Rags to riches stocks

The recent bull run has exposed the truly Mr Market - sometimes elated, sometimes depressed. JM Financial is an interesting example.

An year back, JM Financials was available at 40 rupees. The current NCA is some 28 rupees. The profit contribution is 9.7 crores i.e. around 8.5 rupees per share. The current CMP is a neat 439 rupees. Consequently the P/E ratio is a huge 52 times. Crazy !!! Click on the title for the BSE Charting.

Very interesting - Teledata Informatics Ltd.

- The company has an NCA of 30.43 and is available for 22 rupees. Would you go for it?

- The company is virtually debt free. Would you go for it?

- It has an additional investment of 14.05 rupees per share. Would you now go for it?

- The company has 19.80 rupees per share in cash. How about now?

- Profits are 20.70 rupees per share. Now?

- It's at it's 52 week low of 22 rupees. The 52 week high was 62 rupees.

Would I buy? I wouldn't. Being "suspicious", I found out that the promoter stake is only 7% in the company. Secondly, the company has been pointed out by it's auditors on more than one occassion on the irregularities in accounting (irregularities is my euphymism for misleading practices). Thirdly, look at the tax charge. It's 0.04% of the PAT. I compared it with Infosys which pays 14.5% tax charge. A zero tax charge is impossible.

I would put the management of the company under the highly questionable banner and wouldn't recommend a buy or hold.

Why look and why not look at EPS?

Earnings per share (EPS) is a critical element of share valuation. Most investors use a modified approach to EPS by measuring it with respect to the CMP of the scrip (P/E ratio). EPS and P/E together account for an estimation of the "TIME required" for the stock to reach the current market price of the stock.

E.g. SCI (Shipping Corporation of India) is valued at 151 rupees a share and has an EPS of 50 rupees. In time, the total earnings over the next 3 years should be equal to 150 rupees (ceterus paribus). In such a situation, examining the EPS is crucial. This has to be looked at in the light of the change in pricing of products of the company (a lowering of price without a corresponding decrease in cost will decrease profits and hence value added to the company books), change in competitive scenario, change in management, change in strategy etc.

Look at change in strategy. State Bank of India has realised the pressures of competition and is looking at all products in a very professional way. Their foray into assets with differentitated products is amazing and so is the span of products they are providing. They are not challenging private banks, but are trying to rake in more market share from "other" nationalised banks like Central Bank of India, Indian Overseas Bank, Bank of India etc.

Now lets examine the Grahamian prophecy of "not" evaluating the earnings per share. Graham feels that predicting the earings of the company i svery difficult and not prudent as it is guided by the whims and fancies of the management. Graham lived in a time when corporate governance was a nothing and majority owners used to treat companies as proprietorships, whose assets and resources could be used for one's own advantage. Graham didn't believe that people are honest enough to allow enough profits for disbursements to public (or people were more dishonest than honest. Remember the blog on "Conservatism and Suspicions"). Understand that Graham also lived through a major depression.

E.g. GTL Limited has 72 rupees in cash and is availbale at 107 rupees. Now that's intrinsic value. The EPS of GTL is however very very low.

A strong EPS was a bonus for Graham but a strong NCA was the clincher.

I personally have a stronger allegiance to NCA rather than EPS as the cushion provided by value intrinsic in a company is higher than that in the days to come. As they say, "a bird in hand is better than two in the bush"

Conservatism and being suspicious

"Being conservative" is the hallmark of a value investor. Which means, always look at companys with a suspicious eye. To illustrate -
a) I have come across a number of companies which always account for only a trifle of thier PBT for purposes of taxation. (called tax charge in the P&L account). Corporate income tax in India is 33%. Yet they create a provision for only 5% or even lesser amount. This would be incorrect unless they have a tax holiday.
b) Any inconsistent change in value of sales/profits should be looked at negatively. Why was there such a marked change? What did the company do to get such a change? Be doubly suspicious if the number is reducing.
c) Always be wary of "non recurring" income or expediture in the profit and loss statement
d) Sales/profits are not growing - be suspicious. (these companies are negative companies for us)

The idea is not to pick negative points in scrips but to do a perfect evaluation of the stock. I have found myself, when is the going is smooth, to actually start picking "uncalled for" good points in even some bad stocks. I have lost a good amount of my gains due to this. Be careful of such tendencies. As Warren Buffett says - "its better to be approximately right than being precisely wrong"

Karur Vysya Bank

What is striking about Karur Vysya Bank is it's P/E. At 8, this is one of the "to own" scrips in the banking sector. Add to it an NCA of 160 rupees on a CMP of 472 rupees makes it a stock worth looking at. The dividend yeild is low at 2.11%. Will I buy it or not? Nah, the stock's intrinsic value is still not something that is that exciting but if it reaches a price range of 400-420, then I will put my money on it. So watch out for this scrip.