A few months ago, I watched this very humble interview of a celebrated investor, Mr. Rajiv Khanna, husband of Mrs. Dolly Khanna.
Mr. Khanna bought Unitech’s stock in 2003-2004, when it’s market cap was ₹100 Crores. His investment thesis was simple. Unitech’s business was being valued by the market at ₹100 Crores, a price Mr. Khanna thought was abysmally low. Just their Delhi office was probably worth more than that, he thought.
This is the functional equivalent of walking into an Infosys’ branch and telling it’s owners, “Sell me your business for the price of this office building.” Insane.
Yes, these kinds of absurdities occasionally show up in the market. When Mr. Market is in such a distressed mood, he throws the baby out with the bathwater and creates bargains for investors who can separate the wheat from the chaff.
This video got me wondering. What causes a stock to go up 350x & beyond in just 4 years. Here’s what I found.
From 1989 to 2002, Unitech was an unheard-of company, an also-ran. And then the bull market in real estate began. In 2002, they were selling the same amount of goods, they’d sold 5 years back.
Profits were down in the dumps, too.
And then began an unprecedented bull market in India’s real estate sector. From 2003 to 2008, the market leader in this sector, other than DLF, turned things around at a scorching pace.
Unitech’s total # of outstanding shares went from 1.2 Crores in 2003 to 162.3 Crores in 2008. To remove the impact of equity dilution, I have taken EPS numbers instead of PAT numbers because EPS & not PAT is what matters, from a minority shareholder’s perspective. BTW, PAT went from 46 Crs in 2003 to 1669 Crs in 2008.
Unitech’s promoters were a celebrated lot. The title of this article read “India’s most investor-friendly companies”
What these developments did to the market cap, starting 2003, was unimaginable.
Led by scorching growth, investors were made to start looking at valuations differently, so the high prices could be justified somehow. Valuations were no longer based on earnings but based on land bank. Consensus was “Buy land, they’re not making it anymore.”
|Bubble||Valuation based on|
|Real estate||Land bank|
|Infra companies||Order book|
|E-Commerce||Gross Merchandise Value|
And here’s what happened when the party was over.
Would it have been easy to buy the stock of this company? No. The sheer number of subsidiaries of Unitech’s would make your head spin, besides teasing the forensic analyst in you. In 2008, this co. had 337 associates/joint ventures/subsidiary companies.
Info about Mr. Khanna’s exit from Unitech’s stock is not available but my guess is that he might have exited before or after the peak, once the stock fell beyond a certain threshold. (In the same video, he talks about exiting when positions go down by 15-17% from his buy price.
- Ride the bubble but make sure trailing stop losses are in place. Usually 20-25% from the top is a good enough warning signal. However, let, stop losses not give you a fake sense of security. Like most things in life, this strategy isn’t fool proof.
- Not watching your portfolio for a few years may sometimes, do wonders for your portfolio.
- There are bull & bear markets in real estate too. Returns before and after the real estate boom have sucked. Without the kind of growth experienced between 2004 & 2008, most people are likely to have had low to medium range returns.