The writer blogs at Fundamental Investor and tweets at @FI_InvestIndia.
As any investor would be aware, stocks are broken down by company size. The size of a company is dictated by its market capitalization. It is widely accepted that a small-cap stock contains more inherent risk than a large-cap one. But they also offer a greater potential for return which serves as an enticement to investors.
A large-cap is one whose market capitalization is more than Rs 10,000 crores. Regarding such companies, the most common questions I have endured over time have been:
- Can a large-cap stock create wealth for its shareholders?
- Is it worth investing in one?
- Does anyone make money in large caps?
Here I share my experience with three large caps. They may be staid and boring, but they worked for me. Am I making buy/sell recommendations today? NO. I am sharing my personal experience purely for illustrative purposes.
June 2016
A friend brought Rural Electrification Corporation, or REC, to my attention. At that time, the company was quoting at around Rs 80 (ex-bonus Rs 160) with a market cap of around Rs 15,000 crores. It was trading at around 2.6x earnings and the dividend was Rs 17.1 per share. Read that again. The dividend was more than 10% of the market value of Rs 160!
The issues I contemplated:
- The P/E was already below 3. There was not much chance of it going lower. Even if earnings went up 50%, capital would also move up.
- The dividend was more than 10% (tax free) of the market value of Rs 160. That amazed me. Would investors not invest, at least for the dividend?
When I discussed this with other investors, a few of them displayed a considerable lack of enthusiasm. The reason? It was a large cap on a downtrend which did not even have technical support.
I gathered courage and bought a substantial chunk of REC in June 2016.
September 2016
This time I was introduced to Piramal Enterprises.
I was fascinated by the track record of this conglomerate and the integrity of the management. The prowess of Ajay Piramal deepened my conviction. It was quoting at around Rs 1,800 and the market cap was around Rs 30,000 crore.
The issues I contemplated:
- With 3 fantastic solid verticals - Pharma, Financial Services and Data Analytics, enormous value could get unlocked over the long term.
- Once I valued the company, I believed it would move up sooner or later, and capital would not be lost.
I took a small position at Rs 1,800 levels. Due to demonetization in November that year, the stock plunged to Rs 1,400 levels and the market cap was around Rs 25,000 crore. To take advantage of this, I shifted a large part of my funds from another stock to Piramal.
I convinced a few friends to also take a position in the stock, but again, the lack of interest in a large cap was apparent.
December 2016
A friend got me introduced to the arena of Housing Finance. Right from 2012, I tracked Indiabulls Housing Finance but never took a position in it. To be honest, I was not sure how the business works or how NIM or leverage impacts valuations. Consequently, I had no idea how to value the stock.
Conversations with my friend gave me a solid foundation and a new perspective of the business. I understood that a well-run housing finance company would grow every quarter. Even a small cut in operational cost could create enormous wealth for shareholders. I learnt about their transparency, the dividend policy and went through their annual reports and presentations. While I was enchanted by their growth and their guidance, it was their proven business model that sealed the deal for me.
When I picked up Indiabulls Housing Finance, it was available at a market cap of Rs 27,000 crores. Again, the market cap was a barrier for many friends. I added to my position at Rs 630 levels.
How did they fare?
All the above three stocks fared extremely well and I gained tremendously. Once again I reiterate, since I am not making buy or sell recommendations here, I will refrain from stating my current position in them.
Having said that, let me share my learnings with you.
What my experiences have taught me about LARGE-CAP investments:
1) Do not close your mind to large-cap companies. Be open. You get to make the final call on whether or not to buy the stock, but you lose nothing by listening to others or reading about potential ideas.
2) When bought cheap, even large-cap growth companies can create huge wealth without disturbing your peace of mind.
3) If a large-cap company is growing but available at discount due to various external or macro factors, the downside is limited.
4) If dividend is more than 7-8% of the market value, have a second and third look and see if the investment is worthy. Sometimes, the downside will be capped due to dividend payout.
5) Even a large-cap can make money for you; if it is aggressive and growing.
The companies mentioned in the article are purely for illustrative purposes and NOT stock recommendations. The author has chosen not to reveal his current holdings in the stocks mentioned as he does not want to unduly influence the reader.
