Prajay Engineers is another poignant story. A story which exemplifies the extent to which our markets can go either way when there is a swing.
We witnessed the stock scaling a peak in the four hundreds and also touching the abyss of Rs. 18.
The stock is currently trading at a steep discount to its liquidating value. Its enterprise value is a meagre Rs.210 crores (includes a debt of 107 crores).
The company has sales figures which stands at Rs.64 crores for the half year ended on Sep. 30. Even discounting the stimulation package from the govt for the real estate sector, I would assume the company can sell at least another Rs.60 Crores property in the next six months.
The Operating profit disclosed by the company for the first half of 2008-9 is Rs.22 crores. Assume the company can sustain the same in the next six months, we are likely to see Rs.44 crores. An operating return of Rs.44 crores for an investment of Rs.100 crores along with interest commitment of about Rs.10 crores is not a bad outlook at all for the investors in these times, provided people can wait.
I do not want to go by the last year results which I understand is unattainable for the next few years. But even providing for that, I think Prajay is easily one such share where current market price is way below its intrinsic value after factoring in a margin of safety.
Wednesday, December 17, 2008
Mysore Cements
The Mysore cements story is very interesting.
The Company which had huge interest commitments till like two years back is now debt free!
Consider this, the market cap is Rs.243 crores, while it holds about Rs.170 crores in fixed deposits alone.
Adding to that is the fact that the business has wiped off all debts and its returning strong operating margins for the capital employed.
My take is that Myysore cements which is selling at a discount to its book value can be valued at least three times its current market price.
The Company which had huge interest commitments till like two years back is now debt free!
Consider this, the market cap is Rs.243 crores, while it holds about Rs.170 crores in fixed deposits alone.
Adding to that is the fact that the business has wiped off all debts and its returning strong operating margins for the capital employed.
My take is that Myysore cements which is selling at a discount to its book value can be valued at least three times its current market price.
Tuesday, December 9, 2008
Aftek and insane valuations
Aftek is one of those insanely valued companies in India.
A cursory glance towards its figures will tell us that Aftek's market capitalization is Rs.117 crores, its Total Debt as of March 31, is Rs.79 Crores. Which makes its enterprise value at Rs.196 Crores.
On the other hand, Aftek's Cash balance alone is at Rs. 299.53 Crores. Apart from this Aftek has investments worth Rs.116 crores!
To add to all of the above, Aftek is still making some decent profits.
A cursory glance towards its figures will tell us that Aftek's market capitalization is Rs.117 crores, its Total Debt as of March 31, is Rs.79 Crores. Which makes its enterprise value at Rs.196 Crores.
On the other hand, Aftek's Cash balance alone is at Rs. 299.53 Crores. Apart from this Aftek has investments worth Rs.116 crores!
To add to all of the above, Aftek is still making some decent profits.
Saturday, December 6, 2008
Formula for averaging down stocks
Averaging down a stock is a common activity. But too often i found myself repeating steps time and again for doing the same things. This formula i hope is a time saver.
This is useful when a stock has gone down drastically and the average cost for the investor is much higher. In that case, lets say the investor has a target for the average cost.
Lets say the average cost of X company share is 200 Rs. for an investor. He has 300 shares. Let's assume that the market price of that share has come down drastically to Rs. 50.
But the investor is confident that the intrinsic value of the share is much more than the current market price, and so he wants to buy more. If he wants to bring the average to Rs. 100, how many shares should he buy?
I think the following formula will be useful.. though i still need to tweak it for the rising prices scenario.
Let CMP -> Current market price
Let CAP -> Current average price
Let N -> Number of shares held now
Let TAP -> Targeted average price
Let N1 -> New shares to be bought
Thus, the formula is
N
----- = 1 - R,
N + N1
Where R = (CAP - TAP) / (CAP - CMP)
Applying this formula to the given example, the value of N1 (the number of shares he need to buy) will be 600.
I am not making any explicit claims about the originality of this formula. All i am saying is i formulated this myself and did not wilfully borrow it from external resources.
This is useful when a stock has gone down drastically and the average cost for the investor is much higher. In that case, lets say the investor has a target for the average cost.
Lets say the average cost of X company share is 200 Rs. for an investor. He has 300 shares. Let's assume that the market price of that share has come down drastically to Rs. 50.
But the investor is confident that the intrinsic value of the share is much more than the current market price, and so he wants to buy more. If he wants to bring the average to Rs. 100, how many shares should he buy?
I think the following formula will be useful.. though i still need to tweak it for the rising prices scenario.
Let CMP -> Current market price
Let CAP -> Current average price
Let N -> Number of shares held now
Let TAP -> Targeted average price
Let N1 -> New shares to be bought
Thus, the formula is
N
----- = 1 - R,
N + N1
Where R = (CAP - TAP) / (CAP - CMP)
Applying this formula to the given example, the value of N1 (the number of shares he need to buy) will be 600.
I am not making any explicit claims about the originality of this formula. All i am saying is i formulated this myself and did not wilfully borrow it from external resources.
Wednesday, December 3, 2008
The Hindalco story
One of the important value themes highlighted by Benjamin Graham in 'Intelligent Investor' is the story of a large, unpopular (in the markets) company.
In the Indian stock market context, it is best exemplified by AV Birla group’s Hindalco.
A few weeks back, I read an analyst report which mentioned that due to capex and high debt burden, the earnings of Hindalco will reduce to about Rs.6 per share in FY 2010. That prompted me to check Hindalco’s earnings for now and it stands at a solid 14.24 Rs per share.
The share is quoting at about Rs. 49.50. Hindalco is one of the largest players of Aluminium not just in India but the world with a consistent track record.
Even assuming that bad turns to worse, and that the EPS comes does indeed come to Rs.6 in 2010, is it still a bad bet? I don’t think so. I am not sure of many companies which can boast of an EPS as high as Rs.6 for every one rupee share. Add to it, Hindalco’s advantage of scale and its entrenched position in the aluminium business, one is less likely to lose money in Hindalco even in worst case scenario.
Ofcourse, if one is not in a mood to wait for 2-3 years, then he does not have much to do in the value investing world in the first place.
My conclusion, Hindalco, with a current earnings yield of 15.8% and an ROC of 25% is a safe bet in the long term, especially at its current price levels.
In the Indian stock market context, it is best exemplified by AV Birla group’s Hindalco.
A few weeks back, I read an analyst report which mentioned that due to capex and high debt burden, the earnings of Hindalco will reduce to about Rs.6 per share in FY 2010. That prompted me to check Hindalco’s earnings for now and it stands at a solid 14.24 Rs per share.
The share is quoting at about Rs. 49.50. Hindalco is one of the largest players of Aluminium not just in India but the world with a consistent track record.
Even assuming that bad turns to worse, and that the EPS comes does indeed come to Rs.6 in 2010, is it still a bad bet? I don’t think so. I am not sure of many companies which can boast of an EPS as high as Rs.6 for every one rupee share. Add to it, Hindalco’s advantage of scale and its entrenched position in the aluminium business, one is less likely to lose money in Hindalco even in worst case scenario.
Ofcourse, if one is not in a mood to wait for 2-3 years, then he does not have much to do in the value investing world in the first place.
My conclusion, Hindalco, with a current earnings yield of 15.8% and an ROC of 25% is a safe bet in the long term, especially at its current price levels.
Wednesday, November 26, 2008
Value in Unitech
I may be crucified for saying this. But i'd rather say. I think there is some value in buying Unitech at the current levels. Mmarkets always have the habit of over-reacting to externals and macros. Not too long ago this stock was trading at 550Rs, and i am sure some 'analyst' would've predicted this stock would soon reach four figures!
The way i see it, Unitech is still one of the biggest realty companies in India. That has not changed. The company is currently doing the right things albeit in bad times, but there is no wrong time to do the right thing.
For one, they've got a sucker to pay Rs. 6000 crores for their telecom licence.
A substantial portion of this would go towards settling debts. From what i read, Sanjay Chandra is on record saying at least Rs. 2000 Crores will be moved off its balance sheet. The markets, i believe has not factored this adequately.
Secondly, the management is looking to sell off its hotel venture to some PE players, which again is the right thing to do in the high interest rate environment.
I am sure, they will look to settle some dues out of this as well.
So yes, the times are bad, but the management is taking the right path and that augurs good for the company in the days to come. All the other atrocious decisions they took are already factored in the prices.
If i had any money, i would put it in Unitech, there is very little to lose at current prices of Rs. 26.
The way i see it, Unitech is still one of the biggest realty companies in India. That has not changed. The company is currently doing the right things albeit in bad times, but there is no wrong time to do the right thing.
For one, they've got a sucker to pay Rs. 6000 crores for their telecom licence.
A substantial portion of this would go towards settling debts. From what i read, Sanjay Chandra is on record saying at least Rs. 2000 Crores will be moved off its balance sheet. The markets, i believe has not factored this adequately.
Secondly, the management is looking to sell off its hotel venture to some PE players, which again is the right thing to do in the high interest rate environment.
I am sure, they will look to settle some dues out of this as well.
So yes, the times are bad, but the management is taking the right path and that augurs good for the company in the days to come. All the other atrocious decisions they took are already factored in the prices.
If i had any money, i would put it in Unitech, there is very little to lose at current prices of Rs. 26.
Friday, November 21, 2008
Seth Klarman's speech in MIT
Seth Klarman's speech in MIT - on the time tested wisdom of value investing.
Worth reading!
Worth reading!
Wednesday, November 19, 2008
ABG Shipyard Vs. Bharati Shipyard
When one compares ABG shipyard Vs. Bharati Shipyard, I’d say ABG Shipyard is a better prospect at Rs. 100+ per share even when its discount percentage is less to BV than Bharati. Why?
There are a few reasons:
- ABG’s net normalized operating margins, cash flows and ROCs are better than Bharati.
- Order book is double that of Bharati
- ABG has already done its bit of capex in the last two years
- It has relatively lower debt levels than Bharati
- Bharati has one helluva FCCB conversion issue, if those guys do not choose to convert their warrants into shares coming December, Bharati is in one helluva soup
- ABG is relatively better placed, has more capital to withstand the recessionary trends.
ABG's market price is still less than its book value.
So within undervalued stocks, due weightage needs to be given to companies with show better numbers than others.
There are a few reasons:
- ABG’s net normalized operating margins, cash flows and ROCs are better than Bharati.
- Order book is double that of Bharati
- ABG has already done its bit of capex in the last two years
- It has relatively lower debt levels than Bharati
- Bharati has one helluva FCCB conversion issue, if those guys do not choose to convert their warrants into shares coming December, Bharati is in one helluva soup
- ABG is relatively better placed, has more capital to withstand the recessionary trends.
ABG's market price is still less than its book value.
So within undervalued stocks, due weightage needs to be given to companies with show better numbers than others.
Monday, November 17, 2008
Joel Greenblatt
It was sheer coincidence that I discovered Joel Greenblatt.
I read about his latest book 'THE LITTLE BOOK THAT BEATS THE MARKET' and immediately ordered on through landmark. What I got for 250 Rs is priceless insight.
Here is one hedge fund manager who explains about modern value investing just like a loving father would to a school going son or daughter.
I fell in love with his metrics of Return on capital and Earnings yield which are variations of Return on Equity and PE ratio.
Right now I am setting up my own screen for the BSE 500 using his magicformula for US stocks.
How i wish we had one for our BSEs and NSEs.
The screen I am setting up also factors in the Benjamin Graham forumla of stocks with the market cap being less than the liquidating value along with the parameters of magic forumla investing - high ROC and high EY. It's been a very interesting process so far. I hope to finish it by the next week or two.
I read about his latest book 'THE LITTLE BOOK THAT BEATS THE MARKET' and immediately ordered on through landmark. What I got for 250 Rs is priceless insight.
Here is one hedge fund manager who explains about modern value investing just like a loving father would to a school going son or daughter.
I fell in love with his metrics of Return on capital and Earnings yield which are variations of Return on Equity and PE ratio.
Right now I am setting up my own screen for the BSE 500 using his magicformula for US stocks.
How i wish we had one for our BSEs and NSEs.
The screen I am setting up also factors in the Benjamin Graham forumla of stocks with the market cap being less than the liquidating value along with the parameters of magic forumla investing - high ROC and high EY. It's been a very interesting process so far. I hope to finish it by the next week or two.
Value in Indiainfoline
To my mind, IndiaInfoline is the best brokerage stock.
Not only is its PE ratio in single digits (so is Indiabulls) but it has very low debts relative to its equity and market cap, it's EBIT to EV ratio is decent while its ROC is outstanding considering the kind of business they operate.
In spite of the downturn in the brokerage business owing to poor market conditions, Indiainfoline has been able to increase its topline.
Its drop in quarterly net earnings is understandable and much less than the likes of Geojit.
I would expect IndiaInfoline to do very well in the coming years.
Not only is its PE ratio in single digits (so is Indiabulls) but it has very low debts relative to its equity and market cap, it's EBIT to EV ratio is decent while its ROC is outstanding considering the kind of business they operate.
In spite of the downturn in the brokerage business owing to poor market conditions, Indiainfoline has been able to increase its topline.
Its drop in quarterly net earnings is understandable and much less than the likes of Geojit.
I would expect IndiaInfoline to do very well in the coming years.
Saturday, November 15, 2008
The FMCG stories
More precisely, i am going to talk about the FMCG giants in India - HUL, Colgate and Dabur.
HUL comes at a PE of 24
Colgate comes at a PE of 21
Dabur comes at a PE of 21.
It might seem odd for some that a value investing blog mentions about stocks which comes at a PE of in excess of 20.
But what made me write this was the underlying business and the competitive advantages these companies hold in my view.
Colgate
I am pretty much sure i am going to buy Colgate for my morning brushing even if the world is going to end next month. Colgate has a market share of about 50% in India. Moreover, it has negative working capital requirements, which to my mind implies they are using other person's money to generate profits for themselves. The only requirement is for the fixed assets and which will not change quite often. No wonder none of these guys have gone for capital expansion.
For instance, the Mar '08 EBIT is about Rs.270 crores for Colgate, and the capital employed, in terms of running the business the fixed assets and working capital component comes to about Rs. 90 crores!
Even the return on equity is well above 150% for these giants.
HUL
If anything, the same story gets bigger for HUL considering its range of products and the dominance and distribution network it has in the market.
Dabur
More or less the same story though it is not quite in the same league as HUL and Colgate considering its current price of Rs. 85. I see that its 52 week low had been Rs.60 at which price it would've made sense to buy Dabur.
Amazing stories indeed!
HUL comes at a PE of 24
Colgate comes at a PE of 21
Dabur comes at a PE of 21.
It might seem odd for some that a value investing blog mentions about stocks which comes at a PE of in excess of 20.
But what made me write this was the underlying business and the competitive advantages these companies hold in my view.
Colgate
I am pretty much sure i am going to buy Colgate for my morning brushing even if the world is going to end next month. Colgate has a market share of about 50% in India. Moreover, it has negative working capital requirements, which to my mind implies they are using other person's money to generate profits for themselves. The only requirement is for the fixed assets and which will not change quite often. No wonder none of these guys have gone for capital expansion.
For instance, the Mar '08 EBIT is about Rs.270 crores for Colgate, and the capital employed, in terms of running the business the fixed assets and working capital component comes to about Rs. 90 crores!
Even the return on equity is well above 150% for these giants.
HUL
If anything, the same story gets bigger for HUL considering its range of products and the dominance and distribution network it has in the market.
Dabur
More or less the same story though it is not quite in the same league as HUL and Colgate considering its current price of Rs. 85. I see that its 52 week low had been Rs.60 at which price it would've made sense to buy Dabur.
Amazing stories indeed!
Thursday, November 13, 2008
Wednesday, November 12, 2008
Downsides are better
Market downsides are better times to invest. As a tyro who started out hardly a year back, this slide in the BSE index is perhaps the best thing to happen to me.
Had it been bulls all around, we would've got complacent, stock picking would've seemed all too easy and all hell would've broken lose when the bears returned.
Now with this 1000 point downfall, it made me conscious about what i am doing, and why i am doing. Two, it also taught me that market downsides do not mean crushing losses. There were still some neat 50% to pocket in mini rallies.
One gets to make decent 30-40% profits without attracting to much attention which is a very good thing.
Had it been bulls all around, we would've got complacent, stock picking would've seemed all too easy and all hell would've broken lose when the bears returned.
Now with this 1000 point downfall, it made me conscious about what i am doing, and why i am doing. Two, it also taught me that market downsides do not mean crushing losses. There were still some neat 50% to pocket in mini rallies.
One gets to make decent 30-40% profits without attracting to much attention which is a very good thing.
India Glycols
India Glycols is one of our favorites. This stock has been beaten to coma by the markets. This was trading at 380 Rs. levels about six months ago.
So what has gone wrong then? Nothing except that market does not like low quarterly profits or worse, losses and this company very recently declared both.
The company generates cash profits as far as I can see and is currently available for Rs. 63 about the same as its current working capital or liquidating value.
With the kind of operating margins that India glycols boast of, I think India glycols should at the very least be valued for Rs. 200 per share.
A very good stock, beaten down by the markets.
So what has gone wrong then? Nothing except that market does not like low quarterly profits or worse, losses and this company very recently declared both.
The company generates cash profits as far as I can see and is currently available for Rs. 63 about the same as its current working capital or liquidating value.
With the kind of operating margins that India glycols boast of, I think India glycols should at the very least be valued for Rs. 200 per share.
A very good stock, beaten down by the markets.
Tuesday, November 11, 2008
GE shipping story
Great Eastern Shipping is another of those boring stories.
The stock closed at Rs. 217 today. It had cash and cash equivalents along with investments for Rs. 2000 crore as of Mar.31. Which works out to about two third of its book value per share. And it boasts of an operating margin and Return on capital which is way higher than many other general stocks I see.
For a change, this is one stock whose cash operating profits are better than the earnings shown as EPS. So the PE ratio is in effect kinda better than the 2+ we see...
In short, hardly noticed but hard to surpass stock in terms of value.
The stock closed at Rs. 217 today. It had cash and cash equivalents along with investments for Rs. 2000 crore as of Mar.31. Which works out to about two third of its book value per share. And it boasts of an operating margin and Return on capital which is way higher than many other general stocks I see.
For a change, this is one stock whose cash operating profits are better than the earnings shown as EPS. So the PE ratio is in effect kinda better than the 2+ we see...
In short, hardly noticed but hard to surpass stock in terms of value.
Monday, November 10, 2008
The wine story
Champagne Indage is one of those boring stories.
Five years of increasing sales, continous profitability, decent Return on capital employed, stock selling at PE of about 5.
More importantly, its net current working capital is more than its market cap by about 25%!!
Here I think I need to a word or two about this concept of intrinsic value. The concept of intrinsic value is more of an indicator.
For e.g Someone enters his DOB into a system and the system returns that the DOB is earlier than 1990 - which means the person is a major. Now it is secondary to know if the person is 18 years and 1 day old or 99 years old. But for sure the person is 18 years old. The same anology applies for 'selling below intrinsic value' as well.
If we find a stock obeying four or five parameters of intrinsic value and if its management do not appear to be extremely dishonest or fraudulent, then the probability of not losing anything is much more on that stock, which is the core idea of logical investing.
Five years of increasing sales, continous profitability, decent Return on capital employed, stock selling at PE of about 5.
More importantly, its net current working capital is more than its market cap by about 25%!!
Here I think I need to a word or two about this concept of intrinsic value. The concept of intrinsic value is more of an indicator.
For e.g Someone enters his DOB into a system and the system returns that the DOB is earlier than 1990 - which means the person is a major. Now it is secondary to know if the person is 18 years and 1 day old or 99 years old. But for sure the person is 18 years old. The same anology applies for 'selling below intrinsic value' as well.
If we find a stock obeying four or five parameters of intrinsic value and if its management do not appear to be extremely dishonest or fraudulent, then the probability of not losing anything is much more on that stock, which is the core idea of logical investing.
Sunday, November 9, 2008
The Bharati Shipyard story
Bharati Shipyard has an order book in excess of Rs.4000 crores. Let's just ignore that.
Its market cap is Rs. 220 crores. Its CMP - 80Rs. per share.
By the way, the price of Rs. 80 per share is about 40% of its current book value of Rs. 207.
Bharati's operating margins are very decent, especially the last two years.
At this price, it's current earnings yield will be about 45%.
The interesting part is this. The company's Cash and Cash equivalents as on Mar 31 is the same as the current market cap!!
Which means someone is offering his business which is generating consistent cash profits for the value of the cash in his bank account.
Its market cap is Rs. 220 crores. Its CMP - 80Rs. per share.
By the way, the price of Rs. 80 per share is about 40% of its current book value of Rs. 207.
Bharati's operating margins are very decent, especially the last two years.
At this price, it's current earnings yield will be about 45%.
The interesting part is this. The company's Cash and Cash equivalents as on Mar 31 is the same as the current market cap!!
Which means someone is offering his business which is generating consistent cash profits for the value of the cash in his bank account.
Friday, November 7, 2008
The Agro Dutch story
Okay, Agro Dutch is not a great company. One does not equate Agro Dutch with the likes of Reliance Industries. But is it a bad investment to buy shares of Agro Dutch?
Lets see some details:
http://www.moneycontrol.com/india/stockpricequote/foodprocessing/agrodutchindustries/12/05/balancesheet/marketprice/ADI02
Agro Dutch's market capitalization is about Rs. 40 Crores.
According to its balance sheet, it had a cash of Rs.27.odd Crores as on Mar. 31.
It's Current Assets Net is about 113 Crores. Even if we assume that all the contingent liabilities of Rs. 33 Crores become real, we still are with a situation where the company is sitting with Rs. 80 Crores Net Current Assets while its market cap is hardly half of that!
So lets not even talk about profits, current earnings per share etc. of which there is some amount though not great. But its still a bargain to buy a book store for Rs. 40 crore when it has books and cash for Rs.80 crore devoid of debt. What do you think?
Here, we are not paying any damn for future growth. Rather we are getting a 50% discount to its present value. Profits and growth which do exist comes as a bonus.
Lets see some details:
http://www.moneycontrol.com/india/stockpricequote/foodprocessing/agrodutchindustries/12/05/balancesheet/marketprice/ADI02
Agro Dutch's market capitalization is about Rs. 40 Crores.
According to its balance sheet, it had a cash of Rs.27.odd Crores as on Mar. 31.
It's Current Assets Net is about 113 Crores. Even if we assume that all the contingent liabilities of Rs. 33 Crores become real, we still are with a situation where the company is sitting with Rs. 80 Crores Net Current Assets while its market cap is hardly half of that!
So lets not even talk about profits, current earnings per share etc. of which there is some amount though not great. But its still a bargain to buy a book store for Rs. 40 crore when it has books and cash for Rs.80 crore devoid of debt. What do you think?
Here, we are not paying any damn for future growth. Rather we are getting a 50% discount to its present value. Profits and growth which do exist comes as a bonus.
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