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11 thoughts on “My Blog Posts”
this is Brilliant. Super deep insights.
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Very nice blog. Very insightful. Can u answer why in general comapnies pay dividend when they have to borrow for capex? Cant dividend be deferred. What is the rationale in paying dividend out of borrowing
Hi Ram. Thanks for the compliments.
Regarding dividends, there are 2 aspects. One, purely financial and the other, psychological.
From a financial perspective taking debt and paying dividends just doesn’t make any sense, because all of the interest that the company pays towards the extra loan that the company (technically) borrows to pay dividends, could be used to pep up the earnings per share even higher. Had Alembic not paid out dividends, it’s debt today, would have been lesser by 847 Crs (excluding the interest paid on this amount for simplicity sake), which is almost half it’s total outstanding debt, as of March 2020.
Besides, dividends get taxed twice. Profits are already taxed and those already taxed profits incur a dividend distribution tax, which means there’s double taxation.
Now the psychological aspect. I have attended quite a few AGMs where a lot of shareholders pressurize managements to return some money to shareholders by giving out dividends, doing buybacks, etc. Perhaps some of those minority shareholders are aged, full-time investors and need those dividends to pay their monthly bills. For such shareholders selling shares to pay monthly bills is psychologically difficult, particularly when markets are at lows.
To conclude, paying dividends for any high growth, high ROCE, company just doesn’t make any sense. However, to keep other stakeholders happy, sometimes managements take capital allocation decisions that are not the most savvy. That being said, as long as the management is delivering growth and return on capital, I wouldn’t worry about it, too much. As Ben Franklin once said “Keep your eyes wide open before marriage and half shut thereafter.”
yes i too couldnt find the report. Have you researched Ajanta Pharma. Numbers doesnt seem bad. Do you have anything about the company on corporate governance?
Based on several years’ of data that i have analysed for tens of fast growth companies, if a company’s growth slows down, it never goes back to the previous growth rates.
So, if a company was growing it’s profits at 30-40-50% or more for several years and it slows down to 25% or less, it never goes back to 30-40-50%. I haven’t yet seen an exception to this rule.
To my mind, Ajanta Pharma falls in the same category and I would rather focus my attention on companies that demonstrate better growth.
Coming to governance issues at Ajanta, I had read all the comments on the Valuepickr Ajanta page as a case study at some point and came across the below concerns.
1. Income tax raid
2. Operator manipulation
3. Promoter pledging
4. First generation promoters of Ajanta had a lot of question marks about their integrity and corporate governance. The next generation fared well though.
5. Marketing drugs by M/s. Safetab Life Sciences that were yet to receive regulatory approvals
6. There was also some noise that was made on Valuepickr about promoters selling 3% of paid up capital when the company was starting to slow down.
In the end, the company seems to have come out clean, of all of the above allegations. If you are considering an investment in Ajanta, I would strongly recommend going through all of the posts on the Ajanta page on VP, to get a first hand glimpse of any potential governance issues.
Thanks. No I’m not considering investing. Just studying. I can understand numbers and ratios which is common among businesses but as such the actual pharma business like their formulations, products, chemical terms etc difficult to understand. So I like to invest in businesses which are very simple to understand. When I started long back I used to invest only on cos with standalone financials which are very easy to understand and VST ind was first bet. But I sold it unfortunately when it doubled. It has again doubled since then. among pharma I have highest allocation for Abbott bought at 12k followed by cadila buying price of rs360 which was bought around 2 yr back. It went to 230 levels and now back to 360s. Some positions in sanofi, alembic and alkem. Alkem after being in watchlist for long.
I have observed that when a sector is in flavour it will lead the bull run and this time likely it seems to be pharma. Not that the stocks won’t do well thereafter. Ppl who have held for more than decades have select best comapnies compounding irrespective of that sector being out of flavour. But again it’s best to catch good comapnies and hold on to it when that sector is in favour.
So in the cos like Ajanta, do u consider sell and exit when it stops growing at the old high pace but still grows at reasonable double digits?
I follow a two pronged approach. Amongst fast growing companies I classify companies as good and great.
For good companies, it makes sense to exit when either there’s a slowdown due to a structural issue or valuations have reached frothy levels.
For great companies, which have compounded capital for a long time, where every action of the management tends to get justified, the market seems to give a godly status to such companies and in such cases it’s better to stay invested and hope for earnings to catch up.
do you follow Aurobindo pharma . it has got highest ANDA in USA, a very huge US porfolio , recently into covid vaccine race . Some negatives promoter pledging, USFA inceptions
While Aurobindo has grown it’s profits at a rate of 7% between 2017 & 2020, Alembic has grown at 27% during the same period.
Aurobindo’s sales are 5 times that of Alembic’s. All other things being equal, it makes sense to put our money into smaller companies because they can grow faster and they are also available cheaper, usually.
But overall, Aurobindo is also a good bet. Just that I find Alembic and Laurus better than their peers at this point, because all 3 companies are available at similar valuations and I would rather go with companies with better momentum.
It is great pleasure to read your analysis. I see the MF holdings of Alembic pharma getting reduced.. for various reasons.. but the stock keep ticking.. I liked your Alkem analysis.. esp Cashflow component.. and further analysis, understood the alkem inconsistency in the EPS and tax %.. good learning for me.. Thanks.
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I don’t look at MF Holdings because MFs have constraints with regards to how much they can allocate to a particular sector, to a particular stock if it runs up, etc.
That’s like cutting your plants and watering your weeds.
Cash is like Oxygen in a business and it’s importance is realized when it becomes absent, particularly during crisis times.
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