We Study Billionaires - The Investor’s Podcast Network - TIP632: Mastermind Q2, 2024 w/ Tobias Carlisle and Hari Ramachandra

Starting point is 00:00:00 You're listening to TIP. In today's mastermind episode, I'm pitching Berberi. You might not like the clothes and you might not like the lack of insider ownership. But I do think you're going to love the valuation. A luxury brand with more than 150 years of history, trading your only 10 times earnings almost seems too good to be true. But also, I have to say almost, there is some hair on it and you would need a solid margin of safety to invest in this discounted pie type of investment.

Starting point is 00:00:28 Horace Pick ICICI-CI Bank is a solid bet on India's rise. We're discussing how to position yourself best if you agree with the bold thesis on India, including what might look like an overstretched valuation. Tobias Pitts is Pletiga. This is a stock with 70% gross margins and 20% operating margins, and is trading at a surprisingly appealing valuation. Yes, there are some headwinds. So therefore, we are considering are these secular or their short-term issues?

Starting point is 00:00:58 Now, without further delay, here is our Q2-24 mastermind discussion. Celebrating 10 years and more than 150 million downloads. You are listening to the Investors Podcast Network. Since 2014, we studied the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Now, for your host, Stig Broderson. Welcome to The Investors podcast.

Starting point is 00:01:37 I'm your host, Dick Broderson, and I'm here today. with Tobias Kyleyle and Hari Ramatandra. Gents, you're looking good today. How's life? Thanks, Stig. I've got the Blade Runner background. I've got like a slice through. The sun's coming in at a crazy angle, but it's fun.

Starting point is 00:01:52 How you, Harry? Hey, doing good. Do we and speak. Good to see you guys. Hello, always. Great seeing you. So, Hari, you ask you before we hit record whether or not we could talk about the economy in general.

Starting point is 00:02:04 And I made the disclaimer. I don't know about anything that's going on. We are supposed to be micro investors, not macro investors. And because of that, perhaps we should, I don't know if you have a question you want to ask Toby about macro then. My question essentially was that show of the stuff started, what Milton Friedman or any of the textbooks would have suggested is not happening. For example, interest rates was raised at the fastest rate in history, as they were saying.

Starting point is 00:02:32 But inflation is kind of coming down, but not that much. We don't see a dent on the housing prices. In fact, that it's steadily raising. The stock market is also ripping. It's doing well. There is geopolitical tensions. There are wars going on. But nothing seems to be impacting the key indicators of wealth,

Starting point is 00:02:54 which is stock prasles or home prises in the United States, at least. And I wanted to know what's going on. What are you guys thinking? Like, is it puzzling you or? it is that an explanation. So Toby Stig, I'd like to know what is your opinion. I've got some observations. I don't know how much of this is causative or what's really going on.

Starting point is 00:03:16 But the first thing I would say is, like you guys, I am not a macro investor. I largely ignore the macro, not because I don't think it's important, but because I don't think I can figure out what's happening. I've looked back through. You know, you guys know I love a little bit of market history. If you look back over the last few hundred years, there have been wars and crashes and depressions and none of them were predictable.

Starting point is 00:03:37 Even in hindsight, they're not predictable. So the best setting is just to invest according to where you are in life. You have your exposure set. And you plan for anything that could happen. You can have a bust. You could have a crack-up boom. And you're just in a position where,

Starting point is 00:03:53 whichever one happens, you don't really care. I call it regret minimization. That's really my objective. Whatever happens, I just want to be the least upset. So if it goes up a lot, I'll be fine. If it goes down a lot, I'll be fine. really care. So that's the, that's, everybody should get to that point. So you don't have to be predicting what's going to happen to position yourself because that's very hard. And the one time

Starting point is 00:04:14 you get it wrong, you could blow yourself up. What I think has been happening though, there's an invert, there's the stock market inversion continues on. It's that, it's the, sorry, the 103 inversion, which is basically short dated interest rates. Treasuries are high and longer dated interest rates are lower. And it's unusual because ordinarily, when you're putting money out at risk, the longer you put it out, the more you get, because you've got to contend with inflation, there are risks that you won't get your money back. You don't have the use of your money. So for all of those reasons, they typically attract longer rates for the more time you've got to put it out,

Starting point is 00:04:51 and you get lower rates for shorter periods of time. That's not happening at the moment because the Fed has lifted up the front-end rates. That's the three-month, and they do that in an effort to slow the economy because it was too hot. We had inflation. The Fed has a dual mandate. It's full employment and stable prices. Employments at all-time lows. Prices have been not stable because we've had a lot of inflation, so put up the interest rates to try and cool the economy. And the result will be some unemployment. And that's typically what has happened. And that manifests an inversion in the 10-3 yield. And so when that happens, after a period of time, it's unpredictable. There's usually a slowdown in the economy.

Starting point is 00:05:30 when you have that, you typically have a stock market crash, real estate market crash. Everything gets set lower, and I think that's probably explicitly what Powell's been trying to do, get housing prices down, maybe stock market prices down. None of that has sort of happened yet, and it's the longest inversion we've ever had, or going back in the data, there may be longer inversions that aren't captured in the data. It was also the steepest or the deepest inversion at one point. there's no real correlation between any of those things and the resulting recession or depression or whatever follows other than the fact that they tend to be for about the same length of time

Starting point is 00:06:07 because the lag is so long between raising rates and it actually impact the economy. It's like 18 months or two years or longer. So Fed raises rates, waits, nothing happens. 18 months later, there's a stock market crash and they panic and they lower rates as rapidly as they possibly can, but it has no. you can see in all these crashes, the Fed's lowering rates rapidly, and it has no impact because the lag is so great, and they've sort of overplayed their hand a little bit. I don't know what's going to happen here, but I probably guess it's something similar to that. I think the reason

Starting point is 00:06:40 that it hasn't happened yet, and the reason that stock markets at all-time highs, real estate markets flying along, unemployment remains low, we're running massive deficits on the fiscal side. So the federal government has these inflation reduction act, which is actually doing the opposite of what it says. There's a lot of spending. And that spending goes out into the economy before the money is collected to pay for it in taxes because it's done on debt. It's done with debt.

Starting point is 00:07:10 And Milton Friedman, it's funny that you raise his name. Milton Friedman used to say the thing about inflation and spending is it feels best at the start. It's like drinking. It's like alcoholism. You feel great while you're drinking in the hangover, then. follows after the fact. And so nobody thinks they're making a mistake while they're doing it. And the more you do it, the better it feels. And then you wake up the next morning and that's when you get

Starting point is 00:07:31 the hangover. So I think probably that's where we are at the moment. It hasn't shown up yet because there's so much spending. Obviously, because we've got an election coming up, there's always, that's one of the levers that the incumbent administration can pull. They can spend a lot of money. That makes the economy look better than it otherwise is. And then you get the other side. I don't think it really matters. I'm not particularly political when it comes to the economy. I think whichever team comes in, they'll be both spending. So I don't really know. We're in a grand experiment. I don't think any of this has been tried before. We've got the brakes on and the accelerator on at the same time. So I'm interested to see which one person's got their foot on

Starting point is 00:08:09 the accelerator. The other person's got their foot on the brake. No one's got their hands on the steering wheel. Should be fun. Yeah, that was interesting, Toby. Thank you. And we are in for of fun, right? I guess in the next couple of months. It's like the Chinese curse may you live in interesting times. Yeah. I think you ask a great question, Harry, you know, about the current conditions. I should probably also do my disclaimers and then do a long rant afterwards. And then end by saying, I don't really know. But I think I want to take one step back and then say that to Toby's point, whenever we talked about, you know, wars and everything else, the bigger macro events. And And I remember whenever I started investing a long time ago and I had my rights of passage

Starting point is 00:08:52 going through all Buffett's letters and whatnot. And he has this famous paragraph about, you know, how well the Dow has been doing. And keep in mind, like we're talking about old days now because we're talking about the Dow. Not like the S&P 500, like the modern people who talked about the S&P for 40 years now, but talking about the Dow. And he talks about how well it did in the 20th century. And then he lists all the problems we had in the 20th century and just the stock market

Starting point is 00:09:16 matching on. And I think we can come up with a lot of reasons why, you know, this time is bad. You know, time has always been bad. And so I think the way that I do this, and I don't do anything that's very sophisticated. I don't do like, I don't have a quant AI fancy algorithm or whatnot. I'm very much in stocks because I do believe in general that the economy is expanding and we all become more productive and, you know. So I don't think. bring anything new to the party about on that and I do think most people do the self a disservice if they look too much of the macro and deem that now it's not a good time to invest. And then at the same time, I also want to have a bitter insurance. Like I do see, I completely agree with Toby. Like whenever you look

Starting point is 00:10:01 at the fiscal deficit and like there are some funky things out there, there's huge debasements and of currencies and you're like, there are a lot of people out there who are going to tell you that they know what's going to happen. They're probably just smarter than me. I have no idea what's going to happen, I do see a lot of weakness. And so the way that I'm trying to hedge my bets by being long in the stock market and have ever always been long in the stock market is that I hold physical gold. And, you know, that has looked like a fullest trade for a very long time. I don't remember the last time I pitched gold here in the masterminds, probably like three or four years ago, something like that. And gold has just more or less done nothing. And then here recently it's been

Starting point is 00:10:39 on a tear. And I don't make any kind of naive assumptions that goal are going to perform the stock market or, you know, we're going to go back to a gold standard or anything like that. That's not why invest. Partly, I do it because I get taxed way better in my after tax returns or what I'm optimizing for, not my pre-tax returns, but also because it is my insurance to perhaps the stock market doesn't keep on going up whenever you were rolling back or the past 20 years or whatnot. And so far, so good. So that is my boring answer to that question, Harry, and how I position myself. No, they were both really helpful, actually. Thank you. And I really, the key point both of you are making is regret minimization and position yourself

Starting point is 00:11:19 that it's a kind of an all-weather portfolio so that you don't have to keep guessing what happens to the economy. And gold is a very interesting point. You brought up stick because I remember Jim Grant saying you would like to have an investment that he kind of doesn't really agree. And if nothing is hurting in your portfolio, something is wrong. So in that sense, I think these are really good answers. And thank you.

Starting point is 00:11:45 What do you think about Silicon Valley from your perspective? Because that's been a big engine of growth for the U.S. probably versus the rest of the world. Yeah, I think as you might have seen in the most of the quarterly announcement, what I'm seeing at least in many of the companies is the focus has been moving from growth, just revenue growth or growth at all costs to responsible growth. I'm seeing a lot of companies highlighting their margin growth more than their revenue growth. And in some cases, the revenue growth is slowing down too.

Starting point is 00:12:17 But in some cases, even if the revenue growth is healthy, they are basically projecting their margin growth, which also reflects the sentiments. The Wall Street is kind of, you know, reflecting on them. And also the, it's also the life cycle. Many of the high tech companies are in their 20s now. So, and they're kind of probably realizing that, okay, they're entering midlife. But what is interesting is for a while we haven't seen another Uber or another Google come out of Silicon Valley. That means what I'm saying is there have been many IPOs, but there haven't been companies of consequence for the last 10 years. There was in the 2010s, there were like a bunch of companies like Facebook and others that went public, which became companies of consequence.

Starting point is 00:13:09 But lately after that, at least there aren't companies that are that peak of a consequence yet. Maybe open A, but that's where I see that, you know, things changing in the valley in terms of focusing on Marvians. Acquisitions also have kind of dried up even though they, we still have, we still see acquisitions here and there, but less acquisitive companies. So that's what I see in the Silicon Valley. We and I should probably not take everyone else who was investing down with me on my low level whenever I say this. But I think, or at least I hear a lot of people talking about where there's so much disruption right now.

Starting point is 00:13:51 And I've heard myself say that many times like, oh, like disruption is like faster and faster, better and better. And like it's so difficult in today's market. And then I read this book the other day. I want to say the name of the book was the new Goliath. And it's not a great book, I should say. So please don't go out and buy it. but it had the premise of we don't get disrupted that much.

Starting point is 00:14:11 Most of us know the innovator's dilemma, right? And he said, like, that was around the time that disruption were peaking. And then the author makes the argument that because of big tag and mainly, and there are a few other reasons, but he assumed in on big tech. To your point, Harry, and you don't really see a lot of disruption right now because they're so big and they have so much market power. And so I kind of felt that was an interesting take. do you think he's right about that it's just too difficult to compete with the big tech companies now?

Starting point is 00:14:41 I mean, not saying that we won't see any disruption. I just don't think that's how capitalism works. But are you seeing it down what trend in the valley right now in terms of disruption? Yeah, I think that's a very good point of Stig. In fact, Balagishi, who is one of the VCs, he was former CPU of Coinbase. in an interview said, like, AI is a technology that makes centralized power more powerful. So whereas crypto or chain is a decentralized technology, so it makes the centralized power less powerful.

Starting point is 00:15:19 So that's why the Chinese Communist Party would go after the crypto and the blockchain, but they would embrace AI because that makes it. makes them more powerful. Similarly, in the context of big tech, because of the resources involved, there is a hoard now to get Nvidia chips. And not everybody is getting it. It's either Amazon, Google, Microsoft, or meta. So even Open AI cannot afford it. That's why they partnered and kind of, you know, went with Microsoft because they could use Azure. So it makes it harder and harder for small companies to come up. The only encouraging sign I've seen now is LAMA,

Starting point is 00:16:04 which is a open source LLM by META and META completely backing it and they have their own unmotage to open source it. But that might help smaller companies get a leg up, but still it is very hard. And that's, I think

Starting point is 00:16:24 whatever that book is quoting might be actually true. In fact, Peter Thiel also says And his tagline for his book or his fund also is, we were promised flying cards. All we got was 140 characters. So and Peter Thiel's for a long time, his guide was that we aren't innovating fundamentally the way we did in the 1900s. We are just going after photo apps or social network apps and stuff like that

Starting point is 00:16:55 and thinking it is innovation, but it is just applications. of a fundamental innovation, which was internet that was made. So I think in that sense, yes, innovation has definitely so on. And I think we are, especially in Silicon Valley and maybe in other places to re-equit digital innovation to innovation. But I think digital innovation is just an application on top of innovation. It's the fruits of the innovation that was internet. But what I think Elon Musk is doing with SpaceX or Tesla, those kind of companies are far and few. Let's take a quick break and hear from today's sponsors.

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Starting point is 00:21:20 hearing, sign up for your $1 per month trial today at Shopify.com slash WSB. Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right, back to the show. So my pick for today, and I should probably preface this by saying that whenever I look at the stocks I pitched at the early mastermind episodes. You know, it was usually the cigar butts. And you're optically, they were cheap, there was some hair on it. And then I started, I got this horrible habit of pitching high quality stocks and with high multiples. And I kind of felt I wanted to mix it up and go back to the roots here. So I wanted to pitch a cheap stock with hair on it. And I think I was going through like my rolydecks of different picks and I was like, I want to

Starting point is 00:22:13 see if I can impress Toby and see if I can find a lower P than Toby this time. I think we're neck to neck on this one here though. I just looked it up here before we start recording, but the stock I'm going to pits today is Burberry. And the stock is trading on the London Stock Exchange under the ticker BRBY. And you can also find OTC in the States under the ticket B, UR, BY. And full disclaimer, this is not a stock that I own. And I was, there was a little bit of the ticker B. little hair on, it's not too much hair on. I'm not going to pitch like a 3P stock, unfortunately. It's trading around a 10, 10 PE, which is quite unusual for a luxury stock. And I would also say that it's not a high quality stock. It's not going to compound

Starting point is 00:23:01 for decades, even though it has shown decent growth. So we're not looking at a growing pie. I think the thesis I want to present for you today is, let's call it a discounted pie. And, you know, a lot of value investors has said something like discounted pie all the years and find themselves with a value trap with something that looked cheap and then time just passed by and opportunity cost and they sort of like regretted that. So I'd be very curious to hear how much you're going to beat up this pick. But let's get into it. So for those of you who are not familiar with Burberry, so it's a company providing clothing accessories for men and women. perhaps it's best known for its iconic transcode.

Starting point is 00:23:44 But you can think about it as a fashion retail. I do want to bring the argument that perhaps we're talking about luxury and not fashion later here in the discussion. But you can think shirts, pants, back, shoes and whatnot. It's a very opposite of AI, if I can be as liberal as that. So you can find Berberie in 225 stores worldwide. They also have 133 retail concessions and a small number of, of, outlets. The biggest markets are Asia-Pacific, then you have Europe and the Middle East,

Starting point is 00:24:15 and then Americas. And I think it's important to say that whenever you're looking at Burberry, it's not a company that is growing its footprint right now. It's currently going through a refurbishment of stores worldwide. It's halfway through, and it expects to complete it by fiscal year 26. The bigger stores, and after it, they've been refurbished, they're going to have have a VAP shopping area, most prominently the flagship store on Bond Street in London. And so this is a brand from 1856 founded by Thomas Burberry, and it's built around the idea of modern British luxury. And a brand, of course, it means a lot of different things to a lot of different people.

Starting point is 00:24:59 But I think that there is a consensus right now in the industry that the changing creative directors have created some confusion around the brand. And it's also trading near a 52-week low. And so the current chief created officer, so not to be confused with the CEO. He started in 2022. His name is Daniel Lee. And then a new CEO came in, Jonathan Aykroyd, and he came from a position from Versace and also the sale to Michael Kors, whereas Daniel Lee came from a successful time in Burtigna,

Starting point is 00:25:29 Beneta before then. And so as I'm going through this breakdown of Burberry, I just want to say, I'm going to give you British pounds unless stated otherwise. So one of the traps of analyzing a stock is listening too much to what the management is saying. Because whenever you do that, all of a sudden the valuation starts to look very appealing. So let's see if we can discount for that. But right now, they have around $3 billion in top line. And then if you go through the filings, they talk a lot about $4 billion in medium term, $5 billion in long term, of course without defining whenever medium and long-term is. But, you know, it is a stock that has shown decent growth in the past. So where's

Starting point is 00:26:11 that top-line growth is going to come from? Some of that is going to come from, you know, having these stores like a minute before, refurbers. We've already seen, or investors, the company have seen, proven of 15%-ish in sales per square meter in those stores that have gone through the process. Another thing I also want to add is, as a luxury brand, you also have decent pricing power. So some of the top line is also going to come from that more than volume necessarily. It's one of those things where you don't want to focus too much in volume because then you also end up diluting the brand. And so they have a stronger focus now with a new creative director of 50% should come from

Starting point is 00:26:50 accessories and that's currently at 37%. And so I think the sort of like to place Burberry on the map. It's very easy to compare them to high-end luxury brands like the average. mass of the world and then say, well, Berberra kind of sucks. And this is a terrible company. And you might also say, well, Berber is not true luxury. Like, it's not a mess. It's not Chanel. Like, why would you invest in that company? And the first thing I would say is that, well, MS is trading at 50 times earnings. Berber is trading at 10 times earnings. That is probably the first thing I would say. But I would also just say that within the luxury category, you also have a lot

Starting point is 00:27:31 different tiers. And whenever you are looking to buy a $2,000, $3,000 burberry bag, you're not looking at buying a Birken bag that can be more than, you know, that could be more $100,000 for a Birken bag, even though they start at what, $12,000 now. Like the customers are very different. And then you could, you bring an argument, well, you know, Burberry doesn't fully control the supply chain the same way as the high end luxury producers. They're not all produced in high income countries. And you'll be. very much right about that. But the thing I want to say to challenge whether Burberry is fashion and I do think it's important to make two challenges because as soon as you put them into a group

Starting point is 00:28:11 of fashion, it also means that you have to look at the future discounts a little bit different. And so what do I mean by that? Well, Burberry was established in 1856 and 50% of the revenue comes from these core products. It doesn't come from the newest collection. In the world of abundance and AI, you want to look at which companies are anti-fragile. And I'm not saying that Berber is anti-fragile, but it is a brand that's been there for more than 160 years. And it's not depending on whether or not the latest collection for the summer or whatnot is perceived cool or not.

Starting point is 00:28:47 Like, the strategy is quite different for a company like Burberry. And it sort of like also takes me to the point of, and also keep in mind, of course, I'm providing the bull case here for Burberry. You know, if I didn't spend all my time talking about why it's an inferior company to MS, for example, but instead said, hey, guys, I found this company. It has stable 70% gross margins, stable, 200% operator margins, decent growth. It's trading at 10 times earnings. You know, it's been there for more than 150 years. You would probably be like, tell me about it. Like, that sounds promising. But let's talk about some of the bad stuff. So one of the things I've,

Starting point is 00:29:26 I really like about a company is if there's a high insider ownership, especially if management charts. And that's, it couldn't be more the opposite whenever it comes to Burberry. So I do think that is a concern that I would have management owned very little stock. And a significant part of the compensation is tied to how well the company is doing, which by definition can work against you as an investor, because they could have the wrong incentives, let's say they would start issuing shares that you don't want to at the wrong valuation and whatnot. The vansmen do have some R.O. I see in there, so return investor capital, which is sort of like counter to that. But if you look at how the compensation is structured, it doesn't carry

Starting point is 00:30:08 the same weight. And actually, I would say that what is a little ironic whenever you look at what happened since the new CEO came in 2022, is that I think he's done a better job than what his KPIs are telling him that he should. And, you know, in a way, it's kind of like nice. That looks like he has so much integrity to do the right things for the shareholders, despite what I kind of feel are a bit inferior KPIs. And in a way, you can also say it's pretty bad that the incentives are not fully aligned in the first place.

Starting point is 00:30:41 All of that being said, there are some guardrails, though, where, for example, whenever I'm looking at a stock where it's not at the highest quality, it's deep. You're worried that you're going to catch a falling knife. I do like to be paid while I'm waiting and there's a very decent 50% payout ratio on adjusted earnings. We can go into some of the adjusted numbers afterwards, but they're so much straightforward. And so that is roughly 5% yield that you will be getting right now while you're waiting. And so they bought back 400 million pounds here in 2023 and they did that really fast.

Starting point is 00:31:17 the time it was equivalent to 5.6% of the shares outstanding now would be equivalent to 10% if they did at today's prices. And I would love to see more share repurchase soon. And those decisions are usually made by the board and not by the management. So there are some guardrails in terms of like what they can do and how they're incentivized that comes from the board. That is everything else more aligned with you as a shareholder than if you just read the proxy statement. So there's a bit more to be said about Burberry, about the valuation and whatnot, but I wanted to throw it over to UGNs first before I proceed with that. I've got a question for a stick that Burberry is famously rebrand and it was famously associated

Starting point is 00:31:58 with the early 2000s, sort of mid-2000s. That's like a disfirmistic term for folks in the UK. I don't know how bad that word is to call somebody. I think it's a pretty mild insult, but they wore the, they famously covered themselves in Burberry. It was like their sort of maelums. And there was this period where it got picked up on all the newspapers knew about it, all the television shows knew about it. You know, they're shameless and other things like this sort of dug into that subculture a little bit where these people were wearing the famous Burberry kind of gray check,

Starting point is 00:32:34 which is what Burberry is known for. And that damaged the brand. And so they had to find this way to pivot away from this subculture. and sort of make themselves back into this aspirational luxury brand, which they've evidently they've done that over the last sort of 15 years to kind of get away from that because it's not an issue now. But it is kind of interesting to me that there must be a lot of people around who are sort of my vintage who remember that pretty clearly.

Starting point is 00:33:02 And people who are like our vintage are the ones who have the excess cash to spend on stuff like this. So what's going to lure people like us back to that? brand and is it sort of irretrievably damaged or do you think they can turn around or they have turned around? Toby, I think that's just a great question. And I was discussing Burberry in a mastermind community. And one of the members brought at that point up exactly. You know, a brand means so many different things to different people. And originally I thought, and now I might have to think differently about it on my very small sample size, but I thought, you know, if you were a certain

Starting point is 00:33:45 generation and perhaps if you're based in the UK and perhaps it wasn't just a UK thing, they have that 8% of their business in the UK. And I was about to come up with a cheeky comment about you call football and not soccer like half of our listeners do. Like perhaps that's an issue. But then also you look at the main market and that is in countries that are really into football. and they probably don't remember and they don't know what a Millwall hooligan is or just like, perhaps it's not a thing. And so I don't really know how to best respond to that.

Starting point is 00:34:21 And they have some, they break down like the generations, not very detailed on AIDS, but a generation like disease, millions, whatnot in your annual reports. And I was going through that after having spoke to a community member who talked about like, what do people think whenever they think in the famous Czech? And, you know, I especially think that a brand, like Burberry, and I would completely forgive you if you went into the website and it's like,

Starting point is 00:34:46 this is pretty ugly. And I, this is not my way of saying, Berbury's cool. I do think that what's important about whenever you as a stock investor is not just to think about how you see the world, but look at the numbers and like, what is the world thing? And if you would wear a brand like Burberry, like it's very, it's very like in your face. And there are some, Some people and some cultures that would like to display that more than others. I'm really trying to be political correct as I'm saying all of this. And I think that's just, I think it's very important in terms of, I'm not saying one thing is right or one thing is wrong.

Starting point is 00:35:26 Let me give you an example of that. I was, I was visiting a Burberry store in Manila, Philippines some time ago. And I was looking for a belt. And there's a long story why, because it probably sounds super. super awl. What were you doing in Manila and why were you looking for a belt? Let's not go there this time. But I remember going in there and thinking that the store looked, had a very different feel than, say, the flagship store in Bond Street in London. And the belts were very explicit. And the brand was very explicit. Let me put it like that. And so I, so, and of course,

Starting point is 00:36:04 you know, it's a higher brand. So you're surrounded by sales people who want to give you a wonderful service. And so I asked her like, oh, like, do you have a belt like where you can't like see the brand? And she looked at me as like, I was asking her, well, I could walk on the moon. She's like, why would you want that? Why would you have something that's berbery if people can't see it's berbery? And that's because like in the Danish culture, if you wear like a big brand, it means that it's a, you know, to some extent it means like either it's a dog off or you're like it's a very quiet luxury type of culture. So you're not supposed to wear brands. is frowned upon to a large extent.

Starting point is 00:36:40 And so I think there's something to be said about the perception of brand and understanding, well, who's the core customer? And are you the core customer if you're looking at some of the products and you're like, this is odd. Why do they have three billion pounds in top line? Well, that's because people don't agree with you on what looks nice. Apparently so. The other question I had, there's a huge debt that it took on a whole lot of debt a few years ago.

Starting point is 00:37:07 What was the reason for that? Did they make an acquisition or were they buying back stock or where's that come from? Yeah, so I'm really happy you brought that up. So if you look at that, so if you look at just at the total debt, it's important to, because they actually have very little debt. So they have operating leases. So it's the way it works. And so if you look at IFRS, they're supposed to, like, it's counted as debt,

Starting point is 00:37:29 but it's counted as rights of use assets in the, in the assets column on your balance sheet. So they do have net cash. is the first thing I'd say. If the thought of T accounts just make you fall asleep and you have no idea what you're talking about, that's perfectly fine. What I'll do is that I'm going to link to this specific example of RF. So in the US you use gap, Burmary would be, so you could come in and basically the rest of the world they're using RFIS.

Starting point is 00:37:57 So I'm just going to link to an example of how that's been counted and why the debt they have on the balance sheet isn't quote unquote real debt. So I kind of feel I copped out on that one, Toby. That's good. Otherwise, I think it's a really strong pick. It's got all the things that I really like. It's got, it's a very cheap valuation. And as you point out, it's got huge margins.

Starting point is 00:38:17 So it's one of those things where, you know, I can see this working out really well over a long period of time because it's been around for so long. It's a great brand. It's got good margins. So they are able to convert that brand into people will pay up for it. It's got good top line. That's so cheap. This is the sort of thing that I would buy. I don't know, but it is the sort of thing that I would buy.

Starting point is 00:38:39 Definitely the brand and especially many of these countries that are growing their GDPs with a lot of middle class coming up. This can be a very good aspirational brand in those countries. And also, I think one interesting thing you brought up was it's not about volume here. It's about margins because it's a luxury brand. And I'm assuming the margin compares to other luxury brands. The only thing that I was curious was about lack of insider ownership because many of these luxury brands are family owned and they're able to make long-term bets. And that might be the only risk here if the management is not able to make those long-term bets.

Starting point is 00:39:22 But I think the price is so attractive that, you know, you kind of bake into it already. Yeah. So I'm really happy that you say that, Horry, because you are right. many of the luxury brands are owned by families, and they do not focus on, ironically, they focus on shareholder value, but they don't really focus on shareholder value, which is one of those wonderful things about capitalism, that sometimes shareholder value can be an indirect effect of thinking long term,

Starting point is 00:39:51 but I might be too bullish here as I'm saying this. Let's say that there is a bull case, and then this is like a base case and then a bear case, then you might say that there's a put option to some extent on the bear case because it's not family owned and because it could be snapped up by a luxury conglomerate like LVMAs would probably be the most obvious choice not caring considering everything they're going through right now and I have thought about that and I'm not saying that it's a big part of my thesis that you would have that put option whatever you want to call it that someone would come in and buy them up

Starting point is 00:40:26 Because again, I was discussing this with our mastermind community and then someone said to me, well, Stake, if that is the case and it's so cheap, why hasn't it been acquired? And that's a great argument. You know, what is it that we're not seeing? But I think it's important to say that the lack of inside ownership can in its own way. And I'm trying to be very positive. I'm saying this. But it might even be a catalyst potentially if they were to be acquired.

Starting point is 00:40:53 So let me give you one example. LVMATs really wanted to buy MS some years back, and I think they're quite up to 20%. And the families all, against their many families, they're six generations now with MS. They all joined together and they said, we don't want to be acquired regardless of the price. That is not the strategy that Burberry has. And so actually with the previous, under the previous management, there were rumors, you know, close to management and bored, whatever that means. They came out and said, we really want to be acquired.

Starting point is 00:41:21 And I was just thinking like that type of rumors that had probably started. themselves. They wanted to get a tender offer called 20 or 30% above market price would not be something you're here from a lot of brands. And I kind of feel that's, that is an interesting element to this. But if we can go back and talk about, hey, if this is a, if not a great company, then at least a decent company, why is it so cheap? And like I mentioned, you know, there's some hell on it. And so one of the thing is that the industry is facing some short-term problems. And now I'm not a, I'm not an expert whenever it comes to what looks good in terms of clothing and whatnot. So I'm not the right, I don't think I'm the right person to say the creative output isn't

Starting point is 00:42:04 the way it should be. I think I probably take the long-term view of saying, this is a high-end brand that's been with us for more than 160 years. It's not really about the last few collections that's come out, whether or not looks good or bad. I think it's up for you to decide. But it is a industry-wide issue right now that luxury sector is in a slump. I've previously pitched LVMATs here on the show.

Starting point is 00:42:26 And so I've been reading, you know, their earnings reports and whatnot. And they're a good indicator of, because they're more, I wouldn't say they are the industry, but they have so many brands in the industry. You can also see Kering just coming out. They tanked 7% like Gucci. I think it went down, I want to say revenue fell 21%. Like you see a lot of pain right now in the luxury industry. And so you might be saying that doesn't make any sense.

Starting point is 00:42:49 like MS send out their last quarterly report and they were up 70% on revenue. And you're like, what's going on? So again, we have different tiers within the luxury segment where for a company like Burberry that it's at the lower end, they have a lot of what's referred to as aspirational luxury shoppers. So they're way more hit by the economy. The chefs. Right, exactly.

Starting point is 00:43:12 And by inflation, to extend that, you know, call it old money, the quite luxury type people who buy the MSs of the world are just not. And so a part of the thesis, and I'm always ashamed of saying this, because it is a bit about, to what they say, timing the market, it sounds terrible. So I read this memo a long time ago from Howard Marks, and he talked about whenever you have market cycles, what kind of company that would be hit the hardest and with kind of company that would benefit the most? And he talked about how, whenever industry is in a slump, how you should make sure to buy low-quality companies. And it sounds so counterintuitive.

Starting point is 00:43:53 But his take was that those of the companies get punished the most. And if they have clean balance sheets, they're also going to rebound the most compared to their masses of the world as string and 50 times earnings because people know they're doing well. And so I took that. And then I squared it with, you know, Peter Lynch's wonderful book, Beat the Street. And he talks about investing in cyclicals. And I kind of felt he had this wonderful quote where he talks about investing in cyclicals

Starting point is 00:44:17 is like playing blackjack, because if you stay in too long, the house is eventually going to when. And so there is this thing, whenever you buy cyclicals, especially not the high-end luxury, but discretionary still, you want to, it is a bit of a game of what do other people think and when do they think that is so. And so whenever I'm looking at that, I think that there is a very interesting case here for Burberry. I am acknowledging now that they've been out with profit warnings, some of the

Starting point is 00:44:47 training earnings are not going to look as nice. Whenever it comes out here, they already dress that at length in the press releases. But I can't help but think if we buy it at the current price, so the market cap right now is $4 billion. Keep in mind, if you look at the enterprise value, we have the IF-I-R-S-16 thing about operating leases. So let's just call the $4 billion right now. So what I buy the entire company at $4 billion, and right now, the stock is trading at 1150 pence, so 1,150 pence. I would probably like a bigger margin of safety, especially because as much as we like to talk about astrometric bets, I do think that there is case to be made that things can't go worse, even for a brand like Burberry. But let's say that we have

Starting point is 00:45:31 $4 billion in top line, which I think is absolutely achievable. Right now is $3 billion. We have a P of 20 and we have operating margins of 20%. And so if we do all the math and knowing that the corporate tax rate in the UK is 25%. So we're probably looking, let's say that this is going to come to fruition. We're looking at a company that should have a market cap of 10 to 12 billion British pounds. Again, trading at $4 billion right now. Of course, this is the bull case. The base case for me is closer to $5.5.5 billion.

Starting point is 00:46:06 And then we have the bear case where I want to argue that there might be a put option somewhere. So with all of that being said, that's my pick here for today, Burberry. Please continue your bashing, Jens. I liked it. Yeah, I don't find much to bash here. I think you have, you know, give both the cases, the bull and the bear already. It's an interesting pick. It's just a question of like, you know, what's the upside?

Starting point is 00:46:32 Because it looks like a lot of the bad news has been picked into the price. So I think would I invest in this compared to, say, just investing in an industry? Rexman, maybe yes, because indexes are now overvalued in US. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust

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Starting point is 00:49:59 be found in the income fund fund's prospectus at fundrise.com slash income. This is a paid advertisement. All right, back to the show. All right. Thank you so much for your feedback, gents. Who wants to go next with his pick? I think don't we want to go? I got a short and sweet one. So the stock is PlayTil. The ticket is PLTK. They make mobile games. I can read off a list of these names. It's Board Kings, House of Fun. If you guys play any of those on your phones, then you're playing a playticket game. The stock IPOed in 2021 at North of $30. It's currently trading at $7.24.

Starting point is 00:50:39 They've torn up 80% of their valuation. I think they listed in the tech kind of mania and a lot of the heat has come out of it. Combined with the fact that they had some pretty good growth when they listed, pretty good historical growth when they listed. And the growth has slowed very materially. They're growing about 1% year on year, which is probably less than inflation. So in real terms, they're probably shrinking. which is why the stock is down so much, I would say.

Starting point is 00:51:08 I think they sort of blame it on. They say there have been these privacy updates, which have made, I'm guessing this is like an iPhone through the App Store mostly, but evidently that's made it much harder to market these games, and it's made it much harder to monetize these games for these guys. So that's been their big problem. They tend to have these like celebrity endorsements of their games. That's how they do it.

Starting point is 00:51:34 They have some celebrity play the game. So each game is associated with a celebrity. I'm not going to mention them because I don't think you'll recognize the games. It's not a very big company. It's a $2.7 billion market capitalization now. It's got a little bit of debt. So EVs 4.2. For that, they're expecting for this year revenues of $2.6 billion. So it's about one times revenue, which is pretty good, considering that because it's a tech company, because it's a gaming company, their gross margins a north of 70%, which is, that's very fat. So they're making lots of money.

Starting point is 00:52:08 Ebit, like $472 million. So EVE, Ebit is 745 for the year to come. So it's like six times on EVEIT basis, free cash flow, like $436 million, so 9.5 times free cash flow. P.E's about 11. And it's still run by the founder, CEO, who established it in 2010. One of the things that they're doing in a sort of effort to. to resuscitate the stock price, resuscitate the business a little bit, is they're doing what all of the rest of Silicon Valley is doing. They're doing this efficiency push, which means layoffs.

Starting point is 00:52:46 And so I think when you look at this company, it looks like stocks down 80%, growth has slowed to a standstill. They're doing layoffs, and they're saying there are problems with marketing and monetization of their games, which doesn't sound particularly good. And then on top of that, they're Israeli and they've got some employees in the Ukraine. So they're involved in both sort of geopolitical conflicts that are on the news at the moment. So all of that is very bad news for this business. But I like it for the reason that they definitely do have very substantial free cash for this business that they don't need to grow this business and they don't need it in the

Starting point is 00:53:25 business. So they've said that they're going to start paying a dividend. They've started at $150 million a year, which is the current market price is a dividend yield of 5.5%, which is a pretty fat dividend yield. They also said that they plan to do some acquisitions, and so the founder's CEO, he wants to do these acquisitions. Evidently, there's some stuff out there that they can buy. They may be a target themselves.

Starting point is 00:53:46 There are other big gaming companies at Lovin and various other sort of names that you would recognize in this industry. So I think optically it's something that looks like it's got a lot of problems. Under the hood, the balance sheet, financial statements, balance sheet is probably less than ideal because of the debt. But they seem to be able to set that debt pretty well. But I should mention that the Altman Z score is trending, is towards distress here. So my system excludes things that have, that fail on various statistical measures of earnings, manipulation, and fraud and financial distress.

Starting point is 00:54:19 And that's one of the measures that I look at. But it wasn't triggered in my system because I try to look at the things that are, that collectively have all of these problems. And this is sort of, this is a unique problem. And when I look at the rest of the financial statements, I think that it's okay. So it's generating. Top line is still huge. Margins are huge. There's lots of cash flowing into this business. It's manifesting as free cash flow and dividends and they'll be able to do acquisitions. So I think it's very healthy. I buy these companies for my funds. I own this company in the fund. It's one of the companies that I own in Zieg, which is my mid-cap large. It's one of 30 positions in

Starting point is 00:54:54 that company. I buy them. Or equal weight, I rebalance them at equal weight. Come the next rebalance date, it's entirely possible that I say. sell out of it. I don't know where we're going to be at that point. It's entirely possible that I continue to hold it. I just don't know before I come to the rebalance state what's going to happen. So if you hear this after the fact and then you go and look at the portfolio, it's not in there. That's the reason why. I can see that stock price up two times from here, and I still don't think it would be a particularly expensive company. So that's my pitch. It has obvious problems, but I think that in the context that I buy these things as part of a portfolio, it's a nice

Starting point is 00:55:28 risk adjust. And so I've put it on. Jents. It's a very interesting big Toby, especially gaming. I have a teenager at home. So I'm looking at all the different gaming companies too. Myself, I think it's a very interesting company because, as you said, the margins are really high. It's a profitable model. Distribution is also not that difficult for them because they're on the platforms. However, I think that a couple of concerns is, one, if it is, if I look at it as a long-term holding,

Starting point is 00:56:01 I don't think you are looking at it that way. It's kind of probably medium term for you. So if I look at it at a long-term holding, then I have a few concerns in the sense that, number one, why are they declaring dividends so fast? Just out of the IPO a few years back. Number two is their organic growth has been not that great. It's always through acquisition in terms of their revenue.

Starting point is 00:56:27 And now that they can't acquire more, their revenue is kind of declining or stagnant. And then the daily active user is also declining by 6 or 7% year or year. This tells me that the mode is like narrow or low. It's like switching cost is not there. gamers can be flickery. And then they also have this casino stream of business or games that can have regulation risk at some point or the other in some jubes.

Starting point is 00:56:59 geography or the other. So those are also of the risk to the stock. Having said that, I think up course, the geopolitical risk. But what I've found in my experience is engineers in Israel are the most resilient ones. There might be like middle silence going off, but they'll be still working. So I wouldn't worry about geopolitical risk that much. Why are they not able to grow revenues organically? and whether they're able to hold the attention of the gamers who are very easy to kind of, you know, lose.

Starting point is 00:57:37 Fickle. Fickle, yeah. Yeah, you don't want to use that word, but yes, that's accurate. Yeah, I think that's exactly the problem with this thing that nobody games. I think maybe that's not right. Maybe it's adults as well, but people play these games. They run out of interest pretty quickly and then they just move on to the next one. It's a little bit hit or miss.

Starting point is 00:57:57 having said that they've sort of got this machine for developing these games or buying these games, monetizing these games. That's sort of what you're buying rather than any particular. That's why I didn't spend too my games because it's going to be irrelevant. They have a way of marketing, getting attention, getting people to play the games. Those wells run dry very quickly so then they have to move on to the next thing. I agree with all of that. And that's a problem for these guys that they will have to find something that works. but, you know, I kind of feel that's what they do.

Starting point is 00:58:28 They'll be able to find something. I don't think it's going to be a blockbuster. I don't think that this is a sort of stock. I don't think this is as good as Burberry where I don't think in 150 years time, playticket will still be there. Maybe it'll be wrong, but there's a good chance Burberry will still be there. So I agree with you in the longevity of this thing. There's a limit to it.

Starting point is 00:58:47 But it's very cheap, it's throwing off a lot of cash. Found our CEOs still there. So I like operator-owner type CEOs. I think that they often know the industry pretty well and they know their way around. So I like this as a bit, but I agree. As I said before, I can roll out of these things pretty quickly. So it's not a, I never, I never, I always plan to hold them for a long term. But, you know, if there are better opportunities or it goes in the wrong direction, I'll be out.

Starting point is 00:59:13 I just want to say here from the latest earnings call, the celebrities here, Sarah Jessica Paga for Solitude Grant Harvest, Jason Alexander for World Series of Poker. and they continue the partnership with Drew Barrymore for Bingo Blitz. So whenever I was looking for the celebrities for like a Berberist website, I didn't know any of them, which to me meant they were probably cool. I know all the celebrities here for this company. And if you haven't watched TV in the 90s, you might not know them. And I kind of like that.

Starting point is 00:59:47 There was one more guy that I didn't even recognize him. The fourth guy, Ty Pennington. Yeah. Who's that? Couldn't tell you. Didn't even look at it. He's a celebrity for someone. You know, I was reading this study here the other day.

Starting point is 01:00:00 I think it was from Bain. And I'm always a bit worried about, you know, if it's created by consultants, I don't know if I'm going to insult any consultants by saying this. But if the advice you get from the consultants are you need more consulting, I just always get a bit worried. And so Bain made this conclusion that the more companies you acquire, the better it is, which obviously for a company that relies on the M&A fees, it makes sense to make that conclusion. But if you do think about it, there are some companies that do a very good job acquiring companies

Starting point is 01:00:33 and make it their skills to acquire companies. Of course, it requires... A constellation or Berkshire or something like that. Constellation of Berkshire, yes. Most serial acquires are cut from a very different cloth and they can't pull it off. It's very difficult to grow through MNAs. And so it very much depends on how well is the MNA gene, like a part of the company DNA. And what a lot of companies do after they matured is that all of a sudden to say, we can't really grow organically, so let's start to acquire stuff and grow that way. And that is usually always a bad decision. So it's very important whenever you look at a company like this to ask yourself, is this how they've grown so

Starting point is 01:01:16 far? Are they good at it? Or is it a new shift in strategy? Then whenever you read about their capital allocation. And I'll be the first one to say that it's not because I like being taxed on dividends by any means. But I do think that there's something to be said about a certain type of quality company. And here I refer to none of the highest quality company. It's probably okay to get a dividend. And especially if you're a bit worried about whether or not it's a value trap, while you're waiting for that multiple expansion, which is part of the thesis here, it's okay to be paid. And so I completely understand where you're coming. from Harvard whenever you're talking about, wow, that dividend income came in fast. Whenever I'm looking

Starting point is 01:01:56 at the financials, I'm looking at, you know, sales and marketing went up 24% year of year. And it's not because it's crazy that it's the case because, you know, they do have 70% gross margins and they have very, very decent. Like it used to be low 20s and now as like high teens in terms of operating market. Like, it's very common for those type of companies that they do spend a lot of sales and marketing, but also in the industry where, you know, you need distribution to, to your point before. You need to bring people in, you know, it is the cost of doing business. And so for a company like this, that might have matured to some extent, that's trading at a low multiple, like they talked about it on the earnings call that they would look into share

Starting point is 01:02:31 repurchase. I do think that is probably not the right strategy for a company like this. Whenever you're looking at share repurchase, you would say, what is the intrinsic value and do I buy below the intrinsic value? And I think that is how you should be looking at it. Another framework I want to share is asking, is the business getting better? which again, of course, goes into what's the intrinsic value. That's a part of that calculation. But a lot of companies have tried to boost their share price, but buying back stocks. And

Starting point is 01:03:04 simplistically, you don't want a company to spend their cash on buying back 50% of shares outstanding. If you as a shareholder then own, you have twice the ownership of a company that's worth half of what it used to be, you would probably rather get paid that in dividend instead. So yeah, so that would be my feedback here for your pick, Toby. Great feedback. Thanks, Stig. I'll take all of that on board. And so that's, that's my pitch. Should we do, Harry's? Thank you. And my pick is not at all in the value corner this time. So Toby and Stick, please forgive me. But I wanted to bring this up because I've been chatting with a lot of folks, especially my invested friends in India and my own.

Starting point is 01:03:51 experience looking at the market and I'm hearing a lot about, hey, how do you get into the India investing game or how do you get a slice of big growth in India? And one of the ways I was thinking is how about if you look into the banks in India? Because one of the things I see with India is it has a really positive demographics and that's going to stay for the next 30 years. the GDP is growing 7 to 8% even with all the headbands that we are seeing. In fact, like if the condition gets better, it will cross 10%.

Starting point is 01:04:30 So India is like where China was in the 1980s. There is a lot of appetite and a lot of need, actual need to build infrastructure. So that's both public and private. And the government is also making policies that are conducive for business. In a way, I see India is turning capitalist with huge enthusiasm. But when all this happens, you need a lot of credit for the economy to grow.

Starting point is 01:05:05 So it's at $4 trillion today. It will be $10 trillion in a few years. So when it is growing at 7 to 10%, like 6 to 7 years or 80 years, it might be $10 trillion. How do you capture some piece of it? And one of the ways I was thinking was through banks. And the reason there is another bunch of catalysts for banks in India. So one, I already talked about the sustained credit growth and the need for credit growth. It has been growing at 10% over the past decade and I believe it will only accelerate.

Starting point is 01:05:39 The second more important thing is the adoption of digital technologies that has made lending more efficient and distribution also more efficient, whether it's banking or lending credit approval and everything. In fact, the last few years, the digital lending market has witnessed the CA compounded growth of 40% almost. It is projected to surpass 720 U.S. million dollars by 2030 and a total 1.3 trillion digital lending market. market opportunity. On top of that, the government is also very supportive in terms of its policy. One, I think, is a very famous policy by Prime Minister Modi, which is called as the Jan Dhan, wherein he brought hundreds of millions of people to the fold of banking. For the

Starting point is 01:06:35 first time, they were getting banking accounts. In fact, the rate at which a number of people having bank accounts have grown in the past 10 years is astounding. Like, in terms of 2013, there were 450 or 460 million people or accounts, at least, bank accounts in India. Today, in 2023, by 2023, it might be more today. By March 2020, it was around 3 billion accounts. A lot of, especially all classes of people have been brought into banking and now they're going digital on top of that because of demonetization and the India stack as a colleague, which is the Pintech stack. In India now, when I go, in my personal experience,

Starting point is 01:07:22 even the beggars are the, we call it beggars or the homeless, they have a QR code. So a street vendor has a QR code. Nobody uses cash. So a lot of digitization has happened. So a lot of money is flowing into the banking system as well. And on top of that, there is a recognition by the government that having India used to, especially when we were, India was socialist, 30 years back,

Starting point is 01:07:53 they used to despise big banks because they feel like they will have more power. So they started breaking down and nationalizing a lot of banks 40 years back. Now it's the reverse. And the government has been pushing for privatization and also consolidation because they feel having a lot of small banks is not helping build the infrastructure they need. to build because the kind of credit that needs to be made available for bigger banks is important. So there's a lot of consolidation happening in the banking sector and the banks are going to go bigger and that's the intention of the policy. They are also supporting them by introducing policies

Starting point is 01:08:34 like bankruptcy code. Imagine till 2016 there was no bankruptcy code in India. So if you go bankrupt, there was no clean resolution. And because of that, it was very hard to hold the business was accountable. There are a lot of businesses who would kind of take money but never give back. There are a lot of kickbacks happening.

Starting point is 01:08:57 There was less transparency and there was less risk for the banks because a lot of it was driven by the government or corruption and stuff like that. So all that has been cleaned out and that is visible in all the NPAs, non-performing assets or credits, across all the banks,

Starting point is 01:09:15 not just ICLCI, that I'll be pitching today, but everybody has cleaned up in the last five to six years. And they're now in a state where now they can again focus on aggressive credit expansion. And that's why the asset quality is improving. And then they have very good capital adequacy ratios right now. So the entire banking sector is at around 16% now, which has a very good question. And as we are talking about consolidation, now there are the top five banks now today hold 50% of the entire deposits of the country. And ICICI is one of them.

Starting point is 01:09:57 It's the number five. And HDFC that I had brought up like some time back is number two. So ICICI has around $128 billion in deposits for comparison, HDFC has. has $189 billion in deposits. The top bank, which is a state-owned bank, it's called State Bank of India, has the highest. It has around $491 billion,

Starting point is 01:10:26 just as a comparison, and 23% of the entire bank deposits. HDFC has around 9% and ICICI has around 6%. However, the reason I'm pitching ICICI, and I would be comfortable holding both HDFC and ICICA, because those are the only two ADRs available. If there is anybody from India listening in, I would suggest you can expand your basket to another bank called Kotech Mahendra,

Starting point is 01:10:54 there is Axis Bank, and then there is a NBFC called Bajajaj finance, which I'm a big fan out, which is much higher growth and profitability than all these. So if you make it a basket, then you're really capturing the entire Indian growth. But today I'm going to be talking about ICICI, which is the fifth largest bank, as I said,

Starting point is 01:11:15 $128 billion in deposits growing at 10% Kager for the last five years. They had a scandal in 2014, 13, 14, 15, which when a lot of banks had scandals, they were one of them. And because of that, they had quite a time restructuring everything until 2018. After that, they have recovered and they have been growing steadily, their bank deposits.

Starting point is 01:11:40 their loan growth is at 14% Cagger and the revenue is around $27 billion, net income of $2.25 billion, which is growing at 17% for the past five years, Kagor and a net interest margin of 4.3%. They're definitely not cheap because their price to book is 3.7 and their P.E ratio is 18.5. But when you look at the growth rates in terms of rates, revenues or the interest income. And also when you look at the overall India story and how India as a GDP is growing, how the banking inclusion is growing. And with that, they're also getting this opportunity to cross. Like for a very long time, when I was growing up in India, all we did at bank was just go deposit money and get the money back.

Starting point is 01:12:38 But now when I go to any of these banks, I go to ICICI, HDFC, whenever I go, I have my accounts there. They pitch me different products, whether it's insurance products, whether it is portfolio management products, whether it is mutual funds, whether it is fiction deposits, money market funds, and private banking facilities. They have a bunch of different products, very similar to U.S. banks. So if I think of these banks, they're all like what Wells Fargo or JPMorgan Chase or Bank of America were in the 1950s probably. They're at that nascent stage. So my picture is you've got to hold on to this for the next 15 to 20 years. And the RBI, which is the Fed of India, Reserve Bank of India, has three banks or two banks, I believe, H.D.F.C. and I CICI has been recognized. as the systematically critical banks.

Starting point is 01:13:38 So that means they are covered by the equivalent of FDIC insurance. So to Toby's point, for the next 30 years to be, I'm pretty sure these banks will take as long as the India growth story is alive, these guys will do well. So that's my pitch. I would submit to you in terms of valuation, what do you think? I know that it's right now hot, the Indian market. but among them, I felt ICICI and HDFCR kind of relatively reasonably price

Starting point is 01:14:09 for the growth that they'll capture in Indian market. I like the pitch, Harry. I read a book called Concentrated Investing. I have it just here. It came out in 2016. I was just trying to remember that. We had an interview with an investor who had looked at all of the Indian banks

Starting point is 01:14:27 quite a long time ago. And I just, I don't think that investor, actually made it into the book. So I can't remember if I've told this story in the book or not, but they looked at the Indian banks as a way to get into, for exactly the same reason that you have identified them, that India was going to do very well. They wanted to be exposed to India. That was the smartest, easiest, most direct, highest talk, highest return on investment way of doing that was to be invested in the banks. And they had done it much earlier. And so we wrote Concentrated Investing in 2016, and I had a look in 2016.

Starting point is 01:15:04 And his thesis was, you want to be invested in the biggest bank rather than many, or the second biggest or the third biggest, rather than a long way down the list, because that was the surest, safest way of doing it. And I looked in 2016, and I looked at ICI-I-I just then, and I noted that when I looked at it in 2016, the stock price hadn't gone anywhere since 2005, and it had gone up and down quite a few times in that period of time. It just hadn't moved at all over that period, and it was trading around five bucks in 2016, or maybe even a little bit less than that five bucks in 2006 or 2005. And I had a look at it then. I think it's trading close to 30 bucks now. So

Starting point is 01:15:46 I did finally get that giant run. It looks like it's run really hard. And it's looking a little bit stretch, but you point out that there's so, there's massive growth coming in India for infrastructure, and it's going to require all of this credit. So it's likely that these banks continue to get better. But my questions are, and I think I do vaguely remember us doing an Indian bank discussion on a mastermind some years back. So I think my question is the same now as it is then. Why not?

Starting point is 01:16:14 Is this one of the biggest banks, and therefore it falls into that category of you're going to be fairly, you know, you don't need to go finding the value bank here. You just need to find banks that will be beneficiaries of this theme that you're identifying. and is this bank therefore in that bucket of banks and it's safe to buy this bank for that reason? And the other question is, do you feel like this valuation is stretched and the problem might be, even though you do get all of that underlying growth, is the issue that it takes a little while to catch up to the valuation and you have something similar to what happened between 2005 and 2015 or 6 and 16 where the stock price didn't really go anywhere. Just interested in your thoughts on those too. Yeah, no, thank you, Toby.

Starting point is 01:16:58 I think those are really good questions. I'll answer the first one that is it one of the biggest bank. I think it is one of the biggest banks in terms of the private banks. So in the top five, there is three state-owned banks and two private banks. That is HDFC and ICCC and ICICI.C is one of the top five. The reason they were not doing well between 2005 and 2016 is because, because they had a lot of scandals then. And during that regime in general in India,

Starting point is 01:17:32 there was a lot of corruption and scandals. And that's the reason that government was mooted out. And ICAZ was no exception to that, except HDFC, which stayed clean throughout the time. And that's the reason they're always richly valued. And what I've seen with HDFC, I think that might be the one that we had a discussion long time back.

Starting point is 01:17:50 Anytime I saw HDFC, it felt expensive. But they always grew. And ICICI, I must. assuming will be now that it is clean and there is a new operator, CEO, Sandeep Bakshi, who is really well regarded in the industry. Finally, I'm assuming that ICA will get into the class of HDFC because 2005, six, if you look at their deposits, they were both same. In fact, HGFG was slightly lower than ICSCI.

Starting point is 01:18:20 But then because of all this candle, ICI kind of lost its way, but now they are coming back. So that's number one. Number two, I agree that holding the largest banks will be the best. But what I'm seeing is the value migration from state bank to the private banks because of the services they offer. And not just the volume, but the quality of deposits, the kind of customers who tend to be with private banks are the ones who are the high value customers. And the state bank usually attracts the low kind of, you know, LTV kind of customers because of the facility. the private banks give it's on bar with any other U.S. bank in terms of their online digital

Starting point is 01:19:01 banking facilities and also customer service. If you cross a certain amount of deposits in the bank, you get a private bank who will be available to you, can help you. Many times when I go to India, I don't even go to the bank. They come home and help me with all my stuff. And then you also brought up the other part is like, you know, just the valuation. The valuation, where I think when I look at their valuation in terms of price to book, which is a good measure for any bank, three and four. Yeah. But when I look at, say, something like JPMorgan cheese, it's 1.87, almost two. So relatively, they are valued higher, but then the way I'm looking at it is J.P. Morgan is like so big, like growth opportunity.

Starting point is 01:19:50 And compared to J.P. Morgan and if you look at the. the market cap of 93 billion and the deposits that are there and it's going to grow in terms of the rate of growth of the GDP. I'm assuming, you know, that the valuation will catch up eventually, but it's provided we are willing to hold it for a longer term. But yes, as at present, they are stretched. And any stock in India today will feel like that. Yeah, I was looking at the Cape ratios for globally.

Starting point is 01:20:24 And perhaps no surprise to you, Harry, India is the most expensive, just overtaking the U.S. now. And it's kind of interesting whenever you look at how this sector has been, different sectors been broken down. So in the States, financials are 25%, and it's almost 38% in India. I know there's a lot that, of course, goes into that waiting. I was a bit surprised to see that, also considering how much it's still public. I don't know, perhaps some of that is floating in the public markets. and, you know, so perhaps that explains some of it.

Starting point is 01:20:56 To me, it's tricky. I can't, like, I completely buy into the thesis of the rise of India. I think most people do. Whether or not banks are the right way to play that, I don't know. I went through the earnings call here and tried to read the balance sheet, and frankly, I just don't understand it. And I don't know, it probably says more about my limited skill set, and it says about the complications of it.

Starting point is 01:21:19 You know, they break down. And it's wonderful. They have slides and they give their own ratings to the different assets and that, who am I to say that whether it's AA minus or not? I don't really know. I think it's, to me, it's a tricky bet. And you said 3.27 hard before on price to book. It seems high.

Starting point is 01:21:38 But again, there might be some wonderful quality that I don't really understand. What's interesting from a currency perspective is how much it has recently stabilized. rupees, say compared to the US dollar, for example, which has definitely been an issue in the past. And it seems like there is, for better, for worse, a more stable environment right now in India than in a long time. So I don't know the best way to play the bull case for India. I'm almost inclined to say something along the lines of buying a passive ETF. But then I also just said that it's priced very expensively. But at the same time, you know, it's also the fastest growing on the big economies in the world.

Starting point is 01:22:21 And why wouldn't it be priced as the most expensive? So those are my two cents on your pick, Harry. Very interesting. Thank you for bringing into the group. Yeah. Thank you, Stig. I think you've part of an interesting part. Why is India's like 38% of India stock market is financials?

Starting point is 01:22:38 One of the reason is they don't have big tech like the US. In fact, like I think the way I look at it is India is getting India's is now seriously compared to the fast at a very high rate. So I think there are a lot of different industries coming up now, but I think that's a good point actually. The financials are quite a big component of the overall market. In the 90s and early 2000, it was only outsourcing companies like Infocis and TCS, who would just take projects and do for US companies.

Starting point is 01:23:10 But lately in the last 10 years, I'm seeing product companies, whether it is fresh world, so-ho, so matter. There are many that went public recently in India and there are many in the pipeline for all product companies, mostly SaaS-based companies.

Starting point is 01:23:28 Right now, it's more like you take the model in US, copy for Indian context, or you become the low-cost producer of the same product. That's the model that they are taking now. So it will be really interesting what next 20 years will bring or will there be innovation for India market will be yet to be seen.

Starting point is 01:23:48 All right. Fantastic, Harry and Toby. As always, thank you so much for our time. Before that you go, could you kindly give a hand off, Harry, perhaps you first to where people can learn more about you? Yeah, I'm mostly hang out on Twitter, sorry, X now. Hari Rama is my handles. I would love to engage with you there

Starting point is 01:24:08 and look forward your comments and feedback. my blog is Wixbusiness.com. I run Acquireus funds. We have two funds deep, which is small and micro-domestic U.S. value and Zieg, which is mid-and-large-cap domestic U.S. value. I've written some books that are all in Amazon under my name, and I have a website, Acquireasmultable.com, which has got some free screens and all of our blog posts and podcasts and various other things there. Thanks for having me, Stig. Thank you for listening to TIP. Make sure to follow.

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We Study Billionaires - The Investor’s Podcast Network - TIP632: Mastermind Q2, 2024 w/ Tobias Carlisle and Hari Ramachandra

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