Archive for category Reading Links

Forbes Best under a Billion – Indian Companies

Forbes compiled, as it does every year, a list of ‘Best Companies under a Billion Revenue’ for this year too. Link to the full article here.

From the same link, the list of Indian companies below –

Forbes

Most of the companies are familiar names (Ador, Mayur, Eros, Kaveri, Jubilant, Mindtree, TTK, Ajanta) and some are not (Commercial Engineers, RPP Infra etc.). Some companies are shareholder friendly and some are not. Kindly do your due diligence before investing in any of these.

Disclosure: Invested in a few companies in the above list. This post is not a recommendation to buy or sell. This is only for informational purposes.

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Analysis – FCCB Issue – JP Associates

Deepak Shenoy and I had an interesting conversation on Twitter today and I thought, instead of ‘storify’ing it like everybody does, and the ‘storify’ link getting lost in the melee, a blog would be better to capture thoughts. Also, the more I thought about this, some more details emerged. Hence the post.

Disclaimer upfront. There is no investment opportunity in JP Associates through this blogpost. This is only for informational purposes. I am not invested in JP Associates.

Amongst the wonderful companies that issued FCCBs in the boom period of 2006-07, JP Associates stood tall with a $400mn FCCB (I think only Tata Steel was more than that, at $875mn). As this note (which was also filed with NSE) on the website says, JP Assoc. issued $400mn worth zero coupon bonds at Rs. 854.33 (around Rs. 113/- in current pricing terms (they had a 5:1 split in 2007 and a 2:1 bonus in 2009)) with the conversion price being Rs.1238.78 (a 45% premium, which is erroneous – I’ll come to this in a bit) (Rs. 164/- in current pricing terms) (I am not accounting for $ to Rs. depreciation here – if you account that, then conversion price would be Rs. 220/-).

The CMP as of today is Rs. 64/-.

Needless to say, it is quite disastrous. The bondholders obviously did not convert their FCCBs and promptly demanded their money back. So, a few points here considering this past issue before we get to the present.

a) The conversion price was fixed at Rs. 40.35/- to the dollar. In hindsight, that was quite a stupid move by the FCCB holders considering that the rupee is now Rs. 55/- to the dollar (a 35% loss straight out). However, back in 2007, rupee was all the rage and people were talking of Rs. 32/- to the dollar (yes, even the CNBC folks). So yeah, tough luck. Since FCCB holders are usually savvy investors, ideally they should have (maybe, they have!) bought calls above a certain rupee-dollar equation to hedge forex risk.

b) The note (yes, the same note link as above) quotes a 45% premium. However it also mentions that YTM (yield-to-maturity) at 7.95%. In my enthusiasm, I overlooked the semi-annual* bit, and randomly used XIRR which gave me a result of 7.7%. I assumed it was roughly right and got along fine (I usually am fine with approximations rather than calculate to the exact decimal). However, Deepak pointed out that with a semi-annual it would come to 7.57% (for the curious, you need to use the YIELD function in Excel for this. XIRR assumes it’s annual). And indeed it was. Curiosity got the better of me, and I had to leaf through Annual Reports of JP Assoc. There it was! The premium was not actually 45%, but was issued at a 47.7% premium (based on which YTM promptly comes to 7.95%). How can you quote one figure in the ARs and one figure to the NSE is something I have no clue on? I couldn’t find any corrected NSE announcement either. Is this allowed?

Anyway, back to the present.

JP Assoc. as of Mar 30, 2012 had a debt of Rs. 50,300 cr. (CAT question: How many zeroes in that figure?). They had set apart Rs. 780 cr as redemption premium (as of Mar 30, 2012). Deepak informed me that they had paid off $50mn recently. So, out of $400mn FCCB, $50mn was paid off.

So, calculating, $350 mn remains. They raised $150mn just yesterday/today (I’ll come to this in a bit). So, remaining $200mn. If $ to rupee was not fixed at Rs. 40.35/-, the payment would have been Rs. 1100 cr. since the $ to Rs. was fixed at Rs. 40.35/-, JP Assoc. has to pay only Rs. 807 cr. Since they had already set apart Rs. 780 cr as of Mar 30, 2012, Rs. 807 cr by now shouldn’t be a problem. Rs. 300cr was saved by just fixing the $ to Rs. equation (imagine!)

That done, let’s get to the current deal of $150mn (done yesterday/today). This was also run by Barclays (even the last one was). Why did JP Assoc. go for another FCCB yet again? Well, apart from seemingly cheaper funding outside (risk of currency depreciation notwithstanding), there are other factors. As this Business Standard article explains

However, replacing FCCBs with other debt might cause a problem of a different kind. Though the accounting system in India does not require companies to account for FCCB interest costs on an accrual basis, for simpler debts the companies will have to account for the interest costs and that will hit the profit and loss accounts. According to Bloomberg and IIFL Research, JP Associates could end up with an additional interest of Rs 345.6 crore, which will impact the earnings per share of FY14 by 22.9 per cent.

Also, the redemption premium can be directly adjusted against the reserves’ accounts in the balance sheets. This means the debt-to-equity ratios of companies will rise, as adjusting the redemption money against the shareholders’ funds means the latter, or the reserves account, will go down by a similar amount.

Hence, FCCB is the route yet again (to pay off the previous FCCB and so on and so forth till we squeeze the last investor interested in the term ‘FCCB’ I guess!). JP Assoc. had applied for $500mn, got approved for $250mn (by ECB and RBI) and got funding for about $150mn. However, unlike the previous deal, which JP Assoc. got on very sweet terms (peak of the bull run, remember? the party would never end!), this time FCCB holders were smarter. Instead of a zero-coupon, it is a 5.75% coupon payable semi-annually. The conversion price is at a 10% premium to yesterday’s price, which is around Rs. 77.5/-. These FCCBs are redeemable in 2017 (hence approx. YTM works out to be 9.46%). There has been no circular at NSE yet, and hence we do not know how they fixed up the $ to Rs. conversion (which if you recollect has saved JP Assoc. close to Rs.300cr). 9.46% interest rate seems pretty darn cheap for a company with Rs. 50k cr debt, don’t you think (if they have fixed the $-Rs. equation that is)?

So, why did JP Assoc. stock tank today? Well, maybe the market thought that Rs. 77.5 as a conversion premium was a darn good deal for FCCBs and they would convert in 2017, leading to excessive dilution. Or maybe some major investor sold off. Or maybe there is some jhol. Or maybe, realistically, I might be gunning for the ‘expert’ position in CNBC who can explain every market movement with authority. Who knows? 🙂

*Semi-annual is what it says it is. Interest payable every 6 months (although compounded yearly). Most bonds are semi-annual. So, how can someone pay semi-annual interest on a zero coupon bond? Well, in case of zero coupon bond, that semi-annual stuff is used for calculation purposes only (calculating YTM for example). Interesting background story for this semi-annual stuff actually. It seems that this practice came through 100s of years ago when farmers used to borrow for their 6 month crop and hence interest rate back then (and hence coupon) was quoted semi-annually. Hence, majority of the bonds in the US atleast pay coupon semi-annually.

Disclosure: Not invested in JP Associates in any form (not even in their fixed deposit scheme – yes, they have one! check it out on their website). This post is only for educational and analysis purposes and should not be construed as advice for a buy or a sell.

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Investing Mistake and a List of Value Investors

a)

Q1. What is the first rule that every value investor needs to adhere to?

A1. Invest in stocks which the investor understands and is comfortable with.

Q2. What is the second rule that every value investor follows as a habit?

A2. Run some numbers and see if it is undervalued.

Q3. What happens if a value investor doesn’t adhere to A1 and A2?

A3. He commits an investing mistake – if not in terms of magnitude, but in terms of principle. The act of omission is ok, but the act of commission, in this case, mis-commission is pathetic.

And I am guilty of Q3/A3. The stock was PI Industries. I neither understood the industry nor did I value the stock. But I invested in it. Why? Because a few other investors were extremely bullish on the stock. I got heavily influenced and invested in the stock without checking on valuations (well, I checked P/E, if I want to be generous with myself and it was 12 P/E). I invested around Rs.560/-.

The stock went on to hit Rs. 590/- and then Rs. 620/- within 15 days. I was extremely happy with my investment and congratulated myself on finding a multibagger for the long run without putting in any effort.

And then it dropped. It kept dropping every single day. And with the bear market in 2011, it dropped as far as Rs. 420/-. I had no clue why it was dropping nor did I understand whether I should buy more or sell my position at a loss. I was asking myself a peculiar question – ‘If I put in more money into this stock at Rs.420-430 levels, am I averaging my investment or am I averaging my hope?’. I had not valued the stock and by not understanding the industry, I had no clue of the intrinsic value in the stock. There was no way I could justify that I was averaging my investment. If I put in more money, I was only ‘hoping’ that the stock would bounce back to Rs.500/- levels and then I would get out with a breakeven. But it could drop further (there was no way of knowing) and I would be stuck with a bigger loss. I refrained from putting in more money. I didn’t sell either.

Thankfully, the bull (or whatever) market came along and I sold my position recently at Rs.557/-, a price very close to breakeven (and this is inspite of management not meeting guidance nor having a strong order book). I heaved a sigh of relief. And probably some lessons learnt.

a) I got caught in the wave of ‘influence’ by other investing peers. In fact, most of these peers have made money in this stock by virtue of getting in at a lower price. I didn’t value the stock nor did I understand the industry. What was a ‘low’ or ‘high’ price for me really? Even if it had doubled to Rs.1200/-, I had no clue if I had to sell or hold or buy more.

b) I was definitely caught in the ‘mystique of multibagger’. You know, its a good story for your grandkids. ‘You know kids, there was this stock which I didn’t understand that I invested in and now that one stock paid for all your luxuries. Talk about luck, eh?’. ‘Building castles in the air’ is being too nice here.

c) Loss aversion. I strongly believe in the process/outcome matrix (2×2 matrix). I honestly believe that I was lucky with a bad process and good outcome on this occasion. Most times, that won’t happen (as in, most times, bad outcome results). Even if I was caught in a) and b) traps, a good process would have ensured that I sell at a loss and invest the remaining money in a stock that I understood. But I never did. Resulted in an opportunity loss, considering how my other investments have run up in this market.

d) Laziness. What else can explain the logic of not picking myself up to run some numbers even after I invested in the stock? Nope. It was ‘too hard’ since I couldn’t plug in any decent numbers without understanding the company/industry and that would have taken way too much time and effort. A good process would have ensured ‘boss, if it’s ‘too hard’ then sell the stock and invest in what you understand’. Nope. I thrived on laziness.

Anyway, I am very glad that I sold the stock at very close to break even. This stock might run away from these levels and maybe go 10 times from here, but I don’t care. Somehow, I have never taken fancy to the concept of ‘oh, you should invest in this one – this one is a multibagger’ concept. I have always felt comfortable taking the side of omission rather than commission. PI was the first stock that I deviated from my principles. Thankfully, I haven’t paid heavily. But a lesson learnt strongly. I never want to repeat this mistake again (and boy, this behavioral stuff is hard, very hard).

b) Over the past 1.5 years since I started writing this blog, I have observed that my learning curve has been pretty steep in terms of investing. Through this blog and then Twitter, I have met some super investors and learnt a ton from them. My investing process is much better than what it was 1.5 yrs ago and its all thanks to these investors who have shared/keep sharing their investing ideas, wisdom and investing process with me (and the world in general). If you are new to this blog/value investing in India in general, these investors are pretty much a must-follow (in no particular order, except the first one).

i) Prof. Sanjay Bakshi. Top of the list. Biggest jump in my investing learning due to him. The Guru. Enough said.

ii) Ayush Mittal – Fantastic investor. His blog is ardently followed by many and rightly so. Whatever little I have read about John Neff and little I know about Ayush’s investing picks, their investing styles match very closely. An amazing sense (and art) of picking some great stocks.

iii) Neeraj Marathe – Amazing sense and analytical ability to tell you what’s wrong with some stocks. His mindmap on the Sugar industry had gone viral and so have quite a few posts from his blog. It’s almost like he is teaching you the ABC’s of investing in each of his blogs.

iv) Donald Francis – His investing forum has been golden with a lot of quality investors pitching investing ideas and discussing them. Extremely enthusiastic and thorough in his investing picks and process.

v) Abhishek Basumallick – Crystal clear thought process is what I would term Abhishek’s blog as. Somehow I get the feeling (might be wrong) but this blog’s quite low profile and probably intended that way. But quality of writing, investing process, ideas, thought process – all top-notch.

vi) Amit Arora – His ideas and discussions go viral almost every single time he mentions a stock 🙂 And his blog indicates his focus area – multibaggers. Fantastic stuff on his blog.

vii) Rohit Chauhan – I recollect reading through Rohit’s blog way back in 2006 and dismissing it as yet another blog. Blogging and bull markets were very common then. I was fresh out of college and I was in a bull market. Who cared about value investing, right? Horribly wrong. One of the first investor-blogger, terrific and thorough investing process, widely followed and respected. Need I say anything more?

viii) Ninad Kunder – Special situation investing expert. Again, much like Rohit, starting a investing blog way back. His blogs have helped me develop a special situation framework and checklist. Some of his archives are worth their weight in gold.

ix) Devesh Kayal – A value investor who is gung-ho on consumption stocks and is very good at it. Also follows multiple PE/VC firms focused on the Indian markets (and he keeps you updated on it). He had stopped blogging for a while. He is just coming out of the woods again 🙂

x) Ankur Jain – Ankur, along with Arpit Ranka (who unfortunately doesn’t blog anymore) were one of the first investor-bloggers that I started following actively. What I love about Ankur’s blogs (he started blogging recently again) is the step-jump in thoughts, ideas and conclusions he takes you through as a reader. I am sure there is a ton of research behind each of his blogposts, but the sheer simplicity, learning and insight you get from reading his blogs is wonderful.

xi) Chinmay – Doesn’t blog as frequently as he used to or should have. A hardcore value investor. He will take you through some Graham/Buffett principles through some practical examples. Terrific stuff (do read the archives).

xii) Prabhakar Kudva – If there was ever a hardcore growth investor, Prabhakar Kudva is one. His passion for strong concentration in equities (maybe 3-5 stocks max) and a superior research and mental model process, he is a true Fisher disciple.

xiii) Deepak Shenoy – As much as he wants to convince the world that he is a technical trader, I personally think he has got a great grounding and sense of fundamentals to invest or not invest in a stock 🙂 His charts are legendary as is his ability to simplify and explain complex things in English.

One of the objectives of this blog along with sharing my learnings (successes and failures) was to connect with as many quality investors as possible. I have connected with all of the investors above either through my blog or my twitter handle (@_kirand) and hope to continue to interact with them fruitfully. I hope to connect to many more in the future. Do drop in a line.

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Smart Money Managers (VC/PE/Hedge Funds) – India Stock Market

a) I wanted to compile a list of smart money managers (from the VC/PE/Hedge Funds space) along with their portfolios (most probably, not complete portfolios) in the Indian Stock Market. This list is copied straightaway from Devesh Kayal’s tweets (since I hate twitter search and that search usually doesn’t lead anywhere, I have compiled this list on a more user friendly and searchable forum).

Name of the Fund Stocks held
Sequoia Capital e-Clerx, DHFL, PI Industries, Pratibha Industries, TD Power, Hindustan National Glass, Ess Dee Aluminium, Infotech Enterprises, Lovable Lingerie, Edelweiss, Mannappuram, SKS Microfinance
Nalanda Capital Exide, CUMI, Page Industries, Havells, Shree Cement, AIA Eng, Mindtree, Ahluwalia Contracts, Supreme Industires, Kewal Kiran Clothing, Berger Paints, Voltamp Transformers, Ratnamani Metals, Triveni Engg, Kirloskar Oil Engines, Mastek, Vaibhav Gems, V-Guard Industries
Barings PE Manappuram Finance, Muthoot Finance, Mphasis, TD Power, Balmer Lawrie Investments, Shilpa Medicare, KS Oils
Standard Chartered PE Redington India, PI Industires, Innoventive Industries, Man Infracon
ChrysCapital HCL Tech, ING Vysya Bank, Hexaware, KPIT Cummins, NCC, Gammon India, Pratibha Industries, Ahmednagar Forgings, Simplex Infra, Shriram City Union, Titagarh Wagons, Spanco, JMT Auto
Amansa Capital Cholamandalam Investment and Finance, Max India, Whirlpool India, Greaves Cotton, Rallis India, ENIL, Gujarat Pipavav Port, Blue Star, Kirloskar Oil Engines,  Edelweiss Capital, CUMI, OnMobile Global, Tube Investments of India
Arisaig Partners Colgate, Nestle, GSK Consumer, Marico, Godrej Consumer, Britannia, Jubilant Foodworks

Of course, we need to express caution before rushing to buy these stocks. For one, some of them (like Mastek, Vaibhav Gems, SKS, KS Oils) have been disasters. Two, these funds buy a bunch of stocks. Even if some turn out to be duds, overall their portfolio might come out as a winner. Selectively buying from this list without any research would lead to poor results. Three, this list of companies might not be a complete list, and some of these funds might also be following a long/short strategy. Summary? Don’t buy any of these stocks without further research. This is just a good indicative starter list for research.

b) If you liked the stocks above, and would like to know more VC/PE funds which are focused on India, here’s a list – http://www.avcjindia.com/speakers – let me know if you compile a stock list from some of these VC/PEs. For one, here’s a link to Citigroup’s India portfolio (includes Citigroup Venture Capital India investments) – Link

c) Here’s a list of hedge funds focused on Indian markets (I couldn’t get any stocks list from this hedge fund list though)

http://www.hedgefundsindia.com/blog/HEDGEFUNDSinINDIA

The four largest hedge funds focused on India are HSBC GIF India Equity Fund, Aberdeen Indian Global Equity Fund, JP Morgan India Fund and Fidelity India Focus Fund. Of course, it is just a matter of googling the Top 10 holdings for these funds, so I will dispense away with it.

Now, for some reading links for the weekend –

d) We all go through a stage where we tend to read a lot of books, lot of authors with different styles etc. on investing, spend a ton of time and money going through these books, making notes etc., but haven’t yet had the guts to make an investment? Well, here are three good links which talk through that –

http://www.gurufocus.com/news/144029/invest-with-style

http://schn1eck7.wordpress.com/2011/01/20/thoughts-on-applying-it-all/

http://schn1eck7.files.wordpress.com/2011/01/40-astronomers-astronauts.pdf

e) We all need to improve ourselves in almost all respects all the time(that’s a fiendishly global statement, isn’t it?). Investment process is probably the easiest of the lot. Here’s a short note from the wonderful Greig Speicher on 10 ways to improve your investment process. Very good read.

http://www.scribd.com/doc/66407114/10-Ways-to-Improve-Your-Investment-Process

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Reading matter: Banks valuation, EBITDA multiple and F&O

1) I am currently on a quest to know more about valuing banks (also NBFCs and Housing Finance companies which are almost in a similar line). I have worked for a Bank earlier, and am currently into Banking consulting. But working for a Bank (or in the Banking industry) and valuing a Bank are two different things (although, it does help you in the ‘circle of competence’ part). I will share my learnings as and when I make significant progress. Here are some links that I found quite enlightening –

a) The wonderful Rohit Chauhan has already written quite a lot on valuing Banks. Here are the links from past to present.

Link 1

Link 2

Link 3

Link 4

Link 5

Link 6

Link 7

b) I have found a report on how CARE rates Banks/HFCs/NBFCs, which gives us very good pointers on how to look at valuing these firms. Here are the reports – Report 1 and Report 2.

2) I have been reading a few analyst reports on some companies and it got my gut that some of these analysts quote EBITDA multiples for valuing a company. I would refrain anybody from quoting EBITDA multiples for almost anything. In the words of Warren Buffett, ‘EBITDA multiple? Who do you think will pay for capex? The toothfairy?’ and in words of Charlie Munger (the more straightforward guy of the two), ‘EBITDA earnings are bullshit earnings’. What I usually do, depending on the industry, is take the D&A part and assume it to be maintenance capex. Although not too accurate, it gives a rough picture on how much the company needs to spend to be where it is currently in the marketplace, without spending anything for growth (and I subsequently have a MOS% after valuation, so I hope I am covering my back for the most part after this assumption). Anyway, long story short, if you want to know why EBITDA earnings are bullshit earnings :), it would help immensely if you can go through this writeup.

3) I have this basic idea on Futures and Options, and how they help people get rich/get destroyed. I have never used any of it, but was curious if it could help in my investing strategy. I have a long way to go before I develop certain confidence to add F&O to my investing arsenal. However, I did start reading up on this and no better guide than Deepak Shenoy’s lucid introduction on F&O here.

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Financial Statement readings and a Quick checklist

a) It never hurts to revert to basics (not once in a while, but all the time) and these blogposts from Jae Jun summarize what most of us want to know – how do we know whether the company has any durable competitive advantages? The more important question is, how can I know this easily rather than the tiresome activity of going through Annual Reports one by one (start with the ‘A’s as Warren Buffett said)  and find out firms which have unique licensing contracts (like Page Industries, Cravatex, Astral Polytechnik etc.) or are distribution kings (Asian Paints, ITC etc.). The easiest way is the quantitative way and Jae Jun takes us step by step through each of the financial statements. Must read.

i) Balance Sheet

ii) Income Statement

iii) Cash flow Statement

b) Before getting into the comprehensive checklist as stated above, I have a quick checklist to see whether I would like to further dig into the company.

i) Do I understand the industry that the company operates? (for example, I can’t understand the Oil industry for the world, and hence whenever I hear ‘check out HPCL, IOC, Chennai Petro, Panama Petro etc.’, I switch off my brain (actually, that’s my default state and it requires humungous efforts to turn it on)).

ii) Debt – I usually give a pass to companies with high debt. But what is ‘high’? Well, there are a couple of checks here. I would not analyze a company further if the debt ratio is greater than 25%. Secondly, I would check its peers in the same industry and look at their debt levels. If the comparitive debt is high, I drop analyzing the company.

iii) I am a big fan of the Du-Pont formula. In essence, Du-pont formula tries to arrive at Return on Capital Employed (RoCE) through a couple of factors. a) Capital Turnover b) Profit margins. The key is not to take a single year’s snapshot but to analyze atleast 5 years of data (10 years would be better, but ET and Moneycontrol have only 5 years of data and I am not rich enough to procure data from Religare) and check the average capital turnover and average profit margins. The best case scenario is increasing capital turnover (and hence becoming lesser capital intensive) and increasing profit margins (implying pricing power). I drop analysing the company if both are dropping continously for the past 3 years. Alternatively, I drop analyzing companies with RoCE less than 20% (Think of it this way: Let’s say I invest Rs. 10000 in a particular stock (my capital). Why would I be interested in this stock if the rate of return on this capital (and hence RoCE) is 10-12%? I can get that return by investing in a fixed deposit with almost no chance of a downside. Hence my hurdle rate is 20% – atleast double the fixed deposit rate – that doesn’t mean my rate of return on the invested stock WILL be 20%, rather I try to estimate the return to be as close to RoCE of the firm as possible – no guarantees though).

iv) Cash/Investments – What percentage of market cap is cash/investments? The reason being, higher the percentage of cash/investments in the market cap, lesser is the downside. However, this cash component requires further digging (say for example, whether investments are recoverable almost immediately or whether that percentage of cash is required as working capital due to the nature of the industry or whether there has been a recent sale of a unit of the company or whether they has been any equity offering etc.). Digging aside, just for a quick glance, this cash ratio helps immensely to weed out many companies.

v) Current ratio – If the current ratio is less than 1, the company might be operating on negative working capital. This requires further digging (sometimes customers might be paying in advance for product procurement like VST Industries, HLL, Colgate etc.) but for a quick pass, current ratio greater than 2 would be better.

vi) Cash generated from Operations – This one is from the Cash flow statement, and probably my most important figure. Check the cash flow from operations for the past 5 years. If its negative for the all the 5 years, ditch the company analysis (implication: they are losing money from their operations and are probably funding from equity/debt offerings). If I want to go one step further, I will calculate Cashflow Return on Invested capital (this is similar to RoCE, but is done with cashflow) (formula: Average cashflow from operations/Avg. Capital employed).

vii) Check whether earnings are real – Sometimes (remember Enron, Worldcom etc.) the reported earnings are not real. I perform a quick check (again, for the past 5 years) to see if the reported earnings are real. I check Operating profit against the difference between Cash generated from Operations and Depreciation (for the mathematically inclined Operating Profit ~ Cash generated from operations – Depreciation). If there is a wide difference year on year over the period of 5 yrs (or 10 yrs if you have the data), the reported earnings are not real and I stop the company analysis (Please don’t try to short the company – remember Keynes ‘the markets can be irrational longer than you can be solvent’).

viii) After all these 7 points, I’d like to see if the company is increasing its revenues year on year (for 5/10 yrs of data). Revenue being the first item on the P&L statement, there are very few avenues to manipulate this part (although, it still can be done), but as you go down the P&L, chances of manipulation increase dramatically. I am ok with a one or two year dip in revenue, but 3 continuous years of dropping revenue will screen this stock out of my radar.

These 8 points can seem like a lot of work, but believe me you when I say this – once you do this for about 5-10 companies diligently, this analysis wouldn’t take more than 15-30 minutes max after that for all other companies. There are lots of companies which pass all these 8 criteria and you need as much time as possible for further digging before investing. This quick checklist will only ensure that a) you don’t waste time digging into dud companies and b) you reduce chances of losing your money substantially (upside will come, as long as downside is taken care of).

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Moneysights blog and my quirky behavior

So, I have started to bataofy gyaan to the folks over at the wonderful retail investing site for Stocks and Mutual Funds called Moneysights.

This week I try to explain the fundamental concept of ‘Time in the Market is of much greater importance than timing the market’. I explain this concept through my personal experience in the Mutual Funds I was invested in for the past 5 years. Here is a brief – (Full length article here)

I will rather talk about what starting SIPs in top Mutual Funds & then sitting tight on them has done for me since 2005.With a view that I would stay invested for the next 25-30 years or so in the stock markets (if I live that long, that is :)), here are the mutual funds that I started my SIP in –

  1. HDFC Top 200
  2. UTI Dividend Yield
  3. IDFC Premier Equity Plan A
  4. Birla Sun Life Dividend Yield

That’s it. Just four funds. I am doing a SIP of a fixed amount per month in these funds for roughly an average of 5 years now. So, what are the typical returns over a 5 year period, vis-à-vis SENSEX?

Here is a 5-year return comparison of all the above funds with SENSEX –

1. HDFC Top 200

2. UTI Dividend Yield

3. IDFC Premier Equity Plan A

4. Birla Sun Life Dividend Yield

As you can observe from each of the graphs, almost all Mutual funds beat the SENSEX quite handsomely.

Every Rs. 100 invested in

1. HDFC Top 200 will result in Rs. 56/- more than the SENSEX

2. UTI Dividend Yield will result in Rs. 60/- more than the SENSEX

3. IDFC Premier Equity A will result in Rs. 83/- more than the SENSEX

4. Birla Sun Life Dividend Yield Plus will result in Rs. 44/- more than SENSEX

That is, Rs. 100/- invested in each of these funds will result in Rs. 243/- more than just investing in SENSEX, inspite of the boom (2006-07), the bust (2008-2009) and a relative boom (2010-current).

Imagine this extra Rs. 243/- invested in each of these funds again and so on and so forth. Compounding is so much fun. The only long term wealth creator is ‘compounding effect’ and nothing else.

………

Over the past 5 years, we have had a boom, a horrible bust and a boom again. Unless you were a fantastic stock/mutual fund picker or someone who could spend hours together on the stock market gyrations, you could not have timed a perfect entry and a perfect exit time from the markets. Since I, as a retail investor also have a day job to do and don’t have time to track every move of the stock market, I take comfort in mutual funds. And I have to stay invested for a longer period of time to take care of all these stock market movements. Over a longer period of time, the returns are very good compared to what you get for a fixed deposit (pre-tax and post-tax: which is a different post altogether, but take it at face value for now). And hence the adage ‘Time in the market is much more important than timing the market’.

And to illustrate that human behavior is very monkey-like, jumping from thought to thought, especially if you have that bit of extra time to track the markets on a daily basis, I do the exact opposite of what I proposed in that article. Here’s my little story in brief (and basically highlights the flaw of tracking the market on a daily basis).

Smartlink Networks was a very interesting company at Rs. 52/- in the February lows, when mid-caps were butchered. It was in a fast growing business and they had a substantial customer base. I bought into the story (first mistake, although I was thoroughly convinced of the story, I did not load up). It steadily rose up and when the stock was oscillating between Rs. 75/- to Rs. 79/- during March-end/start-of-April, Smartlink announced that they were selling their major business (which contributed to 80% of its revenues) to Schneider Electric for Rs. 500 crore (4 times the entire Smartlink marketcap). This was an asset sale clearly, much like Riddhi Siddhi’s asset sale back in Jan-Feb. I freaked out at the prospect of the promoter siphoning money from this huge asset sale, rather than reward investors (and as you read this, do note that I knew all this detail because my workload was a little light, and hence had a lot of time to track the markets). I sold out at Rs. 79/- and patted myself on the back for a good move.

Fast forward a month and a half later, today, Smartlink declared a special dividend of Rs. 30/- (along with a regular dividend of Rs. 2/-). The stock price has shot up to Rs. 99/- and may even go higher. That’s a straight 25% notional loss just because I didn’t have the discipline to be in the market for a while. I was trying to time the market, rather than spend time in the market. And that cost me dearly.

Clearly, the lessons learnt from this mistake are –

1) I better follow my policy very strictly (other than extenuating circumstances) of ‘time in the market’. I think I need to do a jap and tapasya on this 🙂 Easy to preach, immensely difficult to practice. Hope you never make this mistake.

2) I have tried repeating this lesson to myself time and again, but I am not able to implement it. The lesson is ‘If you are convinced of the bloody stock story, you bloody well load up’. I didn’t. Feel free to slap me for this, if you happen to pass me by on the road.

3) Thank god, my mutual funds are not online. Else, I would have been trigger happy trying to time the market even with mutual funds. My SIPs are continuing as usual, without a bother in the world. How pleasant!

4) Busy myself with something very quickly, lest I keep pulling this trigger time and again by watching daily stock market gyrations. I define myself to be one following ‘value investing philosophy’. What the hell am I doing tracking the markets on a daily basis? It’s nuts.

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Indian Companies list in Forbes Asia’s Best under a Billion 2010

I was researching on a stock and I landed up on this link, which points to Forbes Asia’s Best under a Billion in Sep 2010. I am really late to the party I guess. I have compiled the list of all Indian companies on that list here. And as every foolish investor does all the time, I have tried to put my insightful insights (!) against each stock. I am also taking the risk of sharing my immense wisdom with you all. Get ready to lose your money by investing based on my comments.

 

S.No Company Industry My Comments
1 Allied Digital Services Software & Services Some auditor raid recently. In the Remote Infrastructure space(RIMS). Promising, but be careful.
2 Amara Raja Batteries Capital Goods Available cheaper than its competitor Exide with P/E of 11 vis-à-vis P/E of 20 for Exide. Promoter issue though. Expanding inverter market might push up revenues
3 Ashiana Housing Construction Promising player. Macro interest scenario doesn’t help though. Pretty positive on this stock.
4 Banco Products (India) Capital Goods No idea about this stock. But in general, Capital Goods industry would require capital to grow. And with capital requirement comes debt. A B2B company in the Capital Goods industry in general cannot generate above average returns unless bought into a 2008 kind of market.
5 Bliss GVS Pharma Drugs & Biotechnology I don’t understand Pharma sector currently. But whatever I hear about Pharma, this one seems pretty high on the list along with Ajanta Pharma
6 Compact Disc (India) Media I’d stay away from this stock even if it gets dead cheap.
7 Core Projects & Technologies Software & Services No idea about this stock.
8 Deep Industries Oil & Gas Operations No idea about this stock.
9 Dhanuka Agritech Chemicals One of the very promising players in the Agri space. Definitely worth a look in. Inventory days and debtor days seem to be a concern.
10 ELGI Equipments Capital Goods No idea about this stock. The capital goods comment for Banco (above) works here too I guess.
11 Emami Household & Personal Products Very much gung-ho on FMCG. This one looks a tad expensive though at current levels. There are better FMCG stocks out there. Can definitely look into this in case of any major correction.
12 Everonn Education Business Services & Supplies This education sector promise has ruined many an investor till date (remember the Educomp mania?). I haven’t researched into this stock though.
13 Exide Industries Consumer Durables Market leader in Batteries. This one along with Amara Raja seem decent plays.
14 FDC Drugs & Biotechnology No idea about this stock.
15 Glodyne Technoserve Software & Services The Allied Digital Services fiasco has rubbed off on this RIMS space player too. No stock specific data though.
16 GSS America Infotech Software & Services No idea about this stock.
17 Hyderabad Industries Construction This stock along with Visaka are starting to look promising at these price levels. Interestingly poised.
18 ICSA (India) Software & Services I mistook this for ICRA when I first saw this and started digging into numbers. I didn’t like the numbers.
19 Indag Rubber Chemicals The rubber industry is very interestingly poised. Indag along with Balkrishna and Gujarat Reclaim are good bets.
20 Jindal Drilling & Industries Oil & Gas Operations No idea about this stock
21 Jubilant Organosys Drugs & Biotechnology No idea about this stock.
22 Kaveri Seed Food Drink & Tobacco No idea about this stock.
23 KNR Constructions Construction No idea about this stock.
24 Liberty Phosphate Chemicals This is more of a fertilizer play. This one along with Rama Phosphate and Khaitan Chemicals are 3 major players in Single Sulphur Phosphate, a super fertilizer (SSP). SSP (Single Super Phosphate) was almost a dead industry brought back to life by the new Nutrient Based Subsidy (NBS) scheme notified by the Government of India. Dig in further if you are interested
25 Micro Technologies (India) Software & Services No idea about this stock.
26 Navin Fluorine International Chemicals I’d stay away from this stock even if it gets dead cheap.
27 Nitin Fire Protection Industries Conglomerates For some reason, the numbers don’t excite me at all. I am neutral on this.
28 Omnitech Infosolutions Software & Services Good player in the RIMS space. Decent bet.
29 Ponni Sugars (Erode) Food Drink & Tobacco Cyclical industry. I usually stay away from cyclicals. Bajaj Hindusthan, the largest player in this space looks interesting.
30 Ranklin Solutions Software & Services This one appeared on my debt capacity bargain screener. Very small player – difficult to evaluate. No revenue visibility.
31 Sandur Manganese & Iron Ores Materials No idea about this stock.
32 Seamac Construction No idea about this stock.
33 Solar Industries India Chemicals No idea about this stock.
34 Spice Mobility Technology Hardware & Equipment No idea about this stock.
35 Transformers & Rectifiers (India) Capital Goods Good play in the Power space. Again, capital goods sector – no great/fantastic returns. Just steady returns expected.
36 Ushdev International Utilities Seems like a trading play on Steels at first look. I shall pass.
37 Vinati Organics Chemicals Impressive stock. Accumulate on declines
38 Wim Plast Consumer Durables Impressive growth. Good potential. Has run up recently. Accumulate on declines
39 Zydus Wellness Food Drink & Tobacco The stock’s run away. Should deliver steady returns. Keep a watch for declines and accumulate

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6 Comments

Buffett-reading Weekend

We’ve all heard of the famous letters written by Warren Buffett. Apart from the letters though, Buffett has imparted his wisdom at different universities and here are some of the links for reading during the long weekend –

1) Buffett’s speech at University of Notre Dame –

http://www.tilsonfunds.com/BuffettNotreDame.pdf

 

2) Buffett’s speech at Wharton Univ –

http://www.tilsonfunds.com/BuffettWhartonspeech.pdf

http://www.tilsonfunds.com/BuffettWhartonspeech03.pdf

http://www.tilsonfunds.com/Buffettspeechstudentnotes.pdf

 

3) An email exchange between John Raikese (Microsoft) and Warren Buffett –

http://www.tilsonfunds.com/BuffettRaikesemails.pdf

 

Other Assorted Links on Value Investing (if you have time to read):

a) http://www.ignorethemarket.com/blog/money-and-investing/favorite-links/

b) http://www.tilsonfunds.com/motley_berkshire.php

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2 Comments