Power of Compounding: Investment Magic

Einstein said once “Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.” 

Let’s take example of Mr. Early X and Mr. Late Y.

Mr Early X thought to start planning for his retirement on age of 25 and started the 5000/ monthly SIP in Mutual Fund for next 15 years. While Mr Late Y thing 25 is not a age to thing about retirement and its time to enjoy the life but later stage Mr Late Y thing retirement planning is also very important and Mr Late Y started 1000/monthly SIP for next 15 years.

So now here is the comparison between both of our Mr X and Mr Y.

	Mr Early X	Mr Late Y
Amount invested	5000*15*12 =9  lakhs	10000*15*12= 18lakhs
Investment Horizon	60-25= 35 years	60-35=25 years
At age of 60 Retirement Corpus	3.88* Cr	2.09* Cr

(Note* : Assuming the average of 14% return from MF Compounding basis. )

 

At age of 60 Mr Early X has 1.85 times more amount than Mr Late Y with half of investment then Mr Late Y. It’s not how much you invest , it how long you invest make a difference.

Let’s take well known example of Wipro's  10000 to 528Cr Journey. 

Let’s just assume that you bought 100 shares of Wipro each at a face value of Rs.100 in the year 1980. Total investment: Rs.10,000. You don’t touch it at all, no profit booking or buying more shares. Wipro has done various bonuses and stock splits in its history of 1980-2014. Here is the list of all such corporate actions:

Wipro Investment growth
Year	Action	Number of Shares
1980	Initial Investment	100
1981	1:1 Bonus	200
1985	1:1 Bonus	400
1986	Stock split to FV Rs.10	4,000
1987	1:1 Bonus	8,000
1989	1:1 Bonus	16,000
1992	1:1 Bonus	32,000
1995	1:1 Bonus	64,000
1997	2:1 Bonus	1,92,000
1999	Stock split to FV Rs.2	9,60,000
2004	2:1 Bonus	28,80,000
2005	1:1 Bonus	57,60,000
2010	2:3 Bonus	96,00,000

After the year 2010, there were no more bonuses or stock splits. But with just that initial investment of Rs.10,000 (100 shares) you now would end up with 96,00,000 shares of the company because of all the stock splits and bonus shares. Current stock price of wipro is about Rs.550 per share, as of 22 Jan, 2016.

INR 550 × 96,00,000 = Rs.528 Cr. That is a CAGR (Compound Annual Growth Rate) of 47.39%. Does any of your bank FD give you 47% annual interest rate.

And we are not even considering dividend pay-out here. Recent dividend declared was 5 per share which make 4.8 Cr as dividend and we have many dividends like this. 

Just Amazing compounding is !!!

Mr Warren Buffet said it correct “Someone is sitting in the shade today because someone planted a tree a long time ago.”

 Be Smart. Invest Smartly

A New Beginning :2016 Value pick 4

Sometime underrated stock outperforms and our fourth value picks is highly underrated.

Let’s start with our low price high value pick:

Suzlon Energy:

CMP: 21.65(8^th Jan).

From a position of strength, Suzlon has gone through multiple crises over the past five years including debt default. However, it has since taken corrective steps to substantially repair its balance sheet by selling off its German offshore wind arm, Senvion for 1 billion euros and issuing fresh equity worth Rs 1800 crore to Dilip Shanghvi & Associates—a promoter for Sun Pharma. Suzlon can now focus all its energies on new order wins and execution in the domestic market, and is well placed to win back 50 percent market share. Government’s ambitious wind energy target of 60GW by 2022 should help to drive demand for wind equipment

Moreover, Suzlon Group chairman Tulsi Tanti said on Thursday(7th Jan) that the group is looking to enter the solar energy sector in the current financial year . Its evolutionary S97"HT DFIG 2.1MW Wind Turbine with an All"Steel Hybrid Tower has achieved 35% PLF over the last 12 months. The evolutionary product has received encouraging response from customers across segments and reflects in the ~350 MW of orders received. Tulsi Tanti, Chairman, Suzlon Group, said, “The S97- HT DFIG 2.1MW with All Steel Hybrid Tower is a game changer and is the result of our continued focus on investing in next generation technologies. Suzlon endeavors to lower the cost of energy and provide clean and affordable energy for all.”

Suzlon demonstrates buoyant growth in Q2FY16; delivers 227MW with 18% normalised EBITDA margin.

• Sales volume is 64% up Y-o-Y.
• 18% EBITDA margin is highest in last 5 years.
• Order book continues to remain strong with INR 6812 crores.
• Gross debt reduces by 963 crores.

Above all clean energy is next big sector for next 5 years and Suzlon and Inox Wind are the two big players in this sector. For one year prospective Suzlon can move to 35-45 easily.We Suggest to buy this stock for 3 to 5 year horizon to see multi-fold return. 

 Be Smart. Invest Smartly

A New Beginning :2016 Value pick 3

We have already given two value pick for 2016. Please check previous post for that.

Now let’s start with another value pick:

Larsen and Toubro:

CMP: 1239(6^th Jan 16)

     L&T is the biggest player in Construction and heavy engineering. Stock has touched 52-week low which makes it more attractive for investor. In current state L&T is well placed for an earnings recovery and improving RoE on the back of:

•   Management’s decision to change the company’s focus to asset light businesses and unlocking value from its subsidiaries/JVs over the past two years and going forward (real-estate, Dhamra & Kattupalli ports, L&T Finance, L&T Infotech). 
•   A pick-up in execution in long-gestation projects to drive 20% revenue CAGR over FY16-18F in the core E&C business, in our view. Unlike orders in the power equipment sector, we think L&T’s order backlog is only ‘slow-moving’ or even ‘slow to start’ rather than ‘non-moving’ as in the case of BHEL
• Margin recovery as several long-gestation orders reach margin recognition thresholds coupled with tailwinds from the decline in commodity prices.
• With bulk of the problems now behind the company, we expect earnings pick up from FY17F and estimate 35% EPS CAGR for L&T over FY16F-18F.(Source:http://www.financialexpress.com/article/markets/indian-markets/buy-rating-on-larsen-toubro-better-days-lie-ahead-for-lt/184330/)

        L&T is exposed to several levers across business/geographic segments and has emerged as the E&C partner of choice in India, which provides a robust foundation to capitalize on the next leg of the investment cycle. Manufacturing businesses (like Shipyard, Power BTG, Forgings, etc) also present interesting possibilities in the longer term. Many of these businesses are difficult to replicate and LT is strongly positioned as a dominant player.

According to the company, its unexecuted order book stood at an all-time high of INR232,649 crore and represents a 28 per cent growth over the order book at the end of the previous year.

For L&T near-term outlook is weak; but long-term growth story remains intact. One can enter at this level and stay invested for 3-5 years to get good return.

Be Smart. Invest Smartly

A New Beginning :2016 Value pick 2

 In our previous post we have given our first value pick Britannia

 (http://kevaljethi2363.blogspot.in/2016/01/a-new-begining-2016-value-pick-1.html)

Now let’s start with our second value pick:

Ashok Leyland:

 CMP: 88.75 (1th Jan 2015).

    Ashok Leyland’s market capitalization surged 74% in last year to Rs.25,471 CR as of 30 December, reflecting its improved operating performance. Stock raise form 51 level to 88 in last year. Management’s focused approach is paying off in a) market share gains, b) rising ASPs, c) controlled cost, d) working capital reduction, e) significant control on capex and f) debt reduction. Strong volume recovery, coupled with weak commodity prices, would drive significant margin expansion and EPS growth going growth.

  

The sales of medium and heavy commercial vehicles jumped 35.33 percent to 9,758 units in December 2015 as against 7,210 in the same month a year ago, the company said in a recent statement. Ashok Leyland is well poised to reap the benefits of the anticipated sustained uptrend in the domestic CV industry over the next two to three years.  

Recently Ashok Leyland has received orders worth $82 million (approx Rs 521 crore) from Senegal Also $200 million (around Rs 1,331 crore) from the West African country Cote D'Ivoire for the supply 3,600 trucks and buses which was largest contract for this country with any firm in India and also represents the largest such contract till date for the company. "The vehicles include trucks and buses, will be delivered over the next 12 months," the company said.

With healthy order book and good management Ashok Leyland is well placed to outperformed in 2016. Passage of GST bill will be added advantage for company. We can see the stock crossing 140 level in next 12 months.

 Be Smart. Invest Smartly