Berkshire Hathaway compounded its book value per share at 19 percent over 52 years. A $10,000 investment in Berkshire Hathaway stock in 1965 would be worth $88 million today. That’s a lot of money. Warren Buffett achieved this feat by judiciously investing the operating cashflows to acquire high quality businesses run by able and honest people. He didn’t interfere and left the managers alone to focus on running the business.
Prem Watsa, also known as Warren Buffett of Canada, followed a similar approach to run his conglomerate FairFax Financials. Over the last 21 years he compounded book value and share price at 19.4 and 18.6 percent. Instead of studying other businesses and wasting time, why not buy and hold Berkshire Hathaway and FairFax Financials? Both these companies are too big and future compounding will be much lesser than the past.
Charlie Munger once told that, “To find a wonderful business, one needs to find them small and get them when they’re little”. One such idea which is in nascent stages is Thomas Cook India (TCIL). It is India’s largest foreign exchange and travel operator having a market capitalization of 7,900 crores and FY17 revenue of 8,600 crores. In its 35 years of operations TCIL suffered a loss for only one year.
a) TCIL throws a lot of free cash flow every year. This is re-invested to acquire other high quality businesses.
b) Acquired Quess Corp, HR facilities management and staffing entity, in 2013 for a consideration of 259 crores. Post acquisition revenue grow by 4x in 4 years from 1,000 to 4,150 crores. During the same period profits grew by 6x from 18 to 110 crores. Quess Corp is a subsidiary of TCIL and it trades in the public markets valued at 11,500 crores. From 259 to 11,500 crores in 4 years represents a CAGR of 158 percent.
c) Acquired Sterling Holiday Resorts for 870 crores and ventured into hospitality sector. Post acquisition it refurbished the resort, increased the inventory of rooms from 1,500 to 2,000, and occupancy rates went up from 28 to 70 percent. Going forward Sterling Holiday can fund its growth from internal cashflows and doesn’t need TCIL to funds its growth. The table below shows how TCIL diversified its income streams.
What about the valuation? Ashish used reverse DCF to value TCIL. Couple of inputs that went into the DCF are: 10 percent cost-of-capital and exit multiple of 2 times book. To justify the current stock price of 210 rupees the book value should compound at 18.68 percent for a decade. Is this growth rate reasonable? In the last 4 years post acquisition book value of TCIL compounded at 42 percent. The table below shows the implied growth rate of book value at various exit multiples. To learn more about implied growth rates and reverse DCF read the book Expectations Investing.
Charlie Munger once told that, “Occasionally, you’ll find a human being who’s so talented that he can do things that ordinary skilled mortals can’t”. TCIL has 3 intelligent fanatics: Ajit Issac, Madhavan Menon, and Prem Watsa. TCIL is aggressively investing in quality businesses, taking a hit on return ratios in the short term to create wealth over the long term. Here is another data point on TCIL valuation:
TCIL has a market capitalization of 7,600 crores, whereas its subsidiary Quess Corp (62.17%) alone has a market capitalization of 11,700 crores. In addition it has investments in other businesses like Sterling Holidays. By buying TCIL we can get a lot of optionality of further such opportunities like Quess as TCIL is an investment vehicle.