Recently, PPFAS Mutual Fund has found itself in a unique position as it currently holds a substantial portion—nearly 17%—of its assets under management (AUM) in cash, primarily within money market instruments. This situation reflects the fund’s cautious approach in a market environment where value-based opportunities appear limited. Interestingly, the only mutual fund with a higher cash allocation is Quant Mutual Fund, at 19%. The heavy cash holding may indicate a shift in market dynamics, prompting questions about PPFAS’s adherence to its value investing principles.
Value investing traditionally involves acquiring companies that exhibit a competitive advantage—or a ‘moat’—and are priced attractively with a healthy margin of safety. With the AUM of PPFAS soaring more than 20 times over the past four years, this raises important considerations: can PPFAS maintain its stringent value investing strategies, or has its approach evolved with its growth? To explore these issues, we will analyze five recent stock picks made by PPFAS over the last year.
Recent Stock Entrants into the PPFAS Portfolio
The five stocks that have recently entered the PPFAS portfolio are:
- EID-Parry (India) Ltd
- Accelya Solutions India Ltd
- Swaraj Engines Ltd
- Indraprastha Gas
- Kotak Mahindra Bank Ltd
Assessing these stocks through the lens of value investing reveals a commonality: each has been selected based on specific financial metrics that align with the principles of value investing.
Evaluating Competitive Advantage
In value investing, companies with stable operating margins over a decade are thought to possess a competitive edge. Looking closely at the operational profit margins (OPMs) of the selected stocks, we find a diverse profile. Interestingly, while Kotak Mahindra Bank operates under a different model that emphasizes net interest margins, EID-Parry and Swaraj Engines have demonstrated consistency in their OPMs over the past ten years.
Notably, Accelya Solutions and Indraprastha Gas have experienced higher volatility, particularly influenced by COVID-19-related disruptions, impacting their margin stability.
Debt Management: A Key Indicator
Value investors typically prefer companies with low debt exposure. A general benchmark is a debt-to-equity ratio below 0.5. In analyzing the debt profiles of the non-financial stocks, we see a favorable trend, reflecting healthy financial management. The interest coverage ratio further indicates how many times a company’s operating profit can cover its interest expenses, which shows that companies like EID-Parry are well-positioned with an interest coverage of nearly 8 times.
Dividend Yields: A Attractive Feature
When comparing dividend yields, three of the selected companies outshine the average yield of 1.2% from the Nifty 500 index. EID-Parry, in particular, has shown a propensity for volatile dividend payouts, contrasting with Kotak Mahindra Bank’s more stable dividend policy of 2%, which emphasizes their focus on reinvesting profits for growth.
Profitability Measurement via ROCE
Evaluating a company’s profitability through the Return on Capital Employed (ROCE) metric reveals which businesses convert their capital into profits efficiently. A standard benchmark is typically set at 15%. In this analysis, three out of the five selected stocks exceed this threshold. While EID-Parry was above the benchmark in the past two years, it has recently dipped below 12% ROCE. Conversely, Kotak Mahindra Bank has been a consistent wealth creator despite exhibiting lower ROCE than its peers.
Valuation Metrics: Smart Investing Practices
The principle of reasonable valuation is paramount in value investing. Analyzing the price-to-earnings (P/E) ratios of recent stock purchases, we observe that most were acquired under their historical medians, reflecting a prudent buying strategy. For instance, Kotak Mahindra Bank’s P/E ratio was 27, significantly below its 10-year median of 51, while Indraprastha Gas was purchased around a P/E of 17, below its median of 24.
Summary of Recent Stock Picks
| Stock | P/E Ratio at Purchase | 10-Year Median P/E |
|---|---|---|
| Kotak Mahindra Bank | 27 | 51 |
| Indraprastha Gas | 17 | 24 |
| EID-Parry | Under 11 | — |
| Swaraj Engines | 19-20 | — |
| Accelya Solutions | 17 | — |
The recent acquisitions have largely taken place between November 2023 and January 2024, reinforcing the notion that PPFAS remains committed to its value investing strategies. Despite short-term market fluctuations, the evaluation of these equities suggests a calculated approach striving to achieve long-term gains.
Conclusion: While our interpretation of PPFAS’s reasoning behind these investments may differ, the evidence shows that the firm appears to remain aligned with its foundational investing principles, navigating the market’s complexities with a disciplined strategy.
It is crucial to note that the insights provided in this analysis serve only as an educational perspective. Investors should conduct their due diligence or consult a financial advisor before committing to any investment strategies.
Rahul Rao has extensive experience in investment strategies and financial literacy initiatives, and he approaches stock evaluation through a data-driven lens to uphold rigor in investment decisions.
