholding, their own shareholding buying from the markets or at times decreasing.
In the last one to three months, in smallcap companies, many of the promoters have actually reduced their shareholding, which means promoters themselves are feeling that the valuation of the company is too high and hence, they should cash out a bit. Look at that trend also. So, these are four or five things. If you have an eye on these points, at least 90% of your problems can be sorted out and you would not make losses.
What are your recommendations and the reason why are you making these recommendations?
This would be again for a medium to a little longer term. The first one would be Indigo. We are seeing what is happening in aviation space. SpiceJet is almost out of business. GoAir is already stalled and Indigo is one company and other companies are not listed. In fact, you do not have any options if you really want to participate in the aviation sector. Indigo today announced that they are going to charge a fuel surcharge of Rs 300 to 1,000 per ticket which is going to increase the yield of the earnings overall.
At least there should be a 10 bps yield increase in the numbers next quarter if this continues. The crude went up to $94, and the ATF prices went up. The company has introduced this and after that the numbers have come down. Now, the crude is approximately at $83-84 but Indigo has that pricing power. It is almost in a monopolistic situation today. They may not decrease this surcharge which they have started charging.
Hence, the stock looks really good. On Friday, it is back to about 2500. I feel the stock could trade at Rs 3,000. Again, the festival season is starting, plus the World Cup. The company is going to benefit out of it. So, Rs 3,000 could be an ideal target.
All right. So, that is Indigo. What about something from the banking space?
I have one more. I feel this is the safest bet an investor can look at today and it is HDFC Bank. The merged loan book year on year has grown approximately 13% which is actually good. And deposit rates have been up an impressive 18% year on year. When this merger was announced, I was saying that for the next year after the merger, there could be some disruptions in the numbers. Now, I feel it may last for next two quarters to three quarters at the max. These numbers are going to stabilise. In fact, most of the brokerages have already started covering it and giving a target of about Rs 2,000. I feel Rs 1,900-2,000 could be a good target. It looks the safest bet in markets today. It was a leader, it is going to continue to be a leader. This is a disruption which happened for a short period. I think nothing to fear out of it, and you should definitely invest in this stock.
We have got the entry points but then usually, what should be your exit point in a particular company or from particular stock?
Okay. In fact, this is my original quote, and it is there on Twitter too. There is nothing called short term, medium term or long term, it is only profit term. As long as your company is making money. In the beginning, when we saw those four or five pointers, how should you choose your stock? One of the things I was told was, look at the profit of the company. Is it growing between 12% and 15%? If the company continues making that profit over a long period, the stock will automatically double every five years. So, 15% there is the thumb rule of 72, wherein if a company grows at 15%, the stock also should double in every five years.
As long as the company is continuing making quarter on quarter…quarter on quarter, there might be small disruptions, but year on year at least 12 to 15%, I do not think there is any reason for you to sell the stock as long as you don’t need the money urgently.
Secondly, while entering, if you have a target that if you are getting 10% or 20%, you would be happy then you should not mind. What happens is people get greedy while entering. They might think, okay, I will be happy with 20% returns. And when they get 20% in the short term or maybe even in the medium term, people get greedy and want to hold on to it.
You can hold it, but with a trailing stop loss. Otherwise, you should not be greedy in the markets. Market is the only place wherein you keep getting opportunities. We keep telling, that in life, when the opportunity comes, strike it, you should immediately grab it. But the stock market is one place wherein if you lose 1,000 opportunities, you will get another opportunity again. So, you should never be greedy in the markets.