Mutual Funds

PPFAS Mutual Fund buys Rs 7 crore worth of Amazon Inc. at $ 1,466/share

In January 2019, PPFAS Mutual Fund bought Rs 7 crore worth of Amazon Inc. at a price of $ 1,466 / share. This amounts to around 0.5 per cent of their total AUM, shows PPFAS monthly portfolio factsheet for January.

“It will not move the needle significantly either on the upside or the downside since the position is tiny. Indeed, the position size is less than the daily NAV movement on many days recently, given the volatile markets,” says Rajeev Thakkar, CIO, PPFAS Mutual Fund, in his note in the factsheet.

Thakkar goes on to explain the rationale behind the investment. He also tries to answer queries like whether there is a drift from the approach of investing only in stocks trading at less than intrinsic value, what changed the stance, as in the past PPFAS Mutual has said that they do not know how to value Amazon, and why only 0.5 per cent exposure.

“If one uses a typical metric of say price/earnings ratio, the stock looks very very expensive. We have been railing against expensive consumption related stocks in India for more than two years now. Amazon may seem to fall in the same category. The answer is that P/E ratio is not very helpful if the reported earnings are not ‘correct’ for some reason,” said Thakkar.

“The reported earnings may be ‘correct’ from the accounting perspective and indeed may have been audited by the best of the auditors. However, they should be representative of investors true economic earnings and sustainable. If the earnings are overstated or depressed due to certain factors, they give a misleading P/E ratio,” adds Thakkar.

In his note, Thakkar gives reasons why in the case of Amazon, the P/E ratio is not representative:

– Mature categories (like say physical books or ebooks on kindle) are hugely profitable while other categories lose
– Mature markets (say the USA) make money while newer markets (say India) lose money.
– A business segment with massive potential on a relatively small base with runaway growth rates (is the cloud computing segment) within the overall company which gets clubbed with the retailing business at the bottom-line.
-Un-monetised / partly monetised levers in advertising, media and subscription, third party sales and logistics.

“Familiarity with the company has been there for about two decades while we have been watching it closely for about a decade. Our YouTube presentations on this company go back about four years. We have been systematically underestimating the levers that have been pointed out above,” says Thakkar. In the later part of 2018, our understanding of the cloud business was much better than it was earlier and that is what tipped the scales, he adds.

“While plugging in numbers in a spreadsheet and even back of the envelope calculations justify purchasing Amazon, the Benjamin Graham readings have been an impediment in building a larger position. The approach we have is that we will either keep buying on each substantial fall in the share price or we will wait to have the reported numbers crystallise our thinking more and more to add to the position.”

“If we find our assumptions not validated by the company performance and if we think there is a mistake, we would not hesitate to sell,” says Thakkar.

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