Stock Update: Century Ply

Q3 FY17 investor presentation and concall summary -

• Hoshiarpur plant for MDF is to start in Mar 2017
• Sainik sold 11,819 CBM (cubic meter) vs 12,037 cbm last year. This is despite impact of demonetization
• Ply sales have been strong in January 2017 as well
• There are around 3,300 plywood units in the country and out of 3,300 units, 2,500 are totally exempted, the turnover is less than Rs1.5 crore, 700 units are under the partial exemption their turnover is Rs1.5-5 crore and only 100 units are there which are in the full duty paying
• MDF: Co 600 CBM/ day capacity MDF plant is expected to come on stream by April, 2017. It entails an investment of 380 cr with 207 cr spent till Q3FY17. 
• The company would also use the MDF produce to make value added products like doors, pre-laminated boards. While it would also produce high density fibreboard (HDF) for manufacturing wooden flooring
• Market share: The company looked to maintain market share in difficult times post demonetisation. Hence, it gave dealers some discounts which led to a margin contraction. However, going forward, the management has indicated that they would reduce these discounts over the time
• Demonetisation impact: The management believes that demonetisation impact is over as the company witnessed ~5% growth in January, 2017. Though the unorganised sector is still witnessing problems, the company believes that it has a great opportunity to capture market share from unorganised players post demonetisation
• Pre-lam particle board plant: Currently, the company has a capacity of producing 1000 boards/day at its pre-lam unit and it would augment its capacity to 3000 boards/day by commissioning one more unit in next 3-4 months
• Commercial veneer: The realisations of commercial veneer increased sharply during the quarter as company sold premium veneer. It expects to maintain such realizations, going forward
• Pricing changes: The company has not taken any price hikes post demonetisation. It would benefit from softening raw material prices and so would look to maintain prices, going forward before the final rate of GST is known. Further, the unorganised players have already take price hikes of ~5% post demonetisation and could also take further price hikes. This would lead to contraction in price differential between organised and un-organised products which would help the company gain market share from unorganised players
• Winding up furniture business: The company has decided to completely wind up its furniture business which it started in 2012. Over the years, the division has accumulated losses of ~25 crore
• Laminates capacity expansion: The company is planning to rampup its laminates capacity by 50% to 7.2 mn sheets
• GST rate: The management expects a GST rate of either 18% against the current incidence of ~27-29%. Post GST implementation, a level playing field would be established and organised players are set to benefit

Near term triggers
• GST implementation is likely to migrate unorganised to organised sector
• Pre-lam is expected to give good growth
• MDF, new facility, is expected to give good growth - FY18 revenue is expected to be around 400cr; At full utilization it can generate 600 cr

Learnings from Buffett's 2017 Annual Letter

This year Buffett dealt with a few important points. I found his lengthy discourse on the superiority of index funds intriguing - but not really applicable for the Indian markets as here, maybe unlike in the US, there is significant outperformance by good funds over the index.

On being in the market

The years ahead will occasionally deliver major market declines – even panics – that will affect virtually all stocks. No one can tell you when these traumas will occur – not me, not Charlie, not economists, not the media. Meg McConnell of the New York Fed aptly described the reality of panics: “We spend a lot of time looking for systemic risk; in truth, however, it tends to find us.” During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost  certainly do well.

Having a portfolio of good businesses, without being leveraged and not needing to pull out of the market when there is a downturn, can produce good results over a long period of time.

On share repurchases

It is important to remember that there are two occasions in which repurchases should not take place, even if the company’s shares are underpriced. One is when a business both needs all its available money to protect or expand its own operations and is also uncomfortable adding further debt. Here, the internal need for funds should take priority. This exception assumes, of course, that the business has a decent future awaiting it after the needed expenditures are made. The second exception, less common, materializes when a business acquisition (or some other investment opportunity) offers far greater value than do the undervalued shares of the potential repurchaser.

Here, I think, the Indian tax laws on dividend distribution has skewed the investor giveback so that companies are looking at share repurchases as an alternate mode of returning cash to shareholders. But, in general, the principle outlined by Buffett holds true.

On insurance operations

A sound insurance operation needs to adhere to four disciplines. It must (1) understand all exposures that might cause a policy to incur losses; (2) conservatively assess the likelihood of any exposure actually causing a loss and the probable cost if it does; (3) set a premium that, on average, will deliver a profit after both prospective loss costs and operating expenses are covered; and (4) be willing to walk away if the appropriate premium can’t be obtained. Many insurers pass the first three tests and flunk the fourth. They simply can’t turn their back on business that is being eagerly written by their competitors. That old line, “The other guy is doing it, so we must as well,” spells trouble in any business, but in none more so than insurance.

This is important bit of wisdom to be kept in mind, since we are seeing listed companies in this space now in India. Insurance is a long gestation business which has the potential to create significant wealth for shareholders.

My takeaways from Howard Marks' presentation

My notes from Howard Marks' presentation on 2-Mar-17:

• Definition of "great" companies is dubious. Very difficult to identify great companies over a very long period
 
• Investing is not a matter of buying good things, but buying things well (buying assets which are out of favour)
 
• Forecasting is not possible as the future is not knowable. Try to know the knowable. Focus on specific sectors, industries, companies
 
• The main decision to make at any point in time - whether to play defensive or offensive. You cannot play both at the same time.

• Low purchase price is more important than anything else (including quality of company)
 
• Have to think differently (variant perception) and better - need to have some knowledge different from everyone else
 
• Most investors behave pro-cyclically
 
• You need to have a philosophy and process that you can stick to even in most trying of times
 
• Most corrosive of emotions is to sit up and watch others make money
 
• Plan to survive the "worst day" in the market without having to sell. The challenge is we don't know what the "worst day" will look like, but can get an idea from the past.

• Hubris, ego, over-confidence are enemies of an investor
 
• Your approach needs to be consistent with your personality
 
• Turn cycles to your advantage
 
• Look at E/P and compare with interest rates to get a sense of overall market valuations

Overall, it was a great presentation with some very good Q&A. Thanks to Prof Bakshi for inviting me and hosting such a fabulous and memorable event.

Building the Right Investment Temperament - Excerpts from Howard Marks - Part 6

Finding bargains
• Investment is the discipline of relative selection
• Our goal isn't to find good assets, but good buys. Thus, it's not what you buy; it's what you pay for it.   
• The necessary condition for the existence of bargains is that perception has to be considerably worse than reality.

Ultimately, we are all looking to make money from stocks. So, even though HUL is a great business, it is unlikely to make to really wealthy. A good business is not always a good stock and vice versa.

Patient Opportunism
• Sometimes we maximize contribution by being discerning and relatively inactive. Patient opportunism - waiting for bargains - is often your best strategy.

Patience and being emotionally able to sit tight on a position or with cash is critical, although one of the toughest things to do. This is where the right investing temperament is required. As Jesse Livermore said famously and is also oft repeated by Charlie Munger, "Throughout all my years of investing I've found that the big money was never made in the buying or the selling. The big money was made in the waiting."

Having a sense of where we stand
• Most people strive to adjust their portfolios based in what they think lies ahead. At the same time, however, most people would admit forward visibility just isn't that great. That's why I make the case for responding to the current realities and their implications, as opposed to expecting the future to be made clear.

Move beyond "hope trades" to discerning what is going on in the markets today and calibrate your actions based on that.

Investing defensively
• If we avoid the losers, the winners will take care of themselves.
• Investing scared, requiring good value and a substantial margin for error, and being conscious of what you don't knowand can't control are hallmarks of the best investors I know.
• Worry about the possibility of loss. Worry that there's something you don't know. Worry that you can make high quality decisions but still be hit by bad luck or surprise events. Investing scared will prevent hubris; will keep your guard up and your mental adrenaline flowing; will make you insist on adequate margin of safety; and will increase the chances that your portfolio is prepared for things going wrong. And if nothing goes wrong, surely the winners will take care of themselves.

Avoiding Pitfalls
• The success of your investment actions shouldn't be highly dependent on normal outcomes prevailing; instead , you must allow for outliers.
• Loss of confidence and resolve can cause investors to sell at the bottom, converting downward fluctuations into permanent losses and preventing them from participating fully in the subsequent recovery.

Shit happens. Be prepared, atleast mentally to deal with it. Don't put all your eggs in one basket no matter how good and insulated the basket is!!

Reasonable Expectations
 • Investment expectations must be reasonable. Anything else will get you into trouble, usually through the acceptance of greater risk that is perceived.

Don't try to overreach. Having an unreal and unjustified return expectation is the beginning to investment mistakes. Don't pick a return (like 25% or 30% or 40%) out of thin air and hope to make that every year. It will necessarily make you do things which will eventually lead you to losses.

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This concludes the learning and musings from Howard marks' The Most Important Thing Illuminated.

You can read the previous posts in order:
Part 1
Part 2
Part 3
Part 4
Part 5
Part 6

Building the Right Investment Temperament - Excerpts from Howard Marks - Part 5

Being attentive to cycles
• Just about everything is cyclical. Cycles always prevail eventually. Nothing goes in one direction forever.
Awareness of the pendulum
• There are a few things of which we can be sure, and this is one: extreme market behaviour will reverse. Those who believe that the pendulum will move in one direction forever - or reside at an extreme forever - will eventually lose huge sums. Those who understand the pendulum's behaviour can benefit enormously.

This is one of my core beliefs. In sports, we call this by "law of averages" or "rub of the green". Mean reversion works, but in some cases, you may need to have a suitable long term time frame to judge its impact.

Combating negative influences
• Many people will reach similar cognitive conclusions from their analysis, but what they do with those conclusions varies all over the lot because psychology influences them differently. The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological.
• From time to time greed drives investors to throw in their lot with the crowd in pursuit of profit, and eventually they pay the price. We must constantly be on the lookout for things that can't work in real life. In short, the process of investing requires a strong dose of disbelief. Inadequate skepticism contributes to investment losses.

Again, something very very core to my belief system. Temperament is what differentiates the good investor from the bad. And the ability to say "No" to things or stories that don't make sense regardless of who is saying it.

Contrarianism
• You must do things not just because they are the opposite of what the crowd is doing, but because you know why the crowd is wrong.
• Establishing and maintaining an unconventional investment profile requires acceptance of uncomfortable idiosyncratic portfolios, which frequently appear imprudent in the eyes of conventional wisdom.
• Only a skeptic can separate the things that sound good and are from the things that sound good and aren't. The best investors I know exemplify this trait. Skepticism and pessimism aren't synonymous. Skepticism calls for pessimism when optimism is excessive. But it also calls for optimism when pessimism is excessive.

Taking a view that is different from the majority is a psychologically difficult thing to do. But the best results are obtained by people who are able to stand apart from the crowd.

Guru Speak - Charlie Munger speaks at the Daily Journal annual meeting

Always instructive to hear Charlie Munger.

Building the Right Investment Temperament - Excerpts from Howard Marks - Part 4

Howard Marks has written extensively on risk and its management.

The riskiest things: the most dangerous investment conditions generally stem from psychology that's too positive. For this reason, fundamentals don't have to deteriorate in order for losses to occur; a downgrading of investor opinion will suffice. High prices often collapse of their own weight.

The greatest risk doesn't come from high quality or high volatility. It comes from paying prices that are too high. This isn't a theoretical risk; it's very real.

Most investors think quality, as opposed to price, is the determinant of whether something's risky. But high quality assets can be risky, and low quality assets can be safe.

Risk is inherent in the price you pay for stocks. The higher price you pay, the higher risk there is. Irrespective of the quality of the business.

The possibility of a variety of outcomes means we mustn't think of the future in terms of a single result but rather as a range of possibilities.

No one knows the future, so deterministic projections make little sense. It is better to think in terms of a range of outcomes that covers the most likely future scenarios.

Invariably things can get worse than people expect. Maybe "worst case" means "the worst we've seen in the past". But that doesn't mean things can't be worse in the future.

Careful risk controllers know they don't know the future. They know it can include some negative outcomes, not how bad they might be, or exactly what their probabilities are.

Case in point, 2008, was much worse that what most investors had expected.
 

I'm very happy with the phrase "perversity of risk". When investors feel risk is high, their actions serve to reduce risk. But when investors believe risk is low, they create dangerous conditions. The market is dynamic rather than static, and it behaves in ways that are counter-intuitive.

My core investment assumption is that the market is a complex adaptive system and is auto-correcting in nature. we cannot determine outcomes from a linear thought process.

The road to long-term investment success runs through risk control more than through aggressiveness. Over a full career, most investors' results will be determined more by how many losers they have, and how bad they are, than by the greatness of their winners.

If you minimize your losers, the winners will take of itself!