Saturday, July 30, 2011

Sugar Sector and Mind-maps!!!

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!!

25 comments:

Jigs said...

Neeraj,
I agree Sugar sector stocks are at or near bottom - Most of them are at 5 years low and at their BV telling us negligible downside from hereon. Similar argument one can make for Cement stocks. But who wants to buy even if one is assured of negligible downside? No one bought Auto stocks in March 2009 but every one ran for Auto in 2010 same thing will happen for Sugar/Cement in 2012?

The Third I said...

Cheeni kum!

Agree. cycle will turn. best is to lay a sugary trap and wait.

nice mind map

Neeraj Marathe said...

Hi Jigs,
ya i agree about the auto stocks..and MAYBE, the sugar stocks are also in the same position now. The question is, just because every1 else might b ignoring them, shud we also do the same? Like, running after auto stocks in 2010 didnt make much sense, same way, maybe running after sugar stocks later wont make sense..let others do it..can we do sumthn different?
Cheers!
Neeraj

Neeraj Marathe said...

Hi Third,
I hope it wont become a sugary trap for us!! ;-)
Cheers!
Neeraj

investment ideas from kukkuji said...

Neeraj,

I feel dwarikesh sugar is good bet,

on safer side andhra sugar is one of the best.

i get inner sense that sugar price may look up now in near future.


midcaps has good value.

cheers


kukku

Neeraj Marathe said...

Hello Kukkuji,
I do not know about Dwarikesh, but Andhra Sugar is really interesting due to its varied businesses and holdings in other companies..
Cheers!
Neeraj

Anonymous said...

Hi,

What do you think on Sugar stocks now. Seems some more pain is coming?

Thanks
Salil

Neeraj Marathe said...

Hi Salil,
I have absolutely no idea how much more pain is gona come..i have started buying some sugar stocks, and will continue to buy as the stock price falls..
cheers!
Neeraj

Anonymous said...

Ho Neeraj,

Any thought on bajaj hindustan. Why this one is failing so much compared to other sugar stock.

Thanks
Salil

Neeraj Marathe said...

Ho to u too Salil :-D
I havnt looked at Bajaj Hindustan, but the recent fall would be because the stock went ex-rights..
cheers!
Neeraj

Anonymous said...

Hi Niraj,

Seems typo, Ho instead of Hi. :)

Thanks
Salil

Neeraj Marathe said...

I kno yaar,
Just kidding..
cheers!
Neeraj

JK said...

Any insights when ll the sugar cycle turn?

Neeraj Marathe said...

No Sir, absolutely none! I have started buying the shares..
cheers!
Neeraj

Neo said...

Hi Neeraj,
Nice Article, can you give an idea on which stocks to bet as i was planning for Bajaj Hindustan...

Also i had been tracking BBL from long time but is it the rite time to go for it as its still falling ?

Thx,
Neo

Neeraj Marathe said...

Hi Neo,
Bajaj Hindustan has issued additional equity at a time when valuations are pathetic. Balrampur has bought back equity when the valuations are pathetic! So, i am not a fan of Bajaj Hindustan..
BBL, i would go VERY slow on the buying. The industry scenario is not at all great and the undervaluation might not just continue, but become bigger.
Cheers!
Neeraj

Neo said...

Thanx Neeraj, your fundamental views are really helpful, But still confuse on which company to go for in the sugar sector if you can give any road map on some companies it would be gr8...

Neeraj Marathe said...

Hi Neo,
Well, our comfort levels are different, so u might not be comfy wid wat i am comfy wid.
What i would suggest is, in case u are confused, make a basket. Perhaps Balrampur, Renuka, Triveni and Andhra sugars would be an interesting basket.
Cheers!
Neeraj

Anandh Sundar said...

Really awesome mindmap. But your 'advice' of following the baaps of sugar Balrampur Chini does seem logically strange, as they may be the masters of their business, but not necessarily of timing the market

Neeraj Marathe said...

Absolutely agreed Anandh. Which is why it makes no sense to buy big in one go. This is also why investing in cyclicals and commodities is v risky. I seldom do it.
Cheers
Neeraj

Jsan said...

Hi Neeraj, recently started to read your blog. Good articles around. Concept of Basket buying look nice, but have not tried it yet. I have Balrampur from long (since it was 80) now I am planning to invest some more may be next month or so. What do you suggest investing in same stock will be a Good idea (Averaging) or buying some other Sugar stock, like Andra Sugar, (Basketing :) ) will be good idea?

Thanks
Jsan

Neeraj Marathe said...

Hi Jsan,
Well, we all have different approaches. For me, since i do not understand or like the sector too well, i am not basketing. I have started buying balrampur, but very slow and am ready to buy more as and when price drops. This is the first time ever i am gettin into sugar, and it seems like its gona b an adventure. :)
so finally, i really do not have a definitive answer to you, coz our approaches, thought processes and comfort levels are different.. i wud do what i am comfortable wid, to which you may not agree at all!
cheers!
Neeraj

ads said...

Let me clear your all your doubts. Most profitable Indian sugar mills belong to Dhampur Sugar. There is a north-south divide in sugar, so buy Dhampur and BajajHind from North. BH because it is the largest player and largest players will always benefit the maximum whenever good times come. Also buy Renuka from South because Renuka is biggest and most profitable in South

Neeraj Marathe said...

Thank you for your confident view ADS..i myslf am not so confident about a cyclical like sugar..
cheers!
Neeraj

Raja said...

Hi Neeraj,

Please help me understand these numbers.

1. equity at the end of 2011 was 256274911.
2. equity at the end of 2012 is 244313923.
3. The difference comes to about 11960988 or 4.6% of 1.
4. Where as company's filing on bse says, they bought back 15410135 nos. in july 2011. that's roughly 6% of 1.
http://www.bseindia.com/stockinfo/anndet.aspx?newsid=ea3c2fcf-a70c-41d9-8b88-633bf524c87e&param1=1

Q1. What am i missing here ? how is it 9% of equity bought back ?
and also the nos. just don't match up. ideally i would expect 4+2=1, but they don't. promoters shares also are constant during this time and i don't see any filing for allocation of additional shares.


Q2. Has there been an improvement in operating environment since your last post. One, which explains the improved performance of the company for this quarter ?

Regards
Raja