Future Multibagger in the making?

Let me tell you the story of Warren Buffett and American Express. 

In 1963, there was a huge scandal in the US named "The Salad Oil Crisis"

A man named Anthony de Angelis defrauded some major American financial institutions of about $180 million. You can read more about it here:

https://en.m.wikipedia.org/wiki/Salad_Oil_scandal

One of the major companies that was hit was American Express. AE had provided Mr. Anthony with most of the loans keeping the inventory of soybean oil as collateral. It was only later that they found out that the storage tanks contained mostly water with a little oil on top. 

The scandal caused huge loss to AE and their share price almost halved from $60 a share to $35.

It was at this time that Warren Buffett starting buying up shares of AE. Conventional investors and fund houses were left puzzled as to why Buffett was investing in a loss making company. But what they didn't know was that Buffett had already done his homework. 

He knew that American Express was a fundamentally good company. 

He knew that the company lost only a tiny portion of money to the scandal, and this setback did not majorly affect their business. 

Buffett went out and observed that people were still using American Express in the form of credit cards, prepaid cards, cash vouchers, etc. These days travelers' cheques were the norm. These cheques were prepaid instruments that any foreigner could use to make transactions in another country. 

Now these cheques were not always utilized and people still had remaining balances which they didn't exhaust for quite a considerable time. In this way, American Express was holding a lot of "float" money - i.e. they were holding money that was not theirs and didn't have to return in the near future. 

Buffet knew that for any business, cash is king. If a business has cash, they can open up a lot of opportunities in their industry which may be inaccessible to their competitors. 

So the above factors - a cash-rich and fundamentally good company undergoing a temporary crisis available at half it's original valuation - presented a wonderful investment opportunity and Buffett took full advantage of it. 

It is estimated that Buffett made a total of 181% gain from AE altogether. 

The reason I am telling this story is because I see a similar opportunity arising in the India Stock Market and if you can understand my viewpoint, you may well be on your way to identify a multibagger. 

As of January 2023, which company do you think is exhibiting similar traits like AE was during the 1963 crisis? A cash-rich company undergoing a temporary crisis for which the market has trashed ita value well below it's intrinsic levels? 

I'm talking about no other company than our household brand Paytm. 

Now before you go on and call me all sorts of names, call me a stock operator, an investor who had subscribed to its IPO and now sitting on loss - I want to say that I am neither of these things. I am invested in Paytm's parent company One97 Ltd. but I bought it way below IPO levels. Let me explain my reasoning behind the purchase -

We know that Paytm has had a tumultuous history in the short span of time since it's listing on the stock exchanges. It has had an overpriced IPO, it's still a loss-making company (although it is projected to report positive EBITDA in March 2023), there have been high-profile resignations from its management, and it's long-time Chinese investor Alibaba recently sold it's entire stake in the company. There are few who would consider Paytm a good company given it's recent reputation. 

But I believe in spite of such shortcomings, Paytm is going to become a fundamentally good company which can potentially give multibagger returns. 

The reason I say it? Three words:

Brand

Brand 

and BRAND! 

You see, according to Buffett, a fundamentally sound company always possess a strong moat, i.e., something which gives it an edge over other companies in the same industry. And I believe the strongest moat for Paytm will be it's brand recall value. 

Think about it - when you think about the pioneers of digitization of the economy, which brands come in your mind? Which was the very first brand you saw in the form of QR stands in petty shops and small businesses when news outlets were showcasing India's emerging digital payments drive? I remember Paytm was in the background long before brands like PhonePe and Google Pay came into the picture, and yes, Paytm already had a decent presence in QR payment segment well before UPI made it's debut 7 years ago. 

I'm not here to talk about what Paytm is already showcasing in its investor reports - rising number of MTUs, rising sales of merchant payment devices, and additional revenue sources from selling various services through its Paytm Superapp. That knowledge is already out in public. I want to talk about something that isn't the general consensus - that Paytm is well on its way to becoming a household brand in India much like Tatas, Godrej, Sony, and the like. 

Brand recall is not something to be taken likely in India, where your reputation in the market had the potential to make or break your company's profitability. Working in the financial sector for quite some time, I've experienced it first hand. On one side, MNC brands are spending crores of rupees on marketing; it is not easy to get a foothold on financial service if you cannot garner trust from your clients - money is already a very delicate matter in most Indian households, not to talk about how risk-averse Indians are on the face of multiple financial scams and frauds that have plagued the country since the beginning of the century.

People would rather have an FD in SBI which gives below-inflation return than invest it in a good well-balanced mutual fund from Reliance Nippon which would actually create them wealth. It's because of brand value that a PSU corporation like LIC commands the mammoth share of the total no. of insurance policies in India. Although that is changing in time (as evident by LIC's decreasing market share), it still demonstrates the length to which Indians will go once they put their trust in a particular brand. 

This is exactly why I think Paytm has a good chance to be an excellent home-grown company. With its familiar name and signature tone, it may well be on its way to become a future multibagger. 

Disclaimer: The author is currently invested in the security discussed in this article.