Saturday, May 29, 2010

Ashiana Housing - An Interesting Case

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:
  1. Possible hike in interest rates, which discourages customer spending on real estate
  2. 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!

Friday, May 14, 2010

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

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.’


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;

  1. 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..
  2. 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.. :-)

Wednesday, May 5, 2010

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

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 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!!