The Coffee Can Myth
Does CCP measure up to tall claims in youtube videos ?
The worst lies are the ones based on some truth.
As India grows, financial asset management is growing like never before. In a country where a net worth of paltry 25 Lakhs is supposed to get you to the HNI (high net worth individual) list, hungry PMS managers are in a position to milk most upper middle class Indians. Among them, there are all sorts of shady characters - insider traders previously banned by SEBI, arrogant idiots who lost their shirts barely ten years back, lucky guys who struck big with one single stock. So much so, that it’s refreshing to see somebody talking about clean accounts and business fundamentals. Add to it that this guy is a renowned foreign-educated academic and hails from a community diametrically opposite to the stereotypical Gujjus and Marwaris - and you shouldn’t be surprised that Saurabh Mukherjea’s Marcellus PMS has found such outsized response.
Marcellus runs three PMS-s, the Coffee Can Portfolio (essentially a focused large cap fund), the Kings of Capital Portfolio (a financial service based fund), and the Little Champs Portfolio (a focused small cap fund). I will not go into detail of each stock, but will dissect one of his picks.
Nestle
Argument Advanced
Clean Accounts : We agree
Baby Milk Powder drives Nestle : We agree
High volume growth in Baby Milk, High ROCE : We agree with the high ROCE part. Baby milk powder is nothing special to make and easy to sell at a premium. Where we disagree is the high volume part.
Saurabh claims that post 1999, volume growth was ~16% CAGR. This is true, but let us look deeper. India circa 1999 was just urbanizing, the urban housewife with 3 kids was the norm, the working mom revolution was just beginning. Out went mother’s milk, in came Lactogen. After twenty years, is this still true ? Yes, but partially. Urban mother is now almost always employed, but the rural mother is still the housewife. So, Nestle’s volume growth, while not stagnating absolutely, is in relative decline. Moreover, the elephant in the room is that fewer babies are born per capita now, and this number will only go down. Factoring them together, we expect Nestle’s volume growth in baby milk powder to be nowhere close to 16% for the next decade (the timeframe advocated for CCP).
Himalayan Barrier to Entry : Indian govt bans sale of baby food except at the Chemist’s and bans all advertisement of baby food. Thus Nestle’s monopoly is in no danger of dissipating. This is a compelling argument, but also perhaps the worst one. Indian govt has made it clear that it discourages Baby food as a product. What is stopping GoI from banning the sector altogether ? Realistically, the chances are minuscule in the intermediate term, but over a decade or two, either such regulations may eventually come, or in the other direction, the ban may be lifted altogether. In both the cases, the Nestle investor will be in for a very rough ride.
Valuation and the 25% myth
Argument advanced : CCP EPS grows at 25% a year, so even if the speculative part (PE) halves in a decade, you still get 18% CAGR, add in 2% dividend and you are in your 20% valhalla.
Really ? I decided to test, and it stunned me. He was lying. a decade back in FY 2012 Q1, Nestle EPS stood at 92 Rs per share. Now it stands at 232 Rs per share. EPS has grown merely at ~10% per year over the last decade. However, the PE nearly doubled from 46 to 83. Thus, ex dividend, Nestle’s 18% CAGR over last decade was 10% real growth and 8% speculative growth.
Now hoping for PE expansion is, as Saurabh himself says, a fool’s errand. So, we are left with 10% earnings growth CAGR (add in 1% dividend Nestle usually pays, so 11%). All this in a decade when Nestle had the odds firmly stacked in its favour. If you want 10%, you buy the Nifty, why bother listening to Saurabh ?
Once I found out Saurabh’s 25% EPS growth claim to be false on Nestle, I decided to check on every single one of his CCP stocks. Here are the CAGR results on a decadal basis (Q1 FY 12 - Q1 FY 22). (Dr. Lal Pathlabs doesn’t make it since it was not listed in 2011)
Stock EPS growth PE expansion
Nestle 10% 8%
Asian Paints 15% 10%
Pidilite 15% 13%
Divi’s Lab 17% 10%
Page Industries 18% 12%
HDFC Bank 27% -2%
Relaxo 26% 24%
Abbott 22% 7%
Berger Paints 21% 14%
Titan 10% 14%
Bajaj Finance 29% 27%
Averaged together, EPS growth in CCP has been 19%, and PE expansion has been 12.5%. Let us add in 2% dividend as well. Contrary to tall claims in countless youtube videos, PE halving and EPS remaining so would result in a 14% return, not 20%.
If PE contracts by the same amount as PE expansion in the last decade, the return would be a paltry 6.5% after dividends.
While 14% CAGR does not look so bad, one has to keep in mind that these stocks have been the best performing Indian stocks of the last decade, and hindsight bias is far more likely to be positively skewed.
Moral : If it sounds too good to be true, it probably is.
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