Reliance Industries Vs Tata consultancy Services

Last month I attended investors trade show held in Sydney, Australia. Met many reputed local analysts and brokers. Many fund managers I recognised in trade show are very active in Asian countries (India is also included within that). Had great insightful day.

Many new clients who want to join our fund throw lot of emails with questions why I don’t invest all of fund money into equities? While even today if I look at mine Indian fund I notice that we are sitting almost 60% on cash. Well the only answer I give to all those questions is that we are in serious investment business and we don’t invest until and unless we see value within business. We are not allergic to hold cash and don’t go out for shopping because our bank balance is rich! End of the day our goal is to beat the market every year. Today after roller coasters ride of last month our fund is still up by almost 8% and market is down by almost 10% this year.

When growth is slowing down, interest rate are at the hill with inflation, it is hard to find good quality investments in Equity market. As a fund manager, I wont be satisfied if we don’t manage beating inflation this year. There are roughly 60 A1 companies we are tracking and very few of them are trading at discount. I think this also explains why we are still sitting on so much cash!

I am writing this piece of paper to share with you about why we should avoid capital intensified businesses. Capital intensified businesses are the businesses where lot of money is invested within Equipments, Plant and machinery.

To explain my point of view I have taken example of two popular businesses that many of us love to invest with. They are Reliance Industries and Tata Consultancy Services.

As you all know Reliance is involved in refinery business where they have heavily invested within their refineries. A lot of money is deployed to build those refineries plus consumed in maintenance.

On the other end TCS is involved in IT consultancy and developing business. To run this business we don’t need machineries but sharp and talented brains. Both the businesses are recognised as blue chip companies.

Now, without using any jargons let me imply simple business sense to prove my point of view.

You should Prefer….

Quality Score

B2

A1

A1 or A2 Quality

Return on Equity

15.79 %

50.34%

>20%

Net Debt/Equity Ratio

44.47%

0.21%

<40%

Property plant & Equipment/ Total Assets

65.18%

17.54%

<25%

Now, lets look at economics of these businesses over the past 5 years.

Profits

Increased from 11,943 to 20,286 Crore

Increased from 3,757 to 7,570 Crore

Shares on issue @2007

13,935 lakh shares

9,786 lakh Shares

Shares on issue @2011

32,734 lakh shares

19,572 lakh Shares

Equity put in by shareholders

1,811.79 Crore

0 INR

Earnings left in the business

72,259.80 Crore

13,886.06 Crore

Return on additional Equity

11.26%

27.46%

Debt held @2007

27,825.73 Crore

50.74 Crore

Additional borrowings since 2007

39,570.95 Crore

-9.62 Crore

Now lets look at the quality and performance ratings of both the companies from last 5 years:

Year

2007

B2

2008

B1

2009

B2

2010

B2

2011

B2

Year

2007

A1

2008

A1

2009

A1

2010

A1

2011

A1

Now, your mission is to find capital intensify businesses within your portfolio. Go to the balance sheet and look into asset column (As per Indian Accounting standards look for ‘Net block’ on asset side). Divide that by total asset and you will know how much capital intensified that business is.

Making this process simple and easy is something we have been working on for you. We created our A1 service because we wanted to make finding extraordinary companies offering large safety margins easy. And offcourse, we love investing.

It is going to be A1 service you would have never seen like that before!