Wednesday, April 28, 2010

Funda-mental Shorter Term Positions!

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! :-)

No comments: