Recently, I looked into Hyderabad Industries Limited (HDIL) and discussed my analysis on this blog. There were few comments and mild discussion with reference to my conclusion and turnaround aspect of the HDIL. Simultaneously, I also posted the same analysis on Moneyvidya’s blog. Over at Moneyvidya’s blog, the discussion was also centered on similar characteristics of HDIL. There were few good points which I believe would be worth mentioning on my blog too. Therefore, I am presenting those points here with some additional thoughts. Readers can refer to the original discussion. There are two different aspects in this conversation. One aspect is about how this commentator critics my observations and my analysis. It would be fair to say the analysis was trashed, challenged to check the pricing after 6 months, and was asked to eat my pudding. Well, I think it is better to keep this part of the comments aside because it is not going to help us learn anything.

The second aspect is about few other points that the commentator mentioned, which I think is worth a discussion here. The commentator mentioned we should look at HDIL in the context of changed scenario of Indian economy. In not too distant past, HDIL’s performance was very inconsistent, it was debt ridden, and nothing was happening. But that is the past. We cannot change the past. When we look into the buying a stock for long term, we should focus on the future growth. The future growth potential is good for HDIL because its products are sold in construction and building industry. The growth in Indian economy, the construction industry, and hence defacto growth in HDIL is foregone conclusion. It has a growing cash flow, and its margins are also improving. Furthermore, the fact that HDIL has turned around its operations provide us some evidence that it could provide good returns. To summarize, business environment has changed for good, low debt, and healthy free cash flow, provides a very good opportunity at current pricing (i.e. current valuations).

In my analysis for Hyderabad Industries Ltd., I did make an observation about that “turnaround story” and “future potential in the context this growth in Indian economy”. So even after these good observations, what makes me feel that I should not buy it? These are counter-intuitive.

• While I attempted/discussed on both sides of the coin, my conclusion was it fails consistency and sustainability (one of the key ingredients I look for). May be I did not explicitly state this, and probably that’s the mistake on my part.

• When I think holistically, I think there are better opportunities than HDIL where I would like to put my capital to work. Another hypothetical way I think about this is; would I put a large portion on my wealth if I had an opportunity to buy a large stake in it? In this case, no, I would not put my money.

Continuing further, the commentator mentioned that, quote, “the theories should be put to test. The correct test of the any analysis will be performance of the share in the stock market. That will be the litmus test.”

• In essence, by not buy any stock, I am putting my analysis to test. But does it even matter?
• In my viewpoint, performance of the share in stock market is not what I look for. I look for “what is in for me”. Over a period of time, I expect xx% return from the investments. Will I get it? Markets will do what it has to do. I do not have any control over it. So why chase something that I cannot control.
• Yes, there are many times I feel I may have missed those so-called multi baggers. That’s the negative side of my investment approach which I am willing to live by. I could very well be completely wrong for not buying HDIL.

But what is the implication of me being wrong? Stock zooms and becomes a multi bagger. I lose the opportunity for good returns. This is the risk I take because that’s under my control. It is my risk. It has nothing to do with the market.

But what if my observations are right? HDIL does not provide me the xx% return that I am looking for? I again lose the opportunity for good returns. I could have bought something else instead of HDIL. It is under my own control. This is the risk I am not willing to take.

The message is; markets will do what it wants to do. You do not have any control over it. Why do you want to chase something that you cannot control? Why base your decision based on market performance? Market performance does not necessarily mean “my personal performance”. You can very well control what stock you buy and what price you pay. In the end, what matters most is “what is your personal returns” not “what market returns or how market performs”.

It is in this context, I made an observation that HDIL does not fit into my objectives, even though it may be a turnaround story or well positioned for future growth.

Do you agree or disagree with this discussion? I would like to know your thoughts?

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