THOUGHTS ON THOUGHTS

That left out feeling!

2012-02-09T11:59:00.000-08:00

A warm hello to all! I think the title of this post summarises the state of the majority of investors (not all!). Its the feeling which the only married guy in a group gets, when all his bachelor buddies go drinking!
The world was so beautifully going to the dogs. The PIGS were being cute and wonderful, China bubble was supposed to pop anytime, US was supposed to have never recovered, the Iran guys were upto something which would take oil prices through the roof, our Government policy and decision making was in shambles, inflation was still not comfortably low, interest rates looked like they would stay high for some more time, our deficit was ballooning out of control, with growth being hit simultaneously and most importantly, everyone around was also not investing. We all were waiting for the inevitable fall so that we could deploy the safely kept cash and dance around merrily. Hell, that didn't happen! Instead, the market (index) rallied, with a huge number of well known small and midcaps going up 50-100% within a couple of months. Investors were left just sitting on their behinds! So what went wrong (or should I say, what went right, for everything to rally?) What to do now? Lets try and answer these questions..

What caused this rally?
Answer: Really doesn't matter! The rally has happened, its done! No point in brooding over past events, which will add zero value to you. No point in looking at the stock prices and saying this available at half the price a few weeks ago etc etc. Lets be in the present and not dwell upon the past.

What to do now?
Well, everyone has different approaches to doing things. So i will talk a bit about what not to do too, coz that is most important..
1. Absolutely avoid panic buying. There is no point in buying just for the heck of it. This is the time when one will become most susceptible to 'tips' because the mind will be looking for support from someone to help you earn some money and not be left behind. When everything around is rallying and someone tells you that xyz stock is the next in line, it is but natural to get tempted. But, don't!! Control temptation, keep logic and common sense alive.
2. Don't instinctively buy stocks that haven't gone up in this rally. Typically, our mind will search out stocks whose price hasn't gone up, thinking that they are next in line to go up. Well, there could be very good reasons why the price hasn't moved and these reasons could very well take the price even lower! So, no buying without proper investigation.
3. Don't justify your failure to deploy cash. Do not say to yourself that I knew this rally was going to come but this is just a one-off. It will fall soon and then I will buy! Admit your mistake. Its the first step towards not making it again!
4. Don't be afraid to sell. If you think that the price of some stocks in your portfolio has undeservedly gone up, do sell them. Don't wait for a higher and higher price to sell, like most people recently waited for lower and lower price to buy!
5. This is a good time to get the crap out of your portfolio. Well, any time is a good time to do that actually! But now, if the crap has moved up, it will be less heart-wrenching to let it go! Use the opportunity! Also, remove small and marginal positions in your portfolio, which you don't intend to add to. Make the portfolio leaner.
6. Opportunities still exist. They always do, wherever the index may be. But now, it will require much hard work to find them out. So, lets work harder. Of course, now is the time to be ultra careful, not because the market has rallied, but because our mind will be eager to buy something and not be left behind. Lets watch ourselves and not get sucked in.

What should we learn from this?
This is most important. We learn from history, that we don't learn from history. Let history not repeat itself! Let us all learn that timing the market is impossible!

So wasup with me?
I am sooo very tempted to look smart and say that I deployed all my cash (which was a rather large %). Well, I couldn't. I managed to build some positions in a couple of special situations and deploy some cash in few stocks I liked, but full cash could not be deployed. Though the rally did not surprise me, to be honest, the speed of it did. Typically, I tend to take a step back when prices of my stocks start shooting suddenly (uncorrected behavioural flaw!), hence, I could not complete my full buying in a majority of my intended purchases. I am so very left out! And I am quite ok with it, as of now! :-) I am continuing to look at some stocks to see if there is something to buy out there. I am sure there is, it just needs to be found out. Guess we will have to work harder and smarter now! Equally important is whether any of my holdings need to be sold. But I am not still finding any compulsive 'sells' yet.

So all in all, if you could not 'participate in the rally', don't fret. Just keep a calm and cool mind and control the very natural urge to buy something, anything, just for the heck of it! Buying/selling should not be dictated by the market direction. Buy only if makes sense and if it does make sense, buy without fear! If you just cannot control the urge to buy something merely for the heck of it, do go out and buy a few good books! They will always be a great investment! :-)
Let it all be 'routine as usual'.

Cheers and happy investing...

Notes from Elecrama 2012

2012-01-24T12:48:00.000-08:00

Last week, I spent some time at Elecrama 2012, an industry exhibition of power transmission and distribution (T&D) players, held at Nesco Exhibition Centre in Mumbai. Hundreds of companies, listed, unlisted, domestic and foreign had their stalls at the exhibition.

I often interact with a lot of industry people (who have no idea of finance/stock market) to understand the ground level realities of a sector/company. Visiting such exhibitions is even better, for two reasons:
1) You get to meet a lot of industry experts from varied sectors at one place.
2) Usually, the stalls are not manned by finance people, but by technical/marketing people. So the view we get from them is totally unbiased. They have nothing to say which can help the stock market price of their company! :-)
(In case you doubt my motives for going there, lemme tell you upfront that the food there is usually horrible!)

The exhibition was by players belonging to the power transmission and distribution industry. Transformers, switchgears, wires, various EPC players, etc were all present. Here are some notes I gathered from my interaction with various people representing various companies from various sectors over a period of 4-5 hours at the exhibition. These are not my own views.

Major problem is coal
Yes, there were no power generation companies there, only transmission and distribution ones. Still they rued about the non-availability of coal. Here's why; without proper coal availability and linkages, power generation capacities cannot come up as scheduled. The T&D work starts only when there is proper view on when the power generation will begin, so that there is seamless transmission of electricity. Without coal, generation is hampered. Without a view on when generation will begin, the down-stream T&D work comes to a standstill. Effectively, the entire process comes to a grinding halt. Coal India, THE supplier of coal in India is facing a tough time ramping up capacity. Proper coal linkages, therefore, are a critical value driver for the entire power-ancillary sector.

Working capital is proving to be a major strain
With overall liquidity in the system not at very great levels and with mounting losses and pressure on SEBs, recovery is proving to be a major problem. A lot of the players gave feedback that business is there, but we are not taking it because we do not know when the customer will pay up! 3-4 months has become a usual time for recovery in most cases. This puts strain on working capital. Companies will not sell more if they do not have working capital to support increased sales. This puts companies' topline in danger too!

Irrational competition is hurting
Competition has become fierce. Even the Koreans and the Chinese are trying to get into the Indian power ancillary market in a big way. (Although there are certain laws to protect Indian companies). Due to intense competition, a lot of companies are pricing their products at substantially lower margins, just to keep the topline going! The industry faces severe pressure on margins in the next future (at least a couple of quarters). This problem seemed more severe on the EPC side (transmission lines, sub-station erection, etc). Players do not expect pricing sanity to return very soon.

Solar is the next big thing
Surprise surprise!! Almost every industry person from varied sectors I spoke to said the same thing. Solar energy is going to be really big! But what about the very high cost of generating solar? What about rational pricing? What about financing for the same? Even the lowest cost for generation quoted recently (Rs.7/unit) is wayyyy higher than the cost of producing thermal power. Also, what about fast changing technology? Whatever solar power projects are being put up now, will they not become obsolete in maybe 5 years from now? So how can one say that solar is the next big thing? To alllll these questions, I got only one answer; solar will be big because the Government wants it to be big! Everybody admitted that there are some irrational things going on in solar power sector. Down the line, there will be huge growth, some players will burn their hands, unviable projects will go bust, sure! But the sector will become huge! Thats what they said! This also gives an opportunity to power-generation-battery makers like Exide. (Like they got a big boost in sales a few years ago during the telecom tower craze!)

Wheels are slowly turning, but even a snail would overtake!
The industry people reported that some improvements are happening. SEBs are being cleaned up, orders from Powergrid have resumed in decent volumes over the last two months and Government has recently started taking some serious steps to tackle the coal shortages. But the process will be slow and will cause pain to a lot of players till it catches on properly. Good old times are at least 2-3 quarters away, they say.

Well, there you have it. Some info about the power sector. I find this sector really interesting, inspite of majority of the players in it not making cash-flow and spending a bomb on working capital. Another interesting article from The Economist about the sector makes a nice read. Do go through the same.

Cheers and happy investing!!!

P.S. Came across something interesting recently. Its a book, which I do not think is released yet. Do check it out. The basic premise of the book seems very interesting, worth keeping tabs on the it.

Nesco Ltd - A good exhibit!

2012-01-07T20:38:00.000-08:00

I often talk with a few value-based investor friends and discuss products, industries and ideas. Its quite amazing that usually there are very few common ideas between us. Almost everyone has portfolios consisting of different stocks. So it was quite a surprise that a coupla weeks ago, me and my good friends Ninad and Rohit discovered that all of us have been independently looking at Nesco Ltd.
So we decided that without discussing our individual thought processes, all three will write about Nesco on our individual blogs and post it at the same time. We thought that it would be an interesting exercise for the three of us as well as the many readers of Ninad's and Rohit's blogs and the few readers of my blog to see how three different investors, though value-based, will look at the same company from different angles. (I hope the angles will be different!) The idea is not to see who is right or who is wrong. All three of us know that even if we reach a consensus, all three of us could be very wrong and even if all of us have different conclusions, all three could be very right! Well thats the best thing about investing, there is no one way of doing things!

You can check out Ninad Kunder's post on Nesco here.
You can check out Rohit Chauhan's post on Nesco here.

After reading the two posts, if you are still left with some patience, here goes mine!

Nesco is a BSE, NSE listed company. Market cap stands at Rs.780 cr (at CMP Rs.555), with promoter holding of 62%. Not the most liquid stock! CMD is Mr.Sumant Patel. His son Krishna Patel joined the Board in FY08 and is now an ED.

The company has three divisions:

Exhibition centre (BEC): The Company owns and lends out the Bombay Exhibition Centre. Its a 4.5 lakh sq ft centre at Goregaon on Western Express Highway.
IT buildings: The company has constructed and leases out buildings to IT, ITES companies in the same complex at Goregaon (65 acre complex). Currently, there are 3 buildings with a combined area of 10.4 lakh sq ft. 4^th IT building has also been announced. This will be a 9 lakh sq ft building entailing a cost of Rs.200 cr. About half of the total land asset has been used up till now.
Engineering business: Indabrator supplies surface preparation treatment plants to various industries. The business is quite lumpy, to say the least.

I am not looking at valuing the company based on its ‘existing land asset’, which will be a few times more than the market cap. I do not think that’s the right approach, since the company is pretty clear about not monetising the land asset.

Prof Bakshi's report gives a very detailed view of the business; there’s nothing much I can add about the business and its working, it’s extremely well explained in the report. I strongly request you to please go through the Prof's report.

Now that the details of the business are understood, what I will do is put up my thoughts on Nesco, as an investment opportunity.

Positive arguments:

The company’s strategy would appeal to any conservative person. Construct a building, lease it out, milk it for a coupla years and with the cash accumulated, build one more! Quite averse to debt. (This may be taken as a negative, but they never stretched themselves because of this policy.)
New buildings are built only after proper feasibility study to ascertain whether the supply can be absorbed. This ensures that buildings don’t remain empty. Also, time intervals between buildings means that the company can generate enough cash for constructing new buildings.
Fantastic payback period on incremental assets created, because of absence of land cost. (IT Building 3 was constructed at a cost of Rs.150 cr. Yearly rentals, at full capacity, should be at least Rs.70 cr. About 2 years payback!!)
Decent management: The conservative actions of the management have helped it negotiate the twists and turns of the sector. On the flip side, one may argue that they haven’t been aggressive enough. I am in the former camp. I did not find anything blatant in the ARs of the company to raise doubts about their integrity. Here, I should clarify that I have never interacted with the management or attended the AGM. The management does not even take the full remuneration they are entitled to, even though there is approval for the same. Also, their whole professional approach while going in for a new building appeals to me.
I read about a lot of corporate offices moving from South Mumbai to Goregaon-Andheri area. (One can counter this argument by talking about healthy supply in Nesco’s area. I believe Nirlon also has land there)

A base-case valuation:

Since this is an annuity business, I have valued it using DCF as follows. (PAT is almost equal to cashflow, since there depreciation is less and 'working capital' is not required.) Please check the assumptions behind this DCF. You will find them to be 'conservative', to say the least! :-)

Click to enlarge

Assumptions:

1) There will be no additions to existing buildings, there will be no increase in rentals of BEC and IT buildings. (Basically, zero growth scenario)

2) Additionally, I have taken the lease rentals for IT buildings at about 10% lower than existing rentals.

3) The entire infrastructure will last for 30 years. Hence, only 30 years DCF done. No terminal value considered.

4) Total expenses (including depreciation) taken at 30% of revenue.

5) 'Other income' has not been considered. (Although this was Rs.17 cr in FY10 and Rs.10 cr in FY11)

6) Full 35% tax on PBT taken.

7) Cash on books taken at Rs.130 cr. (Deducting capex left for IT Bldg 3)

8) Engineering business not considered (although it has been performing well at present.)

9) Discounting rate taken: 15%

The DCF gives us an IV of Rs.460/- per share. (Changing assumptions, discounting rate, etc will, of course, change the IV.) So, it seems that at Rs.460, the market will be valuing Nesco as a zero-growth stock. Whether there will be zero growth in the company? Well the management has disclosed intentions to gradually go for IT building 4, 5, 6 and 7, double BEC capacity to 9 lakh sq ft and also construct a five star hotel. Specifics for IT building 4 have already been announced (9 lakh sq ft, Rs.200 cr capex). That’s not exactly ‘zero growth’! So, at Rs.460, Mr.Market will be (irrationally?) valuing the stock as a zero-growth stock. (This approach I have used is actually Mauboussin's Expectations Investing approach, which can be used to find out what the current price of a stock implies. Basically, we try to find out what Mr.Market expects from the stock at current market price and then check whether Mr.Market's expectations are justified or are they toooo pessimistic or optimistic. As Munger says, invert, always invert!)

Negative arguments (of course!)

The company’s business is very susceptible to macro slowdown. BEC revenues will be especially hit and IT building rentals will come under pressure. This is more of a systematic risk and will affect equities as an asset class on the whole, not just Nesco. Also, slowdown fears in Mumbai real estate market are being talked about. This can affect the IT buildings part of the business.
The company pays pathetic dividend of Rs.2.5 per share. Payout is about 7%. If one wants to hold on to this stock for extended periods of time (8-10 years or so), absence of meaningful dividend payout will be a deterrent for any investor. However, in my view, it is criminal to ask this company for dividend! The cash is better left in the company’s hands! Payback period in incremental IT buildings is 2-3 years! How much will a shareholder earn out of the money he receives as dividend? Surely not as high! However, I think that absence of large dividend payout has been depressing the valuations of the stock (irrationality of Mr.Market?) Over a period of time, the sheer quantum of earnings and cashflow should be so large, that Rs.750 cr market cap would appear just too less. (upon completion of IT building 4, PAT, which is effectively cash earnings could be as high as Rs.150 cr)
I think that the biggest risk against investing in this company is capital misallocation. Until now, the management has not done any hanky-panky in the business. They do not even take remuneration which they are legally entitled to! However, risk of capital misallocation exists in following cases:

- The company proposes to construct a 5-star hotel on part of its land. If the company decides to operate it on its own, without going for the fixed income/leasing model, I think it would be a massive misallocation of capital.

- The management seems to be sentimentally attached to the engineering business, which has not exactly been doing great, struggling to break even. The management also expressed its ambition to be no.1 in India and among the top 5 in the world. With ample cash available, if they decide to put a greater part of it into engineering business, the returns on the same will not be as attractive as the lease-out business.

- The company has been dabbling a bit in equity mutual funds. (Rs.10.5 cr in equity funds against Rs.150 cr in debt funds as on 31^st March 2011). However, if the management feels that they are Buffett part-2 and decide to get a lot into equity (directly or through MF route), there would be much additional risk. I believe that they should leave the act of making losses in equities to us professionals! ;-)

- The company is currently in a rolling phase. Cash earned from existing assets is ploughed back to create new assets, which are substantially cheaper due to almost zero land cost. However, the question remains.. let’s say after 10-12 years when they completely exhaust all their land, what will they do with the cash they generate. Family managed companies have the tendency to neither disclose their intentions, nor to treat other shareholders as ‘owners’.

During real-estate-craze-times, the stock gets bundled up with all the other land bank stories and runs pretty wild. (Some may not take this as a negative point!)

Overall opinion

In my view, Nesco presents a decent opportunity where a high quality business and a conservative management is combined with a first-class asset base, which is being exploited slowly. Intrinsic value in this case would be more like a moving target (based on the mgmt plan), hence I have not gone into the same. What I wanted to look at more is what the current valuations accorded by the market imply? I think that below Rs.500, the market starts giving it a zero growth valuation, which seems to be more on the irrational side, presenting an opportunity.

Cheers and happy investing!!

An update on stuff...

2012-01-05T07:09:00.000-08:00

Hello folks. Wish you all a happy new year and I sincerely hope that investing-wise, it does not turn out to be a crappy new year! :-)

Its been almost an year since I put up an update on previous posts I had made and I think it is time to bore you again. There is a lot of stuff I write, which is not stock-specific. I don't think I should bore you more with updates on that, hence I will update only about the prior stock-specific posts.

In March 2011, I had written about some amazing things that Sharp India was doing. I re-iterate that I will not touch the company's shares with a 20 ft pole.

In April 2011, I had written about Disa India and had followed it up with AGM notes on the same. The price is virtually at the same level. The company has had a coupla quarters of good performance. However, the business is lumpy and this should not be extrapolated. I am not buying the stock at present.

In May 2011, I had written about SBI's subsidiaries and had followed it up with an update. I was of the view that the stocks were not very attractive at the then prevailing market prices. Since then, the prices have dropped decently. I think the stocks will start becoming attractive on further drops. I have built a small initiating position in one of them.

In June 2011, I had written about Goodyear India. I have never had a position in the stock. The post was basically for inviting views from readers. I had some good interactions with a few people over email on the topic.

In July 2011, I had written about Kesar Terminals. The company has announced some expansion plans but has not disclosed the financial aspects of the same. Please check out the BSE announcements regarding the same. I am no longer invested in the stock.

In July 2011, I had written about Balrampur Chini using a mind-map approach. This is the first time in my 8-10 years in the market that I have looked at a sugar stock. The stock price has fallen since then and I have been steadily nibbling into it. I have left decent room to add more on further declines. I have no idea about when the sugar cycle will turn. :-)

In October 2011, I had written about Network18 Preference Shares, with a view that they were too risky for my taste. The price of the shares has appreciated from Rs.105 to Rs.122 since my post, mostly due to some interesting recent events. :-) I still maintain that they are too risky for me and I have no intention of buying the same.

In November 2011, I had written about Bharat Bijlee with a view that the time was not yet right for buying. Even though the stock LOOKED cheap, it was not THAT cheap. The price has fallen from Rs.700 to Rs.540 since my post. I will be eagerly looking into the December 2011 quarterly results to see the position of the business.

In November 2011, I had written about Triton Valves. I had analysed the company strictly on quantitative basis and it was not a good opportunity, in my view. The stock price has dropped from Rs.500 to Rs.370 since my post. I still have no intention of buying the same.

In December 2011, I had written about Today's Writing Products. I honestly have no update on the same! :-D

Well, there you go folks. Hope you had a good time at the blog. New ideas are a bit hard to come by still. Am looking at a few really interesting candidates. Will update soon.

Cheers and happy investing!!

Today's Writing Products - Amazing result!

2011-12-07T11:28:00.000-08:00

Although I have never tracked this company, I am writing about this because;

This whole situation has a bit of entertainment value (Me and my friend Saurabh, who pointed this out to me over a cup of chai, had quite a laugh about it)
I am not finding decent companies at decent valuations to write about! :-D

Today's Writing Products is a BSE-listed company. It has recently managed to perform a herculean task. In its September 2011 quarterly results, the company has managed to report a net loss of Rs.68 crores, on net sales of Rs.15.5 crores (seriously! there is no decimal error here). I agree that making a loss of more than 4 times your sales is rather difficult, but Today's has managed to do it.
The operating business itself has reported a loss in the quarter. But whats more interesting are the 'exceptional items' in the result..

In September 2010, the company had an inventory of Rs.52 crores. In the September 2011 result however, the company has written off Rs.25 crores worth of inventory, citing it as 'slow moving inventory'. This has been included in the 'Consumption of raw materials' in the September 2011 results. Hmm..
In September 2010, the company had debtors of Rs.54 crores. In the September 2011 result however, the company has written off Rs.39 crores worth of debtors 'based on continuous evaluation of overdue debtors'. Hmm hmm..
So thats a total write-off of Rs.64 crores. (Well, the market cap of the company is Rs.7 crores!)

Here is what it looks like...

Ok, entertainment apart, a few questions come to mind..

Were the reported inventory numbers real? Typically, products such as Today's can go 'out of flavour' or become outdated/obsolete very fast. But the company does not write it off, thereby hiding losses. However, the inevitable large write-off materialises at one time or another. We all should remember this while analysing the Koutons and the Archies of the world.
The bigger question..were the reported sales real? The company could not recover money from debtors, and quite a large sum, not a small one! This obviously raises doubts.

While analysing companies, we all analyse numbers quite a lot. But its also important to look into the fact whether the numbers make sense. Whether the numbers are supported by proper tax payments, proper dividend payments and proper cash-flows.

Cheers and happy investing!

P.S. Today's is in a very sorry state. Deteriorating business, directors quitting, jazzy announcements which never saw the light of day, shares pledging, reducing promoter stake, corporate debt restructuring..it has it all. Better to not even look at it..

Why investing is unnatural!

2011-12-01T12:50:00.000-08:00

Nature has bestowed all living organisms with certain instincts. Its hard-wired into the very being of organisms. We humans are no exception. And since we have turned out to be the alpha organisms on this planet, we have a bit more instincts than others, some smarter, some dumber!
Well, instincts are natural. They are like reflex actions and we are, by our very nature, slaves to them. Imagine that you have your face against a strong glass cage, housing a snake. Now, if the snake strikes, you will instinctively recoil back, inspite of knowing that the cage is pretty strong and there is no real danger to you.
Let us try to relate some of our instincts to the discipline of investing. I find that most of our natural instincts are quite useless in investing. Investing is a slow, deliberate, disciplined and a well thought out process, not an instinctive one. I am talking strictly about investing here and not 'trading'. (You know what I mean!)

Instinct to get away from danger
This is an omnipresent instinct in all organisms. Unless you yourself are the danger, you will try to run away from danger! Going against this instinct is quite something! Why do we admire our soldiers and firefighters? They fight every instinct in their body and mind while doing their work and actually run towards danger!
Now what happens in investing? History tells us that the best investment opportunities have been found when everything around is 'dangerous'. Recent memories of Mach 2009 are still fresh in our minds. That was the dangerous time when quite a lot of stocks were quoting at irrationally low prices. If investors run away from it, they lose some really good opportunities.

Instinct to avoid pain
This is a very pervasive instinct in humans. (Just ask all the pharma companies manufacturing pain-killers!) Rational humans will not deliberately do something which can cause themselves pain. The ones who do sometimes get locked up in mental institutions! Unless totally unavoidable (like, lets say, a medicine injection), we all would honestly like to avoid pain and would be willing to do anything for that.
In investing, people experience mental pain, seeing their portfolios in red. To avoid the same, they wait for the market to bottom, where they will buy truckloads and probably retire quick! Well, it just doesn't happen. You will know the bottom for sure, only after it has come and gone. Pain in investing is common. Your portfolio can give you anguish for short-medium periods of time, when things are irrational. If you have conviction and have done your homework, the short term pain is worth taking, for the long term gain.

Instinct to survive
The instinct to survive is probably the most prevalent of the base instincts. We have all heard the story of the monkey and her baby trapped in a well. We all will do whatever it takes to survive, however irrational or illogical it might be.
Does this work the same way in investing? Imagine a person who has lost a lot of money in the markets. He is close to losing everything. If you go and tell him a hot stock idea or some F&O strategy, which can 'recover his losses' fast, chances are he will jump into it without much thought or analysis. The desperation to come out, to survive is extremely prevalent. But here, he might end up hastening his death, instead of managing to survive. The instinctive brain needs to be given a rest sometimes!

Instinct of greed
Many of you will argue that this is no instinct! But I believe it is. We have an instinct to want more of what we like. Now, this 'more' may not be good/healthy for us later, but still it gives us the required pleasure at that moment and we are fine with it.
Well, we all know what greed can do to us in investing, so I will not talk much about that. Gordon Gekko famously said 'greed is good', but he also (infamously) went to jail! This is another instinct which needs to be controlled.

Instinct of instant gratification
Humans look for shortcuts! Our mentality is such that we get attracted to anything which has the potential of giving us fast results. Something which requires longer time and higher effort is something which does not appeal!
In investing, the same thing holds true. Why do people get attracted to the get-rich-quick MLMs, why are the 'hot stock tips' so popular? Instant gratification! Well, there is nothing instant about investing. Businesses take time to perform and so does your investment. Our 'instant' instinct needs to be strictly controlled!

Instinct to form groups
Since ages, humans have lived in groups for a variety of reasons. And it has worked fine. We have a natural tendency to not be alone, if we can help it. Sometimes, any company is good company. (No pun intended!)
This same instinct may not necessarily work in investing. Investing is quite a lonely exercise! If we do what the crowd is doing, the decision may not be correct. The best opportunities to buy have been when the crowd is selling and vice-versa. Always going with the consensus may not be great for your investing health! Mauboussin famously equated fund managers with zebras and is something worth reading.

Instinct of aggression - the alpha male!
The instinct to show that you are the aggressive, happening guy is ever pervasive. The dopamine kick that aggression gives is quite an experience.
Imagine an intraday trader talking about his exploits. How he had the nerves of steel and the aggression to fight the market and come out on top. This aggression may, of course, not work every time. Undue aggression at a wrong moment may be enough to wipe you out for ever! Now imagine a longer term investor talking. :-) It may of course sound boring compared with the flamboyance of the aggressive trader! Investing is not about being aggressive just for the heck of it. The investor will let loose this instinct of aggression at rare, opportune moments. Rest of the times, this instinct needs to be carefully controlled!

Instinct to justify
I honestly think that this is one instinct prevalent only in humans. Imagine this: a cheetah is running after an antelope but he doesn't catch it. He blames it on a small pebble that tripped him while he was running! Seems very funny even to imagine right? Now imagine yourself trying to finish work before a deadline. If you can't, you will have a hundred ready excuses, which prove that 'it was not my fault'. Happens to us all! Its instinctive.
Justifying is perhaps the most dangerous thing in investing. Why did I make a loss? Coz the market itself collapsed. So my stock, which is an amazing company, also collapsed for no reason. Why did I make profit? Coz I am goddam smart! Not coz the market rose! Justifying ourselves in our brain does not help us learn from our mistakes, coz it tells us that we are not making any! Something to be avoided at all costs!

Instinct to do activity
This is another instinct hardwired into all of us. We all have the constant need to keep on doing something. Why is meditation so difficult? Its because its unnatural to sit quietly, with a blank mind!
This is prevalent in investing too. The need to 'do something' is so pervasive. Of course, its not the best of ideas to keep on doing something all the time. There are times to do nothing and there are other times to do everything! Majority of the times, the need to do activity needs to be controlled.

So what can we infer and learn from all this?

I can write really long articles!
We have certain instincts hardwired into our brain.
These instincts may not work in the process of investing. Relying on these instincts may prove disastrous.
There is no such thing as a 'born investor'. (in my view)
We need to train our brain to control our instincts while investing. Investing has to be a thought out and logical process and not an instinctive one. Controlling instincts is very hard, I agree, but no-one said investing is easy!

Hope you did not instinctively ignore this article, seeing its length! :-)

Cheers and happy investing!

Triton Valves - Numbers tell the story

2011-11-17T11:54:00.000-08:00

Spoiler alert & warning! If numbers and number crunching puts you to sleep, please do not read this post!

Triton Valves is a BSE listed small cap company. The company's products are pretty interesting..

Triton is India's largest manufacturer of tyre valves and cores (yes, those little things that poke out of your wheel rim). It is an OEM supplier to almost all tyre manufacturers in India.

Intuitively, one might think that this would be a very good business due to following reasons:
1) The business requires massive scale. For competition to come in, such scale would prove to be a BIG entry barrier. (Imports, aka Chinese goods would surely be a threat)
2) For a tyre manufacturer (Triton's customer), the valve cost is not a large component of total cost (In FY11, Triton's per unit selling price of a valve was just Rs.14.35). So a small increase in price would not be a huge deal for the tyre manufacturer.
3) Due to all these, Triton should be having pricing power, assured and sticky business and growing customers.
Sounds like a very interesting business and opportunity right? I thought so too and glanced through the company.

Well, the numbers show a totally opposite picture. So this post is not only about Triton but also about the importance of numbers in analysis and investment decision making. I personally feel that a good look at the numbers is very essential to get comfort level while investing in a company.

FY04 onward, Triton's sales have grown at a 17.5% CAGR (all numbers in Rs.Cr)

The profitability, however, shows a totally different picture. Operating profits grew at a CAGR of 9.3% and PAT grew at a CAGR of 5.4% only

Cash flows have also shown a deteriorating picture

As a result, the balance sheet has gone for a toss, with debt piling up..

Inventory CAGR (25%) and debtors CAGR (20%) has been much higher than sales CAGR (12%). So every time the company's sales increased, the working capital requirement increased more than the increase in sales, resulting in perennial need of cash for funding working capital.

So what was the cause of all this deterioration? Lets see..

The selling price per unit of Triton's products has grown at a CAGR of 5.2% and 1.7% respectively.

But the raw materials price per unit has grown at a much higher CAGR of 15.6% and 11.5% respectively.

So as raw materials prices rose, Triton was not able to raise its products ka selling prices proportionately, leading to falling margins. In FY04, raw materials consumption was 38% of sales. By FY11, it had become 64% of sales!

Now what will happen if you put more money into the business and expand capacity, but the margins keep going lower? On the expanded capacity, you will earn lesser percentage returns. The return ratios suffer. ROCE, RONW have dropped over the past 6 years.

So what conclusions can we draw from the data?

Triton does not have pricing power. The growth in selling price per unit has not even been in line with the growth in the raw materials price per unit. This has caused a hit on margins.
Hit on margins, coupled with need for expansion every 2-3 years means that even the new assets deployed will generate lower returns. Further, these assets need to be financed by debt, since working capital also blocks cash. This has led to balance sheet deterioration too.
Customers have basically squeezed Triton on two major fronts; product pricing, working capital. And as I have often observed, margins once sacrificed become virtually impossible to regain.

So, the numbers say that (till now, at least..lets not talk about future right now) Triton is not an exceptional business, has no moat or pricing power of its own and will earn super profits only due to luck (e.g. sudden fall in commodity prices). Well, thats just what the numbers say.. What do you say? :-)

Cheers and happy investing!!

P.S. My apologies if I let loose the 'analyst' in me on all you unsuspecting folks! :-D
P.S. Part 2: This is just a number crunching analysis. This does not reflect upon the quality of management (the Gokarns are decent folks, I think) or what they have managed to achieve in really trying times, over the last 7-8 years.

The biases of value investors..

2011-11-15T05:33:00.000-08:00

Value investors are considered to be a class apart. They do things differently, they have their emotions under control and they make fantastic returns over longer periods of time. We have n number of examples to substantiate the same. Listen to Buffett's interview vis-a-vis a broker or an analyst or a hedge fund manager's interview and you will agree!
On the blog, I have discussed quite a few examples of biases and mental screw-ups that investors face. (The articles can be found under the 'behavioural finance' label on the right hand side of the blog). Well, value investors are supposed to be well aware of these biases and generally avoid them. But they are humans after all and it got me thinking as to what other biases specifically affect the value guys?
My thoughts on this topic are based on observations of my own behaviour/thought process and that of others whom I consider to be value-oriented investors and with whom I interact. I agree that a specific value investor may not be prone to all the biases listed and also that there may be other biases out there affecting value investors. I would like to add that I am (and probably will be) very much a victim of some of the biases listed below. So lets try and take the mask off the value investors eh? :-D

The 'absolute cheapness' bias
Followers of Graham will especially understand what I am saying. Typically, value investors run screeners to find stocks that are quoting at absolute cheap valuations; e.g. PE ratio of less than 8 times etc. Of course, it is just a starting point, but I have rarely seen investors of this breed being comfortable with valuations of 30-40 times. Even value investors who take investing decisions exclusively based on a company's business model and not just numbers like PE ratio will flinch at the thought of a stock quoting 40 times trailing earnings. The flip side of this bias? Focus on absolute cheapness might lead to missing the bigger picture or ignoring hidden assets of a company which are currently not earning anything.

The 'under-researched stock' bias
A large number of hard core value investors I know enjoy the process (of finding an opportunity) more than the result (profit/loss). Everybody loves profit, of course! :-) But because of this inclination towards the process, lot of value oriented people are obsessed with trying to discover something new, trying to catch something that the market has not understood. There lies their 'kick'. How many value investors will try to discover value in an Infosys or a Tata Steel? As a result, value investors enjoy digging into unknown companies' ARs and trying to find value. The flip side of this bias? Such value investors will miss a 'well covered' stock, like a large-cap, which sometimes becomes a 'sitter' due to Mr.Market going bonkers!

The 'conservatism' bias
Value investors have a licence to be conservative! :-) Lots of them can be also classified as pessimists too! Of course, when a pessimistic guy finds an attractive idea and loads up on it, results can be fabulous. Of course, this wont happen very often, but thats ok! I feel 1 or 2 ideas in an year, in which you can load up is quite ok! The flip side of this bias? Lotsa opportunity losses because the 'conservative' value investor let it go; and selling the stock too early, because the 'conservative' value investor thought the stock has become 'overvalued' too early.

The 'sometimes the best thing to do is to do nothing at all' bias
I feel this is one bias behind which value investors hide when they are actually scared and afraid! It becomes nothing but a mental justification. E.g. a value investor might be actually scared that the market will fall because of debt in Europe, unemployment in US, interest rates in India, real estate in Middle East, fudged data in China and coz there are too many craters on the moon. So, he might not buy a stock he thinks is really cheap, so that he can buy it lower when the market falls! What he is actually doing is trying to time the market but the mental justification to this is 'sometimes inaction is the best action'! This is a very very dangerous bias and will surely lead to confusion, incorrect decisions and overall misery!

The 'bad management' bias
Without taking any names (for my protection), there are certain families or groups which are considered to be 'bad managements' due to their past activities and history. Now I have to mention something, which happens lotsa times: someone says that ignore this company, its a bad management. I ask why is it bad? And the answer usually is 'someone told them' or 'its generally said that they are bad'. Very few times, people give sensible reasons as to why is a particular management bad. Usually, they just 'think' that its bad, thats all! Value investors are usually ethical people and they wont want to earn money in a 'wrong' way. Well I also agree with this and while there are certain groups whose companies I wont touch, having this in-toto mindblock may sometimes lead to some really good opportunities being lost. Managements might change, new generation might take over which is radically different. Keeping an open mind (but an alert brain) helps!

The 'ignore macro stuff' bias

A lot of value investors I know take investing decisions based purely on valuations and not based on macro scenario. This has its pitfalls too. e.g. interest rates affect own discounting rates, industry scenario will change our growth assumptions. I personally am not very great at analysing macro stuff, but totally ignoring macro happenings will lead to incorrect decisions. I think that a fine line is to be maintained here as per one's inclination as well as ability to understand and analyse macro economic data.

The 'circle of competence' bias
We all have heard Buffett and Munger talk about the circle of competence n number of times. It essentially means; identify what you are good at and what you know, identify what you are not good at and what you dont know and then just stick to the former! But some lazy value investors escape taking efforts by saying that something is 'out of my circle of competence'. e.g. I give the very same answer when someone asks me about any pharma company, saying that I do not understand pharma. Now what stops me to get off my behind, read read read and understand pharma? Nothing! But I still havnt done it! So this is a good justification for my laziness right?! Btw, this also raises the debatable topic of should one be comfortable with a COC or should one go about expanding it?! This topic probably deserves an independent post! :-)

The 'we have to do things differently' bias
I have experienced some value investors having this kida and compulsion of doing things differently. They have this OCD to be different all the time. I agree that being different is a good trait of a value investor, but bring different, thinking differently and acting differently just for the heck of it doesn't make sense! The flip side of this bias? You will frustrate people you talk with and they might probably hit you on the head with something. On a serious note, such investors will make a simple straight forward decision complicated and make a mess of things!

Well there you have it! Some biases that I think value investors face. I do not claim that all of these biases are undesirable and should be avoided. Some of them are very much desirable, depending on the kind of investor you are. But what is important is to recognise these biases, identify whether a bias exists in yourself and to watch and monitor it carefully. See to it that it doesn't cloud your decision making process.

Cheers and happy (value) investing!!

Bharat Bijlee - Going cheap..but yet to electrify!

2011-11-09T12:59:00.000-08:00

Bharat Bijlee (BBL) is one of the oldest transformers companies in India with a very conservative and respectable, but very secretive (!) and closed management. (I know..I have been attending the AGM for the past 3 years) The present financial position of the company is as follows:

The profits one sees in the results include exceptional items, which need to be disregarded to know the real position of the business.

About the company

BBL manufactures sub-station transformers upto 220 KVA, with an installed capacity of 13380 MVA. BBL is also into manufacturing of electric motors, gearless machines used in various industries. The company also has a business segment for executing substation projects on turnkey basis. Please check out the AR here and the September quarter numbers here to get a feel of the two businesses of the company.
The past two years have been really bad for the transformers sector. Overcapacity, rise in costs and reduction in Government orders have hit the sector extremely hard. The performance of all transformer players like BBL, Voltamp and TRIL has deteriorated and so have their stock prices!
BBL's transformers business is no exception and in fact, in the June 2011 quarter, the transformers division reported losses, with the September 2011 quarter being just a shade better. In a normalised environment, BBL's transformers business does Rs.500 cr of business on existing capacity, with 10-12% operating margins (upto 20% in really favourable scenario) and 7-8% PAT margins. But, I do not expect a favourable environment for the transformers sector for the next 3-4 quarters at least.
The electric motors division, however, is reporting healthy numbers both in terms of topline and bottomline. Margins are in healthy two-digits, with the management taking active steps to improve the business, as evident in their actions mentioned in the AR as well as the last 3-4 quarters' numbers. Here , sales growth of 15%, 12% operating and a 8% PAT margin is very much achievable.
The very positive factor about BBL over the last 3 years has been its cashflow. In a challenging environment, where competitors' cashflow has been hit worse than their margins, BBL has shown consistently high cash generation. (Numbers in Rs. Cr)

Anyway, coming back to the earnings perspective, I expect transformers business cycle to turn-around in FY13, with players making normalised margins again. BBL's electric motors business is showing decent traction and continues to grow (segmental margins (17%!!!) have shot through the roof in the September 2011 results)
So lets paint a scenario here, for FY13 numbers. (Please note that I am totally allergic to formal analyst-type 'projections'. Whenever I try to get a feel (i will desist from calling it projections) of future earnings, simplicity and conservatism are the things I give utmost importance. So what you see here is merely a reference point and is in no way, fairly accurate, imho!)

So, can the business do Rs.56 cr of PAT in FY13? (which is Rs.42 cr of earnings in today's terms) I think the probability of that happening is quite high. Also, please note that I have not at all considered the 'other income' on investments, which is fairly high for the company. (Rs.14 cr for FY11)
Valuing this at a low multiple of 8x yields a valuation of Rs.336 cr.

Now come the investments! BBL has the following investments at present (FY11 end)..Number of shares are also in crores..dont mind the decimals :-)

I have taken a 20% haircut to the market value of equity shares (One may take a higher cut for more depressing valuation!!) So, that works out to another Rs.308 cr.
BBL holds these shares since ages and usually, I wont value them at market value, since the company did not intend to sell them. However, in FY11 as well as Q1FY12, the company has sold some shares of Siemens, which is why it makes good sense to me to now consider the market value of the investments.

So, simply adding the business value (Rs.336 cr) to the investments value (Rs.308 cr) and reducing existing debt (Rs.95 cr) gives a total valuation of Rs.549 cr, which is Rs.970 per share. The stock currently quotes at Rs.700, a discount of about 25%.

What I intend to do

1) The company is going cheap for sure. If one compares this with Voltamp, which has about the same transformers capacity (but not same types of transformers), one will realise the 'relative cheapness' of BBL. However, since there are very few relatives whom I like, I never walk down this road! :-) (I have not included this 'peer comparison' to keep the length of the post respectably short!)
2) However, for a cyclical, which is not exactly going through a rosy period right now, the valuations are not dirt cheap and the discount is not high enough.(although you may argue that in the first place, the calculations supporting this 'discount' do not appear accurate, like 'projections' do..well, i do not mind the inaccuracy, as long as i am inaccurate by being on the lower side) Anyway, so I do not intend to make any haste in buying this one. If it drops nicely, nice! If it doesn't, better to move on to some other company.
3) I do intend to keep close watch on the company. Last year, the management passed an enabling resolution to raise upto Rs.400 cr debt. Do they intend to expand lots? Do they intend to start a new business line? I would like to see what they do and how they progress.

All in all, nothing electrifying about it, which would make one ogle and drool.. Hope that time comes too! Till then,

Cheers and happy investing!

Network18 Preference Shares - Amazing return, amazing risk!

2011-10-03T06:39:00.000-07:00

Hello all..

Network18 Media and Investments Ltd is in the business of forming and selling subsidiaries, getting into joint ventures and raising finance. (Ok, that was sarcastic..its broadly a media company)

In March 2008, the company came out with a rights issue consisting of equity and preference shares. The preference shares of the company are listed on BSE (scrip code 700132) and NSE.

The opportunity

The preference shares have a face value of Rs.150 and are to be redeemed at par in May 2013.
The preference shares have a 5% dividend payout, which is cumulative.
Till today, the company has not paid any dividend on the preference shares and it is fair to assume that the entire chunk will be paid along with the principal at the time of redemption.
So, at the time of redemption, a person holding the preference shares should get Rs.150 (principal) and Rs.37.5 (accumulated dividend @ 5% p.a. for 5 years). Thats a total of Rs.187.5/-.
The preference shares are presently trading at Rs.105/-.
So if one buys it at present at Rs.105, then one would get Rs. 187.5 in May 2013.
Thats a return of 79% in 20 months! Super cool!

The problems

Nothing is for free and same is the case here. Lets just take a look at the risks and the problems...

Network18 is not exactly a conservative investor's dream. The business is damn difficult to understand, given the fact that it changes all the time due to frequent M&A activities. The profitability has been erratic, with the company making profits just once in the last 5 years. More importantly, cash-flows have been really pathetic, with the company reporting a negative cash flow from operations of Rs.306 cr in FY11.
The company has Rs.1775 cr of debt but it has about Rs.350 cr of liquid investments too.
The company keeps on getting money by selling subsidiaries and businesses here n there!
The company will require about Rs.195 cr to redeem the preference shares (along with dividend), which may not seem out of reach, but considering the large debt and negative cash-flows, seems unnerving, to say the least..
The biggest risk here is the management. They are no saints, lemme tell you! Just look at this postal ballot they got passed..
Basically what they did was something like this...the Companies Act confers voting rights on preference shareholders, if their dividend is not paid for a period of 2 years. Since Network18 had not paid dividend, the preference shareholders would have gained voting rights.
So the company declared that it had received letters from preference shareholders that they would like to waive their extra rights (now why would anybody do that) and hence, through postal ballot, they got these preference shareholders' rights waived. (Promoters must be holding at least 50% of the preference shares, as per my reading)
So would they pay up at the time of redemption? Or would they find some loophole or the other and do some hanky-panky? Thats a tough one to answer..

To conclude

Although the possible return here is mouthwatering, there are 2 big risks; the financial position and the management.
Both of them scare me to a great extent, to take a meaningful position.
If one is ok with these risks and one thinks that they are not very material, Network18 offers a great opportunity to make respectable returns in this uncertain market. The preference shares are fairly liquid too.
Given my risk appetite, I personally intend to give this one a miss for now, but I would like to keep a watch on future events (like insider buying) to revisit my decision. For the bold and the dangerous people out there, do take a look at this opportunity.

Cheers and happy investing!!

Edited note (added on 03/10/2011): After talking with a coupla legal dudes and taking some serious professional legal opinions, it turns out that in case of unavailability of profits, there is no onus on the management to declare and pay cumulative preference share dividend. In such case, they could very well get away with redeeming the preference shares at Rs.150, and not paying the cumulative dividend at all. Which essentially means, that they would have used the preference shares ka paisa free of cost for 5 years! :-)
In such case, (assuming they honestly redeem it without changing the terms of the issue and all) the return would be about 42% in 20 months..anyway, the risk remains very high and I am not really inclined to get into it..

Regret Aversion Bias and investing...

2011-09-02T13:49:00.000-07:00

People exhibiting regret aversion bias avoid taking decisive actions because they fear that, in hindsight, whatever course they select will prove less than optimal. Basically, this bias seeks to forestall the pain of regret associated with poor decision making.

Regret aversion bias and the decision to sell...

Investor A: Wasup buddy? Howz the market treating you?
Investor B: I am completely out of it. Sensex fell from 18000 to 16000. Same thing happened in 2008 also. I thought it will bounce back again, so I didn’t get out at that time. And I regretted it heavily.

Investor A: But weren’t you bullish when the market was 18000? So at 16000, you should be more bullish right?

Investor B: Noooo man..I don’t want 2008 repeating. Better to get out now. I will see what to do when things stabilise.

Sounds familiar? Investor B sold his holdings, not because they were overvalued, but because he had experienced huge regret when he didn’t sell in 2008 and he did not want to have the same experience again. In order to avoid regret, Investor B has taken a blanket sell decision, which is not a ‘studied’ decision and may prove to be very wrong. Then why did he take this decision?

His thought process..

Please click to enlarge

So basically, what Investor B says is that an opportunity loss is preferable to an actual loss! Hence, the decision to sell will cause him minimum regret. That’s why the decision to sell is the best decision to take. But was that the best decision? He may have sold some really undervalued stocks too, just to avoid regret!

How does it affect investors: Regret aversion bias thus makes investors take irrational and panic selling decisions, which are not well thought out.

What should one do about it: I sincerely believe that, especially, decisions to sell should be taken solely on the merits (or demerits) of that particular stock. Trying to time the market is the worst possible way to take sell decisions.

The other side of the coin.. Regret aversion bias and the decision to buy

Scenario 1: You are looking to buy a stock. You bought it, but after buying it, suppose the price goes down. Will you regret your decision to buy?

Scenario 2: You are looking to buy a stock. But you decide not to buy it, and after that, the price goes up. Will you regret your decision not to buy?

Of course, you will experience regret in both scenarios. The question is, in which scenario will you experience more regret? Sooo, given a choice, which scenario will you prefer? Majority of us will prefer scenario 2 (come-on, be honest!), where there is no actual loss, hence lesser regret!

How does this affect investors: on this side of the coin, regret aversion bias makes investors numb. When the market falls and stock prices are going down, this bias stops investors from buying and lapping up the undervalued stocks, for fear that they may fall further! When the time comes to be aggressive, regret aversion sets in and causes indecisiveness in investors.

So what to do?

I too get affected by this bias and coupled with my ‘conservative’ (a.k.a. fattu) attitude, I incur lotssss of opportunity losses. But typically, here is what I do..

Do not think about results of past actions while taking present decisions.
Study each company you are looking at very well. If possible, write down your reasons for buying/selling or not buying/not selling on a piece of paper. When you write things down, your mind will not cook up excuses later!
Concentrate on the particular stock/company and ignore overall sentiment. If you think its undervalued, then buy. Period. If you think its crazily undervalued, then buy like crazy! Sureeee, the stock may (rather, will) go down after you buy. Accept it and make peace with it. Your portfolio will not show positive returns every day. So don’t be afraid to see paper losses, if your study has been in depth and you have the conviction.

The market gives us opportunities all the time. In bullish times, opportunities to sell are more than those to buy.. and vice versa during bearish times. Take advantage of these opportunities and be at peace!!

Cheers and happy investing...

P.S. For those of you writing in to know my views on 'where the market will go', please refer to this post.

Mahindra Composites Ltd - AGM (Follow-up)

2011-08-02T05:26:00.000-07:00

Hello..
Thanks a lot for the response to my earlier post. The large number of emails I got tells me that investor awareness is not dead yet! My friend Ayush tweeted the post and brought it to the attention of Mr.Anand Mahindra. (Thanks dude, I didnt need to write to the Mahindra Group management because of you.)

Now, I sincerely believe in being objective and disclosing both sides of the coin, hence this post...

Today morning, I got a call from Mr.Satoor, the CEO of Mahindra Composites, expressing regret for any misunderstanding that may have occurred at the AGM. He reaffirmed the Company's and the Group's commitment towards shareholders, regardless of the number of shares held. He also invited me to discuss any unanswered questions I had over a cup of tea and said that the management is always willing to answer all shareholder queries promptly. Free tea is always good, so, thank you for the invitation Sir! :-)

I personally thought that it won't be right to write just about my part of the story or to mention only negative aspects. Its fair to go on record and also mention about what the management did about the AGM fiasco and the prompt and professional way in which the CEO handled the matter..

Cheers and happy investing!!

Mahindra Composites Ltd - AGM

2011-07-31T12:47:00.000-07:00

Hello again! In the last post, I had wished you all a happy AGM season! Me and my colleague attend lotsa AGMs.. Lets just discuss a bit about what happened recently at an AGM I attended. A fair warning; this post does not contain any buy/sell advise or does not offer any opportunity for the reader to earn money. For what its worth, it will be useless for a majority of readers! :-D

Ok..just a bit of basics first..

A company is owned by its equity shareholders, who appoint a group of people to manage the company on their behalf (Board of Directors)
Once a year, these managers meet the owners to discuss what all they did and what all they intend to do going forward (AGM)
Usually, the Board of Directors and the management of the company treat the shareholders with professional courtesy and at least a bit of respect.

Now lemme just tell you people what happened at the recently held AGM of a company called Mahindra Composites Ltd, which is part of the Mahindra Group.

A couple of days before the AGM, a Mumbai based analyst friend of mine called up the CS of the company. The problem was that he had bought the shares a bit late, so he was not a shareholder of the company as on the applicable record date. My friend enquired whether he would still be allowed to attend the AGM. Now usually, companies do allow such analyst-shareholders to attend the AGM (although, legally, they can surely disallow). In some cases, the company people politely refuse, saying that as per law, such request cannot be entertained. However, the reply of the CS of Mahindra Composites to my friend was "kya re, mere baap ka company hai kya? I said no..Dont ask again!!" Thats one hell of a rowdy CS, we thought! :-D

So my friend (very wisely) decided not to come all the way to Pune, from Mumbai to attend the AGM. I, on the other hand (not very wisely), went ahead for the AGM. And it turned out to be one of the most pathetic AGMs I ever attended. Here is what happened...

Myself and one more person who came late, were the only non-employee shareholders at the AGM. All other shareholders present were employees, wearing the company's uniform.
Mr.K (lets call him so), the CFO, came across as an extremely rude and arrogant person, who does not display a ounce of professionalism, taking shareholders fully for granted. Upon seeing my questions which i provided in printout form, his response was "these questions have nothing to do with the AGM of the company, hence they will not be answered". (Although the questions were related to the company's performance and its plans in the near future.. Discussing all this is actually what the AGMs are held for!!) During the AGM too, i asked one question, but was asked to sit down by the CFO and was not allowed to ask questions to the CEO. After being polite for a while, i had to raise my voice (something which I never ever do anywhere!). After about 5 mins of heated arguments, he said that most of the questions are forward looking, and will not be answered by them since 'SEBI does not permit them'. :-) Creating a bigger scene and disrupting the AGM would have been easy, but I thought there is no sense in letting ego come in between..And that wouldnt have been very professional on my part too..
Mr.K then asked me how many shares i own? (My shareholding in Mahindra Composites is only 1 share, bought for Annual Report purposes). Upon learning that, Mr.K suggested that i should not bother asking questions, since i hold only one share. So, i asked him if the management of the company treats small and large shareholders differently. To which, he replied yes!!! The entire staff left immediately after the resolutions (which got over in 15 mins), leaving no chance for asking questions.
Even post the AGM, the CFO was extremely rude and essentially was asking me to get lost (though not directly, of course!)

So what do we gather from this?

A good Group pedigree does not automatically mean good management.
As minority shareholders, we have to humbly learn and admit that we are nothing! And sometimes, people like Mr.K will remind us that!! Well, a dose of humility never goes waste! ;-)
Things like these affect investing decision making (I would not buy the shares of such a company where the management thinks that ye to apne ghar ka company hai. Shareholders and all are just a formality!) I just cannot think of partnering with such people, by buying shares of Mahindra Composites.
However, such factors cannot be brought in an excel sheet. So we should all remember that there is life beyond the excel sheet and a huge number of investment decision making factors lie outside the purview of the excel sheet.

So cheers and happy investing!!

Sugar Sector and Mind-maps!!!

2011-07-29T12:12:00.000-07:00

Hello and happy AGM season to all!
Sometimes, it so happens that while taking an investment decision, one's thought process becomes more important than fundamental analysis, ratio analysis, etc etc.. (Most of the times, its because one is unable/incapable to do fundamental analysis, etc!!!)

For example, consider me and the sugar sector!! We just don't get along! I hate the sugar sector from the bottom of my bottom! I just cannot make any estimation or take a view on the future of the sector. Here's why..
- The price of raw material (sugarcane) is controlled by the Government.
- The price of the finished product (some of it) is controlled by the Government.
- Imports/exports can also be controlled by the Government.
- Government people aren't very rational lotsa times. One cannot even guess what they can do!!
- Soooo, what can happen to the sugar sector in between all this mess is anybody's guess.

However, it so happens that if one plays a commodity cycle (like sugar) right, the returns can be HUGE. Soooo now, we have a situation, where there could be an attractive opportunity, but we have absolutely no idea how to analyse it fundamentally, etc.

So here is where something called as mind-maps come in. When you want to arrive at a decision using a very structured thought process, mind-maps come in very handy. They are a flowchart kinda thing, where a logical flow of thoughts helps you arrive at a decision.

So I scribbled up a mind-map relating to something in the sugar sector, coz I had nothing better to do at the time! :-D Here it is...

Please click to enlarge

Some more points regarding the same:

One can totally ignore the sector as such.. No harm in doing that at all. There is no compulsion. Huge number of other (but not comparable) opportunities are available out there.
If one opts to go this way, one would be holding on to the stock for 2-3 years without having the faintest idea why!!! So it can get very very uncomfortable.
If one wants to take an exposure to the sector, one may also want to do a basket approach. Buy Balrampur, buy Renuka and also buy the worst company in the sector!

Now for some idea killers (a.k.a. why all of the above sucks!)

Extended sugar cycle depression: You could have a situation where you are stuck in the position for a long looooong time without any decent returns.
Capital allocation: How much of your portfolio can one allocate to such a kind of position? Basically, you are taking a position without much 'actual' thought, right?
Probable opportunity losses: Once capital gets allocated there, one may have to suffer the heartburn of suffering opportunity losses, at least for some time.
Irrational decision making down the line: If one cannot control emotions here, there can be some irrational decision making one can get into. It wont be comfortable holding positions like this...
When to sell? While taking the position, one has no idea about the 'value' of the company. So one will have no idea at what price it becomes overvalued, at what price to sell, etc. So it could cause real confusion later..

Anyways, it could very well be the case that you do not agree with me at all. And that's absolutely ok. We are different people, we will have different opinions! Investing is extremely relative. But even if you don't agree with this way of getting into the sugar sector, at least do give a thought to the concept of 'mind-maps'. Its a great way of taking decisions.

Cheers and happy investing!!

Kesar Terminals - whats in store-age?!!

2011-07-15T00:56:00.000-07:00

I had written about this about Kesar Terminals (KTIL) here and here. Lets have a small follow-up on the same.

The business:

The business of KTIL is a very simple one. You erect liquid storage tanks at a port, which can store a variety of liquids like chemicals and oils. You rent them out. Simple! Anyone importing or sometimes exporting liquids will need a place to store them at/very near to the port of import/export. KTIL provides this service to such importers/exporters.

Currently, KTIL has 64 such tanks with a capacity of 1.27 lakh kiloliters right in front of the jetties at Kandla port.
As part of its expansion plan, KTIL has taken possession of 10 acres of land in Kakinada Port in AP, where it plans to put up dry and liquid cargo handling facilities. Also, KTIL has purchased 16 acres of land at Pipavav port in Gujarat where it plans to put up liquid storage facilities and a container freight station.
Capex for the same will be Rs.31 cr @ Pipavav for a 36000 TEU CFS capacity and Rs.27 cr @ Kandla for 40000 kiloliters liquid storage capacity.

Currently, the market is valuing this company at an EV of about Rs.48 cr. Now, the business of the company itself is an annuity business. Do a one-time upfront capex and receive rent on it every year. Rentals of course fluctuate as per macro scenario, but KTIL has long term contracts for about 70% of its capacity, meaning that 70% of its tanks will probably never lie 'un-rented'.

Because of the annuity nature of the business, one can attempt a DCF based valuation of the company. Please note that I am not a big fan of DCF. Imho, DCF can be (rather, should be) done only for a limited types of businesses. So, the valuation is merely for reference purpose and I do not claim in my wildest dreams that it is precise and correct! Certain assumptions to the DCF like growth rate of free cash, discounting rate, etc are relative and everybody's assumptions will surely be different, resulting in different results. (That's what makes DCF an analyst's best friend!)

So, after assuming certain things, we arrive at an intrinsic value of Rs.119 per share, against current market price of Rs.83 per share.

So, should one rush to buy the shares, based on this? HELL NO..and heres why..

Our calculation is entirely based on past and present situation. However, we have to take into account that the company is going for a massive capex over the next 2 year period. Capex of Rs.58 cr (much more than even the current market cap of the company!)..
For this, the company will have to raise a large amount of debt and possibly, dilute equity too. (In my opinion, raising equity at decent valuations must have been the primary reason for the demerger).
Due to this, the current free cash, dividend and the more-or-less pretty picture may not last for a period of time in the near future.

So what would I do?

Wait!! To buy more, I would wait for the entire picture on financing to get clearer. How much dilution, how much debt and from whom? (Public deposits/term loans/FCCBs or what?)

On a different (yet very very important) note, do check THIS out. And consider this...

CRL Terminals (the company which was sold) is a similar business to KTIL, having capacity of 2.6 lakh kiloliters. Other financial details of the company are unknown.
KTIL has capcity of 1.27 lakh kiloliters plus land at 2 places.
CRL was sold for Rs.278 cr. KTIL's market cap is Rs.42 cr, EV is Rs.48 cr.
Sooo, a business, just like KTIL, which was just 2 times of KTIL's size, was sold at about 6 times KTIL's EV. This was just FYI. ;-)

Cheers and happy investing!!

P.S.: Me and my good friend Ninad have exactly opposite views on investing in KTIL.. So, with his due permission, this post is dedicated to him! :-D

The 'Value' Mindblock

2011-06-29T00:51:00.000-07:00

Each of us have got different views, different opinions and different mindsets when it comes to investing. Some of us like to 'play' in stocks, some like to get into under-researched stocks with good businesses and some are content investing in 'bluechips'.
However, as investors, each and every one of us should properly understand one thing; what do we properly understand?! We should know our circle of competence/our comfort zone and invest accordingly. This will ensure not only decent returns, but also a good night's sleep.
This brings us to the topic of the post - a mindblock that 'value' investors face. The value gang typically goes for stocks that are cheap vis-a-vis their future potential and which also offer a decent margin of safety in case things go a bit wrong. Personally, I also look for a 'trigger' which will help the discovery of value in such stocks. Otherwise, such stocks will remain perennially cheap. (Look at Ultramarine Pigments for example).
In this entire exercise of investing, I often face a certain mindblock. Let me tell you about it with an example. Look at the following companies.

The companies I have illustrated are all established, proven and robust businesses. They are not concept stocks like, lets say, Zee Learning or Delta Corp, which have interesting business, but have yet to 'prove' themselves.
Now the question is, will I buy any of the above companies at present market caps? The point is, I just cant!!! Why not? The valuations!! Look at just the PE Ratio to begin with. Such high PE Ratios tell us that Mr.Market expects a lot of growth from these companies in future (As the companies have delivered in the recent past). Mr.Market also likes the business models which could actually deliver the growth expected of them. And yes, these companies really could deliver.
My problem with such stocks is that there is no margin of safety for black-swan/unforseen events. The valuations already discount a high future growth. And as long as the growth comes in, the valuations continue to be high. But what if for some damn reason, the growth does not come in. What would happen to the valuations (and effectively the stock price) then?
Lets take Jubilant Food for example. Personally, I thought that it was expensive at 400 bucks. I thought the same when it became 500, then 600, 700 and now 800!!! Jubilant Food has been nicely growing for the past coupla years. They have recently expanded their products portfolio, which could help sustain and increase future growth. The valuations therefore continue to be high and the stock will give returns as long as the growth sustains.
The question is, what will happen to the valuations of such stocks, if the expected growth does not sustain or some unforeseen event screws up the basic business model? Crash in the stock price is an understatement.

There comes the mindblock:

Should one buy into such 'high growth' stories, paying through the nose for the growth? Or
Let them be and suffer opportunity losses (like I suffer all the time). Invest in the 'cheap' cheap stories and stick to what you understand and are comfortable with.

Views invited...

Cheers and happy investing!

Goodyear India Ltd - Seeking Answers

2011-06-15T06:04:00.000-07:00

I have been tracking Goodyear since quite some time. The reasons I really like this company are:

Excellent brand and brand recall: Goodyear is associated with quality and blah blah (You get the point)
Good positioning in the industry: Goodyear manufactures farm and medium commercial truck tyres and trades in radial passenger tyres and off-road tyres (manufactured by an associate company). Their positioning in replacement market is also very good and the company is making active efforts to improve it further.
Extremely strong balance sheet: Cash of Rs.217 cr against a market cap of Rs.700 cr. The company is selling some land in Ballabgarh, which is expected to bring in another Rs.150 cr as per broker reports.
Decent valuations: At about 10x trailing and 2.2% dividend yield, it isn't over the top expensive.
I will not talk about the delisting angle, because thats been done-to-death in today's market.

However, there are some points in my mind where I am horribly stuck! They are as follows:

The company's main raw material is rubber. Does Goodyear use higher proportion of synthetic rubber? What is this proportion? What are the cost advantages here? (For CY2010, their per kg rubber cost was Rs.153)
What is the break-up of manufactured goods sales and trading sales? (essentially, I am trying to understand the margins they make in the tyres they procure from an associate company)
The AR states that this arrangement with the associate company (Goodyear South Asia Tyres Pvt Ltd) is on a non-exclusive basis and can be terminated by either party after giving four months' notice. If this happens, what is the back-up plan that Goodyear India has? (These sales constitute approximately 20% of the company's total sales)
Almost all tyre companies are aggressively putting up capacities. Goodyear India seems to be chilling out. Their installed capacity has increased just from 12.7 lakh tyres in 2005 to 14.2 lakh tyres in 2010. The AR also does not talk of any aggressive growth plans. Why this contrarian approach? What is the management's thought process?
What is the break-up of OEM sales and replacement market sales?
Goodyear India pays money to the parent under heads such as 'expenditure of trademark fee' and 'expenditure of regional service charges'. The amount paid is about Rs.35 cr. Is this a formula based payment (such as percentage of sales, etc) or is it arbitrary?

If anyone has answers to these questions, I would be highly indebted if you mention them in the comments to this post or email me on research.neeraj@gmail.com

Cheers and happy investing!!

Jagatjit Industries - As weird as it gets!!

2011-06-04T15:35:00.000-07:00

A few clarifications from my side, which will help you choose whether to read further or not!!

The basic idea for this weird case was pointed out to me by a friend of mine. I worked on it fully, but its really not my original discovery.
There is no money making opportunity here.
IT GETS REALLY REALLY CONFUSING! (and funny too!) Its a fine example of how funny situations can emerge by following the law to the letter!!

Ok, so now you know that there is no money to be made here. Still, if you wana read, here goes!

Jagatjit Industries' history is the stuff that Star TV serials are made of! We have the grand old founder, his three sons from two marriages who, of course, don't get along, we have a fight for control of the company, cases filed by two brothers against one with the CLB seeking justice, creative issues of financial instruments (equity) and of course, to top it all, we have a very very very veryyyyyyy weird open offer!!

Spoiler: the open offer would result in a 380% acceptance ratio!!!

Sounds interesting? Lets check it out!

The background

The shareholding of Jagatjit Industries goes like this:

Please click to enlarge

Ok, some points for you:

Jagatjit Industries had allotted 25 lakhs Differential Voting Rights shares to one of its promoters, in which, one share carried 20 voting rights. So, these 25 lakhs shares are equal to 5 crore shares (25 lakhs shares multiplied by 20), as far as voting rights are concerned.
Now, due to this, the promoters had to make an open offer to shareholders, aggregating to 20% of the VOTING CAPITAL of the company.
Now, because of the DVRs, the voting capital will be different than the actual capital, right?

Here is how the open offer calculation goes..

The original open offer was made in April 2006, when the GDRs were not issued yet. Hence, the total capital for our calculation purpose is only 2.09 crores equity shares. (without considering GDR wala shares)

Let us calculate the open offer, based on 'voting rights' criteria:

Please click to enlarge

So basically, the open offer has to be 20% of the voting capital of the company (which in this case, is different than the equity capital, since some shares carry more votes!!)

Therefore, the open offer will be for 20% of 6.85 crores equity shares, which is 1.37 crores equity shares. BUTTTTTTTT the public holding is only 35.8 lakhs equity shares!! So whom will the promoters make an open offer to??? Hilarious!!

Here is what the Jagatjit Industries' Company Secretary (CS) and SEBI ka conversation might have been like... :-)

CS: Sir, we have to make an open offer for 20% of the voting rights. So in our case, we have to make an open offer for 1.37 crores equity shares, right?

SEBI: Yessir, thats what the law says and thats what you will have to do!!!

CS: But Sirrrr, our public holding is only 35.8 lakhs shares. So, to whom will we make an open offer for 1.37 crores shares???

SEBI: Hey thats none of my concern. You have to do what the law says...

CS: But Sirrrrrrrrrr, if the open offer succeeds fully, ALL the public shareholders will tender and we will have to accept it fully.

SEBI: Yaaa, so??

CS: Sirrr, promoters will then hold 100% shares!!! Isn't that kinda like automatic delisting??

SEBI: Yaaa, so??

CS: But Sirrrr, delisting without reverse book-building??

SEBI: O teri!!! Is this whats happening???

CS: Yessss Sirrrr...thats what i have been trying to explain!!!

SEBI: Ok, give us some time to think about it and we will get back to you soon!!

CS: Ummm...well ok..

Well, SEBI did think about it for five years, which has resulted into this new open offer!! Now, the promoters will have to pay the shareholders interest for five years too!! Hence the open offer has been fixed at Rs.38 PLUS Rs.31 interest, thats Rs.69!!! Shares are quoting now at Rs.68.80. Remember, you can buy any quantity you want from the open market and tender it at Rs.69. IT WILL BE FULLY ACCEPTED!! The offer is open upto June 13, 2011. In fact, an offer for 1.37 crores shares, when public holding is just 35.8 lakhs shares, means 380% acceptance ratio!!

All in all, this is one hell of a weird, yet interesting situation which has arisen by following the law to the letter, which will also result in promoters holding 100% of the shares, enabling them to delist the company without going in for reverse book-building!! Can other companies get any ideas from this? ;-) Hope not!!

Hope you enjoyed this as much as I did!!

Cheers and happy investing!!!

P.S. There are some points relating to Jagatjit Industries that i have deliberately not mentioned since they were not relevant to the crux of the article..

SBI Triplets - Update

2011-05-25T02:26:00.000-07:00

This is just an update and a FYI kinda post...
Yesterday, I had posted some stuff on SBI and possible merger of its subsidiaries. SBI Chairman Pratip Chaudhuri has given an interview in ET today. Link for the same.. (Wish I had waited one more day before posting!) :-)

Some relevant stuff from the interview...

Is there a rethinking on the merger of your associate banks?

We have already absorbed two of them. Now, the dilemma is that subsidiary absorption requires lot of capital (which is) a cost. At the same time, we are more worried about the future of subsidiaries. Most of the subsidiaries are relatively small and have a small geographical presence. Banks like State Bank of Travancoreare not known in the eastern, western and northern parts of India. Therefore, they are limited by their name, culture and history to a particular geography . They can't grow beyond a certain size, and banking is a business which requires capital. Now, how long can you pump in capital? And there is lot of duplication. So, theoretically, merger is a desirable thing.

But then you have to recognise operational issues because you have to harmonise and make uniform service conditions and there will be a lot of branch overlap. So, another subsidiary absorption or merger does not happen two or three years before the first one has happened . So, let us first digest State Bank of Indore. With Indore merger, our Bhopal circle alone has 1,100 branches. Now there is an issue of size in the Bhopal circle itself. Now if we merge the other subsidiary, what happens to the related circle of the bank? So we are in the process of rationalising and making the national banking structure more robust. Now, from 10,000 branches, we have grown to 13,000 branches, but the number of circles has remained constant at 14. So we need to increase the span of management.

Does that mean you will not pursue the merger now?

Associate bank merger is not happening in a hurry. It is not because we are not convinced that merger is the right thing but it is because it requires capital and operational efficiencies.

So you are pressing the pause button on the merger of associate banks?

At least for the next one year. We need to give good performance at the end of March 2012 and be on a strong wicket ourselves. It (further merger) will be only in June-July 2012.

Its now abundantly clear that there ain't gona be no merger in a hurry! Merger of unlisted subsidiaries will happen in second half of CY 2012. Merger of listed subsidiaries will happen much after that!! One should take a buy/sell decision and view the triplets accordingly!!

Cheers and happy investing!!!

The SBI Triplets - will their value be discovered?

2011-05-24T03:03:00.000-07:00

A big hello to all!
State Bank of India (SBI) has 3 listed subsidiaries; State Bank of Mysore (SBM, 92% holding), State Bank of Bikaner and Jaipur (SBBJ, 75% holding) and State Bank of Travancore (SBT, 75% holding).
In this post, I am not analysing them as 'banks' per say. I am analysing them more from a special situation point of view. In case you would like to know more about analysing banks, do refer to two very good posts by Rohit here and here.

The basic funda
SBI has 5 subsidiaries at present, 3 listed, 2 unlisted and wholly-owned (another 2 have already been merged). These subsidiaries are growing very well, with consistent high increase in book value over the years.
In the recent past, SBI management as well as the Government have been making announcements indicating their seriousness in merging all its subsidiaries with itself. link, link, link and link. For people who are not 'linky', what these articles and announcements broadly state is that over the next 18-24 months, SBI intends to merge all the 5 subsidiaries with itself, starting with the wholly owned ones and then the listed ones.

The opportunity (?)
There is a mismatch between the valuations of SBI and its listed subsidiaries. The possible opportunity lies during the merger of SBI's listed subsidiaries with itself. Let us see if this opportunity exists.

A basic snapshot of SBI and its 3 listed subsidiaries reveals the relatively low valuation of the subsidiaries when compared with SBI itself. Of course, the triplets should be valued lower than SBI, considering their smaller size and reach. Also, I have not taken SBI's book value, adjusted for its various investments. The subsidiaries are being made a bit bigger through rights issues, before they are merged with SBI. SBM and SBBJ rights issues are over and SBT rights issue is in the pipeline.

The big question - is there money to be earned during this merger? At what valuations will the merger happen?
Well, let us see what happened in the merger of State Bank of Indore (SBIndore), just for reference.

The merger of SBIndore happened in the second half of 2010. The swap ratio was fixed at 34 shares of SBI for every 100 shares of SBIndore.
I managed to get my hands on SBIndore 2010 AR. At the time of the merger, the book value of SBIndore was approximately Rs.1100, while that of SBI was Rs.1191 per share. The stock price of SBI at that time was Rs.2100.
So, on a book value basis, SBIndore shares were valued at Rs.405, a discount of 63% to book value!!!
On a stock price basis (not really useful, since only SBI is listed), SBIndore was valued at Rs.714, a discount of 35% to book value!!
Now, SBIndore was wholly owned, so this is not really representative of what the listed subsidiaries will be valued at. But to me, it gives a clue that one should not assume an extremely attractive valuation when the merger happens. The current cheap valuation of the listed subsidiaries correctly reflects this perception, imho. So, at present price, I do not see a very attractive opportunity arising from the merger, which is still some time away.

What would I do?

Though these banks are valued cheap, I expect them to remain cheap till clarity emerges from SBI as to the time and valuation of the mergers.
I would prefer to commence buying into these subsidiaries at 25-30% discount to their book values at least. I expect them to valued at least at book value during the merger process.
I would view SBT differently, purely from the rights issue perspective. My experience in SBBJ rights issue has been good and possibility of higher-than-eligible allotment exists.

The risks

Delay in merger proceedings: Till now, there is no 'commitment' from SBI as to the timing of the merger. All announcements are purely indicative.
Erosion of the subsidiaries' book value themselves: Primarily due to pension and gratuity liabilities. The notes to the recent results do give indication of the same.
Erosion in SBI's performance and book value: As we have seen in the recent results, this is quite a risk. If SBI's own book value is impacted, leading to a derating in the stock and slide in the stock price, the merger would not give high returns for subsidiaries' shareholders.
Opposition from employees: This is quite a black-swan type event! However, there was no opposition during the SBIndore merger, where 90% employees consented to the same.

To conclude, I do not find the SBI triplets to be really attractive investment opportunities at present. However, I would keep them in my watch-list and wait for proper opportunities, if they come by..

Cheers and happy investing!!

DISA India Ltd - AGM notes

2011-05-12T10:01:00.000-07:00

Hello..
DISA India Ltd held its AGM on 6th May, 2011 in Bangalore. Following are some notes from the AGM. This is only a FYI kinda post!

The AGM was attended by the entire Board, the auditor and senior officials. About 20 odd shareholders were present. Other than me, there was only one other professional investor, who had come from Mumbai.
I got a chance to interact with the senior management (they didnt run away asap, as has happened in some AGMs I attended).

Management Perception: Well informed, professional and no-nonsense people. Their answers were plain, to-the-point statements. No beating around the bush, no tall claims.

DISA is currently looking at increasing the Wheelabrator range in the country over the next 3 years. The range of machines they plan to introduce will not be limited just to the foundry/casting industries, but will cater to a host of other industries such as railways, defence, construction, ship-building, etc. The management looks at Wheelabrator as a big growth driver. Margins in Wheelabrator products are as high as 30%+.
The management is very clear that all business in India will be done through the listed entity. No Timken-giri here (i.e. no 100% subsidiary of the parent and stuff.) This is beneficial for them too, since they would like to utilise DISA's existing network to promote Wheelabrator products too. DISA Technologies Pvt Ltd will remain a R&D entity only.
Currently, the company is working close to full capacity. Capacity, in this case, cannot be measured in usual sense, since what DISA does is mostly assembly. A large number of parts are supplied by its vendors. But the management says that about 20% more turnover is possible with the existing capacity and infra. Due to this, the company is undertaking expansion at both its Hosekote and Tumkur units. Capex in CY11 estimated to be Rs.8-10 cr.
Order book as on 30th April 2011 was Rs.103 cr. The company is not at all focusing on exports, since they feel that the opportunity size in India itself is huge. So India would not be made just a low-cost manufacturing hub of the parent or something. Management does not talk about future numbers. (which I think is a good practice.)
The management admitted that they were facing problems on the raw material price front (which was evident in the March quarter results, which were declared much after the AGM). There is a 6-9 month lag between the raw material price hike and passing it on to the client. So, in the intermittent period, the company has to take a hit due to increase in raw material price rise. Management considers 18-20% as realistic and achievable operating margins.
The company is also keenly looking at inorganic growth (surprising!). No details were given on the same.
Company is also looking at increasing filters business and spare parts/after sales service business, which is a higher margin area.
The case with SEBI is pending with the Supreme Court. Currently its in a 'tareekh-pe-tareekh' mode. Until this case is resolved, there are no chances of delisting .Management did not comment or give any clue about delisting or the intention of the promoters.
On being quizzed about competitors like Sinto, Koyo, some Indian manufacturers, etc., the management admitted that competition is there and some established competitors are looking at the Indian markets. But the management is quite comfortable, given the headstart and the future plan they have for the company.

Shareholders were extremely vocal (i am putting it mildly!) about non-declaration of dividend. The usual stuff which happens at most AGMs happened. A bit of entertainment.

Do get in touch in case you think i have missed some point or you have any questions.

Cheers and happy investing!

Representativeness Heuristic and Delisting...

2011-04-12T05:12:00.000-07:00

I have been following various delisting cases for quite some time now. Over the last few weeks, the market has taken a fancy to this theme, forcing me to take a step back. (One shouldn't do what the crowd does!) Anyways, I couldn't help but notice a high degree of 'representativeness heuristic' in the events of the past few weeks, hence this post...

What is representativeness heuristic?

A representativeness heuristic is a bias in which an individual categorises a situation based on a pattern of previous experiences or beliefs about the scenario.
Umm, if that was a bit heavy, visualise this:
You see a person on the road. He is wearing a starched extra-white shirt (shirt not tucked in). He has an expensive cellfone is his hand. There is a very visible thick gold chain in his neck and an equally thick gold bracelet in his wrist. He is also wearing numerous bejeweled gold rings in his fingers and has a big tika on his forehead. Got the picture in mind? Well, if you suck at visualising stuff, its someone like this:

Now I ask you; What do you think does a person like this do?
a) Software Engineer
b) A local neta of a political party

Chances are, you will choose option b. (Btw, the person in the photo is actually an MLA from Pune)
Now is it a rule that a software engineer cannot dress like this? No! Still, we associate someone like this with a politician, based on our past observations and experience. This is representativeness heuristic. But, its not necessary that our conclusion, based on past observations, may be correct everytime..

Representative heuristic and the market

One can see this phenomenon happening in the market a lot of times. Some examples:

Tata Steel declares phenomenal quarterly results and on that day, all steel stocks prices hit the roof. (just an example, but it happens in a lot of sectors)
IIP numbers show consumer durables sector doing well and all consumer durable stocks go up on that day. (has happened recently)
Rubber prices come down for a brief period and all tyre stocks go up.

Now, it should be noted that in this phenomenon, all related stocks go up, including the ones which do not deserve to! One can see the representativeness bias in the market on numerous occasions..

Representative heuristic and delisting

Finally! Coming to the point!

In Feb 2011, Altas Copco announced its intention to delist. What followed was very surprising and quite rare in the Indian market.. The promoters were fair and generous to the minority shareholders! ;-) They gave an excellent exit price to the minority. (Also, hats off to JM Financial guys for managing this delisting beautifully!)

Now this is where the representativeness bias has creeped in, imho..

The market seems to think that

1) Just like Copco, all MNCs will be fair and generous to the minority.

2) Hence it makes sense to buy all these delisting stories and make a killing!

If you think that this is not what the market thinks, look at the price movement in such stocks, after Copco's delisting succeeded..

Data sourced from Edelweiss Website. In some cases, the
calculation seems inaccurate. Anyways, I am not interested
in strict numbers, but in what they represent.

As can be seen, after Copco's generous-hence-successful delisting, the other delisting candidates have shot up, outperforming the index. This is indeed representative bias..

So what do we do about it?

It could very well be the case that what the market thinks is right and the MNC parents of these delisting candidates will be as generous as Atlas Copco. However, it is not necessary! Just because Atlas Copco was generous does not mean everybody will be equally generous.
One should adopt a logical approach towards analysing delisting cases and not be swayed or affected by biases. Dont take things for granted! More on playing delisting cases here.

Cheers and happy investing!

DISA India - An Interesting Case

2011-04-09T13:14:00.000-07:00

Before I begin blabbering about the company, a disclosure from my side. (Usually I dont give disclosures, but I feel in this case, it is a must). I have been a constant buyer in this stock below 1330 levels and I intend to do it again if I get the chance! I had presented this as an investment idea at a couple of investor conferences during that time, when I was buying, but could not post it on the blog due to paucity of time and in-general-laziness! So please keep this in mind before taking any 'action' in Disa India. Also, PLEASE do read my introductory post.

Now that I have gotten that out of the way, let us look at this particular case...

On the face of it, Disa India Ltd. looks like this:

Nothing worth jumping up from the chair, it would seem.. Well, if we do a regular excel sheet, it would look even sadder.

Disa is one stock idea you just cant express on the excel sheet!!!
To be honest, in case of a lot of interesting investment opportunities, one has to get out of the excel sheet!

I am looking at Disa from two angles; as a delisting candidate and as a business.

Disa - the delisting candidate

If one goes through the latest shareholding pattern, promoters hold 74.27%. However, if we look at the 1%+ holders, another 12.01% are held in an escrow account, these are basically shares that the parent had acquired through an open offer in 2009. However, SEBI contested the open offer price calculation, hence, the shares are held in escrow till the matter is solved. SEBI has lost the case in SAT and has now appealed in the Supreme Court against Disa. More details can be found here.
So effectively, Disa promoters hold 86.28% shares of the company. So they will have to either bring down their holding to 74% or delist in due course of time. As far as I have searched, there are no other subsidiaries of the Norican Group (the parent), which are listed.
This makes Disa India a prime delisting candidate. Time will tell if at all they will opt for delisting, and when. Delisting is anyway going to be difficult, given the super-scattered shareholding pattern. FYI, Disa had tried delisting in 2007. The 'discovered price' came to Rs.2960 per share. This was rejected by the management and delisting failed.

Disa - the business

Disa India is a subsidiary of the Norican Group, a Denmark based entity formed from the merger of Disa (a forging and moulding machinery and equipments manufacturer) and Wheelabrator (a surface treatment and preparation equipment manufacturer) to form a global leader, renamed as the Norican Group. More info here.

For a number of years, Disa was just floating aimlessly. There was virtually no growth, no innovations, no product launches..nothing. The formation of the Norican Group seems to have changed it all. Disa is now expanding, going in for higher R&D, better innovations, launching new products and basically becoming very much proactive. I urge you to please read and absorb this and this article fully. It will surely give you an idea about the 'change' in the company, which I am talking about and the scope for growth for its products.
The December 2010 quarter results do show the improvement in the business. (Most of the new launches were done in mid 2010, so the December 2010 quarter results were of great interest to me.)

Click to enlarge

Disa seems to be quite on track to improve business and financial performance significantly. The product launches, the R&D, the industry feedback, all suggest so.

If I can get India's largest foundry and surface treatment equipment manufacturer at a market cap of Rs.200 cr and an EV of Rs.150ish cr, I think it is a good deal. The delisting angle adds to the goodyness of the deal!
I intend to attend the company's AGM, where I hope to get more information and feedback on the same.

In order to keep the length of the article to a reasonable level (so that the reader will not fall asleep on the keyboard), I have omitted certain details which I felt weren't absolutely critical. Please do get in touch with me in case of any queries or feedback.

Cheers and happy investing!

Playing delisting cases..

2011-04-05T03:55:00.000-07:00

Hello and wish you all a happy new financial year!
I had recently participated in the Binani Cement delisting, earning around 10% in 3 months. I was very happy and was dancing all over the place, until Atlas Copco happened. I decided to give it a pass and it is now part of my long and illustrious list of opportunity losses! (Copco returns have been much much higher than Binani)
Well, the purpose of this post is to pen down my thought process for participating in delisting cases. I hope to fine tune it, as always..

The basics

In order to delist the company from the exchanges, the promoters must follow the reverse book building process, at the end of which they must fulfill two conditions; they must hold more than 90% of the shares and they must buy out more than 50% of the non-promoter shareholding through the reverse book building route.
Just to give an example, if a promoter holds 85% of the shares, he must be able to buy 5% to take his stake to 90%. However, the second condition states that he should buy 50% of the non-promoter holding, which is 7.5% (50% of 15%). Hence, just 5% wont do, he should buy at least 7.5% stake through the reverse book building route in order to successfully delist the company.

Parameters involved

While looking at delisting opportunities, I typically look at the following parameters:

Valuation comfort: This is probably the most important parameter I look at. Most important for me because I am quite fattu when it comes to investing! I always look at the possible downside. If there is no valuation comfort and delisting fails, the downside could be very high. Therefore, I usually do not participate in cases where there is no valuation comfort at CMP unless other parameters over-rule it!
Management quality: Will the management be fair?! That too, in India! :-) Most of them are not. Where the management quality is extremely questionable, delisting could be a very unfair affair for the minority. Better to stay away.
Incentive to delist: Why should the promoters go through all the trouble to delist? How would they benefit? If there is high incentive for them to delist, they will do it by hook or crook. They will do it even if they have to be generous to the minority! If there is no incentive, there is high probability that delisting might fail. So trying to figure out the promoters' thought process is very important.
Floor price: Applicable in case where the reverse book building has already started/has been announced. Floor price is the minimum price indicated by the promoters, which they would be ready to pay to the minority, for delisting. Buying the stock close to floor price, subject to other parameters, is extremely cool!
Shareholding pattern: Who are the minority? Are there any 1% plus holders? Are there professional investors who hold large chunk of shares? In cases where the non-promoter shareholding is concentrated, delisting becomes relatively easy. Also, if professional investors hold decent chunk of shares, the possibility of promoters doing funny business gets reduced to some extent.

For me, participating in delisting cases is a combination of the above parameters. Of course, it is extremely relative and the importance to be given to each parameter changes on a case to case basis. Let me just tabulate three recent cases, on the basis of the above parameters:

Out of the above, I participated in the Binani Cement delisting. I am currently looking at Goodyear India Ltd as another possible favourable delisting case.

Comments and suggestions are most welcome..

Cheers and happy investing!

Sharp India Ltd - How blatant can one be?!

2011-03-01T13:04:00.000-08:00

We often crib about how promoters and managements of Indian listed companies never think of minority shareholders, take minority shareholders for a ride, think only of enriching themselves, etc.etc.

Now if you are, lets say, an Essar Group company :-) , you will do all the above in a nice, quiet and complicated way, which a majority of your shareholders will not even understand or come to know! (sarcasm intended)

But if you are Sharp India Ltd., you will do something which is not so sophisticated, complicated and hush-hush. Leave the niceties aside, screw the minority blatantly!

Well, here is what these Sharp people have done.. (Thanks to Khyati Shah for pointing this out!)

On 15th Feb, 2011, the company submitted a notice of postal ballot on the BSE's website. Let me just put up a grab from the notice..

Click to enlarge

So basically what Sharp has done is to convert the listed company into merely a manufacturing outfit. Sharp India Ltd will do all the manufacturing and sell its products to Sharp Business Systems (I) Ltd., which is a 100% subsidiary of Sharp Corp, Japan! Sharp Business Systems will then sell the final product to the consumer.

Why should this trouble Indian shareholders?
Lets say that Sharp India used to manufacture a colour TV for Rs.15000/- and sell it to the consumer for Rs.20000/-.
Now what may happen is that Sharp India will manufacture the TV for Rs.15000/- and sell it to Sharp Business Systems for lets say Rs.16000/-. Then, Sharp Business Systems will sell it to the end consumer for Rs.20000/- as before.
So the cream of the margins and profit is enjoyed by Sharp Business Systems, which is a 100% subsidiary of Sharp Corp, Japan. This money never comes to the Indian shareholders, who might be left holding shares of just an outsourced manufacturing operation type company. "Redefining the role of Sharp India Ltd" indeed!
And I am quite positive that the resolution will be passed with the requisite majority, as always!

Whether things will progress as detailed above? I cannot claim that I know it for sure, only time will tell. But the changed structuring of the organisation surely seems to suggest so.

All hail the promoter!
God save the minority!

Cheers and happy investing!

(P.S. : After checking the market price of the stock out of curiosity today, I found it to be in the upper circuit!)

Killing your own idea!

2011-02-20T12:23:00.000-08:00

WHAT AN IDEA, SIRJEE!!!

Yes, this post is about investing. I am not going to talk about how great Abhishek Bacchan was in Yuva or how baaaaad he was in Tera Jadoo Chal Gaya.. (Didnt see the movie, the trailers were enough to scare me off!)

Anyway, lets come back to the point before I start talking about Drona and frustrate you all!! :-)

"Killing your own idea" is a concept that can save an investor's "synonym for donkey" time and again. Imho, any and every investor should understand this concept and try to apply it as much as possible. Lets see what it is all about...

The concept

The concept is pretty simple and common sensical. Basically try finding fault with any stock idea that you get. If you think something is good to invest in, try and find out as many reasons as you can, to come to a conclusion that it is not good to invest in. Try and kill your own idea as much as possible.

The process

The process is much more difficult than the concept. e.g. If someone asked you to describe yourself, how many negative points will you put forth? Similarly, when we like a particular investment idea, our mind automatically and subconsciously starts weeding out or justifying negative points associated with the idea. To counter this is extremely difficult, yet extremely important. (I also am not fully there yet). The first thing to do is to mentally disconnect yourself from the stock idea and look at it afresh. Be as skeptical and negative as possible. Best thing to do is, try and write down, point-wise, why that particular idea would be a terrible investment. You will, of course, be in denial first and will try to avoid and justify the worst things about the idea. But its a process and you will surely get there slowly. In the mean-time, what you can do is, ask a friend of yours, who hasnt seen the stock, to point out bad points about it. That should surely help.

The utility

Has this ever happened to you: you bought a stock after studying it properly. Few months down the line, some event unfolded which hit the company and the price sank. And you thought ' Oooo why didnt I think of that???' This happens to all of us a lot of times. We miss out some key point or factor, which seems obvious in hindsight a few months later. This happens because we have not taken a 360-degree view, we have not considered the negatives, we have not killed our own idea..

An example...

One idea I mercilessly killed recently was that of Gujarat Reclaim. Now, this idea seems actionable to a lot of respectable investors I know. But to each his own!
A bit about Gujarat Reclaim:

Essentially, the company recycles waste rubber. With rubber prices hitting the roof, the prospects of the company seem bright. Its the largest company in its sector in India.
I really liked the management of the company. They are very conservative, they have grown well, the books seem clean and the way the management talks makes me very comfortable. They also know their business and have been working continuously on technology.
Gujarat Reclaim has established numerous collection centers and agents, which supply the necessary waste rubber (essentially waste tyres) for recycling. (can be thought of as an entry barrier)
The company has also announced an expansion plan recently. All details can be found in the annual report.
The valuations are not very expensive. Market cap of about Rs.125 cr, 10 times trailing, 2% dividend yield, manageable debt on books, 18%+ operating margin.

So what killed the idea?

The above table shows the rupees per ton cost of rubber scrap and chemicals (raw materials) and the per ton selling price of reclaimed rubber (finished product) for various years. The last column shows the raw mat consumption as % of sales. It can be seen that while the rubber scrap prices have gone up 70% since 2005, the selling price of reclaimed rubber has gone up only 40%. Meaning, that the company has not been able to pass on hikes in raw material prices. There seems to be no pricing power. So will this situation worsen as rubber prices go up? (Since scrap rubber prices also go up). So, will this company benefit due to increase in rubber prices or will it be hit because of the same? Something to think about! (Btw, for the December 10 quarter, raw mat consumption to sales stood at 46.67%.)

I really like the company, but the valuations do not seem to reflect the above. They are not 'sitter' valuations. I will wait for the stock to correct, if at all, and then take a decent position in the same.

Cheers and happy investing!!

From Prof. Bakshi's blog

2011-02-20T12:17:00.000-08:00

Hello,
Prof. Bakshi has recently posted something very interesting on his blog. One can access the post HERE.
I request especially all my students to go through the same and participate.

Cheers and happy investing!

P.S. If you do not know who is Prof. Bakshi, then I sincerely believe you should search and read up all that you can on him. It will be a great education in itself!!

An update on stuff..

2011-02-04T01:18:00.000-08:00

Hello people. Well, you have had to bear with me and my blog for quite some time now. I had discussed some stock ideas in various posts before. So, lemme put out an update about what happened to all those stocks.

I had written about MTNL being a value trap on 21st April, 2010. The price has moved down from Rs.74 to about Rs.50. I still maintain it is a value trap. A company i will probably never look at, as an investment candidate.

I had written about Kesar Enterprises demerger on 21st April, 2010. The demerger is through, shares of new company Kesar Terminals have been alloted and listed. I did earn about 15% in the entire transaction. However, there was a huge delay in the entire demerger and listing process. What was expected to happen in 2 months took more than 6 months. The delay has hit my annualised returns :-( I have been a seller of Kesar Terminals above Rs.115. Kesar Enterprises was sold off around the ex-date itself at an average price of Rs.62.

I had written about Aditya Birla Chemicals being really cheap, on 27th April, 2010. Since then, the price has moved up from Rs.87 to Rs.140. The company is entering a capex phase, which could depress return ratios for a couple of years. It is still not very expensive. I do not have any position in the stock at present.

I had written about LG Bala and Gujarat Alkalies as shorter term positions on 27th April, 2010. Both the stocks moved up. I have closed my positions in both with profit of about 30% and 10% respectively.

I had written about Ashiana Housing on 28th May, 2010. The stock moved up well and was beaten down again as problems with Lavasa started. Delays caused by Lavasa debacle could hit profitability for the medium term for sure. I still maintain it to be an excellent company.

I had written about ACGL on 2nd June, 2010. The company reported phenomenal numbers in the recent quarter. Looks like Murphy's Law is not longer hitting the company. :-) The price has moved up from Rs.230 to Rs.350. Though margin of safety does not appear to be high at present market cap, there could be triggers like a merger happening, which could help unlock more value in the stock.

I had written about Phillips Carbon on 22nd June, 2010, in which I had said that even though it seemed to be in a sweet spot, I would not take a position in it. The stock price has moved down from Rs.186 to Rs.130 since then. However, here, I have been proven right for all the wrong reasons! The company did not report good numbers, as was expected. Further, a likely large acquisition by the company has dampened sentiment about the stock. Got lucky here! :-)

I had written about Binani Cement delisting on 25th November, 2010. The price has moved up from Rs.83 to Rs.91 since then. The reverse book building will start on 7th February, 2011. I intend to tender my shares at Rs.110. Let us see how it goes..

I had written about Dai Ichi Karkaria on 26th November, 2010. It is indeed an interesting case. Few readers also put across interesting points that I was not aware of. The price has moved down from Rs.48 to Rs.43. Worth another and even more indepth look for sure.

I had written about Alembic demerger on 31st December, 2010. I had advocated buying it below Rs.55. The price had not moved and looks like it wont come to my price at all. In that case, I will give this opportunity a miss.

I had written about Jyoti Structures on 12th January, 2011. I got out of the position on the ex-date itself (in hindsight, I got out at a very good price). I will be applying to the rights issue. Lets see how this one goes.

Well, there you go folks. Hope you had a good time at the blog. New ideas are a bit hard to come by still. Am looking at a few really interesting candidates. Will update soon.

Cheers and happy investing!!

Whose money is it anyway?

2011-01-13T11:54:00.000-08:00

There is a category of companies in the market in which a very peculiar situation is being played out. Just take a look at this;

Now, what is common in these totally diverse companies? All of their names end in "Ltd"? Umm, yup, but there is another thing common; all these companies have sold their businesses (assets only) and received cash (bigtime!) for the sale. It is a very convenient way for transferring ownership to others (read firangs) bypassing the pain of open offers/delisting etc etc.

The critical question is, why is the market not valuing these companies at least at the net cash on books? Why are these companies getting pathetically valued? And have the actions by these companies generated wealth/benefited the minority shareholders in any way?

Well, the answer is NO! Shareholders have rarely earned in all these situations. The primary reasons for this are:

Very little transparency: Rarely do the promoters/management of these companies share what exactly they intend to do with the money that the company receives. Which business will they put it into? Do they have expertise in any new business/venture? No-one really knows.
Getting into unrelated business: e.g. Laffans, which was a chemical company announced that they will not payout any money to the shareholders, and instead will utilise that money to get into logistics business!
Not sharing much money with the shareholders: In some of these cases, the companies do not payout anything as dividend to the shareholders. In some cases, the companies initiate a buyback. But in most, they retain most of the money in the company. Again, what will they do with it??
The 'gall bladder effect': When the gall bladder is full of liquids, one pisses it off. Similarly, when there is too much cash in the company, there is a high probability that promoters may piss it off!! :-) The money may be pilfered or spent on absolutely worthless stuff without any benefit to the minority shareholders.

To cite an example, let us take a look at Gwalior Chemicals (Geecee Ventures)...

The facts:

In June 09, Gwalior was trading at about Rs.100, with a market cap of about Rs.250 cr. Debt on books was Rs.150 cr. (Today, its CMP is Rs.51, with a market cap of Rs.105 cr.)
At that time, the company announced the sale of their entire operating business to Lanxess for Rs.536 cr. From the proceeds, they retired debt of Rs.156 cr and were left with about Rs.380 cr.

What they had said:

The management had announced that the company will return Rs.100 cr out of this money to the shareholders through dividend and/or buyback.
The management had also announced in the media that the company will invest the remaining money in specialty chemicals and power generation businesses.

And what they actually did:

The company did not pay any dividend. They, however utilised Rs.50 cr for buyback, in which the promoters also participated.
There is no word about any specialty chemicals/power business. IN FACT, the company recently amended its 'objects clause' in the Memorandum of Association and has now become an NBFC!!!!! So all this money will now not go into an operating business, but will be invested!! Where?? Who has the qualification and experience to handle such a large amount of money? No-one really knows. :-( Maybe the promoters have realised that being an 'investor' in others' business can be more profitable than doing business themselves. Hell, if all promoters start thinking and doing that, what will you and me do???!!! :-D

So whose money is it anyway?? The company's? The shareholders'? Or just the promoters'? Hmm...

What one should learn from the same is that, given this experience, the market will be very wary of such situations and will not accord them proper valuations. Therefore, before jumping into any such opportunity, one should surely think twice (minimum). These can very well end up being 'value traps'. (Recently, Riddhi Siddhi Gluco Biols has announced something similar. Let us see how that goes!)

Cheers and happy investing!

P.S. I am not at all saying that all companies have been unfair to shareholders. e.g. Piramal Healthcare has taken some good steps and have been transparent to some extent. All I am saying is one should be careful in such situations and not rush to invest, sensing value in the situation.

Jyoti Structures Ltd - Interesting rights issue

2011-01-12T07:28:00.000-08:00

Jyoti Structures Ltd (JSL) is basically a power EPC company, executing projects in power transmission, substation and distribution. The company has operations in India, Middle-East and Africa.

The company had recently announced a rights issue, the terms of which are as follows:

The company will issue 1 non-convertible debenture of Rs.120 for every 8 shares held.
Along with the NCD, 2 warrants, convertible into equity shares will also be issued ‘free’. Effectively, for every 8 shares held, one gets 1 NCD and 2 warrants.
The NCD will be redeemed after a period of 15 months at par. Till then the company will pay interest on the same @ 7% p.a.
The warrants will be converted into equity shares at Rs.120 within 18 months of the issue.
The record date for the same is 15^th January 2011. The stock goes ex on the 13^th.
Both the NCDs as well as the warrants will be separately listed.

The opportunity (?)

Buy shares of JSL before ex-date (a larger position can be taken in view of the ratio). Sell them on/after the ex-date.
After that, apply for the NCDs and warrants. (Apply for more than what you are entitled to. You might get lucky!) ;-)
So what one will be left with are the NCDs and warrants.
Hold on the NCDs or sell them off post listing. What remains with you are warrants which will be converted into equity at a later date.
However, till then, your capital does not remain invested. In future, at the time of conversion, if the price is above Rs.120, one makes profit. If not, just let the warrants lapse and you don’t lose anything. Heads you win, tails you don’t lose!

Is it that simple? ABSOLUTELY NOT!

Lets consider a few more points:

Wont the stock price fall on the ex-date? Wont there be a loss while selling the existing shares?

The warrants conversion price is almost the same as the CMP. Just like it happens post a QIP issue, I don’t expect the price to fall on the ex-date because of this event.

The NCDs are yielding only 7%. Could they list at a discount then? Alternatively, if one holds on to the same, what about the opportunity loss, since one is getting lower returns here than a regular bank FD.

This is a very valid point. There is an opportunity loss of about 2%, in case one holds on to the NCDs and I think they would surely list at a discount to the par value. One should keep that in mind.

Will the stock price rise in the near future? Will the price be more than the conversion price, at the time of conversion?

That is anybody’s guess!!! However, consider the following points:

At current market cap, the stock does not appear to be over-the-top expensive.
The company has an order book position of more than 2x FY10 sales.
The management is very clear that they do not take up orders which hit their margins. They do not want to grow just for the sake of topline.
Powergrid is expected to release orders in the near future. JSL could be a huge beneficiary.
Promoters have been buying material quantities in the recent past.

Although all this does not guarantee that the stock will move up, one should consider the same. And in case it does not move up by the time of conversion, one can just let the warrants lapse.

Effectively, one can create a convertible-equity-instrument, without having any capital blocked and paying little cost. The cost would be 2% on Rs.120 (NCD interest opportunity loss) = Rs.2.4, for 2 warrants. Which is Rs.1.2 per warrant. Interesting!

Views, opinions, brick-bats and ridicules are most welcome!

Cheers and happy investing!

Alembic Ltd - Demerger

2010-12-31T03:55:00.000-08:00

New year 'celebrations' are nothing but another excuse to drink. So wish you all a very very happy new year. :-)
Now that we have the 'happy new year' and all out of the way, lemme come to the point. Alembic Ltd is executing a demerger scheme. Let us see if there is any money to be made here.

Alembic Ltd is basically a pharma company, into API and formulations. The company can be divided into two parts; one which contains the entire pharma business, except the PenG business. This is a profitable business with 12-13% operating margins and 6-7% PBT margins. The other part contains PenG business, land and power assets. The PenG business is a loss making business, as detailed later.

The scheme:

Under the scheme of demerger, the first part of the business (the good part) will be transferred to Alembic Pharma Ltd. (Alembic Pharma (APL) is currently a wholly owned subsidiary of Alembic Ltd.)
Alembic will retain the second part (PenG business, land, power assets).
The total debt of Alembic will be split into 85%(APL) and 15%(Alembic)
Shareholders of Alembic holding 1 share will get 1 share in Alembic Pharma.

The shareholding:

Public holding in APL would be lesser, since Alembic already holds some shares in APL.

The facts:

Currently, the market is valuing Alembic at Rs.900 cr mkt cap and EV of about Rs.1280 cr. On a PE basis, the stock is currently quoting at about 20x.
The pre-demerger numbers of Alembic also include those of PenG division. This is a loss making division of the company, with Rs.115 cr revenues and Rs.24 cr loss before tax for FY10.
If the FY10 numbers are split to reflect the demerger effect, it would be as follows:

The opportunity:

Let us try and value the two businesses separately:

Alembic Pharma Ltd:

This company would contain the API and formulations business (domestic as well as export). FY10 revenue attributable for this company was Rs.1030 cr, with operating profit margins of around 12.7% and PBT margin of 6.8%. EBITDA of Rs.130 cr and EBT of Rs.74 cr.
The business is profitable and growing at 10-12%. APL also has recognized brands such as Althrocin, Roxid and Azithral in its portfolio.
Post demerger, APL would have no further need of expansion. Consequently, the free cash generated by the business would be utilized for repayment of debt. (APL debt Rs.350 cr. Alembic total cash from operations for FY10 Rs.127 cr). Consequently, in the EV, the debt should be replaced by market-cap going forward next couple of years.
Alembic’s peers and companies in the sector quote at premium valuations, as much as 12x EV/EBITDA and 24x TTM EPS.
Valuing Alembic at lower multiples of 10x EV/EBITDA(FY10) and 15x FY10 PAT, market cap comes to around Rs.950 cr. Value per share = 950/18.84 = Rs.50/- (to be used as a reference only).

Alembic Ltd:

Post demerger, Alembic will be left with the loss making PenG business, land and power assets. Also, it will have 29.5% stake in APL. Residual assets of Alembic would be Rs.250 crores, which is 35% of gross block.
On a conservative basis, I would value the PenG business at ZERO (although it certainly should be accorded some value).
Alembic will hold 29.5% of APL, which is worth Rs.280 cr. I am giving a 90% haircut to this and taking only 10% of the value, Rs.30 cr. (Pessimistic calculations help provide some MOS)
The power assets consist of 3 cogen plants, total 11 MW and 4 windmills of total 5 MW. Since they are used for captive consumption, I would accord them ZERO value.
Alembic would also have land of 115 acres at Vadodara. Out of this, the manufacturing facilities occupy about 45 acres. So what should be valued is only 70 acres. As per information obtained, the land rate in the area is Rs.600-700 per sq.ft. I would value the land at Rs.500/sq.ft. Valuation works out to Rs.140 cr.So, the residual business of Alembic may be valued at Rs.30 cr + Rs.140 cr = Rs.170 cr, or Rs.13 per share.

Total valuation comes to Rs.63 per share. (Rs.50 for APL and Rs.13 for Alembic)

To sum up:

Dilution in APL is killing off possible arbitrage in the deal.
To get some margin of safety, stock can be bought below Rs.55 per share.
There is a probability that BOTH the companies may get delisted for some period of time. (Got to get clarification from the CS on this).
regarding the time involved in this deal happening, the management had this to say in a recent TV interview: "The demerger is in process right now. We are awaiting some final approvals which we should hopefully get by the end of December and if all the timelines go well then hopefully by about March we will look at listing a separate company."

At CMP of 67 bucks, I do not think there is much money to be made. Lets hope that the stock drifts down. Position should be taken only if the stock comes at a price where there is comfort.

Cheers and happy investing!

Dai-ichi Karkaria - A value investor's delight?

2010-11-26T04:20:00.000-08:00

The reason why I am calling it a 'value investor's delight' is as follows:

* The debt of Rs.1 cr is a deferred sales tax loan.
* Additionally, Dai-ichi holds 8100 shares of Bank of India (market value Rs.37 lakhs) and 57000 shares of Clariant Chemicals (market value Rs.4 cr).

At present market cap, the company is quoting just at its cash and cash equivalents. Plus, there are additional investments in shares, as detailed above. The operating business is available free! Indeed, a value investor's delight.
Sounds good? Well lets get some more dope on it...

The company has some real estate asset on which it receives yearly lease rent of Rs.1.5 cr. This asset (which could be a property in some posh area) would be very valuable. No details of the same are available. But this value provides some more MOS to the buyer of the business.
The business of the company is cash flow positive and has been generating cash from operating activity.
In April 2010, the company completed buyback of 1.55 lakh shares at an average price of Rs.35.74 per share. (Equity pre-buyback was 76 lakh shares)

So the next logical thing to do would be to see performance of the operating business:

Dai-ichi is essentially a specialty chemicals company. More details of the products can be obtained here.
The company has 2 subsidiaries, Basic Oil Treating India Ltd (no longer a subsidiary) and Dai-ichi Gosei Chemicals India Ltd.
The operating performance of the company for the past few years has not been very encouraging, as follows:

As can be seen, over the last 5 years, the operating business of the company has not gone anywhere in terms of topline growth.
However, a slow change is seen in the efficiency of operations, with the business becoming profitable at the operating level. This is a positive sign.
The company has recently entered into an agreement with CTI Chemical Asia Pacific, a subsidiary of a US specialty chemicals MNC. Due to this agreement, Basic Oil Treating India Ltd, which was Dai-ichi's wholly owned subsidiary will become a 50-50 joint venture of with CTI. Details of the agreement can be found here. Essentially, this deal values Dai-ichi's stake in the JV at Rs.3.7 cr.

So should one buy shares of Dai-Ichi? I, for one, would not be buying the shares for the following reasons:

Though this is a great opportunity for someone who wants to buy the entire business, its not so for a small minority shareholder. I, being in the later camp wont be buying.
The company is not strong on the operating front. Some cases launched against it by clients like ONGC don't speak too well about the core business.
Financially too, the operating business is not making money. The company's profitability has sustained only due to the income it receives on its investments.
The cash, which is presently on the books, has come on the balance sheet just last year. Now, whether it will stay there is a big question. Typically, in small companies like these, cash moves around as per the wishes of the promoters! So, I wouldn't want to take that risk.

In short, value exists, but VALUE IS VALUABLE, ONLY IF ITS VALUE CAN BE PROPERLY VALUED!!!

In case of Dai-Ichi, the value might not be valued! I would prefer to stay away from it.

Cheers and happy investing!!

Binani Cement - Delisting

2010-11-25T22:59:00.000-08:00

A big hello after a long time folks. And my apologies for not being able to post often. However, past performance (or lack of it) may not be sustained in future! :-) So, unlike the recent past, I aim to be more proactive now.

Coming to the point, the post is to discuss the Binani Cement delisting play and a possible opportunity to earn some dough here.

Some basics:

As can be seen, at present EV, Binani Cement is not very expensive. However, given the present scenario in the Cement sector, it is not very cheap either!

Let us now look at the shareholding pattern:

The promoters need 20.1% to delist. J P Morgan Special Situations Mauritius Ltd. and Ganesha Prime Holdings Mauritius Ltd (a subsidiary of Stansen Holdings Singapore) together hold 21.4%. So the delisting would require the co-operation of only these two parties.

So let us check out the history of what these big guys have done:

J P Morgan had acquired 25% stake in Binani Cement @ Rs.24 in 2005. Out of this, they disposed 10% @ Rs.75 through an offer for sale in 2006-07 IPO. They further sold 3.4% more in the 2010 buyback @ Rs.90. They hold remaining 11.6%.
Ganesha had also acquired its 10% stake pre-IPO. They haven't sold anything yet.

Now to the key question; what would be the delisting price?
The floor price has been set at Rs.82. The company had recently done a buyback @ Rs.90, in which JP Morgan had participated. So logically, they would not tender shares at a price less than Rs.90. Being the majority non-promoter shareholder, they can surely influence the price. In my view, the minimum delisting price would be Rs.90.

Let us also do a risk analysis:

Valuation risk:
I have not participated in a lot of delisting cases, because valuations did not make sense. However, in the present case, the valuations are not very expensive. This risk is low in my opinion.

Event risk:
This is the risk of the event not happening at all and the delisting getting cancelled. However, the promoters have already taken all the steps to go for delisting. They have increased their stake through buyback. The shareholding is also not scattered, making delisting relatively easy. The promoter who is delisting (Binani Industries) has about Rs.500 cr cash on its balance sheet. The financing for delisting is also not a problem. The event risk is therefore low in my opinion.

Promoter risk:
This is the risk of the quality of the promoters. The Binani Group has not been minority shareholder-friendly in the past. Their actions in Binani Metals in the past speak for themselves. In my opinion, the promoter risk is high. I wouldn't trust them 100%.

Time risk:
This is the risk of the delisting getting delayed. However, I think that the time is ripe for them to delist, considering the depressed market conditions and negatives associated with the sector. The postal ballot for going ahead with the delisting has already been sent. In my opinion, it will take 40-45 days for the reverse book-building process to start. The time risk is therefore low, in my opinion.

To conclude:
With a floor price of Rs.82, Binani offers an opportunity with relatively less downside. A minimum 10% upside is visible, with a holding period of about 2 months. Delisting can be very much successful, due to the concentrated shareholding. However, given my discomfort with the promoter quality, I would not take a huge position in this situation.

Cheers and happy investing!

Where will the 'market' go now?

2010-09-02T03:30:00.000-07:00

Answer: No-one knows!

Well, sorry! If you thought this was a post which will give you details as to where the market (index) will go from the present level, you are going to be disappointed. Because, I honestly do not know. (No-one does!)

The reason for writing on this topic is as under:
Me and some investor friends were recently having a discussion on this topic, as to 'market kahaa jayega'. Some poeple presented logical and valid arguments, along with supporting data, as to why the index should fall. Others presented a counter-view which was equally logical and supported with data. This got me thinking and the result is that you people have to read another post of mine!

Where will the index go next? Well, each person will have his own view and logic on this topic, depending upon one factor; how much is that person invested!

For those who are heavily invested and are sitting on little cash: This camp will always say that the market will go up. Reason? Well, its because they are already invested to a great extent. People belonging to this camp will read up on and pay most attention to all positive factors, macro and micro. (This happens sub-consciously and not deliberately.) They will gather and collect data which supports their argument that the market has to go up. They will sub-consciously disregard or give little importance to negative facts or find justifications against them. They will always reach a conclusion that the market has to go up. And the sad part is, they think that they have done this 'logically', without any bias.

For those who are on huge cash and are not heavily invested: This camp will obviously say that the market has to go down. (That is why they are on cash, right?!) The people belonging to this camp will do the exact opposite of the people belonging to the first camp. They will gather information and data which shows an extremely grim and negative picture which is conclusive 'proof', supporting their hypothesis. Again, the sad part is that they will sincerely think that they have arrived at the most logical conclusion. They too will sub-consciously ignore all the positive factors and fixate upon the negative ones.

So what can we learn from this?

Our mind is extremely well designed to JUSTIFY. By hook or crook, the mind will find out reasons to justify an action. In the present case, the action is of being invested, or being on cash. In any case, the mind will work in a way to accurately find out reasons to justify this action.
Ideally, these reasons should be found first, then the action should follow. However, here, it will inevitably happen that the reasons follow the action. Is there anyone who is fully invested, willing to say that the 'market' has to fall?? Nooo! That person will obviously say that the market will rise! It happens all the time.
So, what should be done about this? The answer is pretty simple; DON'T TRY TO GUESS WHERE THE MARKET IS GOING! It is a waste of time and energy. We invest in individual stocks. So doesn't it make sense to concentrate our attention and energy on those stocks and companies, instead of trying to time the market?
Stocks should be bought and sold on their own merit, irrespective of the market conditions. Personally, I think that is the best way of doing things!

I agree that saying all this is much more simple than actually doing it! Not many will have the courage to buy, when everyone around is saying 'the market will fall'. Very few can do it. But then, very few earn extra-ordinary returns in the market, right?

Cheers and happy investing!

Bring out the animal in you!!

2010-07-29T13:27:00.000-07:00

If one looks hard enough, one can see 'investing' all around. One can learn something or the other about investing from virtually all aspects of life.
A good investor needs to possess some qualities. A lot of these are 'in-built', others can be learnt.
In this post, an effort has been made to compare certain qualities of a good investor with those possessed by various members of the animal kingdom!! (If you think I am going bonkers, I wouldn't blame you! But still, do read on.)

Please note that:

All investors may not possess all the qualities mentioned and honestly, its not necessary too.
What is most important is that the investor displays the right quality at the right time. (not all the time)
Some of the qualities mentioned are mutually exclusive.
Please don't take everything in this post 'literally'.

Sloth - Inactivity

The first one on our list is the Sloth. This tropical rain-forest mammal is an amazing creature. It moves at a top speed of 0.15 mph! 'Sloth' also happens to be one of the seven deadly sins, denoting extreme apathy and inactivity.

In today's 'investing' world, where one is constantly pounded with information, where the need to do something all the time is all-pervasive, where inactivity is unheard of, investors can surely take a cue from the good old Sloth. A lot of times, the best thing to do is to do nothing at all!

As Warren Buffett quotes "Lethargy, bordering on sloth, should remain the cornerstone of an investment style."

Of course, one should not be a sloth all the time. Inactivity is most called for when one can see frenzied activity all around. In short, be a Sloth selectively. :-)

Honey Badger - Fearlessness

Just a few months ago, the indices were at record lows. Valuations in a lot of companies were tempting, to say the least. There were even some well established companies with market cap less than cash on books! But how many of us bought big? Very few. Why? Afraid that the overall stock prices will tank further?

Well in that case, one can learn a lot from this mean little guy, the Honey Badger. The Honey Badger has been entered in the Guinness Book of World Record as being the world's most fearless animal. About the size of a house-cat, a Honey Badger in a bad mood will attack almost anything that moves. One can find youtube videos of Honey Badgers attacking leopards and lions!

Again, if done inappropriately, this attitude is plain stupid. But one should certainly be fearless specially at times when everyone around is afraid.

Mama Turtle - Emotional Detachment

The female turtle is probably one of the most emotionally detached dudette ever. She comes ashore, lays its eggs and just leaves. She neither cares for the eggs nor for the new-born. They are left to fend for themselves!!

Now i agree this is totally extreme! The only thing we should take from this is emotional detachment.. in this case, towards stocks, not children! A lot of times, for a variety of illogical reasons, investors become emotionally attached to stocks and don't sell them even at ridiculous valuations. Other way round, investors don't buy 'sitters' due to certain mind-blocks or biases. (happens with me too) Emotions often cloud logic and reason. One should not be emotional while investing. So, while emotions may play the central part in other walks of life, in investing, the lesser their involvement, the better.

House Lizard - Cut Your Loss!

The common house-lizard (chipkali) will cause most of the female readers to scream with disgust. But there is something to be learnt from this velvety creature too. :-) When faced with danger, the lizard detaches its tail, which keeps on wriggling on its own. As the predator gets distracted by the wriggling tail, the tail-less lizard makes good its escape. Better to lose a tail, than to lose its life, right? The tail will grow back.
In investing too, sometimes, we need to lose our tail. (not literally of course!). E.g. When we realise that buying a particular stock was a wrong decision and its now quoting at a small loss, we should sell it off immediately without waiting for it to come 'cost-to-cost'. A small loss due to an incorrect decision is perfectly acceptable than losing a big chunk and peace of mind.

Hyena - Opportunistic

This rather repulsive looking creature is a super opportunist! Hyenas are opportunistic feeders and have a keen sense of judgement and risk. They typically trail the bigger cats and feed off the leftovers of their kill.
Similarly, in investing, one should be on the prowl for opportunities where the risk-reward ratio is in one's favour. Special situations (mergers, demergers, acquisitions, takeovers, slump-sale, etc), rights issues and warrants are prime opportunities available for opportunistic investors and decent money can be intelligently made in them. One needs to keep one's eyes and ears open for such opportunities always.

Cat - Curiosity

"Curiosity killed the cat"..so goes an idiom. Well, we aren't planning to do any killing here, don't worry. Cats, by nature are extremely curious. You can play with a cat for hours and it will still want more. They like to explore, try new stuff and often get into trouble.
I believe that an investor also should be just as curious. Curious with regard to companies, their products, the nitty-gritties involved. Curious with regard to learning new stuff, appreciating new techniques and always wanting more. The day one's curiosity ends is the day learning stops. And in investing, one should continue to learn all the time. So a big MEOW to all..

Sheep - Humility

I also do not know why, but sheep look so very humble, don't they? Well, at least to me, they do! (dunno if they are really so) The stock market is a place where humility is rare. People often claim to be far more than they are or something they are not! Successes are trumpeted and failures are quietly swept under the carpet. A lot of people think they are the best, much better than everyone else! In such scenario, a healthy dose of humility is an absolute must. One should never think of oneself as the greatest investor on planet earth. The market shows such people their rightful place soon enough.

Crab Spider - Patience

This cute looking fella is the Crab Spider. The most curious feature of the Crab Spider is that it does not weave webs. It does not go hunting after insects too. It sits still patiently, allowing the prey to come within striking range. It can sit still for long periods of time waiting patiently for the next yummy meal.
Now thats patience. Waiting and waiting for the right opportunity to come by. Today, patience is totally lacking in the overall investment community. The definition of 'long term' has become very flexible. In such a scenario, one cannot help but admire the Spider Crab! :-)

Black Panther - Solitude

This fabulous looking creature, the black panther (leopard) lives alone its entire adult life, except during mating. (Hmmmm)
Anyways, relating this to investing, as my good friend Dnyanesh says 'investing is a lonely profession'. I completely agree (although loneliness and solitude are vastly different concepts). As individuals, we are different in all respects. Our investment ideas and processes are equally different. Our decisions are also, in a way, unique. Getting together in groups and discussing investments will only lead to confirmatory biases taking over. Buffett has also strongly advocated the limited use of committee-style investing for getting extra-ordinary returns. Taking cue from the black panther, one should 'hunt' alone. (Also, the idea of the lone hunter/lone ranger sounds so Hollywoodishly cool!)

Dolphin - Have Fun

Dolphins are synonymous with fun. Have you ever seen a sad dolphin?! Even when they are working (a.k.a hunting), they jump around and seem to have a good time.
Similarly, if one is not having fun in one's work, that work is not worth doing, imho. Investing is tremendous fun. (at least I think so) So enjoy, have a good time and make good money. If your investing activity is synonymous with ulcers, blood pressure, tension and sleepless nights, believe me, its just not worth it. Having fun will make you a better investor and a better human. :-)

Well, there you have it. Some of the key qualities of good investors that one can observe in nature. (I am not at all claiming that the above list is exhaustive).
I love to co-relate multiple disciplines and different streams of study and knowledge with investing. It gives one a fresh approach and perspective. If you also liked what you just read (hope you are still awake), then do read this book. Its mind-blowing and a trillion times better than what you just read.
Would love to hear your comments..

Cheers and happy hunting!!!

Some good books worth reading...

2010-07-26T05:39:00.000-07:00

"A man who does not read good books has no advantage over the man who cant read!" So says Mark Twain.. And it is so very true. There is a world of knowledge out there. And its yours if you choose to.
Personally, I love to read. Due to time limitations, I read books about investing and psychology only. These books have taught me a lot. They have awed me, humbled me and I have communicated with the greatest minds on earth through these books! Here is a list of good books you also can read and learn from. For simplicity sake, I have categorized them based on various criteria. The order in which the books are mentioned has no significance whatsoever.

The Buffett/Graham/Munger category:

1) Security Analysis - Graham & Dodd
The original text of value investing, first published in 1934. The book is currently in its sixth edition and it is still on the best-sellers list. It is proof that investing is indeed timeless. The book is extremely technical in nature. Readers who are not serious will find it daunting. (To be frank, boring!)

2) The Intelligent Investor - Graham
The follow-up to the Security Analysis book, The Intelligent Investor is yet another classic. Much more simplistically written, I believe it is a must-read for any budding investor.

3) Buffettology/The New Buffettology - Mary Buffett
An excellent book to read about Warren Buffett. Written in simple language.

4) The Snowball - Alice Schroeder
Size-wise, this is the biggest book on Buffett! :-) Personally, it was not big on value addition, for me. After reading this book, one's respect for Buffett as a human being and family man (not as an investor) would surely come down.

5) Poor Charlie's Almanack - Munger
Reading this book has been quite an experience. It takes a huge amount of mental effort to understand and absorb this book. Munger is amazingly smart, equally funny and kinda whimsical.

6) How to pick stocks like Warren Buffett - Timothy Vick
Gives a step-by-step and simplified analysis of Warren Buffett's stock picking approach. But, do remember that understanding Buffett is comparatively easy, implementing Buffett is damn difficult.

There are countless books written on Buffett. Be careful about choosing which one to read. Most of them contain the 'Buffett' name just to sell the book.

The Value Investing/Investing category:

1) Common Stocks & Uncommon Profits - Phil Fisher
One of the best books on investing, imho. Fisher should be called as the Father of Simplicity! Reading this book will change your whole outlook towards investing and how you look at companies.

2) Value Investing: From Graham to Buffett and beyond - Bruce Greenwald
Another amazing book. I have been fortunate enough to attend a seminar by Prof. Greenwald and hear him talk. It was a great experience. Definitely a book worth reading.

3) Value Investing - James Montier
For me, Montier is a rockstar! He is one of the world's leading authorities on Behavioural Finance, a subject close to my heart. Montier's work on value investing is also very much worth reading.

4) The Little Book of Value Investing - Christopher Browne
An amazing book. Simplifies the 'investing in a business' approach to a great extent.

5) The Focus Investor - Rockwood
Though not strictly a book on value investing, this book provides an altogether different approach to investing by combining varied investing philosophies. Surely worth reading.

6) The Dhando Investor - Pabrai
For me, this is a coffee table kinda book. Imho, the book is over-rated.

7) Margin of Safety - Klarman
This has to be on your must-read list. An amazingly written book on the concept of margin of safety, which is central to the value investing philosophy.

8) One up on Wall Street - Peter Lynch
9) Beating the Street - Peter Lynch
Both are good books by a very street-smart investor. Lynch was not at all in the value-investing camp, but he earned phenomenal returns (the best ever) as a mutual fund manager.

10) Reminiscences of a Stock Operator - Edwin Leferve
This is not a book on investing as such, its written by a hard-core trader. But its an amazing and wonderful read. One can learn a great deal about the psychology of the markets from this book.

11) Its when you sell that counts - Cassidy
One of the very few books written on the art of selling! Contains a lot of stuff on behavioural finance too.

The Behavioural Finance/Psychology category

1) Predictably Irrational - Dan Ariely
A superb book for anyone interested in psychology. Full of examples and experiments.

2) SWAY - The irresistible pull of Irrational Behaviour - Braffman
Well, the title says it all, doesn't it?

3) Panic - Michael Lewis
A history of how markets panic. Will help you to be ready next time!

4) Behavioural Investing - Montier
Another excellent book on the application of behavioural finance in investing.

5) Seeking wisdom: From Darwin to Munger - Peter Bevelin
Another fascinating book, written in an interesting way.

6) Chaos - James Gleick
A very very complicated book imho. Not directly related to investing, but covers multiple fields and aspects.

7) The (mis)behaviour of markets - Mandelbrot
This book takes a look at the classical financial and valuation models and theories and then takes them apart!

The Entertaining Category

1) Liar's Poker - Michael Lewis
A hilarious look at what happens in a typical investment bank. Amazing book.

2) Where are the Customers' Yachts - Fred Schwed
Another excellent and entertaining take on how Wall Street operates. A must-read.

3) Fooled by Randomness - Taleb
4) The Black Swan - Taleb
Taleb's books take time to understand and digest. But are very absorbing. These two books always help me remain within my aukaad! :-)

5) Damn Right - Janet Lowe
This shouldn't really be in the entertaining category, but I personally found it amazingly entertaining. Anyways, anything on Munger has to be witty and entertaining! Do take a look.

These are few of the books I have read and I would recommend that you also take them up. It would be a life-altering experience. I am in the process of reading more books and would update any good books I come across.. Currently, after going through a Montier phase, I am taking up The Art of Strategy which was sent by my good friend Carlos. Btw, Carlos, if you are reading this, I expect a huge number of comments (a.k.a. brickbats) from you, since 'books' is a matter close to your heart. :-)

Cheers and happy reading!!

P.S. I do not have a soft copy of any of the books, so kindly do not ask me to email soft copies n stuff..

Investing in Holding Companies

2010-07-05T12:59:00.000-07:00

One of the more popular 'theme' in the 'theme-based-investing' categories is investing in Holding Companies.
For the un-initiated, let me first explain in brief what this theme is all about...

There are some listed companies, whose main 'business' is to own and hold equity shares of other companies, most of which are listed group companies, run by the same management.
Basically, instead of the individual promoters owning shares of all their group companies, all these holdings are held in a single company. This is called as the 'holding company'. (May or may not be a 'holding company' from accounting point of view.)
E.g. Bajaj Holdings and Investments Ltd. is the holding company of the Bajaj Group. It holds 31% stake in Bajaj Auto, 35% stake in Bajaj Finserv and 24% stake in Maharashtra Scooters, among its other investments.

So what is the 'accepted' logic for going about investing in such companies? Well, it goes like this...

Such companies hold shares of other listed companies. The market value of these investments (since they are also listed) will normally be higher than the value of investments shown in the books of the holding company.
In many cases, the market value of the holding company's investments (net of debt) is much higher then even its own market-cap.
So, investors argue that the holding company is undervalued, since it has 'assets' whose market value is greater than its own market-cap.

An example will clear this further;

Nalwa Sons Investments Ltd. (NSIL) is the holding company of the O.P. Jindal Group. It holds shares of Jindal Saw, Jindal Southwest, JSW Holdings and JSW Steel.

If one were to buy NSIL at current market-cap of Rs.500 cr, one would get investments worth Rs.2200 cr. Seems like 'buying a dollar for fifty cents' huh?

This, precisely, is the investment argument that the believers in this theme of investing put forth. Further, while calculating the 'fair value' of the holding company, investors in general 'give' a discount to the market value of its investments. (The usual norm in the market is to accord a 50%-60% discount.) Thereby, fair value of NSIL should be about Rs.1300 cr (60% of market value of investments). Hence, at the present market-cap of Rs.500 cr, NSIL is a 'screaming buy'.

Now, while this logic seems reasonable, let me ruin your day by putting forth my thoughts on the same...

Strategic stake v/s financial stake: There are some investments which are financial in nature (to be sold later, preferably at a profit and make money.) There are other investments which are strategic in nature (never meant to be sold, but are meant to be held on and on, as part of some strategy.) Holding companies are created from the strategy point of view and their investments are necessarily strategic in nature. Holding companies stake in other group companies is in the nature of the 'promoter holding'. If this stake is sold, the group will lose control of the company. (In effect, it will never be sold)
Does market value matter??? Sooo, since the investments made by holding companies are strategic in nature, these will never be sold, but held on till eternity! So, if the market value is never going to be realised (by selling off the investments), should it matter? Should one even bother calculating the market value of the holding company's investments?

Please keep in mind that I am talking about only holding companies. If a company holds shares of an un-related listed company, the market value of these shares should be given due consideration, imho.

Well then how can these holding companies be valued?

In my view, these companies should be valued like any other business. Its revenue is the income it receives on its investments (dividend). Usually, expenses are limited and most of the revenue is reflected as the profit.
One can multiply this profit by a PE ratio accorded to a zero-growth company (e.g.Graham suggests 8.5 PE ratio) to arrive at the fair value of the holding company.
This is merely a suggestion and cannot be the only way to value a holding company. To each his own!
Further, investments other than those in group companies should be given their fair market value.

Of course, when one values holding companies like this, the resulting 'fair value' will be far farr farrrrr lower then the prevailing market cap, meaning that these companies should not be bought. Well, this happens to me all the time and till date, i have ended up buying only one holding company...

I am well aware that not everyone will agree with me. (In fact, i think most investors wont!). Valuation is an art and is very relative. The way I look at holding companies will not be the way you do!

But isn't that the beauty of investing? Well can all agree to disagree on certain fundas and still, all of us can earn money!! E.g. My good friend Ayush is a firm believer in the holding company investing theme (and I am not!) And i know it for a fact that he has earned a lot of money in this theme (and I have not!) Ayush, party-time dude!

As usual, the purpose of this post is to start off discussions on the topic. I do not claim that my views are right and others' are wrong...

Do pitch in your views on this theme..

Cheers and happy investing!!

Phillips Carbon Black Ltd - In a Sweet Spot!

2010-06-22T11:32:00.000-07:00

There will be some people who will surely run away after seeing that Phillips Carbon Black Ltd (PCBL) is a RPG group company, hence the warning! :-) Also, please read my disclosure at the end of this post.

PCBL is India's largest manufacturer of Carbon Black. It is also the largest exporter of carbon black in India, deriving around 20% of its revenues from exports. The company has three manufacturing units with an installed capacity of 2.7 lakh MT, as shown in Fig. 1.

Carbon black is basically a black powder, used as a reinforcing agent in rubber. The tyre sector accounts for more than 60% of the carbon black consumption in India. The principal raw material for carbon black is carbon black feedstock (CBFS), which is a crude derivative. Hence, its price is always pegged to the price of crude. (Fig. 2)

Consider the following points about the carbon black industry in India:

Only 2 players, PCBL and Hi-tech, a unit of Aditya Birla Nuvo, control over 80% of the country's carbon black market. It is a virtual duopoly. (Total size of the market is approx 6.2 lakh MT)
However, the duopoly does not result into any pricing power for the pair. The risk of cheap imports (a.k.a. dumping) always ensures that the carbon black prices are benchmarked with international prices. Carbon black is a commodity business, with operating margins between 13-15%.
Currently, the industry is protected by an anti-dumping duty which is in force.
Tyre manufacturers are on a massive expansion spree in India, which will inevitably result into improving demand for carbon black, which is expected to grow at a CAGR of around 8% over the next three years.

Sounds cool? So what is PCBL doing to take advantage of this situation?

Of course, PCBL is expanding capacity from the present 2.7 lakh MT to 4.1 lakh MT (0.9 lakh MT Greenfield at Mundra and 0.5 lakh MT Brownfield at Kochi). These capacities are expected to be operational towards the end of this calender year. Considering the customer-industry growth, this expansion seems to be well-placed.
PCBL has also made its maiden international foray by forming a 80:20 JV with Vinachem, a Vietnam based company for manufacturing 1 lakh MT of carbon black in Vietnam.
During the manufacture of carbon black, a combustible waste gas is released, which has to be flamed up. PCBL has established co-gen power plants, where this waste gas is used as fuel to generate power. The company is targeting expansion in this segment too, from the present 44.5 MW to about 70 MW. This move augurs well for the company, since there is virtually no feedstock cost (no coal/gas required). The per unit cost of generation is below 40 paise/unit, while the power can be sold on merchant basis at above Rs.4/unit. This segment wont add much to the top-line, but will add tremendously to the bottom-line.
For re-using this waste gas, instead of flaming it up, PCBL is also eligible for carbon-credits. (Not clear exactly how much)
Additionally, PCBL also has investments in listed group companies, with market value of investments of about Rs.100 cr. (Since i do not believe in the 'holding company valuations' theme, this is totally meaningless for me.)

PCBL is currently valued by the market as given. One can check the detailed financials of the company here. The trailing valuations surely look cheap. With the expansion expected to be operational by the end of this calender year, the carbon black business can do close to Rs.190 cr operating profit for FY11. (Assuming 2.8 lakh MT sale @ Rs.50000/MT and operating margin @ 13%). All the figures have been taken on a bit lower side, to be conservative.

The power business, on the other hand, is an even better story. By the end of next year, PCBL will have operational power capacity of 70 MW against 44.5 MW currently. Out of this, about 30 MW would be used by PCBL and the remaining 40 MW would be sold to SEBs. When the company starts generating power at full capacity, the operating profit from the same could easily be more than Rs.100 cr.

Surely sounds like a steal? Well there is some stuff I am afraid of:

This RPG group company may do something RPG-ish and screw up returns for shareholders of PCBL.
Volatility in crude prices as well as forex could distort future numbers.
Like PCBL, Hi-tech also has aggressive expansion plans. If tyre demand were to taper off or is not as high as expected in future, both these players will sit on their expanded capacities, looking at each other! This is typically what happens in a lot of commodities and is exactly why investing in commodity companies should not be one's first choice.

To sum-up, PCBL is currently in a sweet spot, with decent visibility of revenues as well as profits over the next two years. The EPS growth could also be accompanied by a PE re-rating, once the 'power story' of PCBL gets marketed well! ;-) On the basis of current as well as forward valuations, the 'bright future' does not seem to be priced-in at the present market-cap..

Cheers and happy investing!!

P.S. : Investing in commodity companies is risky. Investing in a RPG group commodity company is, therefore, risky-raised-to-two. So, considering the illustrious history of the RPG group, I have yet not had the guts to invest in this company. I do not have any position in PCBL.

An interesting (and profitable) experiment..

2010-06-08T05:57:00.000-07:00

As I had mentioned in my introductory post, as a hobby, I teach in 3 B-Schools in Pune as a visiting faculty. Besides the regular syllabus, I discuss lots about psychology, investor behaviour etc in class. Sometimes, I also conduct certain experiments where my poor students become the guinea-pigs! (evil smile)

I recently conducted an experiment in Behavioural Finance which i had adapted from one of the many books i read on the subject. The results were pretty interesting!

I started by telling the students that I am going to sell them a Rs.50 note. The concept of 'buying money' itself was a bit hard to digest for some, but what the hell. I also told them that this note was signed by a very famous personality and they could get at least Rs.1000 if they sold that autograph. (This was a mere distraction; the note was signed by just me, but I refused to tell them whose sign it was!!) Almost everyone started fixating on whose signature it might be.

Then I asked them how much would they pay for it. Most of the students quoted an amount up to Rs.50. Some dare-devils also quoted beyond 50. I asked them if they would be ready to buy this Rs.50 note for Rs.5. Everyone said yes. So I said lets have an auction. The auction had the following rules;

The bids would start at Rs.5 and in multiples of Rs.5 thereafter.
A person can talk only to place the bid during the auction and for no other reason. (So that no-one influences others)
The highest bidder wins the auction and gets the Rs.50 note.
The second highest bidder (runner-up) has to pay me an amount equivalent to his bid. (This was the critical condition which no-one really understood. They were all busy thinking about the signature!)

Well, the auction started at Rs.5 and rapidly went up to Rs.45. Almost everyone was interested in bidding. I now told them that the signature was mine and the Rs.50 note was worth Rs.50 only! Then the fun started. (Evil smile again)

One chap bid Rs.50 for the note. (After all, it was Rs.50 for a Rs.50 note..no-profit-no-loss right?)
Then i told the Rs.45 bidder that if he loses, he needs to pay me Rs.45 as per the rules. So, in order to avoid the loss, he needed to win. Naturally he bid Rs.55.
Then I came back to the Rs.50 bidder and told him the same thing. He too placed a higher bid at Rs.60 in order to avoid loss.
None of them could afford to be a runner-up, otherwise they would have to pay me the amount of their bid. The bidding frenzy continued unabated.
In a matter of minutes, the bidding had reached Rs.210!!! It was then that I had to decide to stop the auction.
Well, the chap who had bid Rs.210 won the Rs.50 note. And the runner-up who had bid Rs.205 had to give me Rs.205. In effect, I sold a Rs.50 note for Rs.(210+205) = Rs.415! Sweeeet!

We all have observed similar things happening to us during investing in the stock market. So what are the lessons we can learn from this exercise;

One should become a teacher and swindle unsuspecting students. Its quite profitable. (Ok ok, thats not a lesson to be learnt. In fact, I gave them all chocolates out of the money I collected from them!!)
We all fixate and concentrate on un-important stuff and become blind to the obvious. Just like everyone fixated on the signature on the note so much that they failed to carefully consider the trick condition of the auction! While investing, we must give due importance to all parameters and conditions and not get excited or influenced by some single attractive parameter. We wouldn't want to miss out on something important, would we?
We are extremely loss-averse: Our brains are wired in such a fashion that we will do anything to avoid losses. Its a natural human tendency. In the experiment, everyone started with the objective of earning profits, but ended up trying to avoid losses!! The loss aversion of humans plays out well. We have to learn that there is no need to pay more than Rs.50, for something which is worth Rs.50. This was a losers' auction and those who participated were destined to lose. Similarly, in stocks, if one has made a mistake, then one should get out immediately upon recognising it, irrespective of the loss.

Emotions and thought patterns are truly wonderful (or harmful) and it is fascinating to study them. We just had an introduction to some concepts of behavioural finance and i intend to post separately on each topic.

Hope you all enjoyed this one. (Including any students of mine who are reading this!)

Cheers and happy investing!!

ACGL - Murphy's Law Holds True!

2010-06-02T14:20:00.000-07:00

"Anything that can go wrong, will go wrong". So says Murphy's Law. And in case you want a real life example of the same, look no further than Automobile Corporation of Goa Ltd. (ACGL).
ACGL, whose promoters are Tata Motors and the Govt of Goa, is one of India's largest bus-body manufacturers. It also produces sheet metal components. But things just haven't gone ACGL's way. I honestly feel bad for the company's management.

In 2007, the company raised money through a rights issue to double capacity. And then the global economic crisis hit. Talk about perfect timing! Bus exports fell and ACGL, with its expanded capacity and lesser demand, suffered a lot.
The company had decided to move its sheet metal business to Pune, to make Goa a dedicated bus-body manufacturing operation, since the scale had increased. Of course, then the global economic crisis hit and this plan had to be shelved. The company has now bought a plot at Dharwad for this purpose.
Well, things improved gradually and the company seemed to be limping back to normal. But then, Murphy's Law!! The labour union declared a strike and also prevented any workers from entering the premises. The seriousness of the strike can be judged from this article.

Well, feeling bad for the management and all is fine, but the critical question is, does the company have any value? Now since the company is going through a really bad phase, lets try and find out the bare minimum valuation that can be given to the company;

ACGL is being valued by the market as given. It is important to remember that the cash on books is because of the company's rights issue and is not fully internally generated.

Anyway, the company has two divisions, Sheet Metal Components and Bus Body Building.

The Sheet Metal Component Division is smaller in size and is profitable. This division's performance was hit in 2009 because of closure, for shifting to another location.

So what kind of valuation should one give to this division? Since we are trying to calculate the minimum value of the business, let us value it at 4x FY08 PBIT of Rs.7 crores. This division may be valued at Rs.28 crores.

Moving on, to the bigger and more important Bus Body Division;

This division has not performed efficiently. In 2009, the PBIT per bus body was down to a record level of Rs.35307/-. This was essentially because the company got more orders for smaller buses, in which margins are lesser.
The current capacity of the division is 4800 bus bodies. The only thing lacking is orders!!! As and when the operations become normalised, the company should be able to sell at least 4500 bus bodies a year, generating PBIT of at least Rs.18 crores at Rs.40000 PBIT/bus body. Both these numbers have been deliberately taken on the lower side. (In fact, all requirements for hiking this capacity to 10000 bus bodies are complete).

Ok, let's day-dream here a bit. Let's suppose that the scenario improves drastically and the company manages to get large orders on the domestic as well as foreign front. It is able to operate at full capacity of 10000 buses! What would happen then? Even if we consider PBIT/bus body of Rs.40000/-, the potential for PBIT of at least Rs.40 crores exists!

Those numbers felt nice huh? Good, now back to reality! :-)

One can surely give this business a value of 8x PBIT, resulting into a 'normalised' valuation of Rs.144 crores. (Rs.18 crores x 8 times)

So let us see what can the fair value of the business be;

I have assumed that cash Rs.25 crores has been eroded during FY10. Hence, in the adjoining valuation, cash has been taken as only Rs.40 cr. The valuation works out to Rs.212 cr against present market cap of Rs.147 cr!! Sweeeeeeet!!!

Well, before you place the 'buy' order with your broker, please read The Good, The Bad and The Ugly of the company!!

The Good

ACGL has strong promoters in the form of Tata Motors. TaMo has been supporting the company throughout its times of distress. TaMo has also increased its stake in ACGL over the last 2 years.
The conservative valuation of ACGL works out to much more than the market cap.
The business potential is huge. With rapid urbanisation and transportation requirements, large demand for buses is expected.

The Bad

Due of one reason or the other, historically, ACGL has failed to deliver and live up to its potential.
Our valuation is at 'normalised' operations. When will the operations normalise? Well, thats anybody's guess. Absolutely no visibility is there.

The Ugly

ACGL's promoters (Tata Motors) have a JV in India with one of the world's largest bus body manufacturers, Marcopolo. Details can be read here. In my view, this is a huge conflict of interest. The promoter has a JV, which competes directly with its subsidiary! So how does TaMo divide its business between its JV and its subsidiary? Not really clear. Big risk here..

Well, to conclude, one can say that ACGL definitely has value. The key question is, when will the company get back on track so that this value gets unraveled? Or will Murphy's Law continue to wreck havoc with ACGL? Time will tell...

Cheers!

Ashiana Housing - An Interesting Case

2010-05-28T14:47:00.000-07:00

I know, I know.. The first question that you would pop is; what is a dude, who claims to be 'value-based', doing with a real-estate company! That’s a very fair question, considering the way most builders/real estate players around us operate. But Ashiana Housing is different! Also, it is important for a good investor not to have mind-blocks against companies or sectors. So let us study this company and decide whether there is any value in it.

Consider these facts:

Unlike most other real estate players, Ashiana does not go bonkers over land bank. It keeps on maintaining land bank which would give it project visibility for the next 5-6 years, at any point of time. Further, it enters into agreements with existing land owners, thereby reducing initial capital requirement. As a result, the company is debt-free and yet has excellent revenue visibility.
Ashiana commences a project only after detailed study and after getting visibility of customer advances. The management states that "we won't start a project where we feel we won't get customer advances". This reduces the working capital requirement too.
Ashiana concentrates on Tier 2 and 3 towns. It enters any area only after proper study and also by establishing partnerships with local developers. As a result, it has built up excellent reputation and goodwill in towns like Bhiwadi, Jaipur and Jamshedpur, where it mainly operates. Better to be a biggish fish in a small pond huh?
Ashiana has created a niche in the form of developing 'old age retirement homes' under the brand name 'Utsav'. It currently has two such schemes, one at Jaipur and the other one at Lavasa, Pune.
Ashiana also maintains the projects that it develops, through its subsidiary Vatika Marketing. This ensures that the quality of its projects stays high even after completion/handing over.
Ashiana's accounting policy also appears to be very conservative. The company accounts for sales on a percentage of completion method. (For more details, please refer to the annual report.)

The company appears to be good huh? Well a good company can become a good investment only at a good price and valuation! So now that we have seen some qualitative aspects about Ashiana, lets study the numbers:

Market cap is Rs.225 crores at CMP of Rs.125/-. (Just FYI, the stock had gone down below Rs.30 in Jan 09. And the price has gone up more than 3 times in the past 1 year. :-) I am sure many of you will now be like "its gone up too much, let's wait for it to come down". As is commonly observed, this wait increases, as the stock falls, only to repent after it probably goes up again! Same old, same old!)
The company's financials are in good shape. In order to keep this post shorter, I am not providing a table of the financials. One can check out the financials of the company here.

Ashiana's ongoing projects:

The company has ongoing projects involving saleable area of about 68 lakh sq ft. The company has about 50 lakh sq ft additional land bank. Of the projects detailed above, Utsav - Jaipur and Pune are retirement resorts, Village Centre is a Hotel (100 rooms) cum retail centre owned by Ashiana while others are regular group housing schemes. Except Rangoli Garden, which was launched recently, the company is expected to complete all the other projects by the end of FY13. If we adjust the above total saleable areas as per Ashiana's share as well as a haircut for already constructed area, its about 30 lakh sq ft to be completed upto FY13. This gives excellent revenue visibility.
In one of its investor presentations, the management had claimed that they expect to recognise operating profits of Rs.225 crores upto the end of FY13 (Cumulative). That's equal to current market-cap! Let us see if this is possible.

Ashiana's average realisation per sq ft for the December 09 quarter was Rs.2084/-, while average cost of construction was between Rs.1000-1100/-. That gives an operating profit margin of Rs.900/sq.ft. Let us take it as Rs.800/- to be conservative.
As per Dec 09 management concall, the management's target is constructing 11 lakh sq ft in 2009-10, 13 lakh sq fr in 2010-11, 15 lakh sq.ft in 2011-12 and 18 lakh+ in 2012-13. (Not all this will be booked as sales immediately).
Booking of total 30 lakh sq ft sales and consequently, Rs.240 cr (Rs.800x30 lakh) operating profit upto 2012-13 seems quite achievable. Impressive indeed. Like me, you also need to do some basic excel based calculations to arrive at likely profit numbers. Its quite simple.

There are of course, significant risks, but they are more macro in nature. The real estate sector itself could get hit due to:

Possible hike in interest rates, which discourages customer spending on real estate
Implementation of the proposed Direct Tax Code, where tax benefit for housing loans could be removed. This, i think, is a significant risk to the real estate sector.

One needs to keep these risks in mind. Though they are macro in nature (which means we will probably never be able to predict or time them), in my view, they are quite critical.

Ashiana Housing is expected to declare its FY10 results tomorrow (May 29, 2010). Although, in my view, this company's performance should not be seen on a quarterly basis since quarterly numbers could be quite lumpy. To sum up, I think Ashiana is a wonderful company, with ethical and conservative management which has expanded judiciously. The projects in hand as well as future plans of the company appear good and one should surely keep tabs on Ashiana Housing Ltd.

Cheers and happy investing!

Hindsight Bias - Don't Watch Your Behind Too Much!

2010-05-14T05:34:00.000-07:00

Things are so obvious. Its obvious that valuations in late 2007 were crazy. It was a bubble for sure and one just had to sell at that point.
Its also obvious that valuations in early 2009 were equally crazy. One just had to buy at that point.
These market tops and bottoms are so obvious. One really wonders why most of the market participants didn't act on it...
Well!! If investing was so easy, there would be no other profession! :-) All these facts I mentioned above are obvious today. They were not so obvious at that time. In fact, everything that has happened in the past (not just in investing) seems pretty much obvious when we think of it at present. We sometimes lament at obvious mistakes made in the past, or sometimes justify them, so that we don't have to lament! Think about it, isn't that right? This is the basic funda of the concept of 'hindsight bias'.
Wikipedia defines hindsight bias as 'inclination to see events that have occurred as more predictable than they in fact were before they took place.' Boy, thats one big sentence. In essence hindsight bias is the phenomenon where we look at events in the past, and convince ourselves that we knew they were going to happen and were prepared for it. While in fact, we just weren't.

I like parties. Parties are fun and can be useful too. If I get surrounded by people talking about stocks and offering me tips, its probably time to sell, whereas if everyone is avoiding me, its probably time to buy. (Well, to be honest, I go to parties for the booze, not to take buy/sell decisions!). Anyway, the following is a very common conversation, which happened last year. We all must have heard such stuff at parties and social gatherings.

Mr.A: Boss, bazaar dekha? Its gone real bad man..Sensex below 10000!
Mr.B: Of course, what did you expect yaar? You really believed in the 'India shining story' and all? It was so obvious that the crash was going to happen. In fact, I had told my friend Mr.C in December 2007 itself, that dude, sell off. We can't sustain these crazy levels. And see what happened..
Sounds familiar? Such dialogues like 'maine bola tha', 'I had told you that time only', etc are extremely common, specially in equity investing.
Unfortunately, since I am also part of the conversation, I ask Mr.B: Sirjee, since you knew of the crash so confidently before it happened, did you sell your stocks? Or better still, did you go short on the index? I am sure you must have earned a truck-load of money. 2008 must have been the best year of your life!
Mr.B: Umm, wellll actually I did not sell my stocks. Umm, you see I am a long term investor. The losses at present are just 'paper losses' and i am sure that the prices of my stocks will rise a lot again. So its quite ok since I think long term.
Me: Well, to quote Keynes; 'in the long run, we are all dead!'
Mr.B laughs awkwardly and drifts away. Thank god!
This is a great example of how we think about past events at present. About how we justify our past actions to convince ourselves that we were right.
Another good example is that of technical analysts on TV. Now i do not have any disrespect towards any person. Neither am i saying that technical analysis does not work. It may work for some people. I am not one of those.
This is what is typically said in the morning, before the market opens:

Nifty closed at 5155 yesterday. We remain cautiously optimistic (my favourite market term) on the market. On the higher side, nifty would face resistance at 5182. If that resistance is overcome, nifty could shoot up to 5200, which would be a major resistance. Beyond 5200, nifty would face resistance at 5215 and at 5032. On the lower side, support is seen at 5140. If this support is broken, a very strong support is seen at 5120, below which nifty has a support at 5100. In case 5100 is broken, nifty could free-fall to 5075. We would see strong support coming in at 5060.’

WHAT EXACTLY SHOULD ONE INFER FROM THIS?

Anyway, in the evening, after the market is over, the following is said:
As expected, nifty made an upmove to reach 5182 levels. Overcoming this resistance, it shot up to 5210, beyond which profit-booking set in. Nifty fell to 5150, which acted as a major support, but in the end-of-the-day’s trade, the bears took the nifty down to the support of 5120, to close at 5125.
Perfect post-event analysis, which is essentially not value-adding. Technical analysts are a great example of hindsight bias. (Again, no disrespect meant, these are just the facts)
In the market, everyone has an opinion and everyone is expert at analysing things beautifully after they happen. And everyone has that goody goody mushy mushy feeling that we knew it all along. Well it ain't so!
Now that we know that, maybe unknowingly, we can get exposed to hindsight bias, lets see what damage it can do to an investor;

We don't learn from our mistakes: One of the biggest aspects of investing is learning from mistakes, so that they are not repeated. But those affected by hindsight bias think that they never make a mistake! So the learning gets stunted. Not a good position to be in..
Gives a false sense of security: Investors affected with hindsight bias think that they have successfully predicted and knew all the happenings in the market. Hence, they remain blissfully confident that they will be able to do this in future too. In reality, this might not happen and can lead to significant losses.

So now that we know about this phenomenon, maybe next time, we'll all introspect before we claim to have predicted something that has already happened before it had happened.

To avoid being affected by hindsight bias, we must all be honest, introspect, acknowledge our mistakes sportingly and let bygones be bygones.

Cheers and happy investing!

P.S. My apologies for the cheesy title.. :-)

God..the market is falling...what next??

2010-05-04T15:46:00.000-07:00

I think this is the most-asked and discussed question these days. And it sure is a million dollar question. (Although 'million' seems small these days..one has to talk in trillions to get noticed!)
Well I have been asked this question a lot in different forms lately. The same question comes disguised in forms like 'market kya lag raha hai?' or 'teji ya mandi' or better still 'where do u see the market 2 months from now?'
Arey! If i 'saw' the 'market' 2 months from now, i wouldn't bother with all the research and analysis, would I? ;-)
Anyways, just thought that this is a good time to post on this topic. And I thought it better to post in a question-answer form, to be concise and to-the-point.

Que: Where do you think the market will go from here?
Ans: Well, i think it will either go up or it will go down. Theoretically, it can remain unchanged!!!
Frustrating answer? Well, in my defense, it was a frustrating question! To frustrate you even more, let me answer the question with more questions..
How does it matter? 'Market' as everyone refers to, is the broader index, which is a sweat-inducer for many people. So the 'market' consists of only 30 (sensex) or 50 (nifty) stocks. Now, are these stocks our investment universe? Do we trade in Nifty derivatives? If the answer to both is 'no', then one really should not care about where the 'market' will go. We invest in individual companies, so why not try and focus our attention on that, instead of trying to second-guess the index movements? How does the index movement matter, if we are neither investing in the index nor solely in its constituents?
Have you ever been successful at predicting index movements? I don't think anyone can say 'yes' to that. Predicting index movement correctly and consistently is impossible, as per me. The index is a hotchpotch of many companies, whose individual prices move due to a variety of factors. All these movements together move the index. So, in my view, predicting these individual movements and the overall movement is not possible. (You might have guessed by now that technical analysis does not work for me and I don't even try to do it.) So, all-in-all, predicting index movements is an exercise in futility. So I have made my peace with the fact that I am incapable of predicting where the sensex/nifty will go and that I will never ever be able to 'time' the 'market' properly.

Que: O really? So you mean to say that the index movement has no impact on overall stock prices? Boss, when it rains, everything gets wet. The index is a representation of the macro scenario. You just cannot afford to ignore the index.
Ans: Well, although i do agree partly about it, I would ask one more question. Have you been able to predict the 'macro' picture properly and consistently? You foresaw in 2007 that the world economy would be going through a tough time? Or that it would plateau and rebound quite fast a short time later? Trying to predict the macro (one has to study the world-wide scenario these days!) picture is like trying to put handcuffs on an octopus! Just like an octopus has too many arms, here too, there are just too many variables/factors and one will surely miss some. (if not many). So, while studying/reading up on the broader economic picture does add to knowledge and has made me more alert recently, I have been unable to incorporate the same successfully, while investing in companies. I wonder if your experience has been different.

Que: Bummer! What the hell man? You are negating everything. So what do you think one should do?
Ans: Well, so sorry to be 'the irritating pest who opposes'. But what if we do the following:
1) The absolute golden rule: BUY CHEAP. Now one needs to remember two things here. When I say 'cheap' I am referring to the valuations, not to the price. Second, 'cheap' is a relative concept. What seems cheap to me may look ridiculously expensive to you and vice-versa. So, you should develop your own parameters while looking out for 'cheap' stocks, vis-a-vis their perceived intrinsic value.
2) There should be a decent margin of safety (MOS) too. This would give you the necessary buffer in case things don't go as you plan. One can build good MOS by being pessimistic! If you analyse a stock assuming worst case scenarios going forward, and it still looks cheap, you have a decent MOS. You should, of course, think straight and control your emotions while doing this. Remember, you are doing this to determine whether you can buy, not to justify your decision of buying!
I have been thinking a lot lately on building MOS in volumes! I intend to express my thoughts on this topic in a separate post later.

Que: Well, what if I don't find any cheap stocks?
Ans: The most likely reason for this would be that you are not looking hard enough! Value exists at all times, one just needs to look deeply and dig it out. But still, if you are really not finding any cheap stocks, sit on cash amigo! Unlike mutual funds, we individual investors have the luxury of taking cash calls. There is absolutely no compulsion to be invested all the time in equity. If cash gives you comfort, so be it!

Que: Well what if your so-called cheap stocks also fall?
Ans: Well that would be good news, right? Something cheap has become cheaper! The stock is on sale! If your analysis is strong and you have the conviction, you should buy more. This is where the concept of 'MOS in volumes' can be useful.

Que: Hmm.. Well what should an individual investor do, if he wants to start investing now?
Ans: Well, first, he should introspect as to why he wants to start investing now?!! Is it because he has seen people around him earn a bundle in the market and he has become greedy? If that is the case, its the worst reason to start investing and such an investor needs to think a lot more before entering the equity market.
My humble advice to a new investor would be to be extremely picky and choosy while buying stocks, leave cash on the table and start off by building small positions. You may earn small on the upside but at least you won't lose big on the downside! Build your own conviction as time passes and then graduate to bigger positions. The market is a great teacher, try to learn as much as possible!

Whatever I have written above is from the point of view of 'investing'. Traders and speculators, for whom a company is merely a price quote on a ticker, may think differently and I humbly and readily agree to all their objections and surrender without a fight!
Well, those were my thoughts on the topic. Hope they made some sense. I would eagerly welcome your views and comments. Learning never stops and I would love to learn a lot from you.
Cheers and happy investing!!

Funda-mental Shorter Term Positions!

2010-04-27T14:37:00.000-07:00

In case you are expecting any intra-day, intra-week or even intra-month calls, please read the following first:

For me, a 6 months time frame would be short term, a time frame upto 2 years would be medium term and beyond 2 years would be longer term time frame for investing.

So for those of you, whose average holding period typically lasts a few hours, this post would be of no interest!

Also, let me clarify that this activity has never been my focus area, nor is it my main objective for being in the market. Hence, under this 'theme', I would advocate taking a small, 2-3% of the portfolio position and take advantage of a 30-35% spike in price, typically over one or two quarters. One should also consciously ensure that one's position size in this activity does not increase with consistent success, if any! ;-)

Let me explain myself with the help of a couple of examples:

LG Balakrishnan & Bros Ltd.

CMP: Rs.265/-
Mkt cap Rs.204 cr (EV Rs.313 cr)
Trailing PE: 11x
Dividend yield (normalised) 1%

Consider these points:

LGB is basically a 2 wheeler auto ancillary company. The company manufactures motorcycle transmission chains, sprockets and small parts, using fine blanking process.
The company's brand Rolon commands over 50% OEM and replacement market share. Clients include all 2 wheeler manufacturers in India.
The balance sheet is in decent shape, specially after the sale of its industrial chains business last year. Valuations are not really cheap, but cannot be called over-the-top expensive either.
Bajaj Auto is LGB's biggest customer. Now, upto November 2009, Bajaj Auto's monthly sales were quite sluggish. November onwards, the monthly sales have really taken off, as often discussed in numerous newspaper articles. (Monthly bikes sold 56% up in Oct 09, 137% up in Nov 09, 85% up in Dec 09, 112% up in Jan 10, 80% up in Feb 10 and 85% up in March 10)
So will this have a positive spill-over effect on LGB's sales? Will LGB's March 2010 results look really good, specially because of the low base effect? Time will tell..
Mr.Market usually rewards good results with a spike in the market price, as there occurs a 'reversion to mean'; since in light of good results, the stock suddenly starts appearing cheap. When this happens, the spike in price can earn an investor a tidy profit.
A visible negative: LGB has some optionally convertible bonds, to be converted in 2012. This could lead to dilution in equity. Anyways, under this theme, one would not stick around until that time!

Interesting? Well, here is another example..

Gujarat Alkalies & Chemicals Ltd.

CMP Rs.119/-

Mkt cap Rs.870 cr (EV Rs.1183 cr)

Trailing PE: 8x

Dividend yield 2.5%

Consider these points:

GACL is a diversified chemical company, but is primarily a caustic soda manufacturer. It is also the country's largest caustic soda manufacturer.
In mid 2009, caustic soda consumption in the US turned sluggish due to overall depressed conditions. (US is the largest producer of caustic soda). A lot of mass scale dumping of the commodity in India took place.
Prices of caustic soda crashed in the country. Here is a dated ET article about the same. Prices crashed from Rs.22000-25000 per ton to below Rs.10000 per ton!
The industry appealed to the government to levy safeguard duty, which was levied in December 2009. Notification.
Post safeguard duty, the prices of caustic soda have started rising again and are now above Rs.20000 per ton. A recent news article..
So, with increase in realisations, will GACL report better numbers in March 2010 and June 2010 quarters? Raw material prices (salt) have not increased a lot.
Andhra Sugars has a caustic soda division. The March 2010 results of Andhra Sugars show a 90% increase in the caustic soda segmental profits. This could be a pointer to the likely results of companies in this sector.
A visible negative: GACL has announced a mega expansion plan, for which it will have to take up significant debt and maybe dilute equity too.

I would re-iterate that putting money under this theme is an extremely risky proposition. Second-guessing near term results should not be an investor's main activity. (Watching good movies can be! :-) )

I would never advocate taking a major portfolio position under this theme, but it is an interesting way of looking at things nevertheless!

Also, if one has taken a position under this theme, a spike in market price is all one looks for. (Something like a 30-35% spike can be aimed for in most cases). Once the spike happens and the 'reversion to mean' takes place, the objective of buying the stock gets fulfilled. One should immediately sell off the stock, once it becomes fairly valued. One should not allow greed to take control and hope for higher market price. (Even if it happens later, fine, let others earn too! :-) )

So, one need not speculate/punt while taking shorter term positions. Such positions can make your portfolio go that extra mile.
Reading newspapers, industry journals and talking with industry people is the best way to get information which will help you take such calls.
If you get any, do let me know! :-)
Cheers!!!

Aditya Birla Chemicals - Perplexingly Cheap!

2010-04-27T01:44:00.000-07:00

The purpose of this post is to discuss only the valuation of the said company. I have not discussed the company's business strategy/its expansion plans/sector prospects or any such criteria. In the process, I would also like to discuss 'valuation' as a general concept, not specifically related to this company.

Some stocks in the market are cheap..others are CHEAP.
Aditya Birla Chemicals (ABCL) probably belongs to the latter category.
Aditya Birla Chemicals Ltd is a chemical company belonging to the Aditya Birla Group. (I think that was the least-value-adding sentence ever! :-) )
ABCL's main product is Chlor Alkalies (chlorine and caustic soda). One can have a look at their products here.

ABCL is valued by the market as follows:

"Results of the quarter ended December 31, 2009 has been effected due to annual planned shutdown of power plant taken in the month of Nov´09."
One should take this factor into account while looking at the trailing valuations.
Seems cheap huh?

Well, if you had invested in this company on 26/04/2006, you would have made a total (not compounded) return of 32% in the last 4 years. Now, i am a very conservative fellow, but this kind of return would not excite even me! Dont get me wrong, I really do not care about a stock's historical price movement.. this was just to give you a perspective. :-)

Now let us look at the company's historical performance. I have tried to list down basic financials, which can give us an idea of its past performance.

Growth: ABCL has shown consistent growth over the past 5 years.
Cash-flow: ABCL generates a decent amount of cash. This has led to the entire growth being financed through internal accruals over the past years. The company has not diluted capital and has, in-fact, repaid debt consistently.
Margins: Being a commodity business, margins can fluctuate. 35% operating margins can be considered as normal. (Margins are higher than its peers like Gujarat Alkalies and Chemicals)
Valuations: Extremely low, consistently! The market has neither fancied this stock, nor given it decent valuation ever.
In fact, it can be observed that, over the years, as the company has improved its financials and performance, it has become cheaper!!!

So whats wrong? Why is Mr.Market giving this company such pathetic valuation?
Now I agree that a commodity-type business will never get high valuation, but should the valuation be this low?

Let us look at some typical factors which lead to a company being accorded very low valuation: (My comments are in red)

Dishonest/inefficient management: ABCL is a Aditya Birla Group company. One can say with near certainty that the management is neither dishonest nor inefficient.
Dubious financials: The numbers do seem to be in place. I do not believe that there is any problem with the numbers.
Products with bleak future: This also does not seem to be the case. ABCL's products are well in demand. The company is also getting into more value-added products.
Absence of growth: Mr.Market typically accords low valuations to businesses where growth is severely depressed. This also does not seem to be the case here.
Extremely low margins: Businesses with very low single digit margins are accorded low valuations. This also does not seem to be the case here.
Low dividend distribution: Yesss!! This could be one of the reasons for the low valuation. ABCL has never distributed more than 11% of its profits. In the small cap space, investors generally prefer companies paying out more dividend. However, as long as the company's return ratios remain high, i am comfortable with low dividend payout.
Who will look at a boring commodity-chemical company?? Could this be the reason? Well, if yes, I would be very interested in investing in the company.
ABCL's website does not have an 'investors' section: ok ok, now i am being ridiculous! :-)

Well, then, what could be the reasons for such low valuation being accorded to the company? It is pertinent to note that these valuations have been depressed for years together, not just in the recent past. More importantly, how long do you think will the company keep on getting such low valuation?

Questions questions!! Is there a clear answer? Well, i invite readers to contribute their thoughts, to my thoughts! I am a firm believer that valuation is more art than science and such discussions add great value.

Looking forward to your comments..

Cheers and happy investing!

Analyst Bias

2010-04-22T00:45:00.000-07:00

"Research Analyst"... Probably the best profession in the world! Here's why:

Unlike other professionals like Doctor, Lawyer, etc., one does not need any specific qualification to become a research analyst.
There is virtually no penalty/answerability for going wrong (or even horrendously wrong). Think about it. (Of course, an analyst will be answerable to his boss, who can go wrong himself! :-) )
The analyst gets to blame others all the time. E.g. If a company does not declare results as per the analyst's 'projections', the analyst gets to say that the company has 'underperformed'. Arey!! How can the company ' underperform'? Isn't it the analyst who has 'underperformed', who has not made correct and logical assumptions to arrive at forward numbers? But no! Its always the company and its management who underperform! Sweet! :-)

Research analysts are known to have gone phenomenally wrong (and occasionally, phenomenally right) on the investment advice they dole out. Of course, there exists a big conflict of interest, since most of the analysts are employed by brokers. So the basic objective of their research is to generate brokerage for their employer, and not necessarily the welfare of investors! ;-)

Anyways, enough with the pointless analyst-bashing, partly because i am an analyst myself!
The purpose of the post is to discuss the phenomenon called 'analyst bias'. Now, this affects all investors and not just analysts. So it makes sense to know about it..

Let us see how an analyst should make a recommendation, logically. After that. we shall see how an analyst who is affected by 'analyst bias' makes the recommendation. Damodaran has written on this concept in his books.

The logical thought process of a research analyst:

Now, lets look at the thought process of an analyst affected by 'analyst bias':

As one can see, the entire thought process of an 'affected' analyst gets inverted. Instead of starting with research and ending with an opinion, the analyst has started with an opinion and follows it up with research!

I do not mean to demean analysts per say. Unfortunately, even though this affects all investors, the phenomenon is called as 'analyst bias'. Think about it..how many times have we bought stocks, just because someone gave us a 'tip'? And afterwards, we end up rationalising our decision one way or another.

So how to escape and guard against analyst bias? One very logical approach is to do original research, filter away the noise and ignore 'tips'. Another way is...

Remember this handsome gentleman? For those of you who are not into movies as much as i am, this is the character 'two-face' from Batman: The Dark Knight. He can provide us with an answer to our problem!

Don't get me wrong. I am not asking you to become disfigured, yet cool! :-) What we need to learn from this is about having a bit of 'split personality'.

What if we do this.. For any company that we think is a 'buy', we prepare a 'sell' report on it! I agree that this is extremely difficult, given our natural thinking patterns and biases. It takes time. So the next best thing is to ask someone (some friend, maybe) to give as many 'sell' points for the company as possible. This would help us come across points and arguments, that we might have unknowingly ignored, since we considered the stock a 'buy'. This would help broaden our view and take better and informed decisions.

So there is a lot more to movies than just entertainment after all!! Psychology and behavioural finance are absolutely fascinating and i intend to post more on these topics. Hope you will enjoy them as much as i do.

cheers and happy investing!!

Kesar Enterprises - Seems Sweet!!

2010-04-21T06:42:00.000-07:00

Statutory Warning: Kesar Enterprises is a sugar company!

In spite of this, if you still have any interest left in this post, please read on! :-)

Background:
Kesar Enterprises (KEL) is a sugar company based in UP. It also has small divisions like power generation from molasses, seeds, smart crops, etc. The reason i am writing about this company is because it is demerging one division, which has the potential to create substantial value to the shareholders.

The situation:
Along with the sugar business, KEL also has a liquid storage division. The company had announced the demerger of this division into a separate company, Kesar Terminals and Infrastructure Ltd. (KTIL), which would of course be listed. The demerger has already been sanctioned by the Mumbai High Court and all that remains is for the company to hold a Board Meeting and announce the record date and other details. The ratio for this demerger has been fixed at 7 shares of KTIL for every 10 shares held in KEL.

I have tried to value KEL and KTIL directly on market cap basis, without getting into per-share calculations.

Valuation of sugar business:
Analysing sugar business and investing in sugar companies is not my cup of tea. I do not like the business at all and have never analysed/studied any sugar company. So i faced a big problem here and i feel this is the weak link in my hypothesis.
So, of course, i had to talk with someone who analysed sugar businesses. After talking with quite a few people, there was consensus that the replacement cost of a plant of KEL's size would be at least Rs.250 crores. KEL has debt of Rs.165 crores for FY09. So that gives us an approximate market cap of (250-165)=Rs.85 crores. This is close to the present market cap of KEL. We can conclude that the sugar business is fairly valued. (Again, i am stressing that this is just a rough calculation. Since i do not like the dynamics of the sugar industry in India, i have not even studied the sector/any sugar company and hence, cannot value sugar businesses properly.)

Valuation of the storage business:
KEL's liquid storage division has become an annuity kind of business for the company. For FY09, the business had a topline of about Rs.14 crores and PBIT of just over Rs.7 crores. After considering interest on debt to be transferred to KTIL Rs.13 crores and taxes, KTIL can have PAT of Rs.5.5 crores. KTIL has plans to grow into an integrated logistics player, from having only storage business. Companies in this sector get valuations in excess of 20x trailing. To be conservative, we will give KTIL a valuation of 10x.. that seems quite reasonable right? Soooo PAT of Rs.5.5 crores and a PE of 10x should give KTIL a market cap of Rs.55 crores at least.

Great!! Now lets summarise...

This demerger could create substantial value for the shareholders. Post demerger, KTIL has substantial growth plans of its own, but lets not get into that, since i am approaching this as a 'special situation' case and not as an investment case.

Now lets take a look at the risks/limitations in this entire exercise:

Inability to value sugar business with conviction: As i have already mentioned, its just not something i am particularly good at (like a lot of things!). So if there is anyone out there who can value KEL's sugar business properly, I am more than willing to buy you a nice single malt ka bottle! :-)
Time risk: All the legal and procedural formalities for the demerger have been completed. All that is left is for the company to announce the record date and go ahead with the demerger. It is very much probable that the company might declare the record date, along with the results announcement. (before April 2010-end). So in my view, the time risk is not significantly high.

To conclude, it does seem that if one buys shares of KEL at current market cap, it would prove to be a good special situation position. The MOS comes from the current market cap of just Rs.80 odd crores, which is quite near to the value that KTIL could command and the fact that all legal formalities are over.

Cheers and happy investing!!

MTNL - Value Trap?

2010-04-21T00:30:00.000-07:00

A typical value investing principle states that any company, whose market cap is less than its cash on books, is a buy. (It should be preferably debt free.)

Now lets look at MTNL in this light.
CMP Rs.74/-
Market cap Rs.4600 crores
The company is debt-free.
Cash on books as per March 09 balance sheet Rs.4803 crores
Investments on books as per March 09 balance sheet Rs.465 crores.

Even if one does not consider the investments, the cash on books alone is more than market cap. Sounds yummy? Well then how bout this BSE announcement on 22nd March 2010:

Mahanagar Telephone Nigam Ltd. has informed the Exchange that 'In the matter of deduction under section 80IA of the Income Tax Act, 1961, the Income Tax Appellate Tribunal has allowed to MTNL a further proportionate relief for the Assessment Years 1998-99, 1999-2000, 2001-02, 2002-03 and 2005-06. As a result of this order, MTNL would be entitled to an estimated amount of Rs.1380 crores which would include an Interest amount of Rs.624 crore approximately'.

If we add this to the March 09 cash on books, MTNL would be having cash of Rs.6183 crores. Against a market cap of Rs.4600 crores! It doesnt get better than this huh? Blind buy? Sitter? Well not quite.. Lets see some reasons why...

Lets look at the quarterly results broadly. The company has been making losses at the PAT level. But if we add back depreciation, the company is making cash profits. Thats good right? Welllll...if we look into it more, 'other income' is a major chunk, which is essentially the income earned on its huge cash reserves. If we reduce other income from the results, it is evident that the core business of the company is burning cash.
As a business, MTNL's performance has been really poor, to say the least. During the era when other telecom companies grew by leaps and bounds, MTNL has barely managed to grow. Also, there are issues like a large employee base, inefficiency, limited growth opportunities, etc.
The upcoming 3G auctions will take huge chunk out of MTNL's cash reserves. MTNL operates in prime circles, where the bidding for 3G can prove to be expensive. (i have no expertise in this, but estimates suggest that it could take more than Rs.1500 crores out of MTNL's cash reserves.)

So, all in all, there is high probability that MTNL's shareholders will never get any of the cash on books (through dividend or buyback) and in-fact the cash will eventually erode..

MTNL seems to be more of a value-trap, rather than a value-buy..

The Introductory Post..

2010-04-20T23:07:00.000-07:00

A big hello to all. And welcome to my blog.

A bit about me

I am a consulting equity analyst and advisor based in Pune, Maharashtra. Investing is my passion and investing in equity is what excites me most. I have built my core competency around investing in Indian listed companies, specifically mid-caps and small-caps, using fundamental analysis and value investing principles. I also dabble in special situation cases every now and then.

By nature, I am quite conservative and risk-averse, and it spills over in my approach towards investing too. I am an avid reader and i read books based on value investing, behavioural finance and psychology.

As a hobby, I teach in the capacity of a visiting faculty in 3 business schools based in Pune, where i take up specialisation subjects like Security Analysis, Portfolio Management, Derivatives and Financial Markets. Please click here for my Linkedin Profile.

This blog is a place where I will discuss my thoughts on investing in general, specific investment opportunities and investment psychology. I believe that investing is a profession where learning never stops. I would like to discuss my thoughts and ideas with readers and learn more and more.

This is not at all meant to be any kind of business venture.

The standard disclaimer

Everything that I publish on this blog are my personal thoughts and opinions. They are in no way a representation of opinions of any of the organisations I work with. Most importantly, this is a place for discussions only. None of what I publish should ever be construed as an investment recommendation (or otherwise). Also, I will not disclose buying/selling details of any particular stock. Being a professional equity advisor, i believe it would be unethical and unfair to do so.

Cheers and happy investing!!!