Annotated Annual Reports

Annual reports (ARs) are an excellent source of information and are usually a big factor for any fundamental investor, while taking a call on a company.

ARs primarily contain 2 types of information; qualitative and quantitative. Reading multiple ARs, going into the nitty-gritties of things (both qualitative and quantitative) takes time and effort. Also, it is a matter of being interested to do the same in the first place!

This is where an annotated AR comes into play. 

An annotated AR is the usual soft copy of the AR, but which has been marked and commented upon by me. (I do this in Evernote, for those who are interested). Here, both the numbers as well as narratives are marked and commented upon. The best part is, at the beginning of the PDF file, all my markings as well as comments are presented as a summary first. Then the actual AR follows, which again has these markings and comments at the relevant places anyway.

An annotated AR cuts your AR reading time massively, as well as gives some new and unique perspectives. As an example, check out this Annotated AR of Dollar Industries for FY19. 

An annotated AR can also be a good idea generator. As an example, check out this Annotated AR of Shree Digvijay Cement for FY19, particularly my comments at the end.

An annotated AR can also provide information which may not be positive and which will prevent you from making losses due to some problems with the company. As an example, check out this Annotated AR of TNPP for FY17.

I hope this gives you a better understanding of what an Annotated AR is, and how it can add value to you.

Rights Issues - get it right!

People like me, who are not hyper-active in the markets tend to sit on decent percentage of cash for extended periods of time. While this cash typically earns the regular 7-8% in liquid funds, I keep on looking for ways to improve the return on this large part of my portfolio. Rights issues are a great way (among others!) to put the cash to some use and earn that extra return. If you are lucky, you will earn lots in rights issues. If you are unlucky, you wont lose much! Me likes! My kind of situation. :-)

Here is how it works..

One should not deploy money in each and every rights issue which hits the market. Some basic pointers..
1) The company should be a decent company, not going at atrocious valuations. (Although it doesn't matter if its a bit expensive)
2) The rights issue price should be at a decent discount to the current market price. So, a Bajaj Hindustan will not do, but a Neuland Labs will do!
3) If its an unknown company will less institutional holding, it would be great. (I will clarify why it is so in due course.)

Lets say that A Ltd is coming out with a rights issue. The ratio is 1 share for every 2 shares held. The CMP is Rs.50 and rights issue price is Rs.30. Record date is April 19, 2012 (Ex-date will be April 18).

1) Buy 100 shares of A Ltd. close to the ex-date, on lets say April 15th itself at Rs.50. (So that on ex-date, the shares will be there in your demat account.)
2) On ex-date, the stock price should fall in the proportion as well as price of the rights issue. (Although, in the recent case of Neuland Labs, it did not fall at all!) Lets say here, it falls by Rs.8 to Rs.42.
3) Sell your original shares on ex-date. There would be a total loss of Rs.800. However, since you sold on ex-date, you are still eligible to apply for the rights issue.
4) Now, you can participate in the rights issue. On the original 100 shares, you will get 50 shares guaranteed (1 for every 2 held) at Rs.30.
5) However, while applying for the rights issue, you can always apply extra. Here, lets say that you applied for 950 extra shares. Total application would be 50+950=1000 shares at Rs.30 each.
6) Now, if all shareholders apply for the issue, you will not get anything extra. So, you will get only 50 shares at Rs.30. Lets say you are able to sell them at Rs.42. Thats a total profit of Rs.600. So, along with earlier loss of Rs.800, net-net, there is a loss of Rs.200 on the entire transaction. Since original position is small, the amount of loss is not much, in absolute terms/as a % of portfolio
7) However, if its an unknown company etc, where other shareholders did not apply, you can get extra allotment. Lets say, you got all 1000 shares you applied for, at Rs.30. And you managed to sell them at Rs.42. Thats a profit of Rs.12000! Minus original loss of Rs.800, which gives us a net profit of Rs.11200. Not bad. (I am not considering short term cap gain tax etc to just to keep things simple.)
8) The only risk here is in a situation where you got full allotment, and by the time the allotment was done, the stock price just crashed much below the rights issue price..then you are in trouble. That is why I laid down some basic pointers above.

So if you are lucky (yes, total luck, not skill!), you will get extra allotment and earn decent amount. If you are not lucky, the loss will not be very high, since initial position itself was small.

Some rights issues in which I got lucky in the recent past were Camlin Fine (got HUGELY lucky here!), SBBJ, etc. Others, in which I was not so lucky (no extra allotment) were Veljan, Sadbhav Engg (this one was interesting, since there were attached warrants too), etc. However, there was no loss in the same. Lets see what happens in Neuland!

One tukka in rights issues, where you get massive allotment, can give a huge alpha to your portfolio. e.g. in Camlin Fine, market price was Rs.105 (Rs.10 paid up), while the rights issue was at Rs.15.75!!! I applied a lot extra and for some reason, I got full allotment! Great return, without much analysis or trouble to the brain! Super balle balle.

Hope you get the rights right! Till then..

Cheers and happy investing!!



Disclaimer(s)!!
1) All the posts on this blog, including this one, are for educational and discussion purposes only.
2) I post articles on individual stocks as well as varied topics like behavioural finance, industry analysis etc. None of the material posted should be regarded as advice to buy/sell any stock. My articles are not recommendations to buy/sell individual stocks, and should not be construed as any form of investment advice.
3) I may have positions in stocks discussed. As a professional advisor, I advise clients regarding investments. They also may or may not have positions in stocks discussed, depending on their decision. 
4) PLEASE DO NOT TAKE BUY/SELL OR ANY INVESTMENT DECISION BASED ON ARTICLES YOU READ ON THE BLOG. These are only meant to provide information and initiate discussion. Final decision is and always should be, yours and only yours!

Skill v/s luck in investing - the eternal debate

I am very sure that we all have been part of this debate at one time or another in our investing lives. In my experience, the more drunk the participants, the more lively is the debate! :-)

There are some who really believe in their own prowess and opine that skill is the only factor which dictates success in investing. Well, perhaps these people have been fooled by randomness or have never been hit by a black swan event. These people should really read Taleb. :-)
There are others who say that investing is as good as (or as bad as) gambling. They opine that performance in investing is a matter of sheer luck. Believers in the Efficient Market Theory would surely say that if you are outperforming the market, it is only because you have been lucky. Well, these people should read Buffett! :-)

In my view, the answer lies somewhere in between and is a combination of luck and skill. Its like marriage. One would be lucky to get a good wife, but one has to be skillful so that she remains good to you! :-) Success in investing is a matter of luck as well as skill. However, the percentage of both differs in different situations.
E.g. There is skill involved in earning money as well as in not losing money. So if you avoided something bad, thats skill too. On the other hand, many times, one earns money by luck too.

But in my experience, here is what most people do. If they make money, its all skill, but if they lose money, its all bad luck!! I don't think thats a very great way of approaching things. Crediting skill when we make money leads to overconfidence and stupid decisions in future. Blaming luck when you lose money does not let us introspect and correct our mistakes since we think that we did not make a mistake, it was just bad luck!

Let me share a couple of my experiences with you.

1) Albright Chemicals (now, Rhodia Specialty Chemicals)
Albright was not an extraordinary business. But still, I had bought it for a specific reason. The company was available at a market cap of about Rs.50 cr. (Today its Rs.126 cr). The company had also published an advertisement for selling their land in Ambernath. The 26 acre piece of land would be worth about Rs.50 cr. Now, since it was very clear that they wanted to sell this land, its value becomes material. I thought the business to be worth Rs.45-50 cr plus the land worth Rs.50 cr more, giving a valuation of Rs.80 cr, after deducting Rs.20 cr if debt. So, something worth Rs.80 cr was available for Rs.50 cr. Decent logic, I felt, and I bought the stock.
After some time, suddenly, Solvay acquired Albright's parent, triggering an open offer. The stock price reacted and I sold at a decent profit.
Now, the question is, was this skill or luck? I believe the end result was a matter of pure luck. I had bought it primarily because of expectation of land sale, leading to increased valuation for the stock. The price did increase, but for a different reason. The land still remains unsold!! So, even though the end result was as per expectation, the reason for the end result were not as per expectation. Now, thats luck, wont you say?

So, in my view, if you bought something with certain expectations, and in future, the expectations materialised just as per your view, due to which you earned the desired profit, then its skill. Otherwise, even if you earned the profit, its all luck!

2) Provogue Ltd.
Boy, was that an adventure or what! :-) Although, I must say that it was not a very comfortable adventure! I did earn decent returns here, but it was all pure dumb luck. Absolutely no doubt about it!
The reasons why I bought the stock can be found here.
After some time, due to some changes which occurred in the situation, I decided to sell it before ex-date.
Now, all that I had thought would happen, did not happen!
- I had thought that on ex-date, the stock price wont fall much. Maaan, it fell huge!
- The reason I sold, was that relisting of Provogue could take lot of time..but it got relisted pretty fast.
- Creating free shares of Prozone was the main reason for getting into Provogue. That, it seems, would not have happened! :-)
So, absolute dumb luck it is!

There are other cases where I think I applied decent amount of skill..but there is no fun in talking about success stories, right? :-)

So all in all, we should always remain grounded, with understanding of the reality that luck does play a role in investing. Luck is something we cannot control, but skill is something we can develop. Let us all concentrate on that but not consider ourselves to be exceptionally skilled just because we earned money. If we do that, there would be no room for self-improvement.

On the same topic, me and my friend Ninad often discuss about the idea of positioning yourself for luck. If you can get yourself in situations where multiple lucky things can happen to you or no un-lucky thing can happen, that would be really something! But, that would be a topic for a separate post, I hope!

Till then,

Cheers and happy-go-lucky investing! :-)

Notes from Elecrama 2012

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.

The 'Value' Mindblock

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!

Playing delisting cases..

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:

1. 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!
2. 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.
3. 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.
4. 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!
5. 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!

Killing your own idea!

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!!

An update on stuff..

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?

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:

1. 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.
2. 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!
3. 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??
4. 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. 

Where will the 'market' go now?

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!!

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!!!

Investing in Holding Companies

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!!

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 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!

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!

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)

1. Dishonest/inefficient management: ABCL is a Aditya Birla Group company. One can say with near certainty that the management is neither dishonest nor inefficient.
2. Dubious financials: The numbers do seem to be in place. I do not believe that there is any problem with the numbers.
3. 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.
4. 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.
5. Extremely low margins: Businesses with very low single digit margins are accorded low valuations. This also does not seem to be the case here.
6. 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.
7. 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.
8. 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!