Liberty. Realty. Equity.

Moved on .. http://scrip-tures.blogspot.com

2007-03-18T14:33:00.000+05:30

Hi everyone,

I have moved the blog to a new address .. pls access my posts at http://scrip-tures.blogspot.com

Warm Rgds
Shankar
shankar.nath@gmail.com

Re-starting blogging soon ...

2006-10-14T18:43:00.000+05:30

Buying companies - math of a problem

2006-08-15T17:36:00.000+05:30

Three companies are up for grabs but you have money to buy two only. The management has given instructions for you to only consider companies which give a high "Return on Capital Employed" ratio. All three companies are equally priced. Here are the specs -

1. Company A earns a profit of Rs. 80 from a capital employed of Rs. 100
2. Company B earns Rs. 20 from a capital emp of Rs. 100
3. Company C earns Re. 1 from a capital emp of Rs. 20

Thus company A has an ROCE of 80%, company B has an ROCE of 20% while company C has an ROCE of only 5%.

You might be tempted to buy companies A and B as they definitely have a much higher ROCE as compared to company C. Lets do some further math here -

Case 1: You drop A and pick B, C
Your total profit would be 21 (20+1) while your cumulative cap. emp. will total 120 (100+20) .. giving you a total ROCE of 21/120 = 17.5%

Case 2: You drop B and pick A, C
Now your cumulative ROCE jumps up to 67.5% (81/120)

Case 3: You drop C and pick B, A
A total profit of 100 (80+20) and total CE of 200 (100+100) means, a combined ROCE of 50%

So while dropping company C may seem a good choice, it'll not be too appreciated by your management.

Implications - Such situations also come to light in corporate quarters. E.g. an increase in homeloan rates may lead to lowered demand for housing and hence the share price of banks would come down. The larger part of the puzzle is "what is the contribution of home loans to the bank's total asset disbursements". In a previous blog I had explained the same situation w.r.t. HLL and it's price war with P&G on the detergents front.

More .. sasta stocks

2006-05-31T21:55:00.000+05:30

My picks for tomorrow will be :

1. Rane Engine Valve - small cap; should give quick money .. 15-16% in a week; stop loss at 320
2. Wockhardt - good stock at low price
3. Monsanto - At a PE of 13 and an expected PAT of almost 100 crs ... easy buy
4. Apollo Tyres - quick money; stop loss at 220
5. Balaji Telefims - Good NCAV; good PE for entertainment/media stock
6. Abbott India - sasta
7. NIIT Technologies - sasta; buy and hold
8. Fag Bearing - quick money stock
9. Rain Calcining
10. Madras Aluminium Co.
11. India Glycol - has upside; a PE of 7.02
12. Apar Industries - Excellent sales growth; long-term prospect
13. Aegis Logistics - Great sales growth; good traction; quick money
14. Gujarat Ambuja Export - brilliant PE though sales are slow
15. NOCIL - excellent turnaround story
16. Tinplate Co. of India - Amazing valuations
17. Ind Swift Labs - One of the cheaper pharma scrips
18. Ahmednagar Forging - Forget the zero dividend; has a debt-reap of 64% of m-cap
19. Andhra Pradesh Paper Mills - Amazing valuations
20. Jupiter Biosciences - Future growth story

The God of Pennies .... title shattered !!!

2006-05-26T16:25:00.000+05:30

Hindustan Dorr Oliver went down by 78% today !!! Record date for sub-division of the shares (1:5 ratio) is Jun 02, 2006. The share price is down to 155 rupees. Strictly a no-buy. Any reasons ??

Sasta stock !!!

2006-05-24T19:52:00.000+05:30

This is all I've been listening and reading over the last two days. A friend at office tried an experiment on this - he picked ten random stocks given in the tabloids as ridiculously cheap stocks ... surprise !!! ... that herd of "cheap" stocks actually knoocked off 3.4% of an investors wealth in the last two days.

What did I do? I too bought some stocks on 22-May (when the mkt went down by 1000 pts). As I had only 80000 bucks, I divided the money among some 9-10 stocks. Here are my value picks -
a) Amtek India - I bought this again ... at 108 rupees. It's at 120 today.
b) Bank of Baroda - Bought at 227 rupees ... up to 239 rupees
c) Kalpatru Power - Amazing returns ... bought at 641 .... now up to 755 rupees
d) Mastek - up from my buy price of 307 .. up to 326 rupees
e) Rolta India - Bought at 184 rupees. Now at 194 rupees
f) Gujarat NRE - Bought a little more ... at 65 rupees ... its up to 75
g) Rain Calcining - 38 rupees .. 39.10 rupees
h) Tinplate Co of India - 73 rupees goes up to 77 rupees
i) Alembic - 328 rupees .. disappointing up to only 332 rupees
j) Alok Textiles - bought at 73.5 rupees ... at 77.15 rupees

I had my share of fun today .. the BSE fell by 250 points today ... and my portfolio actually went up a miserly 0.4%

The big bank theory

2006-05-02T19:32:00.000+05:30

Bankex moved up by 4.02% today. That's huge. The major gainers were BoI, BoB, Andhra Bank, Indus Ind Bank, ICICI Bank Limited, Vijaya Bank and UTI Bank (all over 5% gains and all in BSE A segment)

Of all these, I like Bank of Baroda. At a fwdPE of 8.36, BoB is undervalued. I estimate a 1yr earning forecast of 800 crs+ given the legacy and advancements made by the bank. The current dividend yield is 2.20%, which is slated to increase given the rise in profits.

This one's a different Nahar

2006-04-30T16:55:00.000+05:30

Nahar Industrial Enterprises Ltd. The company results have been very impressive over the last 3 quarters -
Jun-05: Sales increased to 176 crs from 90 crs LY; profits up from 3 crs to 14 crs
Sep-05: Sales up from 82 crs to 172 crs; profits rose from 7.12 to 15.07 crs
Dec-05: Sales upto 169 crs (from 156 crs); profits up from -0.72 to 18.26 crs.

Extrapolating these numbers over the next 3 quarters puts the fwdPE of the company at a powerful 8.56. I also find that -
1. The organisation's interest cost has been decreasing over the last few quarters, which is brillant. (there is one news item however, which indicates that the company is in discussion for issue of FCCBs)
2. The NCAV of the scrip is 13.92 with a sizable investment head of 66 crs in the balance sheet (mostly owing to shares in sister concerns - NSML and NEL)
3. A visible increase in net margin from -1.5% in FY2004, 3.3% in FY2005 and 9.2% till Dec-05
4. Surprisingly, no dividend has yet been issued although the company has enough cash reserves and cash profits.
5. The 31-Mar-05 book value is a comfortable 175 rupees/share

I would love to buy this stock. The only hitch on the charting is : the scrip had just created a valley a few days back when it dipped from 170 rupees to 130 rupees. It's now back to 170 rupees. Dont risk market timing ... buy a small number of shares, buy more on declines.

Mutual funds and stock evaluation

2006-04-30T15:49:00.000+05:30

Its often a good idea to see what mutual funds are buying or selling these days. This helps you predict stocks which have a higher propensity of taking the dive or perhaps, soar the skies. I used MutualFundsIndia to list the top 4 performing funds over the last 3 months .. here's their list -
1. Deutsche Alpha Equity Fund - 37.35% in last 3 months
2. Sundaram Select Mid-cap Fund - 33.10% in last 3 months
3. SBI Magnum Comma Fund - 32.90% in last 3 months
4. Franklin India Opportunity Fund - 32.10% in last 3 months

Now, I guessed that the portfolio composition of all these 4 funds would tend towards parity or perhaps, a high correlation. If not companies, atleast the sectors. Here news -
1. Deutsche Alpha - Diversified (29%); Computers (9%); Metals (8%) ... top 3 cos: Sterlite (8%); Tata Steel (8%); Tata Chemicals (7%)
2. Sundaram Midcap - Engineering goods (17%); Housing (11%); Auto & ancillaries (11%) ... top 3 cos.: Kalpataru (4%); Balrampur Chini (4%); Ansal (3%)
3. SBI Magnum - Cement (14%); Diversified (13%); Metals (12%) ... top 3 cos: Hindustan Zinc (8%); Shree Cement (7%); United Phos (5%)
4. Franklin - Entertainment (22%); Auto & ancillaries (14%); Diversified (11%) ... top 3 cos: TVS Motors (9%); Jaiprakash (7%); Calcutta Electric Supply Co. (7%)

Amazingly ...
i) The top three sectors among the four top performing funds is strewn over 8 different industries (from a max:12)
ii) The top 3 holdings of each of the 4 funds is different i.e. we have 12 different companies that form the top 3 holdings of these 4 funds.
iii) The average holding in equities from the total corpus is a healthy 94%. (so you might want to rethink your idea of staying 60% in cash and rest in equity)

Mutual funds donot think alike and have different priorities and basis of evaluating stocks. For us the advantage is in identifying changes in portfolio in mutual funds to understand what they are buying or selling, researching the same and arriving at a decision.

PS: Has anyone checked the Calcutta Electric ... ???

Alembic Pharma

2006-04-29T20:44:00.000+05:30

Watch out for this stock. I advice BUY on declines in the price of the stock. Reasons -
1. Alembic has come out with a good Q4 result, displaying a strong increase in PAT (from 6.36 crs to 17.10). This is in line with earnings over the last few quarters.
2. The yr has closed at an EPS of 28.36. With the CMP at 401 (29-Apr), the PE comes to 14.13.
3. Sales have risen by 20% plus on every Q-on-Q results and so have profits. A lil' extrapolation would put Alembic's next 2 Qs results at a strong footing equaling around 16 rupees in EPS. I would picture Alembic at a fwdPE of 12.9 which is one of the lowest in the Indian pharma space.
4. The heavier part of the sales growth has come from domestic sales (around 77%) however interestingly, Q4 has contributed one-third of the entire export pie. This marginally indicates a move towards ramping export operations by the company.

A 99 yr old company, stable sales and profits, growing, a relative inexpensive valuation to peers ... worth a buy.

Nahar Export revisited - interesting announcement !!!

2006-04-26T23:18:00.000+05:30

Nahar Exports Ltd has informed BSE that ....

Thus upon sanction of the scheme shareholders of the Company holding 100 Fully paid up equity shares of Rs 10/- each on the record to be fixed for the purpose, shall receive 55 Fully paid up equity shares of Rs 5/- each in NSML (post demerger of investment business) and 70 Fully paid equity shares of Rs 5/- each in the Company.

Questions -
1. Any arbitrage?
2. short/mid/long term prospects?

There was one report by EmKay which talks of latent (and now exposed) shareholder value in this deal. Here's how ...
1. The invt business in NSML (Nahar Spinning Mills Ltd.) is worth 346 crs which'll be merged with NCFSL (Nahar Capital and Finance Services Ltd.). Allotment ratio: 1 equity share of NSML = 1 equity share of NCFSL (FV Rs 5) + 1 equity share of NSML (FV Rs 5)
2. Textile business of NEL (Nahar Export Ltd) to be hived off and merged with NSML. Allotment ratio: 100 shares of NEL (FV Rs 10) = 55 shares in NSML (FV Rs 5) + 70 shares NEL (FV Rs 5)

The investment summary presented : a sum-of-its-part valuation of NEL gives Rs. 112 as the fair value of the stock. Hence the potential upside of NEL is 38%. (for a copy of the report, kindly email me)

National Organic Chemical Industries Limited

2006-04-26T22:31:00.000+05:30

or NOCIL for short. NOCIL is a turnaround story ... refered to BIFR in Jan-2004, it came out of bankruptcy with a positive net worth on 31st March 2005. The company had a fantastic 3rd quarter with an impressive 23 crs of profits on a capital base of 160.79 crs. Over the last 9 months, the company has notched up 59.50 crs of profits and should close at around 80 crs for the yr. The fwdPE of the stock would be a comfortable 5.63 - an alice in wonderland situation !!!

And although the company doesn't provide for any dividend, I take comfort over the fact that NOCIL has an NCAV of 4.07 and a book value of 10.90 (as compared to a CMP of 28.25). The high court has approved of a demerger of the company in two divisions to which the shareholders will benefit as the rubber division will take advantage of an independent management.

Peers of NOCIL would be other petrochemical companies like Castrol, Manali Petro, Narama Chematur, Hind Flourocarbons, Sah Petroleum, SA Petrochem, Lanxess ABS, Chemplast Sanma, Jubilant Org, DCW, IPCL and Finolex ... (barring Sah whose profits are almost non-consequential, NOCIL and Narmada Chematur exhibit the best improvements in qtrly earnings ... Narmada Chematur has also been recommended for a buy in a previous blog).

I would place a BUY on NOCIL with a stop loss on 24 rupees.

Behavioural Economics 101

2006-04-23T14:26:00.000+05:30

I've always found the field of Behavioural Economics mighty fascinating. Here's enclosed some very interesting and practical applications of the same.

1. You decide to clean your car yourself to save paying the monthly 300 rupees to the car cleaner. Would you agree to clean your neighbour's car for the same 300 rupees?

2. You research a stock and you found it unworthy of a buy at 150 rupees. Today to same stock is at 1500 rupees, but is working to your buy calculations. Would you still buy it?

3. People tend to be "loss-averse" i.e. they experience more pain over a loss rather than pleasure over a gain. This is one reason why people are very uncomfortable selling stocks on which they are/have lost monies.

4. The principle of fairness is what differentiates the price you might pay for a bottle of soft-drink at a mom-and-pop store, as compared to a 4-star hotel. People feel it is fair for the 4-star hotel to charge 7-8 times more than the neighbourhood store. This is probably one reason why companies tend to lay-off people rather than reduce salaries during tough times.

5. You have a 100,000 rupees to invest in stocks. Since it's your first time, you'd invest 4000 rupees in the first month. You did a fine job of that and made a good 20% on that sum of money. The second month, you put in another 4000 and lo behold! another 22% return after month 2. ... notice that in the third month, your investible amount would have increased from 4000 to perhaps a 12000 rupees. This "mental accounting" allows people to take more risks when a string of success reaches you.

6. Often, cab and auto drivers tend to stop working for the day when they have reached their targeted income for the day. So they nonsensically, work shorter hours on rainy days and work longer hours when fares are scarce. In context, they forego an opportunity to earn more on "make-hay-while-it-shines" days. On the investing front, day-traders are like the cab drivers. The author goes on to suggest that investors should be allowed to look at their portfolio only once in 5 years.

7. The use of incentives (cue) is another factor that determines behaviour. In Ireland, a small charge (15p) was levied on plastic shopping bags. Since then, most people carry their own shopping bag to save some money. On the other hand, when in Israel a nursery imposed a fine for parents who arrived late to pick-up their children ... the response was that parents arrived more late than ever. Reason - by making the payment, the parent no longer felt guilty (in other words, they have cleaned their conscience) ... this is a great illustration of how behaviour is often different in different situation though the premise is similar.

8. Most people crib on the taxes charged by the government on one's incomes but then tax deducted at source doesn't exhibit a more mellowed emotion. Similar instances ... annual performance evaluation by companies is a hot-bed for politics, prejudice often leading to attrition of "dis-satisfied with evaluation (and not necessarily non-performing)" employees.

Behavioural Economics is a fast growing field in research and study. Why not ... people are prone to error, irrationality and emotion, and they act in ways not always consistent with maximizing their own financial well being.

References:
> Behavioural economics: seven principles for policy-makers
> Exuberance is rational (The NY Times Magazine)
This was however one instance I didn't agree to in the article. It says: A team is trailing by 2 pts in a basketball match. With 3 seconds to go and the ball with them, should they go for a 2 pt - which will tie the game and take it to overtime OR, should they go in for a 3. A 2-pointer has a 50% chance of going in, while a 3-pointer has a 33% chance of winning it. The author feels coaches often go for 2 pts as it lowers the risk of sudden loss. ... this is where I disagree because when I go in for a 2-pointer and then my chances at OT (which is again a 50:50 chance) .. I have never ever moved below a 50% chance of a victory. However, going in for a 3-pointer would give my team only a 33% chance for a victory.

P.a.p.e.r.

2006-04-23T13:16:00.000+05:30

Surprisingly, the paper industry has been an underperformer. It's PE ratio has often been between 5 and 10, which is mighty lower than most other core industries. .. but things are looking better for this industry (story). An 8% growth in GDP means an 8% plausible increase in demand for paper, while the production is expected to grow at only 4%. This would lead to a rise in prices and hence profitability. Also, there will be consolidation in the industry with the smaller players merging with bigger ones (primarily due to the introduction of environmental norms). Players are also getting ready to explore the export market with 10-12% of the produce leaving Indian shores. (This would fuel prices even further)

Lets examine the prospects of a few players -

[1] West Coast Paper Mills Ltd. - The lastest quarterly data pegs the company at 537 crs of sales and 42 crs of profits. At a CMP of 393 (21-Apr), the PE is at 8.37. The company has also indicated an improvement in the net margin owing to cost control measures (and inspite the increase in fuel costs). It's a BUY candidate.

[2] Andhra Pradesh Paper Mills - I bought this a week back at 120 rupees. It's at 140 rupees today (21-Apr). The scrip has a fwdPE of 10.11. A recent report by EmKay Research gives the following cues -
a) Margin will double from 13.5% to 26.2% in the next two years
b) A 125% improvement in PAT over the next two years. In fact at today's price, the research agency estimates the stock to reach a PE of 4.4 by FY2008
c) Sales growth at a CAGR of 15.20%
d) The price target for Andhra Paper Mills is INR 224.00 (an increase of 76% from current levels)

[3] JK Paper - Here's another research report by Religare Securities Ltd. The CMP of JK Paper is 60 and it has a price target of 96 rupees. I'd however, prefer Andhra Paper Mills and West Coast over JK Paper as the company has shown a lack of consistency in profitability (profits went down by 8% last yr and sales were stagnant)

[4] Star Paper - Here's a pick of the week by icicidirect.com. Star Paper Mills has perhaps the lowest PE valuation in the paper industry ... a fwd PE of just 6.20. The company has shown brillaint improvement in sales with one glitch in the quarter ending Dec-05, where PAT was only 2.40 crs ... a huge reduction over last yr. So any investment in the scrip can be recommended only after checking the Mar-06 results of the company.

So here it is ... divide you paper industry booty equally between West Coast Paper and Andhra Paper Mills. They are a t good valuations, have grwoing sales+profits and good management structures.

Scrips I dont like

2006-04-22T22:52:00.000+05:30

4 codes ... Buy / Wait / Pricey / Penny ... is what I use in my stock tracker.

Buy means an under-valued stock
Wait means a stock, fairly valued .. yet in contention if the price reduces
Pricey is a stock, over-valued and hence, not in contention yet
Penny is the scum-stock ... ones I'll stay away from for a long time

Here's a list of some I've classified as "Penny" (some changes may be done from this list on account of fundamental changes to the scrip) ... the primary reason for not investing in these stocks is the low profit levels exhibited by the below stocks

Silverline Technologies Ltd.
Tele Data Informatics Ltd.
Jindal Worldwide Ltd.
Shyam Telecom Ltd.
Vardhman Spinning and General Mills Ltd.
Saurashtra Cements Ltd.
Rain Commodities Ltd.
Morarjee Realties Ltd.
Selan Exploration Technology Ltd.
Prakash Industries Ltd.
Birla VXL Ltd.Mysore Cements Ltd.
Andhra Cements Ltd.
LML Ltd.
Moschip Semiconductor Technology Ltd.
Andrew Yule & Company Ltd.
IFCI Ltd.
Consolidated Finvest & Holdings Ltd.
FCGL Industries Ltd.
Sterling Holiday Resorts (I) Ltd.
Sharyans Resources Ltd.
Gujarat Sidhee Cement Ltd.
Swan Mills Ltd.
Premier Explosives Ltd.
Jay Shree Tea & Industries Ltd.
Ruby Mills Ltd.
Bhansali Engineering Polymers Ltd.
Mahindra Gesco Developers Ltd.
AVT Natural Products Ltd.
Suprajit Engineering Ltd.
J K Industries Ltd.
Agro Tech Foods Ltd.
Liberty Shoes Ltd.
Polyplex Corporation Ltd.
Sirpur Paper Mills Ltd.
Shriram Overseas Finance Ltd.
Gujarat Apollo Equipments Ltd.
Forbes Gokak Ltd.
Samkrg Pistons & Rings Ltd.
Himachal Futuristic Communications Ltd.
Empee Sugars and Chemicals Ltd.
Energy Development Company Ltd.
Aksh Optifibre Ltd.
ABG Heavy Industries Ltd.
UTV Software Communications Ltd.
Yokogawa India Ltd.Prime Securities Ltd.
Cyber Media (India) Ltd
Eimco Elecon (India) Ltd.
Harrisons Malayalam Ltd.
Kalyani Forge Ltd.
Venky''s (India) Ltd.
Revathi Equipment Ltd.
Standard Industries Ltd.
Sarla Polyester Ltd.
Themis Medicare Ltd.
Goodricke Group Ltd.
Ramco Systems Ltd.
Nesco Ltd.
Om Metals Ltd.
Z F Steering Gear (India) Ltd.
Texmaco Ltd.
Star Paper Mills Ltd.
Madhucon Projects Ltd.
Transgene Biotek Ltd.
Indian Hume Pipe Company Ltd.
Central India Polyesters Ltd.
Swaraj Mazda Ltd.
Anant Raj Industries Ltd.
Ondeo Nalco India Ltd.
Scooters India Ltd.
International Travel House Ltd.
State Trading Corporation Of India Ltd.
Megasoft Ltd.
Spel Semiconductor Ltd.
Saregama India Ltd.
Faze Three Ltd.
Eskay Kn''''''''IT (India) Ltd.
Kale Consultants Ltd.
Force Motors Ltd.
S B & T International Ltd.
Deepak Nitrate
Mather and Platt (India)
Excel Industries
Bharat Gears
Triton Valves
Liberty Phosphate
Advanced Micronics

Abhishek Industries

2006-04-22T15:46:00.000+05:30

The Trident Group came as a shocker for the PGPM 2000-2002 batch of MDI, Gurgaon. The year was perhaps the worst, in salaries given to B-school students. Companies, on the other hand, were having a wonderful time picking students at dirt cheap packages. (I started at a take home of 19k p.m. which incidently, was higher than batch median ... whatever the tabloid might have said). Trident entered the campus as a Day 3 company and offered a package of 38,000 rupees p.m. .... a package that even batch toppers were deprived of.

The financials of Abhishek Industries :
1. The sales and profits have grown at 25% over LY and the Q-on-Q numbers have been impressive
2. I expect a closing of 51 crs for this yr ... an EPS of 2.62 rupees/share and a P/E of 11.35 which is much lower than competitors like Welspun India whose PE is at around 22.
3. A little high on debt, but has a good BV/share of 14.6 rupees
4. Two small hiccups .. Abhishek has not given a single dividend in the last five years and, has a negative NCAV (am not giving too high a priority to this however)

Abhishek Industries is a fantastic candidate for "buy and hold". The downside in the stock is minimal and has an excellent management team. The annual report (pdf, 6.20 MB) of the organisation calls for an excellent reading (dont miss the managements' discussions and analysis part .. pgs 46-57).

I would throw a buy on Abhishek Industries .. to be held for long.

God knows what but my broker friend is extremely bullish on ...

2006-04-22T15:13:00.000+05:30

In a recent post, Amit had penned the following comment :

Hello shankar,

My broker is extremely bullish on jHUNJHUNWALA VANASPATI.This stock has been hitting circuits for the past some time,the current market price(at todays circuit) is 58.He expects it to reach a three figure mark in a months time(atmost).

One other stock is UB enginerring trading at 63(todays circuit) which has also hit circuits almost daily in the past few days....

Will look forward for your advice on UB Engineering and JHUNJHUNWALA VANASPATI.

God knows what but my broker friend is extremly extremly bullish on JHUNJHUNWALA VANASPATI.

Best regards,
Amit.

Jhunjhunwala Vanaspati has risen from 40 rupees (Mar-28) to 65 rupees (Apr-21) - a return of 62.5% in 3 weeks [Charting]

On a more sanely and boring front, lets examine the financials of this scrip -
1. The stock is at a fwdPE of 6.12
2. Has been profitable over the last 5 yrs and all quarters are in the black (this isn't some small company .. it has sales of almost 500 crs)
3. Although quarterly profits are not high .. the company should close the yr with 10 crs of PAT

I would advice a small sum of money (not to be entirely taken as a gamble) ... towards this company. Keep a stop loss of 50 rupees however.

UB Engineering was at 32.95 (Mar-28) and has risen to 66.00 rupees (Apr-21) without a single day of negative returns .. one reason why Amit has not been able to lay his money on this stock [Charting]

UB Engineering has been posting losses for the last 4 yrs. One reason for recommending this stock can be the expectation that UB Engineering will be in the black this quarter like the previous one and perhaps actually, have had made some money. I would advice a "no buy" on this scrip.

Torrent Power SEC Ltd.

2006-04-17T18:12:00.000+05:30

After living in Delhi - Ahmedabad and Surat came a great respite .. from power cuts. The AEC (Ahmedabad Electricity Company) and SEC (Surat Electricity Company) are governed by Torrent Power and both stocks have good valuations .... SEC being the better half.
1. SEC gives upwards of 10 crs every quarter and would close the year at 60 crs.
2. The stock is available at a fwdPE of 9.15 which is pretty good.
3. The energy sector is on an upscale and Surat's energy consumption is surely on the rise ... aren't you hearing news on textile and diamonds more often ... ?

One pt. - the growth of the company will be dependent on the geographical spread. So although I see an upside to the stock ... maybe hitting 720 rupees in the next 3-4 months ... further holding will need to be checked with every quarter.

Hexaware Technologies

2006-04-16T12:43:00.000+05:30

Hexaware is a global provider of IT and Process outsourcing services with presence in the Americas, Europe and the Asia Pacific region. The company has an active base of over 100 clients and has companies like Peoplesoft and SAP as partners. It operates in the HR outsourcing space. Net net, Hexaware is a new-age technology company ... and ... the valuation is very interesting. Measure this :
1. Revenues have grown by 24.3% over LY and is now at INR 678.6 crs (press release)
2. PAT grew at 43.6%; now at INR 91.4 crs
3. 39 new clients added; 129 active clients
4. At a CMP of 150 (Apr-15) and a share capital of 23.48 crs (FV per share is 2.00 rupees) ... the P/E comes to 19.13.

The company has given a guidance for Q1 FY2006: 167 crs in revenue and 23 crores in profits ... which spells the growth objective of the organisation. Extrapolating the expected growth in business (as a function of manpower recruited, clients added, previous trends), I find the company well on course to reach a 1000 crs of revenue by 2008. Thus, profits will also rise at a CAGR of 27%. I estimate the 1-yr fwdPE at 16.6 which is much lower than peers such at 3i and Matrix.

Hexaware Technologies is a long-term buy.

AVP

2006-04-15T21:06:00.000+05:30

Alien v/s Predator is a Hollywood flick where a team of archeologist discover an Aztec temple under the Antarctic circle, housing a host of alien creatures .. none better than the Alien family and that of the Predator lineage. Only one will win.

A similar comparison can be made in IT stocks .. the biggies .. esp. after the wonderful guidance given by Infosys Technologies Ltd. a couple of days back. I put four IT companies to the test - Infosys Technologies, Satyam Computers, TCS and Wipro. All the above companies have a m-cap of over INR 25,000 crores and have over INR 750 crores of LY profits. All carry virtually zero debt in their balance sheets, are cash-rich businesses and have strong management. And yet there are a number of differences which can be analysed and exploited -

1. Growth in profits has been rather different for all 4 companies. I find that TCS has shown the fastest growth in profits over LY at 42%, while Infosys has been the slowest with only 16% growth. (Satyam - 20%; Wipro - 31%)

2. CMP/NCAV would mean the "margin of safety" that Graham has so often cited in his many illustrations. The ideal number is 0.66. However this number is more true for old economy businesses and not for new sector business like IT services. For the record, Satyam is the best here with 8.66, while TCS has 37.79. (Wipro - 19.73; Infosys - 21.95; NCAV includes investments too)

3. At current prices, I estimate the fwdPE of all four companies at - Satyam - 27.91; Infosys - 37.38; Wipro - 37.81; TCS - 33.31

4. Cash per share - Satyam is at #1 with 75 rupees/share while Infosys is #2 with 54 rupees/share

5. While the dividend yeild of all 4 players is below 1%, Wipro is the best of the lot with a 0.96% dividend. Infosys however just pips Wipro with the special dividend of 30 rupees/share declared recently.

Examining these numbers, I feel Satyam is a good buy at the current price. There is an expectation of a bonus issue from Satyam aswell or a big dividend (it has crazy amounts of cash and is not eyeing any acquisitions).

PS: The movie was pathetic !!!!

Why panic?

2006-04-13T16:43:00.000+05:30

The sensex fell 300 points on 12th April and another 100 points on 13th April ... and people are saying all kinds of things. Some important facts -
> the market has gone down by just 3.44% over the last two days. This is much better than those days when some of our stocks have gone down by 10% or more.
> a 400 pt drop reduces the current sensex P/E by almost hundred bps. So this should be at 19, right?
> corporate profits have improved over time ... nothing drastic has happened in terms of reduced exports, still higher fuel prices (it's remained the same over the last three quarters), global downturn. Infact exports have jumped, global economy is also on a high, real estate, gold prices and commodities are increasing .. things are getting better. Now an improvement in corporate earnings by 10%, would result in a reduction of PE by 180 bps. So your PE will go down to 17.20. If corp earnings is up 15%, then PE is 16.35.

It's my opinion, that the market will be upto 12000 by the end of May. Watch !!!!

Wi-fi'ed Pune

2006-04-11T21:11:00.000+05:30

A jolly good progressive plan in India " ... a 400 sq km area of Wi-Fi connectivity will enveloping Pune ... " surely raises many an eyebrow. But this seems a reality as the Pune Municipal Corporation and Intel have joined hands to do just that. Here's the link to the article in the Economic Times. Surprisingly, this project would cost the Pune Municipal Corporation a sum of only 7 crores, which means ... Wi-Fi is a truly inexpensive and a quicker option to cables connecting homes to broadband or dial-ups.

Which means ... better infrastructure in Pune, attractive IT destination ... higher property prices. Got that?

Bloddy coincidence

2006-04-11T19:58:00.000+05:30

I maintain a fairly extensive stock tracker which gives me a decent idea of NCAV, P/E ratio, fwd PE, debt recap numbers etc. Two stocks - Aarvee Denim and Exports Ltd. and Nahar Exports - are listed sequentially there. Surprisingly ...
1. Both stocks have an m-cap of 290 crs
2. Both stocks give a dividend of 1.50 on a 10 rupee share
3. Both stocks have similar debt recap value of 105 crs and consequently, the same ratio of debtrecap/m-cap
4. Both stocks have the same fwdP/E ratio of 7.90

I had put Nahar Exports on the BUY list a month back when it was at 70.00 rupees (the stock has jumped up to 89.00; I bought this stock yesterday at 82 .. so I made 9% in a day ... ha ). Im putting a buy on Aarvee Denim and Exports Ltd. aswell. The stock is available at 132 rupees (11-Apr), is largely profitable at 37 crs (expected this yr), growing sales and profits and good management.

The God of Pennies

2006-04-09T20:00:00.000+05:30

I first tracked Hindustan Dorr-Oliver Ltd. in the summer of 2004, somewhere in the month of May. The stock was lingering at around 36 rupees per share. A lot has happened to the stock price and the company over the last 24 months. I am kinda shaken over the current price of the stock, especially when I measure it up with the profit numbers (quarterly data) of the stock ...
Mar-04: 8.78 crs; Jun-04: 0.04 crs; Sep-04: -0.38 crs; Dec-04: -0.91 crs
Mar-05: 2.37 crs; Jun-05: 0.37 crs; Sep-05: 0.39 crs; Dec-05: 2.90 crs

As on 7-Apr-2006, the CMP of the company is at 847.00 rupees. So here is a stock which is at a trailing PE of 154.20 and a fwdPE of 97.90; with an EPS (fwd) of around 9 rupees per share .. and yet commands a market value of 489.52 crores.

Take a bow, gentlemen ... you've just met the god of 'pennies' !!!!

Su-Raj Diamonds - a discussion

2006-04-09T16:43:00.000+05:30

Su-raj Diamonds should explode at the bourses. Some reasons -
a) The scrip is at a fwdPE of 7.55
b) The NCAV of the stock is a good 97.60 rupees while the CMP is much lower at 64.15 (Apr 7th) - a true Grahamian stock !!!
c) Cash rich company with 26.50 rupees of cash per share
d) Has a dividend yield of almost 2% (which is a rarity these days)
e) The company also has investments of 43.21 crs on it's books

The growth in sales has been good and consistent ... 495 crs (FY02), 583 crs (FY03), 723 crs (FY04) and 1028 crs (FY05). The company would close at 1150 crs for this financial yr ... another rising sales yr. Likewise, growth in profits is at 10.97 crs, 12.11 crs, 21.89 crs and 30.69 crs over the last 4 yrs. I estimate the profits for FY06 to close at 34 crs.

Note, that the P/E ratio of Su-raj Diamonds is much lower than it's peers - Vaibhav Gems, Goldiam International, Rajesh Exports, Shrenuj & Co. etc.

However, Su-raj Diamonds has never moved much. Movement has largely been between the 50 rupees to 70 rupees range over the last one yr. Surprisingly, a number of analysts have given a thums up to the stock over the short and medium term. Here's one by ICICIDirect.

Is this stock worth investing in?

Dial M for ...

2006-04-08T20:33:00.000+05:30

It's my opinion that MRF Tyres is overpriced. The scrip touched an all-time high of 3,895.00 rupees on 7th Apr. The charting of the company is enclosed .... (notice the price rise - extreme right)

- Notice the price stabilisation at the 2800-2900 levels (Oct-mid to Jan-end) and once again at the 3100-3200 levels (Feb to Mar). Net net, the price of the stock has vacillated between 2700 and 3250 over the last 7 months.
- The biggest movement post quarter result was when the scrip moved from 2800 to 3230 over 4 days.
- Suprisingly, the scrip has moved from 3050 to 3895 in 6 trading sessions : an increase of 27.7% ... with no supporting news.
- Q1 for the company was marginally better than Q4 of FY2005

At a CMP of 3895.00, MRF is at a fwdPE of 27.76, offers a dividend yield of 0.51%, has a NCAV of only 151.30. The input price (rubber) is on a rising trend - increasing by 50% over the last 12 months (the company is feeling the pinch of the same ... between March and July - historically, rubber prices tend to swell)

It's my opinion that the stock will be range bound ... 3500 to 4000. Which means, there is still money to be made by selling the stock short. An option will need to be considered, however. More on this, if I succeed.

PS: On April 3rd, MRF announced that it'll produce helicopter tyres once it gets the approval. Apparently, Brian Lara was in town for the launch of the same. Surely, that cant be the reason for the huge rise in the stock price.

Munjal Auto

2006-04-06T21:12:00.000+05:30

The consistency of growth in sales and profit numbers of Munjal Auto is truly remarkable. The sales / sales growth over LY and profit / profit growth over LY is listed below -
2002 : Sales - 105.63 crs (49.4%); Profit - 11.97 crs (148.0%)
2003 : Sales - 126.61 crs (19.8%); Profit - 13.15 crs (9.80%)
2004: Sales - 159.13 crs (25.68%); Profit - 19.68 crs (49.6%)
2005: Sales - 246.10 crs (54.65%); Profit - 25.98 crs (32.01%)

I estimate the FY2006 numbers on the sales and profit front to close at -
2006: Sales - 375.00 crs (52.37%); Profit - 34.00 crs (30.86%)

Some other important stats about the company -

a) The fwdPE of the scrip is 14.49, which though is not the lowest in it league .. is however among the better one. (I ran a massive filter on some 250+ auto ancillary companies for a minimum of 100 crs sales, profits of atleast 20 crs a year, qtr profits of atleast 6 crs ..... Munjal Auto came a #4 after Pricol, Subros and Amtek India ... I have put the entire list in the comments section)

b) At a dividend of rupees 4.00 for a 10 rupee share, the yield comes to only 1.63%. However, it is estimated that the payout for this yr would gross closer to 5.50 rupees.

c) The NCAV of the scrip is negative 11.52 due to the use of debt, which I feel is never a bad strategy as long as there is enough money to service the debt.

Although Munjal Auto's future is closely linked to that of it's more illustrious customer, Hero Honda Motors Ltd. and to the motorcycle industry per-se - I find the future of the company in good hands. At rupees 245.00, the stock may be a bit higher than the price I might want it at but I am comfortable in looking at a small investment and jacking up if the price diminishes in the short run.

Good advice

2006-04-04T21:42:00.000+05:30

1. The recent bull run is a fantastic opportunity for you to sell-off stocks which have not given good profits (and in the future, have a greater probability of not giving you desired returns). So if you haven't done that yet, please use this to it's fullest.

2. Further investment in stocks should always be on the basis of good investment principles. Some ideas -
> Profit for the yr should be no less than 30 crs with a min of 6 crs per quarter
> Exhibit increased sales and profit growth over last three years
> Sales and profit growth for last 4 qtrs vis-a-vis LY quarters
> Price/BV less than 3
> P/E should be less than 66% of industry P/E (mostly fwdP/E < 12)

3. Always see the charting of the stock. www.bseindia.com and www.nseindia.com have the best charting features i've come across. Note, the support and resistance levels over the last one year.

4. Always have a stop loss for any stock you purchase. (and sell when the stop loss is breached; some Buffett-wanabes may think otherwise)

Unichem Labs

2006-04-03T22:24:00.000+05:30

The stock jumped by 6.3% today to hit a CMP of 308.00 rupees. Consider exploring this stock for a buy.

Here's why -
a) The stock is available at a fwdPE of 12.36, which is one of the lowest amongst all pharma stocks
b) Although sales are growing slowly, the PAT is zooming at over 20% growth
c) The PAT per quarter has been in upwards of 18 crs over last 3 quarters
d) There is preferential allotment of shares to a private equity firm which has recently jacked up the prices. (the stock grew by 37% in two months)
e) The current dividend yield is 1.14% only. But given the increase in profits this year, I expect an increase in dividend to 5 rupees a share. It wont be more than this as the company is looking at expansion opportunities and acquisitions .. where internal accruals may be more handy than debt.

That apart, I found another swanky news item on Investsmartindia. Diabetes, Cardiology and Anti-infectives are growing areas in the healthcare segment. Buy in low numbers now and increase stake if it drops anywhere.

The Adventures of Ponty Manesar

2006-04-02T16:06:00.000+05:30

Amit has posted a hilarious compilation on the 'Adventures of Ponty Manesar' by Eldo Scaria. The links to the trilogy is enclosed :
1. The Adventures of Ponty Manesar
2. Further Adventures of Ponty Manesar
3. Even more Adventures of Ponty Manesar

The third ODI in Goa, between India and England starts at 9:30 am (IST). Enjoy !!!!

It aint done, till it's done

2006-04-02T15:33:00.000+05:30

The picture above is what provisionally sixth placed Giancarlo Fisichella saw, as P5 Jenson Button's engine blew at the penultimate turn of the Australian GP. Inspite of a blown engine, Button didn't remove the foot from the pedal in a serious bid to cross the line ... he finished a menacing 7 metres from the finish line. Ironically, Jenson Button started on pole position at the start of the race. News

Well (sob, sob ...) this is the second time, I've lost a bet because of engine blowups in the last lap of a race. The last occasion was when Mika Hakkinen's splendid drive around the 2001 Spanish circuit came to a close as his Mercedes engine gave way to a lucky Michael Schumacher.

GNFC Ltd

2006-04-02T14:11:00.000+05:30

Gujarat Narmada Valley Fertilizers Company Ltd. specs are enclosed -
Share Capital - 146.48 crs
Loans - 299.08 crs
Investment - 218.05 crs
Net CA - 292.47 crs
FV - 10 rupees per share
Dividend - 3.75 rupees per share
CMP - 115.00 rupees per share
LY Profits - 224.20 crs

Examining the balance sheet and the financial statements, I find -
1. The estimated profits for this year would be 270 crs which means a fwdPE of 6.24. Consequently, the sales have been growing at 12% over LY while profits are up, 30% over LY.

2. A dividend yield of 3.16% (on current levels) would only go up this year given the increase in profits. I estimate a dividend payout of 4.5 rupees per share which will propel the dividend yield to 4.11%

3. The investments shown in the books is at 218 crs. On going through the quoted investments in the balance sheet, I found that the current value of the quoted investments alone comes to 238.27 crs. These are liquid investments and hence can be included in the NCAV also. Here's a review of the quoted investments -

4. NCAV for the scrip (excl investments) is negative 0.05. By including liquid investments (and only 70% of it; I am keeping the remaining 30% as buffer for any plausible reduction in value), then NCAV comes to 14.43 rupees per share.

Finally, news value ... the big news for the company is the merger of the company with it's subsidary, Narmada Chematur Petrochemicals Ltd. The merger proposal was cleared on 2-Mar-2006.

On first count, it seems that this merger is not likely to disturb shareholder value of GNFC. Some reasons are enclosed -

1. NCPL is a profitable company with positive and growing profits QonQ.

2. Amazingly, the current dividend yield and the P/E ratio of this subsidary are better than GNFC (4.26%, 7.21)

3. A consolidated picture would thus be something like -

a) The GNFC share capital would increase by 20.54 crs to 167.02 crs

b) PAT for this year for the combined corporation would close at 300 crs. Thus the fwdPE would be 6.40.

It's a buy from my end with a stop loss at 100 rupees. But also look at NCPL ... seems to be some kind of arbitrage here ...

An arbitrage opportunity :

For every 3 NCPL share, one gets 1 GNFC share. Now GNFC is at 115 rupees and NCPL is at 35 rupees. Which means, if I purchase 3 shares of NCPL at 35 rupees each, my purchase cost would be 105 rupees. And when it gets converted to 1 share of GNFC, the same 105 would be worth 115 rupees. There are many a caveat to this ... but on the face of it, it's almost risk-free.

Micro Inks - a discussion

2006-04-02T13:24:00.001+05:30

An interesting discussion on this stock is on at http://valueinvestorindia.blogspot.com. A few premises have been laid -
1. Is the German parent in attempt to delist the company?
2. Or, has something gone terribly wrong - with directors resigning and selling shares?
3. Significance of an open offer of 675 rupees/share to the shareholders of the company on Jan-13-2006. (the steep slide in the share price of the scrip started from then, when it came down from 625 rupees to 410 rupees in the next 30 days)
4. The analyst presentation is rather low on the business strategy of the company. Infact, more stress has been laid on how MHM Holding GmbH can exploit synergies by making India the production base for all it's subsidaries abroad.

... the company has an NCAV of 126 rupees per share which is excellent and a fwdPE of 16.52. Any insights?

Sandesh Ltd.

2006-03-28T19:08:00.000+05:30

Sandesh Ltd. is available at 113.00 rupees (28-Mar).
Sandesh Ltd. has an NCAV of 111.45 rupees.

The scrip has cash per share of 26.60 rupees which is very good. It has a good market share in Gujarat where it is now the #3 newspaper (from #2, a year ago). At these numbers, prudence has it that the stock will go up however from an investing viewpt, the following needs a look into -
a) Sales have dropped; so have profits
b) Didn't declare any dividend last year
c) There was a sudden spurt in sales last yr (from nowhere we has a number of 635 crs in the financial statement)
d) Q3, 2005 was a negative profits quarter
e) Fwd PE comes to 17.20 (but very inconsistent profits)

So although this stock gives me fantastic margin-of-safety, it doesnt give me the comfort of a consistent and growing earnings growth. If anyone's been tracking this stock, then opinions are soughted.

To NRIs with love

2006-03-28T10:31:00.000+05:30

I came across on a fabulous presentation "Revisiting FX as an Asset Class" (366 Kb) by Stephane Targui from the Corporate and Investment Banking division of BNP Paribas. Presented were a number of FX related structured product investments which I thoroughly enjoyed. One observation, which may be of good information to NRIs and foreign citizens is the limited use of plausible ‘risks’ in the pitch. These however were conveniently stashed away as part of the disclaimer.

Lets explore two such exotic options given under short-term structures -

[1] Dual Currency Option Deposit (DCOD) – I have always felt that the DCOD is the easiest product to sell to any investor who doesn’t take the pain of thinking just a step ahead. The presentation say the following about the product (slide 8 and 9) – “a deposit offering the certainty of a boosted rate, well above the money market”, “it is a win-win situation”

Let me explain the structure in an example –
1. Assume the two underlying currencies are the US Dollar (USD) and the Indian Rupee (INR). The spot rate (USD/INR) is 45.50
2. Your investment in the structure is 100,000 USD (so the USD is the deposit currency for you and you measure your wealth in dollars, and not rupees)
3. The structure reads like, if the USD/INR rate is greater than 45.00 then you shall get 10% p.a. for the 3 month period in INR for your deposit amount i.e. Rs. 46,12,500. However, if the USD/INR rate goes below 45.00 then you shall still get 10% p.a. for the 3 month period but in USD i.e. USD 102,500.

For anyone, this might seems a rather harmless transaction as you shall always get 10% p.a. for your efforts – whichever currency you end up with. But if I put the specs in a matrix, the results are rather annoying for any investor –

[a] Note that the structure is similar to selling a put wherein your gains are limited, while your losses (on conversion of the rupees, back to dollars) can be unlimited. Notice how my overall gains become (4896.61) USD if the USD jumps up to INR 48.50. This is one aspect that the presentation misses out on. So although the pitch revloves around how FX-related investments can boost your returns, ironically it's the same movement in FX that can fetch you a negative return aswell.

[b] These structures are callable at the option of the issuer e.g. BNP Paribas. So, they can, on any fine morning tell you to round off the numbers as they are closing the product. No surprises, why they may do so.

[c] Notice, no one will say if the principal is protected or not. As you have, now deduced that although this product WILL fetch you the 10% p.a. return HOWEVER WILL NOT guarantee you protection of capital invested. Interesting concept, ain’t it?

[2] Corridor Double Knock Out Deposit (CDKOD) – Unlike the DCOD where principal is not protected, this product guarantees capital (it’s true). The product defines a range within which the FX rate (e.g. EUR/USD) should operate. E.g. the lower and upper limit of the EUR/USD is fixed at 1.22 and 1.32 (the current exchange rate is 1.27). So as long as exchange rate stays between 1.22 and 1.32, the investor would get an 8.00% p.a. interest for that day. However, if on any day the exchange rate breaches the limits then the investor will not get any interest for that day.

So the trade off matrix for investors here is [min=0.00%; max=8.00%; @ 8.00%*n/N] ;
where n = number of true observations; N = number of all observations

Here's something more I learnt about structures while going through some text on the internet -
a) 70% of all structures floated get ‘called’ within the 9 months of issuance and 90% of all structures within one-and-a-half years of issuance.
b) These structures are created as a money mobilization mechanism for investment firms. Now since they can’t just take big monies without making a challenge out of it, these deposit + derivative products are designed. The same investment firms which garner these 'high-yielding' monies make nothing less than 20% p.a. by deploying it in various other alternate investment areas …. and this has been happening for the last 200 years and more.

In a few years from now (2-3 yrs), such products would enter the Indian investment diaspora also as more companies will offer the same and hybrids of these products.

For just a penny more, or maybe a penny less

2006-03-26T15:59:00.000+05:30

1. Abbott India is range bound. There is support for the scrip at 625 rupees and has a resistance at 700 rupees (level 1) and 725 rupees (level 2). The scrip is current available at 640 rupees. Advise punters to buy with a stop-loss at 620 rupees. The Q1 results of the company are due on 31st March 2006. There will be some traction in the stock then.

Fundamentally, profits have been lower than LY and at a CMP of 640, fwdPE comes at 16.12. The NCAV of the stock is 101.94 rupees. The company has declared a dividend of 17.5 rupees only (it was 35 rupees last year; the announcement came early this month .. and hence the rapid fall in value from 700 to 640. Yet the dividend yield stays at 2.76%). Sales are growing at 12% p.a., all quarters have been profitable (at over 10 crs a qtr) and management is good.

2. Helios & Matheson's stock value has been on a down trend due to a news item. Infact 13th Feb was a rather volatile day for the scrip. It opened at 220; reached a high of 254.90; fell to a low of 200 for the day and closed at 249.15. The news was w.r.t. to some arbitration proceedings over one of it's subsidaries vMoksha.

The company has a marginally negative NCAV. What's remarkable is the rising revenues and profits of the company which went up 90% and 140% respectively. My calculations of the fwdP/E come to about 10.58. Traders can look at an exposure in this scrip with a stop loss at 170 rupees.

There are a number of stocks which have seen a reduction in prices over the last one month or so, however you and I'll be comfortable with the one where fundamentally the stock is sound, while external events which can be controlled are responsible for the lowering in value.

The Framing of Decisions and the Psychology of Choice

2006-03-24T22:54:00.000+05:30

The following text is an adaptation of a 1981 Science paper, “The Framing of Decisions and the Psychology of Choice” where Tversky and Kahneman presented a glorious example which delve in the psychology of making a rational decision among seemingly-diverse options.

Imagine the Avian flu disease has now been discovered in Sri Lanka and is expected to kill 600 people. Two alternative programs to combat the disease have been proposed.
1. Under Program A, a projected 200 people will be saved.
2. Under Program B, there is a one-third probability that 600 people will be saved, and a two-thirds probability that no one will be saved.

Which one will you go in for - Program A or B?

The researchers then restated the problem: this time, with -
1. Program C, “400 people will die”
2. Program D, “there is a one-third probability that no one will die, and a two-thirds probability that 600 people will die.”

Now, which one will you go in for - Program C or D?

PS: The authors observations are given in the comments. Please have your answer ready before peeking through the comments

It's getting better all the time

2006-03-24T22:38:00.000+05:30

I'll be closing 2 years of investing on the equity markets this 31st March. Confession - I have made much less money than what an index fund would have given. But have learnt a lot in the process. How I missed many an opportunities? And again missed the same opportunities? When to sell and not to sell? Buy or not buy and buy how much? Im still ridden with a number of stocks which have dimished 40%+ in value.

OK, this may be amusing ... the first ever stock I bought on the equity market was Padmalaya Telefilms and this was also the very stock I sold off at a loss ... a loss of 63% from cost.

But the truth is: I am very much getting better at this. In evaluating companies, on the right time to buy, am seeing more in the B/S and P&L and the importance of news and volumes. My choices and recommendations in the last one month have been much better than ever before.
> Amtek India in 37 days, is up 18%
> Gujarat NRE Coke in 33 days, is up 10%
> Aftek Infosys in 3 days, is down by 1%
> Ind Swift Labs in 1 day, is up 16%

Ind Swift Lab

2006-03-24T16:28:00.000+05:30

Ind Swift Labs moved UP by 15% today. I bought the stock yesterday.

It's not often that I write a statement like this. Fluke .... (no wait) ... big fluke !!!! ... not buying the stock, but the sudden jump

Share Capital - 20.90 crs
Loans - 145.35 crs
Investments - 3.14 crs
Net CA - 88.16 crs
FV - 10.00 rupees per share
Dividend - 1.50 rupees per share
CMP - 115.00 rupees (Mar-24)
LY Profit - 26.59 crs

Why I bought Ind Swift Labs?

1. I estimate a closing yr profit of 35 crs i.e. a P/E of 6.87.
2. Growing profits and sales for the last 5 years (YoY (04-05) growth in profits was 300% and sales was at 55%)
3. The sales growth numbers (qtr-on-qtr for 2004 and 2005) show a progressive story -
a) March - 45.22 crs v/s 83.22 crs (84% increase)
b) June - 44.00 crs v/s 79.97 crs (82% increase)
c) September - 45.48 crs v/s 80.28 crs (77% increase)
d) December - 66.75 crs v/s 82.36 crs (24% increase)
4. Profits have also moved in a positive direction, though not on similar constants - 251%, 18%, 21% and 418%.
5. Dividend yield is 1.30%. I expect a higher dividend payout of 2.5 rupees per share i.e. a dividend yield of 2.17%.
6. Excellent news value
7. The final blow was dealt by the charting of the scrip. Notice the fall in the share from 210 rupees, an year back to half that price today. The big avalanche started from Jan 18th (170 rupees) till it reached it's low of 97.60 on March-23rd (yesterday).

Please note that Grahamian numbers will not purport a buy for the stock because of the negative NCAV of 25.86 rupees, low cash in company and high debt. I find the management good, an enticing price even at 115 rupees (imagine, I bought it yesterday at 97 rupees) and excellent growth prospects.

What a tip !!!

2006-03-22T22:50:00.000+05:30

A friend called up this evening to discuss a tip he received from his broker - Buy Ramco Systems. The reason being - the stock is at it's 52-wk low of 193 rupees and it's 52-wk high was a huge 519 rupees. He said, the stock had mighty upside as buying levels will increase. I checked out the numbers and was absolutely taken aback with the financials. Enjoy this !!!

a) The company has been in the red for six out of the last eight quarters
b) The P&L account of the company shown a loss for the last 4 financial years
c) Personnel expenses account for 40% of the total sales of the company
d) No dividend for the last 5 financial years (obviously)

But that's not the shocking part ....

Check the prices over these last eight quarters. I have taken the highest price within one month of the close of quarter (these are the times when the financial statements come out)

Mar-04: Profit of 4.21 crs; Price was 265 rupees
Jun-04: Loss of 9.29 crs; Price was 250 rupees
Sep-04: Profit of 2.32 crs; Price was 290 rupees (the price increased while profits dipped)
Dec-04: Loss of 3.36 crs; Price was 440 rupees (the price increased while profits dipped)
Mar-05: Loss of 30.04 crs; Price was 425 rupees
Jun-05: Loss of 6.03 crs; Price was 405 rupees
Sep-05: Loss of 7.11 crs; Price was 450 rupees (the price increased while profits dipped)
Dec-05: Loss of 3.68 crs; Price was 330 rupees

From 13-Sep-2005, when the stock reached a high of 546.70 rupees ... it has been steadily declined and it today (22-Mar-2006) at 194.25 rupees. A decline in value of 64.46% in a little over 6 months. Amazing tip, aint it?

There's something about Aftek

2006-03-22T10:05:00.000+05:30

Aftek Infosys stats are enclosed -

Share Capital - 17.06 crs
Loans - 129.54 crs
Investments - 59.59 crs
Net CA - 374.40 crs
FV - 2.00 rupees per share
Dividend - 1.00 rupee per share
CMP (22-Mar; 10:05 am) - 78.45 rupees per share
LY Profit - 59.80 crs

Hence,
a) The NCAV (excl invt) comes to 28.71 rupees per share, which is quite excellent for an IT company (pl revert to the blog on Visualsoft Tech where Prasanth, Ravi, Rohit and me blew away the NCAV technique for evaluation of IT companies).
b) Sales and profits have been rising at 25-30% every year and this year is also no different.
c) Dividend yield comes to 1.30%
d) EPS comes to 7.01 rupees per share

Some other inferences ....

1. Loans are very interesting. Unbelievably, Aftek Infosys had been debt-free for the last 3-4 years. From nil debt last year to 129 crs this year would raise eyebrows. However, when I look at this number on the basis of capability to service debt ... the company is well on cue. At 129 crs, the interest cost would come close to 13 crs for the year (at 10%) and with the company earning 60 crs of profits per year, servicing this amount is not an issue (at an interest coverage of 4, the company would have a AAA rating with 150 crs of debt). The debt has been raised through the FCCB route.

2. I expect this NCAV to come down in the next annual report due to the major component of this NCAV is cash (328 crores or 38.45 rupees/share). Aftek would ideally be using this cash to acquire other businesses across the world. The fact that Aftek already has enough profits to take care of it's debt servicing, would mean it can deploy as high as 80% of this cash for acquisitions. If I assume 60% deployment, then the outflow of cash will be 196 crs or 23.07 rupees/share of cash. So the NCAV should come down to 14.86 rupees/share in the next annual report, ceteris paribus.

3. Consequently, investments would increase because of the increase in stake with Arexara Information Technologies Gmbh and V-Soft.

4. I expect a stronger dividend payout by the company inspite of the increase in share capital. The dividend payout may well be close to 75% for this financial yr which improves the dividend payout marginally.

5. The financial year has been changed, so it makes sense for us to see quarterly numbers. On this basis, I find that the fwdP/E of the company should come to 10.08 which is truly excellent.

Whats changed? ... see the charting below.

The stock seems excellently priced, a good management, concrete business plans ... all in the making of a good buy.

Property wisdom

2006-03-20T15:47:00.000+05:30

"The whole of Delhi is into properties", said the property broker, who took me for a spin this Saturday. Clever buggers these guys ... they'll do their best to ensure that he thinks my money as his onw, he would say that he'd sell our flat to another buyer at a little higher rate (it's another story that he might do the same thing to me aswell) .... that's their way to gaining confidence. Traits of a professional salesman.

Some tips I could remember -
a) Always go in for smaller property sizes as compared to bigger property sizes. It's easier to sell and often has the best appreciation in value
b) Plots are preferable over flats if quick returns are your goal. Plots are easier to sell as compared to flats.
c) In flats, the variation in prices is not as much as compared to plots, where location and frontage is of primary significance
d) If you are searching for one (plot/flat/house), there will always a second broker who would give you a better deal. So search more, and seek more.

Meaningful answers

2006-03-18T23:39:00.000+05:30

Which drink tastes better - Coca-Cola or Pepsi? In a recent focus-group discussion, a market research company asked this question to a 100 people and of them, 90 said Coca-Cola while 10 said Pepsi. To further understand if people are able to distinguish between the two drinks on the basis of it's taste, the agency asked 5 volunteers from the "i-love-pepsi" group to sip 5 bottles of the blank-labeled cold drinks presented to them, and tell us the right drink. Amazingly in 4 out of five occasions they got it right.

Conclusion : 80% of all people are able to identify the taste of the drink they are having and 90% say Coca-Cola is better.

Let's revisit this - 0.8 is the probability of a person identifying the right drink which means he/she has a 0.2 probability of doing the opposite (reading the wrong drink). Which means, of the 90 Coca-Cola afficionades, it's possible that 20% of them would have got their taste wrong i.e. although they say "I-love-Coke", they would have selected Pepsi from the draw. Simialrly, the Pepsi group of 10 would have 2 people who would have tasted a Coca-Cola as the superior taste. So we have 16 "CC to P" people and 8 "P to P" people = 24 "I-love-Pepsi" people

Or, not 90% of the people love Coca-Cola but only 76%. And Pepsi goes up from 10% to 24%. onsequently, the probability of a Pepsi lover choosing a Pepsi from two drinks after sipping it, is only 8/24 = 0.33

News, prices and tale spin - Visualsoft Tech

2006-03-18T21:23:00.000+05:30

Visualsoft Technologies Ltd. made a press release on the 17th of March, 2006 stating that - they are no longer going ahead with the amalgamation of the two other pvt companies with Visualsoft Technologies Ltd. Another relevant info in the same news item was - Mr. Sashi Reddy has resigned as the CEO of the company.

The charting below shows the performance of the stock.

The stock price has taken a serious dent from it's Jan4th levels of 260 rupees and is today almost 50% below that price. Notice the strong volume of 1.75 million on 17th March 2006 because of the news that the amalgamation has been aborted and the resignation of the CEO of the company. On that day, the stock fell from 162 rupees to 138 rupees.

Financially, the specs of the company are enclosed -

Share capital - 19.98 crs
Loans - 0.00 crs
Investments - 0.00 crs
Net current assets - 154.10 crs
FV - 10 rupees per share
Dividend - 2.50 rupees per share
CMP - 138.65 rupees per share (17-Mar)
LY profit - 28.34 crs

Lets make some inferences from this -
1. NCAV for Visualsoft Technologies is a fantastic 77.13 rupees/share (the CMP less than 2x of the NCAV)
2. Cash with the company is 54 crores i.e. 27.02 rupees of cash per share
3. Zero debt company (cash rich - zero debt is a lethal combination !!!)
4. Dividend yield would come to 1.79%.

Now the problem areas -
1. While sales in Q1 and Q2 increased by 14% and 15% respectively over last yr, the Q3 sales actually dropped by a huge 41% over last yr
2. Profits for Q1 fell by 24% over last yr, for Q2 fell by 6% over last yr and for Q3 fell by 41% over last yr
3. Estimated profit for the year is only 19 crores for the company which means a P/E of 14.72. (a P/E of 14 is available with other peers aswell who although donot have this fantastic NCAV that Visualsoft holds, but have more stable earnings)
4. The profits are well below my 10 crs per quarter rule.
5. and ... I have the slightest idea how the stock will behave over the next 3 days.

Mar-17 saw huge volumes on this counter and massive decline. March 20th can be a make or break. Amazingly, this is the same company which was listed in Forbes as one of the Top 200 Small Companies in the world.

Questions for you -
a) Is Visualsoft under / fairly / overpriced at rupees 138.65?
b) Will Visualsoft go further down in price over the next week or so? If yes, how much? If not, why not?
c) Is there some appreciation to be seen in the price of the stock over the next 3 months / 1 year from today?

An additional question - investing in which stock is preferable ... a Visualsoft which has a great NCAV but sparse earnings record or an NIIT Technologies which has no NCAV but a consistent and growing earnings record?

When probability becomes non-sensical

2006-03-17T12:27:00.000+05:30

You enter your plush office this morning and are greeted with a phone call from your broker. He wants to play a game, and feels you are the right player for this little experiment. He explains the rules - you shall toss a coin and call for a heads or tail. If your call is correct, then i'll double the money in your wallet. However, if you call wrong then i'll halve the money. If you dont participate in this game, the eccentric broker would give you 100 rupees.

What he doesn't know is that he is dealing with a mathematics stud from your school days and such problems are small-fry for you. Being the champion of probability, you pick your pen and try to simulate the problem ...
a) You assume that you hold 1000 rupees in your wallet
b) If you call right, the 1000 rupees become 2000 rupees.
c) If you call wrong, the 1000 rupees is down to 500 rupees.
d) In both cases, the probability of the event happening is 0.5

Simple equation .... X = [probability of (1000)*two + probability of (1000)*half] - 1000
or, X = [(0.5)*2000 + (0.5)*500] - 1000
or, X = [1000+ 250] - 1000
or, X = 250

Brilliant, you say. X is 250 rupees which is greater than 100 rupees (for non-participation). So, I must participate. Its a clear arbitrage of 150 rupees.

Think a little further .... You've participate in the game based on this probability analysis. What next? .... The use of probability analysis to aid you in decision making of participation in the game is only secondary. What's more important is how probability helps you in arriving at the correct call so that you can double your money.

To illustrate, imagine you had called wrong. Your purse would have been lighter by 500 rupees, although your profound mathematical skills would beg to differ on your interpretations of loss.

OK, think still further ... the broker has tossed the coin which lands on his palm. He hasn't shown you the result. Remember, you have used your probability skills to arrive at the logic that you have 150 rupees of "free money" to be made by participating in the game. He now gives you a second chance ... he says "I give you an option for you to not take this fall of the coin. You can tell me to toss the coin again.". You do your round of mathematics again and arrive at the same 150 rupees advantage. This still holds true. But what is the use?

By now you would have realised that the deal was inconsequential when we used probability analysis to the problem. Perhaps, just taking the 100 rupees was a better deal.

Adapted from "The Two Envelopes Paradox" by Keith Devlin

Savita Chemicals

2006-03-16T21:04:00.000+05:30

Pl keep this scrip in your watchlist

I'll start with 'things-that-hurt' on this scrip. The stock -
a) Is rather close to it's 52-week high
b) Is below my 10 crs a quarter rule
c) Is fairly above it's NCAV (4x above)
d) No news value

Now, what I like about this stock.
a) Savita Chemicals has improved in sales and profits by 20% for the last three quarters
b) It's fwdP/E ratio is 11.08
c) The company hardly deploys debt in it's balance sheet .. just 20.24 crs
d) Cash in the company is 21.66 rupees per share. Not much, but good enough to convince me of another dividend ... of atleast 12 rupees.
e) Dividend yield would come to 2.33%

The charting of this scrip has me stumped. Savita Chemicals has virtually no volumes to speak off, however it has consistently grown in the stock market. Price on 16-March-2004: 100 rupees; Price on 16-March-2005: 235 rupees. Only one dip - in the month of Nov 2005 when it went down to 275 from 375. I feel the stock will fall down to 350 rupees and not more ... sooner or later. It might be a good idea to pick a small stake once the stock touches 375 rupees to a share.

Pricol Ltd.

2006-03-15T21:02:00.000+05:30

I examined the nine-month financial statement of Pricol Ltd.
In summary,
a) The sales have increased marginally (7.4%) over the nine-month period in the last FY (2004).
b) Correspondingly, the PBT have fallen significantly (from 43.9 crs to 28.6 crs; a drop of 34.8%)
c) Notice the rise in interest cost. The nine month interest cost is at 8.43 crs while the financing cost was 4.87 crs in the previous FY. (a 73% rise)
d) Net profit after tax, dep and interest (PAT) is at 22.9 crs while it was 28.09 crs for FY2004-05.

The balance sheet reads ...
Share Capital - 9.00 crs
Loans - 155.90 crs
Investments - 14.75 crs
Net CA - 86.13 crs
FV - 1.00 rupees per share
Dividend per share - 1.00 rupee
CMP - 39.75 rupees/share (15-Mar)

Thus, the NCAV (as per 2004-05 balance sheet would come to negative 7.75). Estimating trends in FY2005-06, I find ...
1. The profits for the year should be around 29 crs. This would mean a P/E of 12.08 on todays CMP.
2. There is no margin of safety here. The NCAV is infact, negative.
3. The company would be in a position to give a dividend of 75 paise only this yr due to the lower earnings. This comes to a 1.89% dividend yield.
4. There is no news of value on the stock too - although it has decent volumes on the bourses.

My take - this stock will not move much from this level for the next few weeks. Further improvements in the stock price will be a function of news or increase profitability. There is no hidden value in the stock that is visible.

PS: I think the company is resorting to some creative accounting practices here. Picture this (look at the annual report) -
> In 2003-04, the company had borrowings of 115.23 crs on 31-Mar-2004 and had accounted for an interest cost of 8.02 crs. Which means we are looking at a financing cost of 7.5%. Fair.
> In 2004-05, the company had borrowings of 155.90 crs on 31-Mar-2005 and had accounted for only 6.83 crs .. a financing cost of only 4.4%. At 7.5%, this should have been around 11.69 crs.
> For 2005-06, the interest cost would close at close to 13 crs. I would like to assume that the increased financing cost is making up for the lower accounting of interest cost in the previous financial year. So, loans would not have increase too much this year. Lets estimate it at around 160 crs.

Fantastic P/E ratios ( .... low, figuratively !!! )

2006-03-13T22:00:00.000+05:30

You might want to research some of these stocks. They have a fairly good market capitalisation and a rather strong P/E ratio amongst their industry peers. I found these in some old files .. seems to be January 2006 data.

I have marked the ones which have shown increasing Q-on-Q profits over the last three quarters in green for your reference. We'll evaluate these over the next two weeks.

Madras Aluminium [12.58]
Pheonix Lamps [10.78]
Pricol [10.58]
Eicher Motors [2.78]
Ashok Leyland [13.48]
Punjab Tractors [10.86]
Bank of Baroda [12.17]
Federal Bank [5.65]
SBI [10.02]
Jupiter Biosciences [6.65]
JK Lakshmi Cement [10.11]
Everest Industries [9.33]
Gujarat NRE Coke [7.42]
India Glycols [6.17]
Savita Chemicals [9.35]
Jaiprakash Associates [13.02]
Nava Bharat Ferro [6.45]
Havell's India [17.09]
LG Balakrishnan [16.09]
Kirloskar Oil Engines [6.50]
GNFC [6.59]
GSFC [6.25]
Mangalore Chemicals [5.85]
GAIL [9.86]
Mascon Global [11.79]
Tata Elxsi [19.22]
Tinplate [5.30]
Adani Export [12.46]
Atul [12.35]
Dredging Corporation [11.79]
Gujarat Alkalies [4.84]
MIRC Electronics [7.23]
Su-Raj Diamonds [7.95]
LIC Housing Finance [9.34]
Shriram Transport [8.42]
Tata Investment Corp [8.90]
ONGC [11.07]
JK Paper [7.97]
West Coast Paper [7.11]
Rallis [9.38]
IPCL [5.30]
Ind Swift Lab [8.18]
Aarti Drugs [9.06]
Merck [11.99]
Shasun Chemicals [13.71]
Torrent Power SEC [8.73]
Infomedia [8.14]
Bongaigoan Refineries [7.00]
Chennai Petro [5.14]
Mercator Lines [4.82]
Varun Shipping [5.77]
Bhushan Steel [4.30]
Monnet Ispat [6.40]
Essar Steel [1.58]
Lloyds Steel [1.78]
Mukand [2.61]
SAIL [4.15]
Mawana Sugar [12.51]
Avaya Global Connect [13.94]
MTNL [10.96]
Alok Industries [10.74]
Nahar Export [6.56]
KEC International [4.58]
Apollo Tyres [14.96]

The greatest cricket ODI ever played

2006-03-13T09:26:00.000+05:30

South Africa broke the world record for the highest chase ever reaching a score of 438 with one wicket and one ball to spare. Consequently, they now also hold the world record for the highest runs scores by any international side in a one-day international game of cricket.

What are the odds?

2006-03-12T22:44:00.000+05:30

When you have scorecard that reads this ...

.... and still have to bite the dust

1=2 but not 3

2006-03-12T16:19:00.000+05:30

2. GM Breweries

Venus Remedies was a turnaround story (sort of) and hence commanded Stockpaisa.com's patronage as the stock-pick. A quick-peek of GM Breweries reads a similar story.
a) LY sales were 104.33 crs; this year the company may close with 155 crs
b) LY profits were at 0.75 crs; this year the company should close at 9 crs
c) Again, an NCAV one would have zero comforts on (negative 22.84)
d) Surprisingly, this company doesn't subscribe to making many an announcements as in the case of VR.

I would again quantify this stock as a may-be-superhero stock and is more for aggressive investors and not conservative ones like myself. The price target given by stockpaisa.com for this stock is 120 rupees in the 3-5 month horizon.

The stock did reach a high of 89.35 rupees to a share and is currently at 71.2 rupees. The 52-wk low is 16.60 rupees/share. The charting of the scrip shows some inconsistent volume movement. The current trend shows that volumes are a bit on the decline .. but this can abviously change anytime.

3. Areva T&D India Ltd.

When I last researched this stock (Feb 25), the stock price was 468.00 rupees. I found it a bit expensive then. Today it is at 746.40 (Mar 10). The stock jumped 59.6% in 15 days.

Lets examine the stock stats -
Share capital - 39.89 crs
Loans - 1.58 crs
Investments - 9.65 crs
Net CA - 128.38 crs
FV - 10.00 rupees per share
Dividend - 1.75 rupees per share
LY Profit - 21.20 crs
Est profit for this FY - 50.00 crs
CMP - 743.00 rupees per share

On the basis of the above -
a) NCAV of 34.21 rupees / share
b) Dividend yeild of 0.24%
c) fwdP/E of 59.28

Any news value? Heavy ... the group is hiving off it's motor business, amalgamation etc. The company has some very good sales and profits to show for the last 3 quarters. The current volume trend suggests a little further movement up in the stock before a possible correction (afterall a P/E of 60 might be a bit difficult to sustain esp. when the industry is at around 34 levels)

Stock picks at Stockpaisa.com

2006-03-12T16:05:00.000+05:30

Stockpaisa.com has given it's list on price targets in it's website. The list has been worked keeping positive ripples from the budget into perspective and the technicals / fundamentals of the company.

The top five in the list with expected returns over the next 3-5 months are -
1. Venus Remedies - 61%
2. GM Breweries - 58%
3. Areva T&D India Ltd. - 54%
4. Astra Microwave Products Ltd. - 49%
5. Flex Industries Ltd. - 49%

Let's examine a few of them in this post -

1. Venus Remedies

VR is not a Grahamian stock, by a long shot. It's NCAV is at 5.76 while it's CMP is at a fairly high 363.00 rupees per share. With a dividend yeild of 0.28%, I was kinda wondering what makes this stock command such a high valuation. That was when the news element of the stock bundled me ....
a) 12-Dec: VR in talks with MNCs over drug licensing (Cephalosporins combination)
b) 15-Dec: VR has appointed a senior scientist
c) 16-Dec: VR sets up wholly owned subsidary in Germany
d) 27-Dec: VR broad bases Board
e) 3-Jan: VR filed third PCT International Application
f) 17-Jan: Venus Remedies up on Q3 (we'll examine this aswell)
g) 31-Jan: VR acquires pharma unit in Germany
h) 20-Feb: VR filed fourth PCT International Application
i) 8-Mar: VR to consider issue of FCCB

Financially, here's where the company stands -
a) On profits - LY profits were a miniscule 4.1 crs. However this year has been a different story. Q1+Q2+Q3 profits currently stand at 10.81 crs. Extrapolating the numbers, the profit for the year should be on around 16 crs. Which means an EPS of 24.96 rupees/share.

b) The fwdP/E of the stock is at 14.54 which is fairly lower than other emerging pharma companies

c) Sales are going at a doubly pace (a bit more than that) ... LY sales were at 30.83 crs while this year (in 3 qtrs), the company has reached 62.06 crs. At this scoring rate, the company should close at around 90 crs of sales for this FY.

Now, what makes me think again ....

a) All this news ... where did this come from? You might want to read the announcements in BSE. Venus Remedies has close to 50 announcements at the BSE in the last 365 days. (Dr. Reddy's had around 60 announcements in the same period)

b) There is no margin of safety in the stock for comfort. At an NCAV of 5 and a book value (LY) of 23.55 rupees per share ... a CMP of 363 would mean .... (both LY numbers)
1. P/BV ratio of 15.41 and,
2. P/Sales ratio of 7.5

c) And ofcourse, you know my disapproval to any stock who would not give me 10 crs of profit to the quarter. VR is well below that mark.

However, this is not to dissuade you from purchasing the stock as a not-that-far-feteched-bet. The big question is ... when to buy and how does this stock move. Answers to this can be obtained from the charting given below. Interesting trends, these ...

The stock first started moving in the September of 2004. It moved for 4 months (till Dec 2004), post which the stock was silent for 5 months. Again in May-2005, huge volumes moved up the stock to touch 300 rupees per share. This continued for 4 months (till July 2005), post which a lull set in for another 5 months. Another spurt has been seen this Dec onwards. It's been on for Jan, Feb and Mar ... 4 months again. What's your take for the next 5 months?

Player 1 v/s Computer

2006-03-04T23:39:00.000+05:30

This isnt a Playstation game or the latest version of International Cricket Captains (ever tried this computer game .. it's amazing !!!). Just an extension of Devlin's piece on "A Game of Numbers". Devlin in this treatise has described how Oakland Athletics won the Western division of baseball in 2000, 2002 and 2003 with a team which had no 'A' cat super-stars ... a team which was just a summation of individuals with specialised skills.

Here's how they did it -
a) The initial premise was that unlike football (american style), baseball didn't require excessive teamwork. The pitcher pitches depending on his individual skills, the batter plays using his own skills and the out-fielder fields the ball unguided by other individuals. This is somewhat similar to what happens in a game of cricket.

b) Over time some 11 million batter-pitcher confrontations have occurred in 150,000 games. Thats a world of data to analyse. Coupling this data with random elements of pitches, weather, toss etc. you can create patterns w.r.t. which position to send each batsman, batsman can play a spinner or a faster bowler better, condition training schedules accordingly, individual tactics, patterns on how a bowler balls his first two balls and the last two balls (i've always noticed that the first two balls of any pace bowler are never the slower ball) etc.

Reading the article I came across some really wonderful notes, worth putting down here -

1. Batting averages are now generally regarded as a poor guide to performance - not least because they do not distinguish between a single, double, triple, or boundary; or how many players scored runs on a mis-hit or after being dropped or narrowly escaped being out.

Also, averages are rather misleading. Analyse this -
In the 1997 season, Jacques Kallis played 14 matches and scored 560 runs while Rahul Dravid played 35 matches to score 1350 runs. Assuming both got out on all occassions, the averages for the two batsmen are - Kallis - 40.00; Dravid - 38.57 ... So Kallis was better than Dravid for the 1997 season.

In 1998, Kallis played in 30 matches to score 1000 runs (at an avg of 33.33) while Dravid featured in 16 matches to score 500 runs (at an avg of 31.25). For the second time, Kallis beats Dravid with a better average.

Now, just combine the numbers. So,
Kallis ........ Matches = 44 (14+ 30); Runs = 1560 (560+1000)
Dravid ..... Matches = 51 (35+16); Runs = 1850 (1350+500)

Relook the averages .... Jacques Kallis is now at 35.45 runs/match while Rahul Dravid has an average of 36.27 runs/match. Hence Dravid is a better pick (and averages is not as powerful a statistic as is expected to be)

2. Extra credits - Peculiar to baseball, the batter is scored as per 'runs'. So you come out to bat and there is also a player standing on base 1. And you hit a 'home run' ... both you and the man at base 1 collect one run each. Howzzat !!! You do the fantastic work of hitting the home run and the free-rider also collects the same points for just being on base 1.

In cricket ... similar parallels in getting out on a run-out, mis-field off bowlers, missed chances etc. are never considered in the algorithms.

The entire attempt to bring the games down to numeric equations has many an advantage. The approach pins the relative importance of the contributions that players with different talents, can make to a team's overall performance.

Ofcourse, this doesnt mean there isn't a lot of skill involved in any sport, cricket or baseball. Nor does it mean that some players aren't better than others. Statistical tools are fantastic aids in guiding team fortunes and in predicting trends which can be rectified or improvised for success.

Nahar Exports Ltd.

2006-03-04T14:58:00.001+05:30

Nahar Exports Ltd. stats are enclosed -

Share Capital - 35.08 crs
Loans - 144.81 crs
Investments - 116.24 crs
Net CA - 184.18 crs
LY Profits - 23.22 crs
FV - 10 rupees per share
Dividend - 1.5 rupees per share
CMP - 70.80 rupees per share (3-Mar)

On the basis of the above, I find -
a) NCA (excluding invt) comes to 11.23 rupees per share
b) Dividend yeild is at 2.12%
c) P/E ratio (on LY profits) is 10.69

Also discovered ....

a) Breaking the investments further, I find that a lions share of those investments are held in Nahar Spinning (71,22,930 shares) whose current price is at 214 rupees/share (3-Mar). This means the market price of investments is atleast 152.43 crs from Nahar Spinning itself. Add to it the 21.3 crs, the company has invested in income/liquid funds .. final investment numbers come to 175.56 crs or, 50.04 rupees per share.

b) So your NCAV is at - 52.50 (from net current assets) + 50.04 (from investments) - 41.27 (from loans) = 61.27 rupees per share.

NCAV at 61.27 rupees per share .... CMP at 70.80 rupees per share ....

c) The disturbing aspect of this company is the reduction in Q on Q sales (10% drop in sales), although the profits have gone up. I would estimate an yr closing at 36 crs of PAT ... i.e. a fwdP/E of 6.90.

d) Some peer-estimates (Jan data of P/E ratios):
Abhishek Inds [13.86] . . . . . . Aditya Birla Nuvo [32.95]
Alok Industries [10.74] . . . . . Arvind Mills [12.20]
Bombay Dyeing [21.68] . . . . . Century Enka [12.58]
Forbes Gokak [19.41] . . . . . . . Garden Silk [19.38]
Himatsingha Seide [26.97] . . . Indo Rama Synth [12.26]
LMW [26.19] . . . . . . . . . . . . . . Mahavir Spinning Mills [12.29]
Rajasthan Spinning [9.82] . . . Raymond [24.45]
SRF [25.26] . . . . . . . . . . . . . . . Welspun India [17.37]

Nahar Exports has the least P/E of all it's peers.

The scrip looks enticing at these numbers - it has a decent dividend yield, is very close to it's NCAV and has the best P/E ratio in the industry. However the negative sales growth rates is a trade-off you might have to live with. I would recommend small quantities at this price with a stop loss at 60 rupees. The next movement in the price is expected after the Q4 results are out.

PS: I am deviating from the Buffett notion of "I'll-buy-more-when-prices-go-down" for this stock as the PAT is periliously close to my 10 crs PAT per quarter principle. I'd be more comfortable buying more on a lowering stock price if the PAT was somewhere over 20 crs per quarter (makes me more comfortable). Since this one is not in that domain, hence the stop loss.

Irrationality is everywhere

2006-03-04T13:40:00.000+05:30

A~ in his comments, had posted a link on a most fabulous article on - "The Crazy Math of Airline Ticket Pricing" - an insight on how airline seat prices have nothing to do with the distance of travel. The article reflects on the fact that, there are a number of reasons why airline ticket prices are priced the way it is. Surprising, distance is hardly a factor here.

The reasons have been enumerated here -
a) It's the demand and supply for a seat from point X to point Y which determines the price of the ticket.
b) Attract customers from other airlines or other modes of transportation like the railways
c) Offer discounted airline fares as a loyalty programme

The article says ... "The problem was that all the different pricing rules interact in ways that not even those who designed the pricing systems could begin to fully understand. Mathematically, this made the (idealized) problem of finding an optimal fare between two given locations undecidable, which means that it is impossible to write a computer program to solve the problem."

Linking this irrationality to some news stories from the stock market which have been featured in earlier posts -
1. Infomedia offered a buy-back offer of 245 rupees, on a day when the stock price was only 196 rupees. (The promoters could have just purchased back the shares from the market at 196 rupees)
2. Suzuki sold it's stake in TVS Motors at 16 rupees per share, while the market price at that time was rupees 90.
3. The HLL stock going down by 20% while P&G moved up by 10% - while both firms reduced prices by the same margin. (and HLL was more profitable with greater cash reserves)

Irrationality is everywhere .. in stock markets, airline industry, hotel industry ... even cricket !!! ... imagine Greg Chappell inviting inexperience youngsters to the side while Ganguly, VVS, Sehwag, Kumble might be sidelined - inspite of having better averages, better man-of-match performances per match, better strike rates and better experience. Debatable, but appalling.

Time to pack your bags

2006-03-03T21:33:00.000+05:30

Yesterday, we had some excellent holiday packages circulated by our nternal communications department through email. Largely India, there were some great deals on visits to Manali, Shimla, Shirdi, Kerala, Kumaon etc. I liked the Goan package :-)

The hotels and tour operators were offering a drop-down of upto 20% on all charges which was rather enticing. This made me wonder ... if at any given time, there are people in a hotel who stay at full price and also those how donot pay as much (i.e. they have a discount of 20% or even 30%) ... how in the world, does the hotel arrive at the logics to determine the number of rooms, it wants to keep at a discounted rate.

I found this a very interesting and logical exercise.

Some things to ponder on -
1. When the hotel rents the room at a price below the 'card price' then the hotel is at a risk of losing potential revenue on account of -
a) it's possible that the customer would have paid the card rate, as he desperately needs a room
b) demand for that day might have been more than the supply, and all rooms could have been occupied at the card rate, or
c) if the hotel over estimates the number of people who would rent at a lower rate

2. The second aspect of the problem is : how much should be the card rate at the hotel? It's truly possible that the current 'card rate' might actually be a perceivably discounted rate for the customer. What is the deemed logic for arriving at the 'card rate'?

Unusually Mutual Funds

2006-03-02T16:34:00.000+05:30

I recently read many a reports published by international fund houses where they say, "we are going slow on India ... the breakneck speed of growth in foreign institutional investments in India is over ... we will continue investing in India but it'll be marginal of what was seen in the last two years ...."

Some people may agree, some may not ... but what should help us decide should not be optimism - but an assessment of other opportunities.

Within India, property is on a roll. People are adopting varied techniques to invest in properties and investment agents are coming up with enticing schemes. There is a current commodity bull (In an article, Marc Faber said that the bull run in commodities will continue till 2015) also.

Outside India investments is another area worth exploring .... read on. I've heard of the fantastic appreciations in property in the Gulf area esp. after expatriates have been allowed to purchase some property in UAE. If you are in Qatar, nothing better than buying Qatar petroleum. The US stocks are also seeing a wonderful surge. Property in Japan is on the rise after a decade of descendency.

I am picking one such investment which is Indian, yet alien of sorts.

Imagine a mutual fund based based on the Indian markets, with zero withholding taxes (conditions apply), zero entry load and unbelievably, 100% principal protection. It does exist, but in US dollars.

The Maharaja Note is an offering by ABN Amro N.V. The product is a 6 years maturity structure, USD denominated with 100% capital protected at maturity. It offers 80% participation in a basket comprising 50% HSBC GIF Indian fund and 50% JP Morgan Fleming Indian fund. The fund has done exceedingly well and is currently on an NAV of 144.50 i.e. 44.5% return on investment in the last 16 months.

I find this note very very interesting because this has been created for the extra-conservative investor (people like me). Two major reasons, why -

a) It gives you a 100% principal protection when held till maturity

b) The NAV is not calculated in the normal (Indian mutual fund) way. The fund follows something called the Asian indexing option i.e. the 6 yr period is divided in 24 quarters and the applicable NAV when you are exiting the fund is the arithmetic mean of all previous quarters. E.g. if the NAV for Q1 is 103, for Q2 is 110, for Q3 is 106 and for Q4 is 104 ... then the applicable NAV (if you are exiting) will be (103+110+106+104)/4 = 105.75. Some people may ask - why is that important? Imagine, you are removing the money, right after Q4 ... you would have got 104 dollars only. But because of the Asian indexing, you get 105.75 dollars. (so this is a trade-off, of sorts)

No risk !!! Thing again. Perhaps the biggest risk you take here is the movement in the US dollar. Available at around 44.50 rupees, the US Dollar (as most) is set to depreciate vis-a-vis most world currencies. If this turns true, all gains made can be negated by a weak dollar. In other words, for every Rs. 4.45 drop in the USD/INR rate, you lose 10%. In case you feel otherwise, i.e. the US economy will bounce back and actually gain in the long run ... then this is worth a try.

Donot forget to read and understand the term sheet given in the web page.

Though these opportunities have an NRI tag to it ... the indian resident is allowed to invest in some scheme (the RBI does allow USD 25,000 per calendar year to be invested abroad)

Learn more about structured products ... it will absolutely change your perspective of investment options. Start by reading an excellent summary given by ICICI Bank on the various categories of alternate investments it caters to.

You can view some excellent structures on:
1. ABN Amro
2. HSBC
3. UBS (see Luxemborg for maximum options)

Jai Corp Ltd. - ???

2006-02-27T21:17:00.000+05:30

There are two striking things about Jai Corp Ltd.'s balance sheet -
a) It has a net current asset of 140.56 crs (i.e. 162.9 rupees per share)
b) It has investments of 57.87 crs (i.e. 67.1 rupees per share)

Add a) and b), you find a Grahamian NCAV at 230.0 rupees per share. The stock is available today (Feb-26) at 109.90 on the NSE - a discount of 52.21% on the NCAV !!!

On further examination of the investments, the company has been a rather decent participant at the stock markets. As of 31-Mar-2005, it held the following shares :
1. Bharati Shipyard - 10728 shares - Today: 383 rupees = 0.41 crs
2. Jet Airways - 8592 shares - Today: 964 rupees = 0.82 crs
3. ONGC - 159975 shares - Today: 1175 rupees = 18.79 crs
4. PNB - 11199 shares - Today: 452 rupees = 0.51 crs
5. Indraprastha Gas - 110000 shares - Today: 138 rupees = 1.51 crs
6. TCS - 33538 shares - Today: 1687 rupees = 5.65 crs
Thus, the total quoted investments itself comes to 27.71 crs i.e. rupees 32.1 per share

A discount of 52.51% on NCAV - seems a cropper !!!

What I dont like about the stock?
a) Reducing Q-on-Q sales and profits
b) The company has charged taxes at -1.30, -1.14 and -0.52 for the three quarters of this year
c) The company is striving to get it's cash liquidity in place

See Chart (you'll be surprised that the stock has not gained much over the last 1.5 years, while the market has gone crazy .. including peers of Jai Corp Ltd.

Im confused on this one !!!

Reading the fine print - India Glycols

2006-02-26T15:00:00.000+05:30

Most investors tend not to look at the notes that come along with each quarterly financial statement. I confess, I am one of 'em. However, after getting some strong advice by Jagadish on the Teledata issue, this is one area i've been trying to evolve in my calculations. A striking example has been seen in the quarterly statements furnished by India Glycols.

First impressions may read the following numbers -
- Q1 profits of 21.16 crs this yr v/s 20.30 crs last yr
- Q2 profits of 13.68 crs this yr v/s 18.55 crs last yr
- Q3 profits of 19.17 crs this yr v/s 19.12 crs last yr

Which means, India Glycols is partially short in it's nine month performance numbers (a PAT of 54.01 crs this yr v/s 57.97 crs last yr). At 2,78,80,000 shares (FV of 10 rupees/share), the nine-month EPS should come to 19.42 rupees/share.

Now read notice note no. 4 in the quarterly report - it reads .. "Income Tax liability (excluding deferred tax Rs. 336 lacs) for the quarter works out to Rs. 455 lacs and for the nine months will be Rs. 1208 lacs (excluding deferred tax Rs. 444 lacs). Full year tax liability (excluding deferred tax ) is estimated at about Rs. 629 lacs. Considering the substantial variation in the quarterly Tax provisions, it has been decided to provide for tax (including deferred tax) at the end of the year."

In simpler terms, India Glycols paid a tax of 35.2 crs on a gross profit of 117.4 crs ... i.e. 30.2% tax on PBT. This yr, the 9 month PBT comes to 80.33 crs, which should be a tax of 24.1 crs. So far the company has provided for zero tax. Extrapolating the numbers available, I would estimate the PBT for Q4 at around 35 crs (which is a little over the median). Less depreciation to this at 8.5 cars and the tax at 24.1 crs .... India Glycols should put up a result of just rupees 3 crores as it's quarter 4 PAT.

This is one stock about to take a beating for this !!!

The revised EPS on the basis of this info for the year (all 12 months) should be 20.5 rupees/share. And hence the P/E ratio would be 8.85.

This is a classical example of the things retail investors miss out on.

NIIT Technologies

2006-02-25T19:15:00.000+05:30

Increasing sales, increasing profits, good dividend yield and a P/E lower than industry peers ...

The business stats -
Share capital - 38.65 crs
Loans - 53.90 crs
Investments - 96.97 crs (in grp cos, so cant be factored in NCAV calc)
Net CA - 79.07 crs
FV - 10 rupees per share
Dividend - 5.50 rupees per share
LY profit - 40.25 crs
CMP - 175.00 rupees per share

This calculates to -
Dividend yield of 3.14%
P/E of 16.80
NCAV of 6.51 rupees/share (very low)

The sales and profit growth has been a neat 20% for this FY. I estimate a profit closing of 48 crs for this year and a dividend payout of 5.5 rupees per share (I would not accomodate an increase in dividend as the company is desirous of suitable acquisitions abroad which would be from internal accruals rather than any borrowings - pls note that the cost of funds has increased over the last 2 years in Indian and international markets; also an increase in debt in the balance sheet would affect the credit rating of the organisation and thereby increase the cost of funds).

Given the increase in profits for the year, the P/E moved go down to 14.09 which is much lower than most other software companies.
Infosys Technologies - 41.6
I-flex - 41.7
HCL Technologies - 81.3
Patni Computers - 32.9
Polaris Software - 19.5 (avoid this stock for now)
Satyam Computers - 34.0
TCS - 41.5
Wipro - 51.1

The management of the organisation is excellent and has a good vintage of 25 years. I like the fact that the education arm is present in around 40+ countries around the world including a huge presence in China. (A presence in China with 100+ education centres cannot be bad). This will help leverage the Software solution business in NIIT Technologies.

Disclaimer: My first job was with NIIT Ltd (not NIIT Technologies, I was in the education and training business - it was good fun working with the likes of Sanjeev Shrivastava, Gulraj Bhatia ... and excellent leaders in Mr. Rajender S Pawar and Mr. P Rajendran. This estimate is however devoid of any occupational loyalties. Do the math yourself for comfort.

Liberty. REALTY. Equity.

2006-02-23T23:10:00.000+05:30

It's been for a month now ... my dad has been harrowing me with "What's with your stocks ... do property ... it will pay you better". I kinda cant argue with him - given some amazing statistics he's been sharing with me over the last few weeks.

So here's the deal ... please email me some good (and very good) property investments in cities around India from an investment viewpoint (and short term 1.5-2 yrs). Feel free to let me know about residential, commercial, plots etc. But read the billboard again - investments only !!!

Kindly email the same at shankarnath@gmail.com

PS: I like that title ... what say you? Shall I change the blog title to "Liberty. Realty. Equity."

Rain Calcining and Gujarat NRE Coke

2006-02-23T22:59:00.000+05:30

Yesterday, Sonal was rather excited about a tip he received in the morning. His anonymous tipper said "Buy Rain Calcining .. it's about to shoot up". The CMP of the stock was 40.2 in the morning, and before Sonal could check ... he eventually did that at 2:15 pm ... the price of the stock was 48.35 rupees.

In a serious bid to redeem ourselves from this folly, we set out to negate our dissapointment by trying to prove how wrong we would have had been, if we'd bought the stock. So here goes "our search for skewed analysis"

Share capital - 129.00 crs
Loans - 286.07 crs
Investments - 0.00 crs
Net CA - 107.71 crs
FV - 10 rupees per share
Dividend - 0 rupees per share
CMP - 40.2 rupees (morning price)
LY profit - 12.00 crs

At a P/E of 51.12 and an NCAV of negative 13.77 rupees/share, this was sure not practical. However the company has been posting some very good results.
Q1, 2005 : 13.60 crs
Q2, 2005 : 13.05 crs

Assuming similar trends, I estimate a maximum yearly profit of 42 crs because of (a) the tax charges (at a half-yrly income of 26.65 crs, the tax should be around 9 crs; the co. has surprisingly factored -2.51 and +2.71 crs for the two quarters) and (b) the interest charges (apportioned amount for half yr is only 10.91 crs while 10% of 286 crs would be close to 28.6 crs). At 42 crs of profit, P/E comes to 14.89 but the NCAV remains at (13.77). The company might just be in a position to give a dividend of 40 paise, which will not excite any market.

The company is outside my comfort zone. So, we didn't buy the stock. Today it fell to 43.80 rupees on the NSE.

Instead we checked out another company which works in the same industry - Coke/Metallurgical Coke production.

The business stats of Gujarat NRE Coke are -
Share Capital - 94.32 crs
Loans - 52.10 crs
Net CA - 77.15 crs
FV - 10 rupees per share
Dividend - 4.00 rupees per share
CMP - 86 rupees a share (Feb 23)
LY Profit - 90.78 crs

Like Rain Calcining, the profits for Gujarat NRE Coke have grown in Q1 and Q2 - 45.20 (32.76 in Q1, 2004) and 39.01 (27.83 in Q2, 2004). On this basis, I estimate a profit closing for this company at 120 crs for this year, which would mean a P/E of 6.76 (excellent). The NCAV of the stock is 3.36 (low).

Gujarat NRE Coke has one very good feature in it's unutilised debt capacity. On an interest coverage of 4, I estimate a total debt carrying capacity of 226.95 crs on LY numbers. Which means the m-cap of this stock (811.16) is around 358% of it's debt carrying capacity - fairly decent.

Oops.. and did I mention, at a profit of 120 crs - i would estimate a dividend payout of rupees 3.5 (outlay for the company would be 32.92 crs) ... which means a dividend yield of 4.07%.

Confession - I bought this stock yesterday at 89.8 rupees !!!

Change is good

2006-02-21T21:56:00.000+05:30

The recent change in conditions at HCL Infosystems is a good example of how any change in the 4Ps (price, place, product, public) can dent or raise a stock's going price.

To illustrate -
Say HCL Infosystems. Upon viewing the Q1 + Q2 data, I find that the change in agreement with Nokia, means the company has dented it's revenue numbers (ceteris paribus) by 40.12%. The new revenue number will be 3041 crores (i.e. 50% of 4074 crs from their telecom business plus 1004 crs from other businesses). The PBT would come to 115.5 crs - a dent of 32.06%. If I were to not question the fact that the HCL Infosystems stock is overly/fairly/under priced, the HCL Infosystems stock should have been at anywhere betwee 32% to 40% i.e. from a price of 259 rupees ... the fall should lie between 155 rupees and 176 rupees.

The stock had an intra-day low of 145 rupees and it closed at 180 rupees. Pricing anamoly.

A more interesting example can be seen in the 2004 HLL-P&G price war where P&G initiated a price war by reducing the price of popular detergents by 25%. As a response, HLL followed suit with a 25% reduction in prices. The P&G scrips were at 405 on the day of the announcement and HLL stock was quoted at 174 rupees.

Surprisingly the P&G stock went upto 433 rupees by the first week of May (see charting) while the HLL stock actually reduced from it's levels by a good 18% till the first week of May (from 175 rupees to 142 rupees; HLL touched a low of 105 rupees on August 16th, 2004).

Same industry. Same reduction in price. Same effect to profitability. And yet, the 4th P (public) made a different inference.

But that's not the point .... Analyse this !!!! Detergents contributed only 24% to the total revenue of HLL. Which means the 25% reduction in price should have brought down the revenue by only (25% mult by 24%) ... 6%, but the market actually drilled down the HLL price by exactly the same amount of price cut i.e. TWENTY FIVE PERCENT.

A clear anomaly in understanding "impact on profitability".

Value investors kept on buying this stock as soon as it went below the price of 150 rupees. Easy money. Watch out for such opportunities !!!!

Analyze that !!! - HCL Infosystems

2006-02-20T17:00:00.000+05:30

HCL Infosystems plunged more than 30% today !!!!

The business stats of the stock are enclosed -
Share Capital - 33.44 crs
Loans - 81.31 crs
Investments - 122.77 crs
NCA - 340.60 crs
FV - 2.00 rupees per share
Dividend per share - 6.20 rupees
LY Profit - 132 crs

Thus, we have the following estimates -
1. I estimate the total profit for this FY for HCL Infosystems will be close to 105 crores. At a CMP of 180 rupees (close of day - Feb 20th 2006), that amounts to a P/E of 28.66 (profit may be more, but I'd rather be conservative)
2. Consequently, the dividend yield for this scrip will be at 3.44%
3. From a value perspective, NCAV for the stock is only 22.85 however, please note that this is an IT and ITES company which doesn't hold incredible amounts of NCAs .. barring maybe cash. The cash per share held by the company is however 8.67 rupees per share.

At 180 rupees, HCL Infosystems is rather enticing. The enclosed graph may stun you ... (see at the extreme right) ... for a stock which was comfortably between 240 and 260 for most part of the year.

Enclosed are two news stories you may like to read for a better understanding of the events that led up to this bloodbath -

[1] Nokia deal hits HCL Info as brokerages downgrade stock

[2] No reduction in revenues: HCL Infosystems

A very interesting case to analyse and make an investment decision.

An excellent presentation on Value Investing by Prof. Sanjay Bakshi

2006-02-19T21:28:00.000+05:30

Prof. Sanjay Bakshi is a visiting faculty at the Management Development Institute, Gurgaon. Enclosed is a presentation published by Capital Ideas Online where Prof. Bakshi extensively discusses the various techniques of value investing from an India perspective. He has featured a number of opportunities like Trent, Madura Coats, Zodiac Clothing etc. but none better than his acquisition of the GESCO Corp. The link is enclosed here.

Prof. Bakshi also maintains a most fabulous website in www.sanjbak.com.

Overheated stocks and the amazing 20-day test

2006-02-18T22:02:00.000+05:30

Three weeks back, I picked out a set of 24 stocks in order to arrive at certain patterns on overheated stocks (i.e. stocks to avoid now - which is as important as picking up the right ones). The list of 24 were on the basis of the biggest movers of the month and necessarily with an m-cap of 500 crs and above.

The following measures were estimated on the basis of the data available -
a) Profit for FY 2005-06 (on the basis of 3 quarters of results)
b) CMP of the stock on Jan 28th 2006 and as on 17th Feb 2006 (to calculate the fwdPE and movement in share price over the 20 day period)

The list is enclosed for your persual -

Some interesting patterns were observed.

1. Of the 10 stocks (out of 24) which had a P/E of over 40 - surpisingly only 5 stocks fell over the last 20 days, while 5 stocks actually gained thereby pushing up the fwdPE of the scrip. Shockingly, the ones that fell were within the 0-5% band while the ones that rose grew at ... 10.9%, 6.7%, 11.0% and a huge 29.1%.

2. Of the 10 stocks between a fwdPE of 20 to 40 - only two stocks went down, 6 of 'em went up while 2 remained at status quo.

3. Surprisingly, of the 4 stocks whose PE is well below the market P/E - THREE have actually performed worse at reduction in value of 13.2%, 10.1% and 11.0%.

It's as if, the market is punishing companies which are available at ridiculously low P/E and actually rewarding companies which exhibit a higher P/E.

Is this the elated Mr. Market at his very best?

We need some answers here ... fast !!!

Amtek India - is it another hidden goldmine?

2006-02-16T21:59:00.000+05:30

Rakesh had posted a comment on a previous blog, seeking views on Amtek India. In a rather nonchalant manner I was examining the stock stats. Infact let me put down the stupid comments I was about to post ...

"Hi Rakesh, I checked out Amtek India. You may have something here. The stock is currently trading at a fwdP/E of 10.4 which is rather good. Though it doesn't have any margin of safety to speak of and a low dividend yield of 0.4% - I like the fact that it is growing at 25% year on year in Sales and Profits and fantastic management."

Repeat : it doesn't have any margin of safety to speak of

A look at the balance sheet may give a different picture. Annual Report. Pg 29 .. under Investments, reads 9675095 shares of Amtek Auto Ltd. of Rs. 2/- each .... amount 3511.2 lacs. So each share of Amtek Auto is being evaluated at rupees 36.29 only. The current price of the same Amtek Auto share (Feb 16th) is 302.00 rupees on the NSE. Which means, investments on the basis of this one holding itself is atleast INR 29,218.78 lacs (292.18 crores).

292.18 crores is exactly 50% of the current m-cap of Amtek India (587.86 crs).

There is my margin of safety.

Moral of the story ... always, always read the annual reports !!!!

Am I like this ????

2006-02-16T15:04:00.000+05:30

"This describes you best" - was a message my friend sent me yesterday. (im the one in the right)

Prasanth's comments and 'value picks'

2006-02-15T10:01:00.000+05:30

This blog is in response to Prasanth's comments. Prasanth found these stocks enlisted in the capitalideasonline round table. Enclosed is my evaluation of the same -

1. India Nippon Electricals

The evaluation in numbers –
NCAV (incl invts) – 97.14 rupees per share
Dividend – 8.50 rupees per share
FV – 10 rupees

There is nothing exciting about this stock, neither is there anything I feel rather uncomfortable about. The sales are rather constant, so are the profits. At a CMP of 276 rupees per share (Feb-14) and a fwdPE of 12.50, the stock is attractive enough. The dividend yield is also a decent 3.08%. It’s a fairly stable stock which has had rather minor swings over the last 12 months (the highest being a rise from 245 to 300 in 30 days). There is a fair chance of the stock going up in the next 5-6 weeks with moderate returns of 12-20%.

2. Cheviot Company Ltd.

A similar company to India Nippon Electricals, Cheviot has an NCAV (incl invt) of 225.98 on a CMP of 512.00 which is very decent. I approximate the fwdPE of this stock to be 6.42 and is currently at a dividend yield of 1.95%. The big spike in the Cheviot stock came in the month of August 2005 when it jumped up from 330 rupees to 600 rupees in 20 days; otherwise the going has been easy over the last 4 months. Very stable - sales and profits – not too exciting from a company standpoint, but a little under valued. I would not be able to comment on further movements in this stock, although there is a higher probability of the stock going up rather than down.

3. Investment and Precision Castings

A stock I held at one time (bought at 275, sold in a month at 525) and still retain one share (I tend to retain one share, because I get the annual report of the company then). Before dwelling on the financials, my advice is to not invest in stocks where the profit per quarter is very low. In this case, we are looking at close to 2 crores per quarter or 66 lakhs a month. This was one factor for me to move out of this stock. Surely one cant be comfortable with such a company. The business stats are enclosed –
a) NCAV – 126.61 rupees
b) CMP – 617.00 rupees
c) FwdP/E – 9.56
d) Dividend yield – 1.22%

4. Fem Care Pharma

Just the kind of stock you should never buy. A truly un-Graham stock with no “margin of safety”. Its more of a “Value shock” rather than a “Value Stock”. Examine these –
a) It has an NCA per share (incl invt) of 1.12 rupees per share against a CMP of 428 rupees
b) The company has never given a dividend in the last 5 years, except the last yr when it shelled out 5.1 rupees per share
c) The stock is at a fwdPE of 16.10 which is also very high
d) Sales and profits are growing at a miserly 15-20%

5. Motherson Sumi Systems Ltd

A good profitable company with expanding sales, Motherson Sumi is an evolved and fairly valued stock. The business stats of the same are enclosed –
NCAV – negative 1.67 / share
CMP – 82.00 rupees per share
FV – 1 rupee per share
Div. Yield – 1.22%
Profit (LY) – 62.09
P/E of 31.02 and fwd P/E of 27.92

An excellent company with a good management, the stock is largely overpriced given the specs above. Advise buy only if the stock goes down to around rupees 60.

In summary, Cheviot Company Ltd. seems to be the best buy of the 5 stocks listed. For it's stable revenues, stable profits, good NCA/CMP ratio, management and P/E ratio.

Quote - Unquote

2006-02-12T18:06:00.000+05:30

There have been some great quotes associated with value investing and by value investors such as Graham, Buffett, Munger, Schloss etc. Enclosed is a compilation of the same -

"It's better to be approximately right than to be precisely wrong."

"What we learn from history, is that we don't learn from history."

"The more cash that builds up in the treasury, the greater the pressure to piss it away." (check ITC and it's foray in unrelated businesses)

"The smarter side to take in a bidding war is often the losing side." – Warren Buffett

"The most dangerous words in the investment business are, "this time it's different."" – John Templeton

"No matter how great the talent or effort, some things just take time: you can't produce a baby in one month by getting nine woman pregnant." – Warren Buffett

Courtesy: 1. Google.com; 2. 'My favourite quotes' by Sanjay Bakshi

My favourite is one which my first boss often recited - "With data you can prove anything ... even the truth". (one reason, why my posts look pathetic with no data)

Hidden Value - Sundaram Clayton

2006-02-11T18:15:00.000+05:30

Sundaram Clayton Limited's balance sheet throws the following numbers -
Equity - 18.97 crs
Loans - 109.18 crs
Investments - 57.08 crs
NCA - 16.96 crs
PAT - 70.71 crs
FV - 10 rupees per share
Dividend - 9 rupees per share
CMP - 854 rupees per share (10-Feb)

A fairly expensive stock, whose valuation from our perspective would read -
1) NCAV of negative 48.61 rupees/share
2) Dividend yield of 1.05%
3) PE of 22.64; fwdPE of 17.79 rupees/share

However notice two items here -
[A] The market capitalization ... 854 rupees/share multiplied by 1.896 crores shares equals 1,619 crores
[B] The investments in the balance sheet reads 57.08 crores.

This is the most interesting. Apparently, SCL and it's subsidiaries have a significant portion of it's investments in the TVS Motor Company. To be precise, we are looking at - 135,000,000 shares of TVS Motors that SCL holds. (thats 56.83% of TVS Motors). Multiply these 135,000,000 shares with the current price of Rs. 120.45 per share (Feb 10) and you'll find that SCL holds investments worth a huge Rs. 16,260,750,000 from TVS Motors alone. i.e. 1,626 crores.

Which means, firstly the investments shown in the books of SCL of 57.08 crores are a pittance when we calculate the same, with the current market price and secondly, the value of the shares of TVS Motors that Sundaram Clayton holds is more than the market capitalization of Sundaram Clayton itself.

Surprisingly SCL values these investments at their face value (cost) rather than the market value. It's list of quoted investments include (other than TVS Motors) - 34,346 shares in ICICI Bank Ltd., 69,740 shares in HDFC Ltd., 500 shares in HDFC Bank Ltd. .. this itslef amounts to 115,833,904 (11.58 crores) as on Feb-10 '06. These shares have been valued by SCL at an amount of 1,045,000 rupees (10.45 lacs) ... i.e. at 0.902% it's actual value

But the fact that TVS Motors in SCL is greater than SCL itself is crazy !!! Yet true. This is like me paying a 'fairly evaluated' price for a cow, only to discover that it's pregnant with a couple of calves.

Are you looking at that "careers" page

2006-02-11T17:52:00.000+05:30

Nope, im not looking for a job. Just something that my colleague Sonal pointed out - "always look for the 'Jobs available' column ... in the company website, or Ascent, or Business India etc." If a company is looking for a CEO or any top management personnel, then .... there are two possibilities -
a) The company profitability can take a hit if it is on shaky ground, or
b) There is a good probability that the price of the company stock may fall

This happens all the time, esp. when directors resign. There is often a vacuum and company performance goes bad. If the company is not a professionally managed one, then it will mean doom for a number of investor. An exact opposite of this notion is in an Accenture print ad .... link also attached !!!

Look out for these instances. Marginal changes in conditions often create strong value buy opportunities. The relevance of this point comes in when we link this to Warren Buffet's style of investment where he puts a higher focus on management. You might want to check the previous blog on "Teledatamatics" where Jagadish has commented on the "bad management" of the organization and on that basis (and some shoddy book-keeping) has recommended a NO BUY on the stock.

Go for good businesses

2006-02-11T16:48:00.000+05:30

I've been receiveing a number of emails on the growing Indian equity valuations. At a PE of 18.6 and rising, "the Indian market is expensive" - most say. If I can infer better, they mean - "I am not able to find undervalued stocks". Additionally, there are two pertinent concerns here - is the stock I am picking overly valued and second, if the market tanks then will my stock crash also.

There are a number of theories that investors subscribe to, but if you are conservative one then start seeing every stock as "excellent businesses to own". So, all investments should be factored on ... I will buy stocks where -
a) Stocks which have a P/E of less than 15 (they will survive the crash better)
b) Stocks of companies which are either #1 or #2 in their industry
c) Stocks which have an earnings (PAT) of 50 crs + on an average over the last 5 years

Some extra level of comfort can be derived if -
1. Sales of the company is greater than the market capitalisation of the company
2. Look for rising sales and profits (atleast 30% over LY)

I shall now be featuring a number of stocks which are good businesses and subscribe to some of the parameters given here.

I turn 26 today

2006-02-08T22:08:00.000+05:30

No stock analysis. Let me celebrate. Pluheeeease ...

Polaris in the RED, but are you thinking ....

2006-02-05T15:06:00.000+05:30

A Tale of Two Cities .... One city is called "Polaris HUMBLE-BE" and the other is known as "Polaris BUBBLE-BE".

Polaris Humble-be is a representation of the financial records of Polaris Software Labs i.e. the kind of thing. shareholders are concerned with - return on capital invested. Polaris Bubble-be is a news driven city where everything depends on the whims and fancies of inputs given by the news agencies. Here a glorious example in the making ....

Polaris Humble-Be:

1. Comparing the quarterly data of FY05 and FY06, I find -
a) Q1: Polaris PAT down 57% from FY05 numbers
b) Q2: Polaris PAT down 47% from FY05 numbers
c) Q3: Polaris PAT is negative. Losses of 7.54 crs (compared to 12.08 crs LY)

2. From a value perspective -
a) NCAV = 21.75 rupees per share
b) Debt free company
c) LY Dividend = 1.75 on a 5 rupees share. This year, I expect the company to give zero dividend because of the low profits.
d) Low cash reserves of 3.93 rupees per share

3. Share price charting at BSE ......

Here's a comparison of shares bought in various months and returns (excl dividend and assumed: if held till date) -

The graph clearly illustrates how the Polaris scrip has managed to give positive returns in only 4 months out of 48. (Hey.. i just remembered ... in my last job, this is how I used to sell hedge funds ... the investors used to get confused with so many graphs)

So Polaris was truly, a shareholder's nightmare.

Now, lets look at Polaris BUBBLE-BE :

Something is happening at Polaris and they are putting enough news in the air to make it count. Here are some news stories in review -
1. Polaris is ranked Best in the category for "specialty Application Development" (link)
2. Microsoft chooses Polaris as a Launch Partner in India for VS 2005 and SQL Server 2005 (link)
3. Polaris Software signs up Lloyds TSB for INTELLECT SUITE (link)
4. Polaris launches Collect.net (link)

This was major news till November 0f 2005. However one very interesting piece of news that hit the papers (The Hindu Business Line) on 10-Jan 2006 was when McKinsey submitted it's proposals to Polaris ... "stay focused on the legacy modernization services, where one sees big growth in the financial services space".

Lesson for us - At 109 rupees, Polaris Software Labs Ltd. is enticing. There are positive news in the vision/expansion/clients stream but the negative news are flowing in the financial areas. Graham would have been a NO-NO-NO for Polaris, but Warren Buffett might still tip in with a YES-YES-NO.

Whats your pick?

PNB GILTS

2006-02-05T14:17:00.000+05:30

Here's a "Wizard of Oz" opportunity.

Here are the business stats in the B/S of the company -
Equity - 135.01 crs
Loans - 790.6 crs
Investments - 5.37 crs
NCA - 1251.52 crs
LY dividend - 0.00 rupees
FV - 10 rupees per share
Profit for the year - negative 68.25 crs

This was last year. Now take a look at this year's numbers ....
Profit for Q1 - 16.53 crs
Profit for Q2 - 11.09 crs
Profit for Q3 - 12.12 crs
CMP - 22.35 rupees per share

Which means -
1. NCAV of PNBGIL is at 34.13 rupees (a true Grahamian stock !!!)
2. Estimated PAT for the year is 53 crs. So P/E at todays CMP should be 5.69.
3. Here's the clincher ... the cash inside the company is 16.69, so dont be surprised if the company awards a dividend of rupees 2 per share. That would blow your dividend yeild to 8.94%.

This is a classical case of an ignored stock. Since PNB Gilts is on the govt. securities and gilts market ... analysts have presumed that the proceedings will be shaky for this organisation.

Here's an news story on PNB Gilts : "... PNB Gilts, the primary dealer promoted by Punjab National Bank, is turning around after a difficult spell, thanks partially to its involvement in fee-based activities....". (and although news stories are something I show my backside to, this one is backed up with some solid data).

Lower the risk, Higher the Return

2006-02-03T19:12:00.000+05:30

In most scenarios, a greater risk is associated with a higher return and vice-versa. It's only in value investing that you'll find the very opposite picture. Let put this hypothesis to the test -

It's your first trip to New Delhi and you pick Karol Bagh (of all places) to shop. A stroll down Ajmal Khan Road and the crowd there, make you wonder why you would choose this of a thousand other places. On reaching the westend (where you have the Bata and Roshan-di-Kulfi shop), you come across a lane where two vendors are selling shirts. Equal in size, in colour, in quality and both are worth 100 rupees. So you know that you can sell the shirt to someone else at 100 rupees. Since it's off season, vendor A sells it at rupees 45 and vendor B sells the same shirts at rupees 60.

Which is more riskier - buying the shirt from A at 45 rupees or B at 60 rupees?

90% of all people I have asked this question have said "60 rupees". Think again. It's better to shell out 45 rupees for a 100 rupee shirt or 60 rupees for a 100 rupee shirt. A value investor (and most people) would be more comfortable paying 45 rupees than paying a higher sum of 60 rupees.

But where are the returns higher?

a) When you buy the shirt from A - Risk = 45 rupees; Return = 55 rupees
b) When you buy the shirt from B - Risk = 60 rupees; Return = 40 rupees

... which means lower the risk, higher the return (and vice-versa)

Howzzat !!!

God must really love crazy ....

2006-02-02T23:58:00.000+05:30

My favourite scene in Rambo III (the one in which Rambo goes to Afghanistan to save a general) is where he participates in a horse race. The objective of the race is to pick up a dead sheep lying on the ground (while one is mounted on the horse) and carry it to the finishing line which is a good 200 metres from that point. Over 20 horsemen run around you, trying to snatch the sheep. In spite of a friendly guide's advice (where he says, that these people are all crazy) .. Rambo participates and wins the race. Then the rather aghast guide remarks - "God must really love crazy people, he makes so many of them."

We have crazy companies aswell .... Nike .....They are known for sub-segmenting categories to sell more shoes like golf shoes, tennis shoes, basketball shoes etc. But now they have brought to market, an exclusive "yoga shoe" (these shoes have no heels). I am enclosing a picture.

The most amazing part of this entire initiative is "YOGA IS PRACTICED BARE FOOT". Crazy, isnt it?

The learning here is - It is these things that more often than not, jack up the stock price rather than true fundamentals. Also words like diversification, cost-cutting, acquisition, restructuring, demergering etc.

For a better insight on the same read the document - "THIRTY-NINE REASONS WHY AMATEUR INVESTORS FAIL TO BEAT THE MARKET OVER TIME". The fancy words point comes under point #26 (Failure to Understand True Growth). The document is an essential guide for every amateur investors in equities.

One of the most excellent quotes on this was once said by Peter Lynch :

“Wall Street seems to favour restructuring these days, and any director or CEO who mentions it is warmly applauded by shareholders. Restructuring is a company's way of ridding itself of certain unprofitable subsidiaries it should never have acquired in the first place. The earlier buying of these ill-fated subsidiaries, also warmly applauded, is called diversification.” – Peter Lynch, the highly successful fund manager and author of “One Up on Wall Street.”

Found: Website on Teledata Informatics Ltd.

2006-02-02T23:27:00.001+05:30

This is one company for which Prasanth and me did many a search. We found the stock ridiculously under-priced ... even now. Request all readers to do an analysis of this stock by yourself. Some of the numbers might trouble you :-)

One important point - There was an issue of bonus shares in the company which has not been given in the BSE announcements (cant understand why) but please factor the same in your calculations. So the equity in the company is rupees 877,690,800 (87.7 crores).

Oops almost forgot .... the website is www.teledatain.com

Reading a company - Hindustan Constructions

2006-01-31T22:48:00.000+05:30

This time round, I shall not be listing down the brief stats of the Hindustan Construction Company. For, when I sat down to read the company numbers on ICICIdirect .... a number of things caught my eye which often get missed when our world is around P/E ratios, m-cap, 52 wk H/L etc. You can view the ICICIdirect research section for all numbers on the company. Here's the link.

My observations -
a) The co. has a rather heavy loan amt in its books - 425.68 crs. The financial expenses incurred for servicing this debt was 54.19 crs. This becomes interesting when you observe that the company has been increasing it's debt input every year .. even more interesting when compared with the interest paid in servicing these debts under "financial expenses" in the P&L
statement.

2002 - Loan : 322 crs; Interest : 30.58 crs; Servicing : 9.50%
2003 - Loan : 379 crs; Interest : 50.90 crs; Servicing : 13.41%
2004 - Loan : 419 crs; Interest : 48.11 crs; Servicing : 11.47%
2005 - Loan : 425 crs; Interest : 54.19 crs; Servicing : 12.73%

Questions - Why does the loan rate increase in 2003, 2004 when the borrowing rates were it's lowest ever?

b) Look at the tax charges. You might find it unbelievable !!!

In March 2002, the company paid a tax charge of 48% on the profit before tax (PBT). In March 2005, the company paid just 9%. Two extremes.

c) Investments for FY2005 are placed at 189.92 crs. An analysis of the investments schedule in page 16 of the annual report reveals -
1. A significant portion of the investments (approx 51 crs) have been apportioned with Lavasa Corp. Ltd. - a 50% subsidiary of HCC.
2. Their exposure in MF is 130.74 crs and in a few equity shares of other companies. An interesting aspect was that a share like Hindustan Oil Exploration Ltd. (104400 shares) they hold is accounted at rupees 10 in their books while the CMP (31-Jan) in the market is 1342 rupees. The total (MF plus shares) is at 135.81 crores.

d) The company holds a cash balance of 3.81 rupees per share, so the dividend for the year can be as high as 90 paise. That will mean a dividend yield of 0.69%. This is low.

e) Q1, Q2 and Q3 for the company have been extremely good. Together they have closed at 81.3 crs. The big job is to predict the income numbers for Q4. Some points here -
1. As mentioned, financial charges for FY2005 was 54 crores. However in Q1, Q2 and Q3 of this year (all put together) only 32.8 crs have been accounted. So a huge chunk of 23-25 crores will be used in Q4.
2. Tax charges - Q1 plus Q2 plus Q3 equals only 10.7 crs. Even if I assume a tax charge of only 20% on PBT, I am looking at a tax of atleast 19 crs for Q4.
3. Extrapolating numbers (Q4 has been the best for HCC over the last two years), I would work out the PBIT to 58 crs. Cut an interest of 24 crs and a tax charge of 19 crs, my understanding of PAT should be 15 crs. Which would close the year for HCC at:
- PAT: 96.25 crs (a growth of 26% over LY)
- P/E: 35.51 (at todays CMP)

There is one important rule that Graham has always said (read: Intelligent Investor), "if you cant read the annual report of the company then you have no place in researching and investing in a stock. You are better off giving it to a mutual fund"

On reading the annual report (FY2005), I found the following statements you would be interested in -
1. This will confuse you ... on page 5, to the profit after tax, the management has added "Excess Tax Provision of earlier years written back" (and we here are discussing that the company is not paying enough taxes)
2. The total balance value of work on hand as on March 31, 2005 is Rs. 5381 crore including CompanyÂs share in the Integrated Joint Venture Projects.

The latest news item (Jan 24th 2006): "Hindustan Construction Company Ltd has informed that the Company has been awarded a contract for Rs 3,959 million from National Hydroelectric Power Corporation Ltd, Faridabad for Civil Works Package (Lot-I) (Construction of Diversion Arrangement, Concrete Gravity Dam Along with Spillway, Roller Compacted Concrete (RCC) Dam, Intake Structure, Surface Power House, Tail Race Channel, Switch Yard and Other Associated Civil Works) of Teesta Low Dam HE Project, Stage-IV (4x40 MW), West Bengal."

I took up this stock as a study of "how to read a company". However, the writing on the wall says : Is 149 rupees a good price to pay for this stock?

"mAlice in Wonderland" - a money machine

2006-01-31T00:15:00.000+05:30

Once upon a time lived a girl named Alice, in a world where earning money was termed malice .... so much for my attempts at poetry. The world has changed enough from the fantastical world of Lewis Carroll. Lets examine a situation in this new world order down our rabbit hole ...

Day 1
You wake up and go through your rather extensive phone book. There are exactly 1000 mobile numbers. After neatly dividing the stock in two equal parts, you start the rather laborious exercise of sending a message to the first 500 people - "Reliance will go up today" and to the other 500 people - "Reliance will go down today". Your cost = 1000 rupees (Re.1 being the charge of an SMS)

Day 2
Another wonderful morning. You pick up the morning paper to find the Reliance stock to have shot up. You look to the skies, say a small pray for the people who got your prediction wrong and get about your work for the day. You divide the stock of 500 people who got the right tip
into two parts. To one part (250) you sms - "Infosys is definitely up today" and to the remaining 250 - "Infosys is surely down today". Your cost = 500 rupees (total cost = 1500)

Day 3
Infosys seems to have gone down today.. these cut in spends in the US are creating some havoc, you say and get down to business. 250 correct tips (for two days) get cut in 125 and 125. To one half, Wipro to go up and to the other, Wipro to go down. Cost for the day = 250 rupees

Day 4
125 is broken into 62/62. Now HLL is at stake, and you have me (the famous stock analyst) to give you your daily sms stock tip. Cost = 125; total cost = 1875

Day 5
By now these 62 people who got all 4 tips correct would be really going nuts. Some might have also invested using my tips while some others would be really scouting for some money because they now have this amazing stock analyst who gives correct predictions after another. Only this time it's pay-back time. In return of these wonderful tips, I ask for a paltry sum of rupees 10 for the next tip. Let assume the 62 of them pay up 10 rupees. Thats a cost of 62 for me (for the sms) but an earning of 620 rupees. Total loss is now down to 1,317 rupees. Again we do the 31/31 split.

Day 6
31 is split as 16/16 (rounding off numbers here for illustration purposes). This time I charge a premium of 20 rupees because its 5 correct tips in a row.

Day 7, day 8, day 9 and day 10
16 = 8/8; 8= 4/4; 4=2/2; 2=1/1
Premiums also increase to 30, 40, 50 and 60 rupees. I am currently sitting on a cumulative profit of 362 rupees.

Day 11
Last day at work. I pick up my phone for a rather lackluster day, flip a coin and sms the one lonely fellow my tip of the day (boy, this guys must have gone real crazy by now)

At the end of 11 days of work I have a net PROFIT of 431 rupees.

Scenarios -
a) Had I started the share-tip collection in the fourth iteration itself, I would have made profit of 2921.
b) And if I had charged a premium of 10 rupees throughout from the fourth iteration - i would have gained 491 rupees.

The queen of tarts may ask - "Is it legal?". Well what makes any aspect of this illegal. The people receiving the tip have a choice to act or not act on it. Consideration is being taken for a service rendered - i.e. pain-staking research of Indian equities.

Excellent money making machine, eh?

Elgitread India

2006-01-29T22:08:00.000+05:30

Elgitread is all about retreading. Retreading equipment, retreading material, retreading equipment and retreading tools. And if you are as stumped as I am, the company has been gracious enough to explain dummies like myself what retreading is.

My first impression of the company, was a capital intensive industry with single digit NPMs but the 11%+ NPM got me looking. Rising sales and profits over the last 5 years (although 2004-05 was a bit weaker in the OPAT area which would explain the lower dividend payout that year)

The financial are enclosed -
Share capital - 4.28 crs
Face Value - 1 rupee per share
Loans - o.oo crs (debt free)
Investments - 40.39 crs
Net curr assets - 63.62 crs
Dividend - 0.60 rupees per share
CMP - 42.75 rupees (27-Jan)

Notes -
1. The NCAV per share is 14.86 rupees which is just 1/3rd of the CMP. A secondary cushion is provided by investments
2. Investments are at 9.44 rupees per share. However, not all of this 9.44 is under quoted investments. Upon examination of the annual report 2003-04 (couldn't find 2004-05 report), I find that 153,907,849 rupees is under quoted investments i.e. 3.60 rupees/share. That would make our NCAV (incl invt) equal 18.46
3. Dividend yield is at 1.40% which is again low.
4. P/E (LY) is at 13. 54 and although Q1 and Q2 have been a dash better, its not something very commendable.
5. Debt recapitalisaition is also not very strong. It sums up to 33.78 crs which is 0.16 of m-cap.

Retreading is a growing business in many countries esp. China, Russia and India. Although the financial donot support a confident buy, keep an eye for this stock. You might be tempted to buy the stock in a smaller quantity and increase intake once the price reduces.

Every investor should read this

2006-01-28T23:23:00.000+05:30

It's called "Seven Secrets of the Investing Masters". Read, re-read the text because it gives you a wonderful glimpse of how the worlds best investors have earned their wealth from investing, from trading, getting rich overnight and other strategies/tactics.

The article features -
1. Benjamin Graham
2. Warren Buffett
3. Peter Lynch
4. Anthony Gray
5. George Soros
6. Jim Slater
7. Anthony Bolton

I am reminded of Charlie Munger, who has often related investing with psychology. It's often called the madness of the crowd. Please find enclosed a most fantastic text - Extraordinary Popular Delusions and the Madness of the Crowds by Charles Mckay which'll help you understand bubbles. Since the text is too long, sincerely request all to definitely read the chapters on the South Sea Bubble and the Tulipomania.

Bhagyanagar Metals Ltd.

2006-01-27T11:06:00.000+05:30

The last time I told someone about this stock, he quirked a remark - "Yeh stock lo, aur Bhagya pe chod do" ("Buy this stock, and leave it to destiny"; bhagya in hindi means destiny). As destiny would have had it, this is one stock which can fit the Graham radar. Please explore the enclosed stats -
Share capital - 6.3 crs
Loans - 14.47 crs
Investments - 1.6 crs
Net CA - 70.13 crs (22.2 rupees per share)
FV per share - 2.00 rupees
Dividend per share - 0.5 rupees
CMP = 30.20 rupees

Observations -
1. NCAV (Net Current Asset Value, net of all debt) comes to 17.66 rupees per share (0.56 times of CMP)
2. Dividend payouts for last 5 years (avg payout being 15%) have been good. The cash available is 2.71 per share so another payout of 0.5 rupees is defintely on (maybe more).
3. Debt recapitalisation (on an interest coverage of 4) is a cool 67.4 crs. The m-cap is 108 crs which makes me very comfortable.
4. The company works on a P/E ratio of 3.51
5. Growing sales and profits for last 3 years.

Some things to look out for - 1. The company is trying to work on a restructuring plan - a possible demerger; 2. Promoters are buying shares - a possible buy-back; 3. The quaterly results over the last one year have many an ups and downs - ???

I would suggest a buy for this stock. And be vary of the news on demerger, this may create opportunities in the pricing and valuation of the business.

Bimetal Bearings

2006-01-26T02:02:00.000+05:30

Bimetal Bearings would faintly fit in a Grahamian definition of a value stock. It has some unique features which makes the stock very enticing. Bimetal Bearings is a small-cap company with the following stats -
Outstanding shares - 0.33 crores
Loans (secured and unsecured) - 1.53 crores
Investments - 28.03 crores
Net CA - 37.14 crores
Face Value - 10 rupees
LY dividend - 6.25
CMP - 286 rupees
PAT - 10.98 crores

Lets examine this company using our principles of value investing and other derived techniques

a) Graham puts good focus on the net CA per share. In this case we are looking at 109 rupees per share. This is much lower than the CMP of the scrip (albeit a very good number when compared to most other stocks in the Sensex). We need cushion.

b) Investments are at 28.03 crores. If the investments are of a quantifiable and liquid nature then we should go for it. Unfortunately I was not able to locate the website of the company and hence couldn't go through the balance sheet. At liquid investments, the contribution of investments to the value of the company is 73.18 rupees. Being conservative, I'll take only 50% of this amount i.e. 47 rupees to our calculation. Thus, we have a net NCA (incl invt) of 156 rupees (109+47).

c) Bimetal Bearing has been giving positive profits for the last 5 years in a row. Sales have been increasing on an year-on-year basis for the last 4 years albeit at a slow pace of 10%.

d) The company has been giving dividend for the last 5 year. The last two yrs, the dividend ratio has been a healthy 6.00% and 6.25%. Two things are important here - the dividend yeild and the ability of the company to give the same or more dividend. Firstly, the dividend yeild would come 2.18% which is rather low (a risk free bond would give 5.5% over a one-year period). Secondly, the quarterly results indicate that PAT will close at the same levels as last year, so we can expect a similar dividend payout. I am doubly confident of a similar payout of dividend as the company has a good 22.1 rupees of cash in hand in it's books. So 6.25 rupees should not be dificult.

The company is a safe bet and I cant see too much of a roll down from current levels. I would recommend a small investment in the company and buy further on declines. Donot have too much of exposure in the company . I will have a further update on the company in another 2 quarters.

He wants stock "tips"

2006-01-26T01:47:00.000+05:30

Mohit had recently posted a comment in one of my previous blog with a suggestion for me to start posting some stock related pieces. So let me try my hand in proposing some stocks to invest in. But there are some rules - a) All stocks suggested will be based on the principles of value investing and b) all investors who consider the advice must use their own research before ariving at the final decision.

I would attempt to take this blog to be an investor's shack where all can sip a brew of value investing and run down numbers and suggestions to grow the network. True to self, I would still take time to put down some very relevant insights that are listed in some of the great books of our time. (I have started reading "The Intelligent Investor" by Benjamin Graham)

So sit back and enjoy the ride ...

Rich Businesses, Poor Businesses

2006-01-21T11:18:00.000+05:30

I couldn't overhear a couple of men talking about Robert T. Kiyosaki's amazing book - Rich Dad, Poor Dad. The most important lesson, they said, was the generation of assets which give revenue. The word "asset" was suitably defined in terms of the revenue earned by the capital investment. They recited an interesting example of a house which, if kept vacant was a "liability" as you are losing an opportunity in utilizing the asset. Similarly, if given on rent - it is an "asset" owing to the fruitful use of capital.

Whats true for an individual must surely be true for an organization aswell. Let take an example - online share trading companies. Platforms like ICICI Direct, HDFC Securities, IndiaBulls etc. have today built up a technological backbone. These require minimal maintenance and yet there is no stopping the customers who want to use this facility. The fee (account opening and brokerage) can be quipped as rental income for these technology buildings.

The NOIDA Toll Bridge Co. Ltd. is a similar and very interesting example. It's almost a monopoly for travelling from Delhi to Noida and vice-versa. No one can do a thing about it. You can't fly from Noida to Delhi or perhaps take a boat from Delhi to Noida. Going around the toll bridge is rather expensive. Take situation 2 - what if NTBCL increase the toll fare from 30 rupees for a 4-wheeler to 40 rupees. Can anyone do anything about it?

In essence, these are true monopolies. In a previous blog, I had mentioned brand names which have a similar power. Paras Pharmaceutical has some of the most important brands in it's repetoire - Borosoft, D Cold, Dermicool, ItchGuard, Livon, Krack, Moov, RingGuard, Stopache etc.

That is one key difference in Rich and Poor businesses.

A missed opportunity - Titan Industries

2006-01-07T22:45:00.000+05:30

I first observed Titan Industries when it was around the 90 rupees per share mark. Seemed enticing, but the heavy debt in it's book stilled me away. The 90 in due course became 190 ... then 290... then 390 ... and 490 .... 590 (phew !!!) ... 690 (i was going crazy) ... 790 before it reached a high of 864 rupees per share.

Very few would have observed that the company had reached a P/E of 140. Crazy high for any company. This could have been a potent opportunity for short-selling the scrip. Something I strongly discussed with a colleague (Sonal). But then laxity-mania caught me and i didn't short the scrip. Day 1 after laxity-syndrome, Titan Industries drop by 6.6% and Day 2 it further dropped by 4.5%. Two days of killing lost !!!! (BSE Chart)

An over-heated market is like oil .. slick and slippery. Too much heat more often than not leads to a fire where even good stocks are not spared. Some other mid-cap stocks which are overheated - (stocks with P/E of 40 and above; market cap of over 500 crores)
a) Aztec Software & Technology Services Ltd.
b) Honeywell Automation India Ltd.
c) Trent Ltd.
d) iGate Global Solutions Ltd.
e) Atlas Copco (India) Ltd.
f) Ingersoll-Rand (India) Ltd.
g) J M Financial Ltd.
h) Astrazeneca Pharma India Ltd.
i) CRISIL Ltd.
j) New Delhi Television Ltd.

There are some big names here. Research strongly, there may be a strong case for short-selling and making crazy profits - EVEN IN HIGH MARKETS. (Remember, Mr Market)

Numb3ers

2006-01-07T21:58:00.000+05:30

I was watching the teleserial "Numb3ers" on AXN. It comes every Saturday between 7pm and 8pm. In today's episode a very interesting point emerged when a fellow detective (sniper) asked the mathematician if he had factored in the pulse of the gunner, the adrenalin rush he would have, the sweat on his forehead, the fact that he would measure the cover to avoid being sighted. The mathematician had made no such factorization - his theory was in anything, theoretical.

We can make a similar note in what Benjamin Graham told years before about Mr. Market (read from "Here's how Buffett describes it.... " in the link). Graham made evaluations on the scrip based on two numbers - his intrinsic price and the current price. In the process, he would also readily buy obscure companies which may be shams - just because the 'numbers added up'. This is where I feel Warren Buffett turned out to be one up on his master because he checked the adrenalin, sweat, pulse and factors of the scrip he was gunning after. Indeed a very important quality in stock investing which should not be left aside.

I have made a similar change in my stock pick research which has now moved from examining NCA to CMP to the use of debt-recapitalisations methods and price-earning ratios. A strong filter is put keeping atleast two of the three factors in mind. The second set of filter is on the management of the company and the industry per se. So we are now evolving our value investing practices.

Another very interesting observation in the episode was on "gaining expertise". In the episode, the mathematician illustrates by throwing a ball of paper in a waste basket bin. Shot 1 - he misses, Shot 2 - scores, Shot 3 - misses. Thats 1 out of 3 (33%). Then another three balls - 2 in and 1 out. Thats 3 out of 6 now (50%). Again 2 out of 3. Result - 5/9 (55%) and finally 3 out of 3 in which takes his tally to 8/12 (66%) success. There is a learning here ...

Often a greater jump is observed in stock prices of companies which do something new for the first time rather than for companies which have been doing it all the time. These jumps are associated with words (and not numbers :-)) like "restructuring", "alignment", "power brands" etc. More often, there is a chance of 1 out of 3 rather than 8 out of 12.

Think about it

Looking for hidden value

2006-01-07T14:56:00.000+05:30

I was going through the annual report of "Kirloskar Brothers". All seemed fine when I arrived at the investments page of the company (Pg 36). The quoted investments in the balance sheet was 828,266,840 rupees. I peered through the schedules for further details. Under it's quited investments were a number of companies, one of them being "Kirloskar Oil Engines Ltd." - a rather well perfomring company. So Kirloskar brothers have 7,390,327 shares of this company which is listed in the books at 404,980,851 (i.e. 54.79 rupees per share). The current price of the same shares is 203.3 (7th Jan 2006). So the investments of Kirloskar Brothers Ltd. are atleast 1,502,453,479 rupees. (given their stake in Kirloskar Oil Engines). Add to this the remaining investments they hold.

There are numerous ways of finding value but the best to read the balance sheets of companies. Some companies have crazy amounts of land (SBI, CBI will qualify for this), some have investments (Sundaram Clayton in TVS Motors). Not just assets - I would look at patents in the same way, or an unstoppable franchise. Warren Buffett looked at Disney in the same way - "although Mickey Mouse and Snow-white may be written off in the Disney books, they are stil powerful franchise". Mattel Toy's Barbie would fall in the same league. Nearer to home, "CeaseFire" and "AquaGuard" have this distinction.

Oil prices - where is it headed?

2006-01-01T21:55:00.000+05:30

Increase in oil prices always has an inflationary effect on the economy. Worse still, this effect pans across the globe affecting each country which has energy requirements. Consulting firm, Delloites has some good views on the rising oil prices. The most striking part of the article posted in their website was on reasons why the world economies have been able to withstand the rise-in-oil-price blow. Here's their view-
1. A number of economies are not dependent on energy driven sectors like manufacturing alone which is true fro countries like the US and India where services is the predominant sector over agriculture and manufacturing whose energy requirements are higher.

2. The price of oil is not as high as it was in the late 1970s and early 1980s when adjusted for inflation. I have put together a graph on the same. Infact the highest price of oil per barrel was $80.69 in Feb-1981 and lowest point being Dec-1998 when the price of oil was just 9.3 USD to the barrel and the inflation-adjusted price was 11.47 USD. From there the price of oil has come a lot, but not equal to what it was 25 years back

3. There has been a decline in the value of the dollar. This means, the price you pay for one barrel of oil will come down if the USD/INR exchange rate has gone down ceteris paribus. E.g. Between Oct 2004 to Dec 2004, the USD fell by almost 4% and the oil prices too fell by a sparkling 19%. Thus the impact on the oil bill was -
Oct 2004 - Cost of purchase of 1 barrel = 2020.38 INR
Dec 2004 - Cost of purchase of 1 barrel = 1554.96 INR

4. There was also a time lag between people awakening to the fact that the rise in oil prices was not a temporary blip. It often happens across all industries and almost all situations.

5. Another striking part of the oil price rise, is that this one is demand-driven rather than it being supply driven. The larger consumers of oil are developing countries like India and China. With their economies growing at 7+%, these people will not raise a hue and cry over it.

All this may reverse if the following happen -
- China, India grow into energy guzzling monsters
- The USD for some reason appreciates vis-a-vis other currencies. (this will raise the import bill of oil for all countries)

Are the market set to tank?

2006-01-01T15:52:00.000+05:30

A question that most people are asking today. Markets are ideally guided by a lot of sentiments so I decided to fill in some numbers to check this out.

I randomly picked 170 midcap stocks (m-cap of 100 cr to 2000 cr; profitable cos.) comprising a total of 93,000 crores of m-cap. My immediate focus was an understadning of the P/E ratios of the stocks. The total weighted P/E (factoring in the m-cap of each stock) came to 31.6. This is mighty expensive.

I did a second analysis of m-caps .. this time of only the top 20 stocks (in m-cap terms) .. the P/E was 26.4. Again high.

Also let's see the rise in stock prices over the last one yr in these top 20 stocks (weighted for the m-cap aswell) - 108.18%. The profits of these cos. have increased by only 26% overall. Some people may say that these stocks were undervalued. Possible, but equity markets donot move on the whims and fancies of individual stocks. Let me prove this to you.

Look at the last one week data - the list of top gainers. Not one A cat company in the top 20 list, just two B1 cos. And yet the market was up a strong 250 points. Now in that list, the number of penny stocks (negative profits / P/E of greater than 50) - 8

Still ready to invest or, perhaps revel in cash .... !!!

The stories behind stock market crashes

2006-01-01T15:17:00.000+05:30

A very interesting story was featured in Ankur Jain's blog. It's a bit long but harps on the following points -
a) A crash is the product of knowledge known to many
b) Ever increasing greed only hastens the inevitable crash
c) Bubbles are there everywhere - some see it, some don't

Another interesting aspect to the same was also found in Sanjay Bakshi's blog. The most interesting aspect is how naive people can be and follow the crowd. Check this out aswell. Here's to all cheaters ...

A strategy that has outperformed the Sensex for the last 8 years

2005-12-31T18:36:00.000+05:30

Termed as one of the most "mechanical" stock-picking approaches, this technique has been widely described in Michael O'Higgin's excellent book, "Beating the Dow".

O'Higgins defined his set of out-of-sight stocks as the ones which give the highest dividend yield. So his technique was simple -
1. Divide your money into 10 equal packets.
2. Now log on to any website financial website and extract the list of the top dividend yielding companies.
3. Invest equally in each of them
4. Revisit after one year. Sell off the ones which are no longer there in that list. Make another round of investment

If your stock is still in there - you would have made a neat 5-6% arising out of the dividend payout. If the stock is not there, it's because the stock value has increased or the dividend payout has been reduced. The incidence of the second happening is low, unless something drastically wrong has happened to the company or the industry per-se. (this might have been true in bubbles like the dot com boom)

I would recommend a filter mode here. Pick from the BSE 100 stocks only so that we can keep penny companies out. Or perhaps, pick stocks from only B1 and above scrips. (this may however mean a lower dividend yield and one tends to find more under-valued scrips in the lower capitalization levels)

My 10000 rupees on January 1, 2004 would have been invested in - (see article)
1. GE Shipping
2. Procter & Gamble
3. Hind Lever Chemicals
4. Tata Chemicals
5. Gujarat Narmada
6. HCL Infosystems
7. IDBI
8. Hero Honda
9. Neyveli Lignite
10. SSI

My 10000 rupees on January 1, 2005 would have been invested - (see article)
1. HPCL
2. Kochi Refineries
3. Hindustan Lever
4. Rashtriya Chemicals
5. Indian Oil Corporation
6. GE Shipping
7. Vijaya Bank
8. BPCL
9. Bank of India
10. Hero Honda Motors

So, if I were to invest my 10000 rupees on 2nd January, 2006 - (see icicidirect data. I have considered only 500+ cr m-cap companies)
1. Bongaigaon Refinery
2. J B Chemicals & Pharma
3. Hindalco Industries
4. Kirloskar Brothers
5. Pidilite Industries
6. DCM Shriram Consolidated
7. Kirloskar Oil Engines
8. SAIL
9. EID Parry
10. Hindustan Construction Co.

This technique is very interesting and takes little effort. Best of stock picking dummies like myself :-)

What price will you pay?

2005-12-22T21:34:00.000+05:30

Company A and B are in the same business, with company A having a 2 time market share than company B. The nature of the industry is such that there are only two firms, A and B.

Company A's stock is currently trading at twice the price as that company B. Company B is currently on a new product project, which if successful - would mean Company B's stock going up by 100%, i.e. doubling. If the project is unsuccessful, company B's share price will halve as a huge amount of resources have been put on the same and losses will be considerable.

Also as a result of a "successful" new product project, company A's market share will reduce from a 2:1 share over company B to a 1:1 market.

Company A is valuing the business of company B for quite sometime. Now on Dec 19th 2005, we have the following information. The project has be "________". This information (success / unsuccessful) is only available to company B executives which they wil not tell company A until the deal is signed. What should company A do?

Some questions you may want to answer -
a) Should company A acquire company B?
b) If yes, at what price?
c) Best ways of dealing with company B to reduce risks/maximize profits?

Common Stocks and Uncommon Profits

2005-12-09T21:57:00.000+05:30

On of the finest books on investment strategies ever written is by Philip Fisher in his book "Common Stocks And Uncommon Profits". Fisher summarized his investment philosophy into eight points:

1. Buy stocks of companies that have disciplined plans for achieving dramatic long-term growth in both profits and revenues. Such companies must also have inherent qualities that make it difficult for new entrants into that business to share in such growth.

2. Fisher prefers to focus on such companies when they are out of favor; i.e., market conditions are not favorable or the financial community does not properly perceive the true worth of such companies.

3. Hold the stocks that you buy until there has been either a fundamental change in the company's nature or it has grown to a point where it will no longer be growing at a faster rate than the economy as a whole. He also says that one should never sell his most attractive stocks for short-term reasons.

4. If your primary investment goal is long-term appreciation of capital, then you should de-emphasize the importance of dividends.

5. Recognize that making mistakes is an inherent cost of investing. The important thing is that the investor must be able to recognize such mistakes as soon as possible, understand their causes, and learn from them so that they are not repeated. A willingness to take small losses in some stocks while letting profits grow bigger and bigger in your more promising stocks is a sign of good investment management. Don't just take profits for the satisfaction of taking them.

6. Realize that there are a relatively small number of truly outstanding companies. Your funds should be concentrated in the most desirable opportunities. "For individuals (in possible contrast to institutions and certain types of funds), any holding of over twenty different stocks is a sign of financial incompetence. Ten or twelve is usually a better number."

7. An important ingredient of successful investing is to have more knowledge and apply your judgment after thoroughly evaluating specific situations. You should also have the moral courage to act against the crowd when your judgment tells you that you are right.

8. One of the basic rules of life also applies to successful investing -- success is highly dependent upon a combination of hard work, intelligence, and honesty.

Fisher concludes this book with the following paragraph:
"While good fortune will always play some part in managing common stock portfolios, luck tends to even out. Sustained success requires skill and consistent application of sound principles. Within the framework of my eight guidelines, I believe that the future will largely belong to those who, through self-discipline, make the effort to achieve it."

Blog changes

2005-12-03T21:19:00.000+05:30

Hi. It's been some time I've visited my blog. So it's time for a makeover. Going further, I would make this a blog for learning and for understanding things. I would still continue with stock scrips but the focus will be to learn through them.

Rags to riches stocks

2005-11-17T21:51:00.000+05:30

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.

2005-11-17T21:26:00.001+05:30

- 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?

2005-11-07T10:20:00.000+05:30

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"