This is small cap which has potential in my long term buy and hold because it operates in niche market with high entry barriers. I want to understand its financial management and whether it meets my buying criteria.

Trend Analysis

The whole reason for any business to exist is to generate sales revenue and make more profits. At a minimum, the parameters listed below should have continuously increasing trends. All the data below is from 2000 to 2009.

• Revenue: Increasing trend since 2001 with average growth of 31% (SDev. 47%). Neutral observation.
• Earnings per share: Historically increasing trend, but flat for last three years. Average growth of 53% (SDev. 96%). High variability and has possibility of negative growth. Neutral observation.
• Net cash flow from operations: Increasing trend prior to 2004. Reduced until 2006, and now again increasing trend. Neutral observation.
• Profit/Loss from operations: Overall increasing trends in profits from its operations since 2001. Good observation.
• Reported net profit: Overall an increasing trend since 2001 and increase trend. Good observation.
• Gross margins: Current GM of 23.8% is higher than historical average of 17.3% (stdev. 3.01%). Good observation.
• Operating margins: Current OM of 26.8% is higher than historical average of 19.1% (stdev. 3.68%) and increasing trend. Good observation.

Trend Analysis: Graphite India Ltd

Quality of Dividends

In this part of my analysis, I am trying to understand dividend growth rate, consistency, and ability of the corporation to demonstrate sustainability. In is also an indirect way to gauging management’s policy vis-à-vis sharing of profits with common shareholders.

• Dividend per share: Chart 3 shows very slow growth until 2006 and then good growth onwards. Neutral observation.
• Payout factor: This has been less than 30%. Good observation.
• Dividend growth rate: The dividends have not grown at sustained year-on-year basis. i.e. there has been a high level of variability. Overall, on the basis of last nine years, the dividends have grown at an average of 37% (std dev. 61%) which is less than overall EPS growth rate of 53% (std. dev 96%). Good observation.
• Ratio of cash from operations to reported net profit: It had been more than 1.0 prior to 2005. This could be due to the funding for growth plans. Has been improved since then. Good observation.
• Ratio of profits from operations to reported net profit: This ratio is more than one. Good observation.  
• Ratio of Cash from operations to total debt: This ratio was trending upwards prior to 2005. But here also, the debt funding for growth reduced it. It trending upwards. Neutral observation.

Dividend Cash Flow vs. Risk Free Savings Cash Flow

Why should I take risk if I can get a same or more cash flow by putting my capital into any risk free savings, fixed deposits, or any such risk free accounts? Therefore, I try to understand how dividends will affect mycash flow in 10 years of time period. The baseline assumptions are (1) the stock’s dividend yield is 3.6% at current price of Rs 84.00; and (2) savings interest rate is 7%.

• Best case scenario: considering average dividend growth rate of 26% for last nine years, the dividend cash flow will be 2.22 times the cash flow from savings interest at the end of 10 years.
• Worst case scenario: considering low end of the expected dividend growth of 15%, the dividend cash follow will be equal to the cash flow from savings interest at the end of 10 years.
• So at current pricing of Rs 84 and assuming the dividend growth rate of 15%, the cash flow from dividends is equal to savings cash flow.

Projected Beta-based Expected Return

I measured Beta for this stock’s risk (or price movement) relative to the S&P CNX NIFTY (or index movement). Here, I am trying to understand how a stock price behaves relative to the market and how to factor in the capital appreciation into my expected returns.

• The stocks three year Beta value is 0.18. This means this stock has low volatility w.r.t. S&P CNX NIFTY index.
• The expected return is 8.5% relative to market index.
• Now factoring in 8.5% of expected return into the worst case dividend growth of 15% and current yield of 3.9%, the total cash flow is 3.6 times the savings interest rate.

Fair Value Calculation

The next step is to estimate the fair value so that we can understand return characteristics for this investment.

• NPV price based on 15 year DCF: Rs 101.23
• Average high yield price calculated based on past 9 years: Rs 50.6
• Pricing relative to 9 year average PE ratio: Rs 78.5
• Pricing based on PE ratio of 12: Rs 138.0
• Graham number: Rs 131.8

The range of fair value is calculated as Rs 81.7 to Rs 100.

Qualitative Analysis

• Graphite is one of the only two companies in this domain in India. Another one is HEG.
• The market in which Graphite operates has high entry barrier for technology and capital intensive. This provides it an edge.
• It seems to have completely executing its growth plans. It has used both organic and inorganic strategies for growth. I has increased internal capacity in India for organic growth. The inorganic growth comes from acquiring German company to remain export competitive in European markets. The debt is being reduced faster than I would expect in any other businesses.
• It has also initiated some product diversification (on industry diversification) within its domain of graphite expertise. However, it revenue from this segment is still only 10%.
• It has steady increasing margins, although I believe it will get capped at certain point. When that will happen? I do not know.
• There are two reasons for which I preferred Graphite over HEG (1) operational cash flow for HEG is less than net profit; and (2) for similar level of revenues HEG has higher debt. Even though its margins and dividends are higher, it seems Graphite has better balance sheet management.
• The downside risk is related to operating in the relative niche markets. Majority of its product is supplied to steel industry, which is expected to remain slow for some more time (probably another 2 years?). It remains to be seen how its product diversification helps its profitability and margins.

Summary…

I would expect Graphite to provide potential capital appreciation over long term and slow dividend cash flow. I believe it will have near term challenge of maintaining its earnings and dividends. However, long term it is very well positioned as being one of the only two suppliers of graphite electrodes and related products. At present, the shares are trading within my fair value range. I will add shares of Graphite as per my allocation levels.

Disclosures: Long on Graphite India Limited.

Disclaimer: This analysis is in the context of my long term buy and hold investment philosophy. It is in accordance with my investment objectives and my personal risk profile. If you intent to use this analysis for your own investment decision, then please make sure it meets your own objectives and your own risk profile.

Trend Analysis

The whole reason for any business to exist is to generate sales revenue and make more profits. At a minimum, the parameters listed below should have continuously increasing trends. All the data below is based on last 8 years i.e. from 2001 to 2009.

• Revenue: Consistently increasing trend since 2001 with average growth of 43% (SDev. 24%). Good observation.
• Earnings per share: Increasing trend with average growth of 94% (SDev. 95%). This means the growth rates are very volatile. Growths have varied from 26.2% to 102% in last 9 years. Neutral observation.
• Net cash flow from operations: Overall, an increasing trend since the company went for IPO in 2007. There is not much history available before that. Neutral observation.
• Profit/Loss from operations: Consistently increasing trends in profits from its operations since 2001. Very good observation.
• Reported net profit: Overall an increasing trend since 2001. Very good observation.
• Gross margins: Current GM of 22.6% is higher than historical average of 15.4% (stdev. 3.6%). Very good observation.
• Operating margins: Current OM of 23.3% is higher than historical average of 14.4% (stdev. 4.5%). Very good observation.

Quality of Dividends

In this part of my analysis, I am trying to understand dividend growth rate, consistency, and ability of the corporation to demonstrate sustainability. In is also an indirect way to gauging management’s policy vis-à-vis sharing of profits with common shareholders.

• Dividend per share: Chart 3 shows that growing dividend payments since 2001. Individual investors should be looking at dividends from 2006 onwards (i.e. since it got listed on stock exchange). Not much data to make any observation. Neutral observation.
• Payout factor: This is ratio of dividends per share divided by EPS. This has been less than 20% in last five years. Neutral observation.
• Dividend growth rate: Post IPO, there is not much data to make any worthwhile observation. However, based on last four or five years alone, the trend suggests that dividends have not grown with the EPS. Not a good observation.
• Ratio of cash from operations to reported net profit: Not much data here to make any worthwhile observation, but trend suggests lack of consistency. It keeps fluctuating above of below 1.0. Neutral observation.
• Ratio of profits from operations to reported net profit: Consistently more than one. Good observation.  
• Ratio of Cash from operations to total debt: This ratio is consistently more than one and increasing. This is an indication that company is relying less and less on debt for growth. Very good observation.

Dividend Cash Flow vs. Risk Free Savings Cash Flow

Why should I take risk if I can get a same or more cash flow by putting my capital into any risk free savings, fixed deposits, or any such risk free accounts? Therefore, I try to understand how dividends will affect my cash flow in 10 years of time period. The baseline assumptions are (1) the stock’s dividend yield is 1.7% at current price of Rs. 749.20; and (2) savings interest rate is 7%.

• Best case scenario: considering average dividend growth rate of 25% for last few years, the dividend cash flow will be 0.97 times the cash flow from savings interest at the end of 10 years.
• Worst case scenario: considering low end of the expected dividend growth of 10%, the dividend cash follow will be only 0.31 times the cash flow from savings interest at the end of 10 years.
• In order to have equal cash flow (i.e. dividends = savings interest) in 10 years time period, the current yield should be 3.6% with average dividend growth of at least 10%. At this yield the buy price is Rs 318.

Projected Beta-based Expected Return

I measured Beta for this stock’s risk (or price movement) relative to the S&P CNX NIFTY (or index movement). Here, I am trying to understand how a stock price behaves relative to the market and how to factor in the capital appreciation into my expected returns.

• The stocks three year Beta value is 0.88. This means this stock is highly correlated to S&P CNX NIFTY index, and hence it should be expected to remain volatile.
• The expected return is 14.5% relative to market index.
• Now factoring in 14.5% of expected return into the worst case dividend growth of 10% and current yield of 1.7%, the total cash flow is 4.1 times thesavings interest rate.

Fair Value Calculation

The next step is to estimate the fair value so that we can understand return characteristics for this investment.

• NPV price based on 15 year DCF: Rs 568.9
• Average high yield price calculated based on past 9 years: Rs 471.2
• Pricing relative to 9 year average PE ratio: Rs 1037.2
• Pricing based on PE ratio of 12: Rs 557.9
• Graham number: Rs 485.2

The range of fair value is calculated as Rs 506.6 to Rs 624.2

Qualitative Analysis

• Voltamp is small market cap company that remains focused on its core strength of providing smaller rating transformers to industrial segment. Approximately 92% of its revenue comes from industrial customers, while government SEBs contributes only 8% of the revenue. Typically, majority fo these industrial customers require customized solution. And this is its niche.  This allows better cash flow and relatively higher margins.
• Overall, it enjoys approximately 20% market share in its class. In addition, it has 40% market share in dry type of transformers.
• I like Voltamp’s debt free balance sheet and its capital management practices.  For a small cap company, it is one of the good ones I have look at in recent times.
• The company came out with IPO in 2005/2006, however, it was not for capital requirements or funding its growth. It was offloading the shares (and cashing out) of two of its long time partners. Lack of debt allows the company to have very good capital usage ratios.
• The company acknowledges the need for future growth and risk, and hence is looking for higher exposure to SEBs, and expanding its product portfolio to transformer with higher kV ratings.
• Risk is slow down of industrial growth, capacity driven margin pressures, and low barriers to entry for Chinese competitors.

Summary…

Voltamp Transformers is one of the small cap which has very good balance sheet, very good capital management, and a niche market. Being a small cap, it gets my brownie points for ability to focus on its core strength, keeping balance sheet clean, and still manage growth. In the current prevailing growth oriented Indian economy, where every 30+ year company is conglomerizing in the name of diversification, Voltamp Transformers continues to remain focused on its niche market.

A long position bought at fair valuations in Voltamp is expected to provide a long term capital appreciation. Being a small cap and focus on niche markets, it needs to conserve capital and fund its growth. I do not expect this to be good dividend investment. I expect Voltamp to provide a moderate dividend that is in the order of 10%-20% of its EPS.

At this point in time, the stock is trading at 20%-45% premium based on my fair valuation range. At fair valuations, I would be open to invest in Voltamp Transformers depending upon my allocation levels to small cap and power sector. In addition, it should be expected to have high volatility.

Disclosure: No position at the time of this writing.

Disclaimer: This analysis is in the context of my long term investment philosophy. It is in line with my investment objectives and my personal risk profile. Please do your own research before making an investment decisions for Voltamp Transformers.

Financials
The company has revenue of 676 crs and has recorded an average growth of 15%+ in the last 10 years. The bottom line is around 105 Crs with a growth of 20%+ in the last 5 years. The key point to note in the performance is that quite a bit of growth in the topline and bottomline has happened in the last 5 years.

The net margin of the company is currently at 17%. However the net margin has fluctuated between 4% and 17% in the last 10 years. These fluctuation are closely linked to the steel demand and pricing and has generally fallen when the overall economy has slowed down.

The company has now become a debt free company and has a cash holding of around 115 crs on its balance sheet.

Positives
The company has a strong balance sheet with excess cash which can be used to fund additional capacity without taking on debt. In addition the company is a part of the Tata group which is known for good corporate governance.

The company also has access to ore supplied by Tata steel which provides some stability to raw material costs. In addition the company has acquired a coal mine and is in process of developing it. This would help the company to control its key inputs costs which is iron ore and coal.

The company has demonstrated good topline and bottom line performance and has a high ROE (15% or higher) at low to moderate levels of debt. Finally the company has always operated at a low or negative working capital.

Risks
The key risk for the company is the nature of the industry in which it operates. The industry is cyclical, with low barriers to entry. In addition, the product is a commodity and hence the profitability of the company is tied to steel prices and the demand supply situation of the same.

The industry and the company are also characterized by large swings in performance depending on the demand and pricing for its product.

Competitive analysis
The industry is characterized by low entry barriers and the only competitive edge a company can have in this industry would be from economies of scale. Companies do not have much control on raw material (coal and iron ore mainly) pricing and the pricing of the final product (sponge iron) is also driven by steel prices. Scrap steel is a substitute for sponge iron and hence the price and availability of scrap steel also has an impact on the price of sponge iron.

Finally the industry faces price based competition, atleast at the local level and most of the companies are price takers. I don’t think any company can demand a premium for their sponge iron.

Management quality checklist

• - Management compensation: Management compensation is fairly low with the MD drawing a compensation in the region of 50-60 lacs
• - Capital allocation record: The management has demonstrated a good capital allocation record. The company has maintained an ROE in excess of 15% even during downturns. The company has also demonstrated an ROE of around 25% on the incremental capital invested in the last 5 years. The only negative has been the low level of dividend payout. The low dividend payout is however understandable due to the lower levels of free cash flows (atleast 20-30% of the earnings is required as maintenance capex).
• - Shareholder communication - Shareholder communication has been good and the management has been transparent about the performance.
• - Accounting practice - looks conservative
• - Conflict of interest - none
• - Performance track record - good in comparison to the industry economics

 
Valuation
The intrinsic value of the company can be taken between 350-400 for a net profit margin of around 11-13% over a business cycle and for a topline growth of around 13-15%. The current margins of around 17% cannot be taken as a base line as the margins have fluctuated between 4 to 24% with an average of 11% for the last 10 yrs. The topline assumption is a bit conservative, but a higher rate of growth will not increase the intrinsic value as much, as a higher growth would require a higher level of re-investment and result in a lower free cash flow.

Scenario analysis
The current price discounts a net margin of 11% and topline growth of 9%. A topline growth of 15% would give an intrinsic value of around 360-400.

Conclusion
The company seems to be undervalued by around 30-35% at best. The company may look undervalued based on the PE, but the correct approach to value a company is to compute its intrinsic value based on a DCF (discounted cash flow) formulae using the free cash flow generated by the company.

A company such as Tata sponge is in a commodity business which requires a higher level of maintenance capex (for understanding maintenance capex, see here). As a result the earnings of such a business consistently overstates the free cash flow. In case of tata sponge, the free cash is around 70-80% of the earnings. Based on the above free cash flow, margin and growth estimates, I would conservatively put the intrinsic value between 350-400.

Finally, the industry and the company is in a commodity industry with low to non-existent competitive advantages. As a result, it would be sensible to take the intrinsic value on the conservative side

Disclosure: I don’t hold the stock as it is not cheap enough for me. However I may not disclose it on my blog, when I decide to initiate a position in the stock. As always, please read the disclaimer

HYDIND is a part of C.K.Birla group of Companies. This group of Birla’s also owns the waning Hindustan Motors (i.e. Ambassador brand). My objective in this analysis to see if HYDIND is a good fit for my portfolio.

Trend Analysis

The whole reason for any business to exist is to generate sales revenue and make more profits. At a minimum, the parameters listed below should have continuously increasing trends. All the data below is based on last 10 years i.e. from 2000 to 2009.

• Revenue: Increasing trend with average growth of 12% (SDev. 10%). It has volatility on higher side. Not a good observation.
• Earnings per share: It was negative until 2004, since then it continued to increase. On last 10 year basis, average EPS growth rates have been negative. However, since 2005 it seems to be a turnaround story. It is not a type of company I am looking for my long term portfolio.
• Net cash flow from operations: High variability in cash flow. Twice it has been negative in last 10 years. It could be due to cyclical business. Not a good observation.
• Profit/Loss from operations: Before 2005 it was negative, 2005 onwards its positive but lacks consistency. This again indicates towards turnaround story.
• Reported net profit: Same story; indicates some kind of turnaround message.
• Gross margins: Fluctuates quite a bit in last 5 years, from 5.2% to 12.5%. Lacks consistency. Not a good observation.
• Operating margins: Fluctuates quite a bit in last 5 years, from 7.5% to 16.2%. Lacks consistency. Not a good observation.

Quality of Dividends

In this part of my analysis, I am trying to understand dividend growth rate, consistency, and ability of the corporation to demonstrate sustainability. In is also an indirect way to gauging management’s policy vis-à-vis sharing the profits with common shareholders.

• Dividend per share: Chart 3 shows dividend is more or less flat. Not a good observation.
• Payout factor: This is ratio of dividends per share divided by EPS. This has been consistently less than 30%. Neutral observation.
• Dividend growth rate: No sufficient dividend history. Very different than EPS growth rate, i.e. no correlation. Not a good observation.
• Ratio of cash from operations to reported net profit: all over the place with no consistency. Not a good observation.
• Ratio of profits from operations to reported net profit: all over the place with no consistency. Not a good observation.
• Ratio of Cash from operations to total debt: Very high variability. Not a good observation.

Summary…

After going through this analysis so far, I do not believe HYDIND will fit into my long term portfolio.

• Prior to year 2005, it was in complete mess with all negative indicators.
• Since 2005, it does appear that company is on a turnaround path and has made some progress in that direction.
• The company was saddled in debt until 2004, and reduced significantly in 2006. However, the debt is again creep up. The cash it generates can barely keep up with the debt on balance sheet.
• Dividends and its growth is erratic and is not in-line with EPS growth rates.
• Most of the parameters are very cyclical, indicating cyclical business environment.
• In addition, my initial excitement turned into a concern after reading its 2008/2009 annual report. Enterprising investors who would still prefer to invest for long term should first read page 20 to page 23 of annual report. It shows the long list of dues and appeals it is in. If those appeals went against it, the company will have to pay a heft tax over time.

This is another example where, the current PE ratio, current dividend rupees, and current dividend yield appeared very attractive. But when we look holistically and then reflect it on company’s performance, one will find lack of good history and cyclical behavior. As I have said on many occasions on this blog, dividend investing is not about current yield. It is about sustainability and what future yield you can get.

One could argue that its focus in construction materials industry abodes well for future growth, which is in-line with India’s continually growing economy. It very well could be true and is surely possible. It is also possible it could be one of the turnaround stories.

I buy stocks with a view of holding it for 10 years or more. I expect to see consistency and sustainability so that I can get my returns. Hyderabad Industries falls short of meeting those objectives. I will not be buying any shares in this company.

Disclaimer: This analysis and conclusion drawn are in the context of my long term investment philosophy. It is in line with my investment objectives and my personal risk profile. Individuals should do their own analysis with their own objectives in mind.

The question I have on outsourcing kind of IT companies like NIIT, Infosys, TCS etc is, “where is the moat?”.

Every company seems to be into everything that happened yesterday, today or will happen in the future. All companies are generally present in all geographies, across all industry sectors etc. To top up the challenge, the “asset” of such IT companies are their people, but the employees keep hopping between the competitors and there is hardly anything preventing them from doing so. So where is the moat or where is the long term advantage? This also leads to the question - how do you value such a company?

This is an interesting question and there are several ways to answer it. I will try to answer it, by first doing a porter’s five factor model analysis on IT companies (for more on this model you will have read this book).  I will then use the conclusions from this analysis to answer madhav’s question and see if we can value these companies.

The porter’s five factor model has the following five factors, on which the moat of a company can be analyzed (by the way, I do this analysis for every investment I do)

• Entry barrier : Level of entry barriers in the industry to a new entrant
• Level of rivalry : Level of competition within the existing companies
• Supplier power : bargaining power of suppliers
• Buyer power : bargaining power of buyers
• Substitute product : presence of substitute products

I have a spreadsheet uploaded in Google groups, wherein I had done a similar analysis some time back for multiple industries. It is dry reading, but I think a useful document (for me). I am reproducing some parts below for this post, for the IT industry with appropriate updates.

Entry barriers: This factor can be analyzed in detail based on multiple sub-factors. I have listed the analysis in the table below. The summary of the analysis is in the first row

The above analysis clearly shows 2-3 main sources of competitive advantage. Scale is critical in this business as the larger companies tend of have cost advantages due to economies of scale and can also provide the requisite resources for large engagements. In addition, these companies can afford to spend higher amounts on marketing and sales. The second source of advantage is customer relationships (long term contracts). This advantage is not set in stone, but it a very critical asset. For ex: After the scandal, the key value in satyam, was existing client relationships and Mahindra paid for that. Ofcourse this asset does not have as much life as fixed assets and can be lost much more easily.

Level of rivalry

The above analysis shows that the level of rivalry has been high, but not destructive till date. Most companies in the sector earn high return on capital and are fairly profitable. This has been mainly due to high growth in the industry and low fixed costs (they can cut our salary and bonus when the demand drops J). Due to multiple companies in the industry, the long term returns in the industry are bound to trend lower (read that as profit margins).

Supplier power

If you work in the IT industry, you are the supplier. Supplier power - zip, nothing..doesn’t exist. Yes, companies say employees are their asset etc etc. We all know the reality. Employees are the raw material for the industry like steel and copper (sorry if I hurt your feeling by comparing you to a commodity J ). Most companies pay for this commodity based on what the market prices it.

Buyer power

Buyer power is clearly a bigger issue for smaller companies. The large IT companies have consciously tried to diversify their revenue to reduce dependence on any specific client. This is a key variable for a company. If the buyer concentration is high, the vendor can get squeezed and will not be able to make high returns.

Substitute product

Substitution of one vendor with another is a key competitive threat for each company. Clients typically have multiple vendors to ensure that they can maintain competition and keep the prices low. Till date, the competition has not been destructive and most companies have made decent returns in the past.

Conclusion

The broad conclusion one can draw from the above analysis is that IT companies do enjoy a certain degree of competitive advantage. The source of this advantage is no longer the global delivery model (everyone does it) or the employees (all the companies source from the same pool). The key sources of competitive advantage can be summarized as follows

• - Switching cost due to customer relationships
• - Economies of scale
• - Small barriers due to specialized skills in specific verticals such as insurance, transportation etc
• - Management. This is a key source of competitive advantage in this industry and explains the wide variation of performance between various companies operating in the same sector with the same inputs and under similar conditions.

Inverting the question

Let’s assume for argument sake that the industry does not have a competitive advantage and is similar to the steel or cement industry (which by the way has some competitive advantage). In such as case, the industry would be characterized by intense competition and low returns on capital (low ROE). This has not been the case for the last 15 odd years and most companies especially the larger ones have maintained fairly high returns on capital. This variable alone shows that the industry has some level of competitive advantage - especially the larger ones.

Valuation

The above analysis is clearly a backward looking exercise. Valuation on the contrary requires a forward looking estimate. Can we arrive at any conclusion from the above analysis?

It is difficult to arrive at how each company will evolve over the next 5-10 yrs (the typical duration required for a valuation). However we can arrive at some general conclusions

• 1. As in other industries, the return on capital for the industry should come down over the course of next 5-10 yrs
• 2. The industry could split in two levels - the large SI (system integrators) such as Infosys, Accenture, Wipro, IBM etc and the niche players. Both these type of players should enjoy a decent level of profitability.
• 3. The industry is likely to diversify and expand into new geographies, but the future growth is unlikely to be as high for the big players.

The above conclusions are my educated guess and are as valid as anyone else’s. However based on these conclusions I would propose the following

• - The large SI like Infosys, WIPRO etc should continue to do well. However, these companies would see only moderate growth in profit. As a result I would be hesitant in giving a PE of more than 25 to these companies.
• - The attractive returns in this sector are to be made with the small niche players. These companies, if they can be indentified early enough, are likely to have high growth and profit. However this is a specialized form of investing, requiring deep skills in the specific sub-segments.

Sulzer india has received technology support from its parent, which holds 80% of the equity in the company

Financials
The company has maintained an ROE in excess of 25%, with the number increasing to around 40%+ in the last 2 years. The company’s total asset base is almost same as the cash balance, so net of cash the invested capital is a very low amount. In addition the company also has a source of additional capital - customer advance which reduce the net capital requirement in the business.

The sales have tripled and net profits gone up by more than four times in the last 4years. The company is debt free and now operates with negative working capital

Positives
The company operates in a knowledge and technology intensive industry. It is supported by the parent in terms of technology and technical transfer. The company also has a strong balance sheet with excess cash and has demonstrated a decent growth record in the last 5 years.

Finally the company has maintained a decent dividend payout ratio in the last few years

Risks
The key risk in my mind is the lack of in depth information available on the company. The annual report is fairly sketchy. The parent holds 80% of the company and has attempted to delist the subsidiary in the past. As a result, I personally don’t expect them to care too much about their Indian shareholders. The tone and disclosure in the annual report seems to reflect the lack of interest on part of the management for the minority shareholder.

The core business of the company is fairly healthy and the company should continue to do well in the future. The risk is how much the minority shareholder will benefit directly from the value creation.

Management quality checklist

• - Management compensation : The management compensation is not excessive and appears to be on the lower side
• - Capital allocation record (dividend, ROE, excess cash, acquisitions etc) : seems decent with reasonable payouts in the form of dividends
• - Shareholder communication: sketchy and poor.
• - Accounting practise: appears conservative
• - Conflict of interest: Though strictly not conflict of interest, the company pays 2% of sales as royalty to the parent. There is no explicit conflict of interest.
• - Performance track record: The business performance has been good even during the downturn.

Conclusion
The company sells at around 11 time current earnings with cash levels in excess of 10% of the market cap. In view the fundamental performance, the company could easily be valued at 20 times current earnings. However fundamental performance is not always the sole determinant of value. In cases such as sulzer, which are MNC subsidiary companies the business performance does not always translate into shareholder returns as long as the management does not take specific measure to improve shareholder returns.

Sulzer has tried to delist the company in the past and current holds 80% of the stock. I will have to stretch my imagination on the point, that the company will suddenly start looking at improving the returns for the minority shareholder. In such a scenario, it is quite difficult to put an appropriate number on the intrinsic or fair value of the company.

Under the new system there are currently just 10 members with the full 5 star rating. This number is expected to grow over the coming weeks as more and more of our analysts meet the new requirements.

Moves above 17k do seem a little stretched and speculative in nature although it can even go to 17.7k-18k in a very optimistic scenario for extreme near term. But at this point of time the upsides do seem to be capped and not a great place to go for longs as risk-reward is no more favorable.

Market Observations and Thoughts :

OPTIMISM , SPECULATION, QUICK MONEY , BUY long term , 6k on Nifty, NEW HIGHS nOW , INVEST soon etc etc and many such words to describe the current mood of investors/traders.

The market sentiment has not been so bullish since Jan 2008. At the same time in Feb/March 09 or even in May 09 the sentiment was still very cautious with people asking for Nifty puts/Shorts etc as hedge to portfolio or should i sell of everything !!!!

And now at 17k i get more requests for Long term investments!! Whereas at 9k people asked should I sell all and re-enter at 6k :P. Nothing wrong with it this is how the market is.

The simpler view now is remain hedged/increase cash if you are a medium term investor. Yes the index may go to 18k also in near term but discipline is what one should keep forever.

Had u been disciplined last year then u would have digested the pessimism in October-March 09 and if you are disciplined now you should not have problem seeing the excessive Optimism Now

By all means I do remain a very strong believer of the BIG BULL market in India but in short term I would like to just sit n watch more …. This is the best time to review personal portfolio/life and learn more !!

This article was written by Nooresh. He also writes on his own blog at Technical View by Nooresh

I will try to detail out my thoughts on the above topic . This is however my own idiosyncratic way of doing it. It may make sense for some of you to approach a licensed financial advisor (if they exist in India!) for advice.

Before I discuss about the above topic, let us look at the above issue by inverting the problem. We need to identify what we should absolutely not do when planning for retirement - especially for our parents

• Chasing returns: Repeat after me - I will not put my parent’s or family’s funds at risk in pursuit of returns. Please read this a few times and memorize the statement. I cannot stress this enough. It would be completely stupid and irresponsible to chase an investment idea for extra returns with your parent’s money when they are depending on this capital to support themselves for the rest of their lives
• Due diligence - Do not put your family’s money in any instrument without complete due diligence. This includes the obnoxious ULIP schemes sold by most banks and guaranteed return policy sold by friendly insurance agents to unsuspecting seniors. The agents in question are not targeting your parents out of malice. Most of them have good intentions, it’s just that they do not fully understand the product they are selling. So please avoid all such agents unless you are sure you are buying something worth it.
• Be realistic - Do not assume returns in excess of 10-12% for a conservative, low risk portfolio. Even if you have made 30% returns in the past and consider yourself a finance whiz kid, please hold your horses and spare your folks of your brilliance. If this performance turns out to be a fluke or you hit a bad patch, they will suffer and you will carry the guilt (which is a horrible feeling)
• Face the facts - If your parents have unfortunately not been able to save enough for their retirement, do not target higher returns to cover for it. It could mean tough decisions for you and your parents in terms of lower standard of living (though assured) or help from you to maintain their current living standards.
• Paper work and admin - Do not develop an intricate investment portfolio where your parents have to spend half their time filing documents, visiting banks and other such administrative tasks. I have done this in the past and made it difficult for my family.
• Teach - Do not keep them in the dark about where their money is being invested. Teach or atleast educate your parents about the investment options you are selecting for them. Do not make it mumbo jumbo for them - When the market hits the top and retracts 5%, I will sell 6% and move to cash! Keep it simple and understandable. It will also ensure that you will pick some sensible options for them.

I do not plan to layout a template which can be followed step by step to plan for retirement. It would be difficult to do that as individual circumstances vary and so would the solution. My attempt is to layout my thought process on various factors for retirement planning which can be used to think through and execute a plan.

Risk and return
The starting of risk and return should be risk and not returns. One should not start with a return target of x% and then work out the investment plan. On the contrary, it is important to look at your risk tolerance and how much time you would have to cover losses, if any.
Risk tolerance in turn is a difficult and subjective topic. What is risky for me, may be low risk for you. As a result, risk should be analysed from a personal perspective. I personally do not follow the typical risk measures of beta and other such academic concepts.
I look at  risk as doing something without the knowledge and experience to do it, especially where I do not have a clear view on how much I can lose in the worst case scenario. Lets explore that point further - Lets say I wish to invest for my family in such a way that they are able to get a return of 10-12% over 3-5 year period. It is easy to get around 8% through FDs and other such fixed income instruments. In order to get the extra 2-3% per annum, I need to look at equity to improve the returns.

My own personal experience and the last 10-25 yr data shows that the BSE index has returned between 12-15% per annum over the long term. However at the same time, this average return has been marked by 30% drops and 40% increases too. So in this case I can look at index funds as a possible option as I have a rough idea of the risk and return profile.

Now suppose someone suggests that I should invest in gold or real estate as these are good hedges against inflation. I would hesitate for multiple reasons  

• I have never invested personally in these asset classes for investment purpose.
• There is lack of enough long term information and transparency in case of real estate (or atleast I do not have access to it)
• Gold has not provided good long term returns over the last 20 yrs. Now the next 10 yrs could be different and there seem to be a lot pundits saying so, but I don’t have the data to validate it and hence would stay away from it.

 In a nutshell, risk for me is a lack of understanding the investment option in terms of the long term return and the maximum possible loss under various scenarios.

Expected returns
The next aspect of investment planning is returns. Returns are closely tied with the level of knowledge and sophistication one can bring to the process of investing. Lets look at some scenarios

The know nothing investor - you have no idea of equities and have never invested in the stock market. Your idea of a bull market is the bull or cow you may have seen in a local indian market :). A person who has no idea of even the basics of investing should look at investing in bank FDs and look at 7-8% returns. Such an individual when planning for retirement for self or for parents should not go beyond these FDs. There is however a risk for such an investor too. The risk is inflation. As the investor is barely earning 1-2 % above inflation (or even less), there is serious risk that the investor would not be able to support himself with the excess 1-2% returns over inflation. If the investor draws any more than 3% of the capital per annum for expenses, he or she will run out of money in due course of time

The beginner - you have some idea of equities. You have invested a little bit in mutual funds. You typically watch CNBC and think the anchors are dispensing good advise. Your idea of the stock market is that this place is like a casino where you can make it big or lose money big time. A person at this stage is at the highest risk of losing his or her capital. Half knowledge is always dangerous. A person at this stage needs to decide whether he is ready to invest the time to learn more about investing. If this person is not ready to invest the time and energy to do so, then the best option for such a person is to invest a small portion of his capital every month in a good index fund (via a systematic investment plan) and the rest in bank FDs. If the person is able to keep a 40-60 asset allocation (40% in equities), he or she can expect 10-11% returns over the long term.

The key issue for such an investor is that he or she needs to start saving and investing early in life and reduce the equity allocation to a max of 20% after retirement. I would not recommend an equity exposure (via index funds) of more than 20% of capital for anyone in this group who has crossed retirement.

The sophisticated investor - This kind of investor has been investing for the last 6-7 years. He or she has seen 1-2 bear market and has not been scared by it. He understands the risk involved in investing and has a fair amount of risk management skills. If you parents fall in this bucket, I doubt they would need your help.

If you are planning your own retirement and have 15-20 years to go, then you are in a good position. A 60-70% allocation in equities can be maintained. A 30-40% investment in stocks with the rest in good mutuals or index funds can be built via a systematic investment plan (investing a fixed amount of money each month).

This kind of investor needs to keep the long term in mind and should avoid a short term approach of performance chasing. The risk of losing capital for an extra 2-3% is fairly high and should be avoided. An investor in this group can expect around 13-15% return in the long run and if he or she starts an investment program early, should be able to retire very comfortably

The expert or the guru - This kind of investor has been investing for more than a decade. He or she has beaten the pants out of the market (in excess of 20%). If your parents are in this group, congratulations !!. They will take care of your retirement

If you fall in this group, I am not sure why you are reading this post. A person in this group has no reason to think or worry about his or her retirement. Any one who can compound money in excess of 20% can retire a very rich man ( for ex: such a person can convert 100000 to 40 lacs in 20 years). A person in this category can manage money for others and become seriously rich before his or her retirement.

Various instruments
In the above discussion I have discussed about fixed income instruments and equities. You would have noticed a lack of discussion about other assets such as real estate, gold, commodities, options etc. Let me share some thoughts on the various asset classes below

fixed income: One can expect returns in the range of 6-8% and low risk. Typical options are bank FDs, Post office deposits and debt mutual funds. All these options are low to very moderate risk and good for the first two group of investors (the know nothing and the beginner)

Equities: One can expect returns in the range of 12-14 %. Typical options are index funds and mutual funds. This option has moderate to high risk and should be handled with care. A beginner should look at only index funds or some good mutual funds. A sophisticated investor can look at stocks as long as he or she knows what they are doing. A lot of investors and financial planners would like to assume that equities can returns in excess of 20%. However the indian markets over the last 15-20 yrs (a typical retirement planning horizon) have returned around 13-14% and I would not like to assume anything more than that when planning for retirement.

Real estate: This asset class has become a hot favorite in the last few years. However the long term history of real estate across the world and across time horizons is that the returns from this asset class are 1-2% lower than equity. If you are beginner or a know nothing investor, I would really not look at putting money in real estate (other than for primary residence). This is an illiquid asset class with lack of transparency in india. If you are a sophisticated investor, then it may be possible to get a fair return, but then one has to be ready to spend the required time managing it too. I have written about real estate here in the past

Gold, commodities, and options: I have clubbed all these options on purpose. If you are a know nothing or beginner, I would stay away from these assets as far as possible. In these categories I will buy gold when I am buying jewelry for my wife and commodities when I need sugar or wheat for my kitchen J. The only group which should invest in these assets should be the experts. I would even say that sophisticated investors should not look at these assets for long term investing. If you need an ego boost, invest a little bit for fun, but If you are not an expert, you can get you’re a** kicked big time in the market.

Asset allocation and rebalancing
I have written about how asset allocation drives you portfolio returns. All of us think we can tolerate risk and can afford to have a high equity component. My suggestion is to keep it lower than the level you think you can maintain without losing sleep.

Let’s say you are looking at 11-13% returns and are planning to keep around 50-55% of your portfolio in equity. I would suggest that one should start with a 30-35% allocation and go through a bear market and see how one is able to survive it. If you are able to avoid the gloom and doom and still able to invest during the bear, then go ahead and start raising the allocation. It is easy to maintain a high equity allocation during a bull market. We are all geniuses during bull runs. The test of patience and risk tolerance is during a bear market.

Finally if one is not actively managing his or her investment, then it makes sense to start reducing the equity holdings during a bull run to bring it to the target allocation. For example, if you target is 40% and the equity components goes up during the bull market to 60% of your portfolio, then it makes sense to start liquidating some equities to bring it to around 40%. In contrast, if your allocation drops to 30% during the bear market, then one should start buying equity to bring it up to the target level.

The above suggestion is easy to understand and very difficult to execute. I have personally gone through this last year. It felt like quick sand. I was constantly adding money from March 2008 to my equity portfolio and the market kept dropping at the same time. So at the end of the year, the absolute value of the equity portfolio stood at the same level as the start of the year, inspite of pouring money into it. It is not easy to constantly lose money in face of a bear market.

One can further split the allocation between different instruments in each of the categories. One can split the debt component into Bank FDs, Debt funds, Post office deposits etc. In a similar manner the equity component can be split between mutual funds and shares. The actual numbers need not be precise and you do not have to get very scientific on it. As long as you are close to your target levels, it should work out fine.

Administrative effort
This is an ignored, but important component of portfolio planning. It does not make sense to invest in an option where there is a lot of documentation and other risks and costs involved. In the past, shares could be bought and sold only in the physical format and there was always a risk of bogus shares and the headache of paperwork.

In a similar manner mutual fund investing also involved a decent amount of paperwork. Luckily most investment options (except Post office schemes and Bank FDs like that of SBI) are now convenient and easy to manage. However one should keep in mind the paperwork involved in the specific investment option. My own preference is to look for option which requires minimal paperwork, allows online mode of investing - preferably automated, and does not require me to track payments and receipts on an ongoing basis. I also prefer investment options which would allow me to pull an electronic statement at the end of the year for tax purposes.

Most of the investment options and firm providing them are focused on making it smoother and easier for the investor. However we still have some options such as the post office and public sector banks who believe in torturing you, even when they take your money.

The entire topic of retirement planning which is a subset of personal finance is a vast topic. One could write a book on it and could easily update it on an annual basis. I have tried to scratch the surface here and just provide some initial thoughts or factors to look at when developing your portfolio for your or your parent’s retirement.

If you have to take one point from my post, it should be this - Invest with full knowledge and understanding of the investment option and always focus on the risk or downside.

Just jaw-key-ing. There, that’s how you’d say it. An expression of comfort that reflects your change of urge to be crazy, uninhibited, carefree, un-posey, cheeky even. We’re all for it. Go ahead, easier said than done.

A “BRIEF” ABOUT THE COMPANY

Just jockeying Sounds and feels familiar na? Well yes, I’m talking about one of India’s very popular brand for Innerwear/Leisurewear for Men and Women. The company behind getting the world renowned brand “JOCKEY^®” to India, Page Industries Ltd. was set up in 1994 by Genomal family.

The family had then been associated with JOCKEY International Inc. for 44 years as their sole licensee in the Philippines. Page Industries became a public company in March 2007 and is quoted in the Bombay Stock Exchange and the National Stock Exchange of India.

Page Industries Ltd., located in Bangalore, India are the exclusive licensees of JOCKEY International Inc. (USA) for manufacture and distribution of the JOCKEY^® brand Innerwear/Leisurewear for Men and Women in India, Sri Lanka, Republic of Maldives, Bangladesh and Nepal. Recently the contract has been extended for the next 20 years, i.e. till 2030.

CURRENT SCENARIO

As of the end 2008, the company employs over 6,000 people with manufacturing operations spread over three plants in Bangalore totaling 500,000 square feet of space. Page Industries commands wide spread pan India distribution encompassing over 16,000 retail outlets in 1,100 cities and towns and has revolutionized the innerwear market by launching exclusive JOCKEY^® outlets across India numbering 50 as of end 2008.

PEOPLE ON THE INSIDE

ACHIEVEMENTS TILL DATE…

® Awards:

In 2005 and 2009, the company was awarded the “best licensee of the year” by Jockey International Inc., as recognition for its outstanding achievement in establishing and strengthening the JOCKEY^® brand as a market leader in India.

® Adds New Geographies & Renewal of License till 2030

® In August 2008, Page Industries’ promoters, Genomal family and Jockey International USA celebrated their golden anniversary of association and both groups renewed their commitment to an even more exciting next 50 years. The new agreement will be for the next twenty years, extending through the year 2030 and will include additional countries, focusing on the Middle East.

FUTURE PLANS

® MORE JAW-KEY-ING!!!

New Sports and Leisure wear range for men and women

Jockey has become an aspirational brand overtime and has now evolved into a lifestyle brand. It is this aspect that has seen the company recently advance into the leisurewear segment for men and women with clothing that can double up as sleepwear, casual wear or gym wear under a sub-brand called Jockey Sport.

Jockey Sport can grow because it leverages the company’s core competence. There is synergy at the back-end because it uses the same technology used in creating innerwear. The leisurewear market is currently very fragmented in India, but is estimated to be about two-thirds of the Rs. 3,000 - crore men’s innerwear market.

3D-innovations^®

Jockey has just introduced ‘3D-innovations^®’, a new product category exclusively for men which takes the meaning of “Comfort” to a new level. This range is targeted to consumers who appreciate the benefits of innovation and technology.

® SETTING UP EXCLUSIVE RETAIL STORES OF JOCKEY

Page Industries will set up 28 more exclusive brand outlets through the franchisee model, taking the total number to 75 by 2010. It has a market leadership of about 21% in the mens Rs 1, 600-crore middle and premium innerwear segment but has a market share of 12-13 % in the Rs 650-crore women’s premium innerwear segment which is also being addressed by brands such as Lovable, Triumph and Enamor. The premium mens innerwear segment in India is growing at 28%.

First Jockey lifestyle boutique opened in Nagpur – Tapping Tier Two City

As part of this expansion, exclusive Jockey outlets will open in Pune, Ambala, Chandigarh over the next few weeks; and in Hyderabad, Chennai, Coimbatore and Kota in Rajasthan over the coming months.

The international style exclusive boutiques carry the full range of Jockey inner wear and leisure wear.

FINANCIALS

Lets take a look at some of the fundamentals of the company. The company’s performance over the past 5 years has been spectacular (from the time it’s listed)

Its debt/net profit ratio, which tells us the number of years a company will take to repay the debt, is also very reasonable at 1.32 years. Its ROIC has also been very high at approximately 33% over the past 5 years.

Despite the downturn in the economy experienced by some sectors Page Industries’ performance has been good. In fact for the third quarter ended December 31 2008, its sales touched Rs.67.34 crores; registering a growth of 30% over the sales of the corresponding quarter of the previous year.

Sale for nine months ended December 31 grew by 35% to Rs.198.25 crores and PAT amounted to Rs.26.08 crores for the nine months, registering a growth of 34%. The Board declared a third Interim Dividend of 40% and this along with two Interim Dividends already declared amounted to 140% for the year 2008 – 09.

Shareholding Pattern:

The total promoter holding in the company is quite high at 64% - another good indication!

LOOKING AHEAD

Page Industries Ltd. has recently launched the new “Just Jockeying” campaign for Jockey, positioning the brand as a fun, youthful lifestyle choice, to appeal and tap the free thinking mentality of today’s youth. And what an eye catching ad it is indeed!

The next thing about the company which caught my attention was that they are launching new products and segments like Jockey Sport and selling casual t-shirts and people are buying their products!. I felt compelled to come back and check the company behind jockey and checked its past performance. After a long time I felt compelled about writing a post. I’m completely convinced about the company, its brand and its policies, about everything. The company is opening up exclusive retail stores and is in an expansion mode even during a downturn!

I would love to hear views from experts and anyone interested in the company.

This article was written by Charu Gupta. She also writes at her own blog Charu’s Blog

Some of the beginners to online stock trading do not understand relationship between Share Trading account and Demat Account . In this short article lets see the relationship between Demat account , Trading Account and your Bank Account . We will also see how many trading or Demat account you can have in total .

Work Flow

Below is a short chart where I have tried to give the flow when you buy a share . click to Enlarge

Demat Account : Account where your Shares are stored in electronic form .

Trading Account : An account which is used to place orders for Buying and Selling of shares .

So Trading account is an interface between your Bank account and your Demat account , when you buy something , Trading account takes money from your Bank Account (Its already taken from your Bank account and saved in Trading account) and buys shares and stores it in your Demat account . When you Sell something , Your trading account takes back the shares from your Demat account and Sells them in Stock Market and get back the money and that goes back to your Bank account (actually you manually transfer it to Bank account from Trading account most of the times .

Question : Does any one know maximum how many demat account can one open ?

The current rally has added 98% to the SENSEX relative to March 2009 low of 8160 points. The rally is going on for last 5 months, the question is, what is fueling this rally? This rebound will make us believe it is start of next Bull Run. Any prudent investor will try to figure out what has happened since March 2009 that justifies this rally. As always, at hindsight everything makes sense.

With the unprecedented level of stimulus from many different countries, the global economy is showing signs of stabilization. In addition, the rebound of Oil prices in international market seems to give boost to many countries. Accordingly, I believe Indian economy is also showing signs of stability. I think the biggest boost for Indian business sentiment and environment has been the continuity of the pro-reform government at its helm.

Let us look at latest quarterly earnings (relative to last quarter) of the 30 Indian corporations that are included in the SENSEX.

• I compared total income, operational profits, gross profits, net profits, and earnings per share.
• The latest quarter was quarter ending June 2009, and it is measure relative to SENSEX performance for  quarter ending March 2009.
• Red indicates negative, Green indicates positive and Yellow indicates no changes in quarter-over-quarter results.
• Table below shows the mapping of this performance for all 30 companies.

As you can see in the table, there are more positive attributes than any negative indicators. There are now 10 companies (as opposed to seven in March 2009) that are showing positive results across all parameters, while eleven companies are showing negative results (same as before). In the remaining nine (as opposed to 12) companies are also showing mixed results. As one can observe there is marked improvement in earnings for SENSEX companies.

Assuming that one can use SENSEX companies as a trend indicator for any given sector, the sector trends relative to March 2009 quarter are:

• Capital Goods: turned negative
• Finance: stabilizing
• FMCG: continues to be positive
• Housing Related: turning positive
• Information Technology: turning negative
• Metals and Mining: turning positive
• Oil and Gas: turned positive
• Power: turned positive
• Telecom: turned negative
• Transport Equipments: turned positive

At its low point, the SENSEX PE ratio had reached around 10. With this 5 month rally, the SENSEX PE ratio is now at 20.

I would tend to believe this rally has being fueled by the two aspects viz., (1) positive signs in company earnings;  (2) market getting back to the fair valuation after undershooting to PE of 10.

How does it affect individual investor like me?

In simple terms, the buying opportunities have reduced. Many stocks that I have looked in recent past are above my fair value range. If I have to buy them they are at a premium of 15% to 20%. Therefore, I am inclined to hold on to my cash position. Having said that, I believe looking the SENSEX provides only a generic trend. For an average to exists, there has to be companies above that point, and companies to be below that point. So I am continuing to look for opportunities which are below the average point.

I am not a fan of IPOs. I do not consider them an attractive opportunity for my investment objectives. In general, companies or organization come to the market with IPOs to generate capital. Their objectives are to generate as much capital as possible with minimum possible dilution. Companies usually choose opportune time frame to offer it to open public so that sufficient premium can be added to fair value (or book value). I do not find fault with the company. They are doing what they are supposed to do. They are attempting to meet their objective to get maximum possible value from the market.

Everybody will have an opinion which is perfectly acceptable. The broking world says “buy it for long term”. Retail market sentiment says buy, buy, and buy. However, I am not buying it. I am giving it a pass. The key question here is what is in there for me as an investor?

• First, I am already exposed to oil and gas sector in my portfolio. Buying Oil India will over expose me to one sector. While believe Oil India is a good company and worth investing, but over allocation in a given sector never a good idea. If oil and gas sector performance improves for whatever reason (such as pricing regime change, market pricing of oil, etc), then I will get the benefit because of my current allocation to ONGC.
• Second, I believe the shares are a tad higher than I would initiate a buy. My rough estimate based on earnings, dividends, and book value would be in the range of Rs 800 to Rs. 900. This is the fair value price range for me to buy (assuming I am interested). The shares are being priced in the range of Rs 950 to Rs 1050 which is higher than I would be willing to pay. The IPO offered price has 10 to 12 PE ratio, 2.0 to 2.3 of book value, and has close to 3% dividend yield. This would tend to suggest that it is priced to buy.
• Third, assuming if this generates interest for me, I will have to sell my partial winning position in ONGC to buy Oil India. It may be a good reallocation strategy to diversify my positions, i.e. to take something out of winning position and buy something else. However, selling winning position and buying at fair value is not justification enough to make the move. If Oil India shares were in my fair value buy range or below, then reallocation would make sense.

Now you know why I am giving it a pass. Although it is approximately one tenth of the size of ONGC, I believe Oil India is a very good company. It has good profitability, good financial management, good operative history, good future prospects, and pays good dividends. Long term investors who are not exposed or lack oil and gas shares in their portfolio can think of initiating a small starter type of position.

All - MoneyVidya.com recently got some coverage on ET Now, on a show called ‘Starting up’. We did an elevator pitch for some funding. Check it out on YouTube: www.youtube.com/watch?v=TqdgTlD9l6c

I have written in the past on my reluctance on sharing my portfolio in detail, especially the performance. I have disclosed my portfolio in the past (see here) and it has more or less remain unchanged since then.

There are several reasons for not sharing my performance. The key reason for not sharing the performance, is that a public display would put pressure on me and would in turn impact my investing decisions. Investing is tough enough and I don’t want to make it any more tough for me.

The second reason for not displaying the performance is that I want the readers to follow my posts based on the strength of the ideas I present and not the performance of my portfolio. The soundness of idea - sensible and rational value investing - does not change based on whether I perform well or badly as an investor. There are some investors who are far superior to me in performance and practise a similar approach. The performance of these investors is a reflection of their superior skills.

In addition to the above reason, I can choose to put any numbers as there is no independent audit of these numbers. I do not want to create a situation where the readers are always wondering whether the numbers on the blog are real or imagonary.

As you can see in the sidebar, I also publish my posts on moneyvidya.com. This association is non financial and i was contacted by the moneyvidya team in past to be a member of their core blogger team. I have posted my stock ideas on the website in the past few months and thought of sharing a  snapshot of the portfolio performance.

A few caveats before you read too much into it.

• The above stocks do not represent my portfolio. They represent a few of my ideas which I decided to post on the website.
• The above is an equal wieghted portfolio of the picks which is not the case in my personal portfolio.
• The portfolio performance may not be a true reflection of my personal portflio in future as I do not have idea of how to take a stock off this model portfolio when I decide to sell it (maybe the moneyvidya team will clarify that for me)

So why publish this portfolio
A few key points stand out.

This dummy ( pun intended ? :) ) portfolio has been in the top 10% for the last 10 months ( I don’t know how that is calculated though by the moneyvidya team). This in a way shows the validity of picking good stocks and holding on to them.

This dummy portfolio has beaten the index by around 20% during this period. This period is too short to reach a conclusion, but is interesting as typical value investors generally under perform bull market and out perform bear markets.

Finally, not matter what I try to claim, there is a certain amount of bragging involved too. The reason why the last few months have been more satisfying, is that I have been able to follow my convictions, ignore the doomsday predicitions and commit my personal capital to my ideas. That is more satisfying than the gains themselves.

Sensex Rising Wedge :

Sensex Technical View :

Rohit,
As a stock moves towards its intrinsic value, there is a temptation to exit a little before the final value is hit, especially if you have waited a long time for Mr. Market to come around.
I feel that as a value investor the sell decision is much tougher than the buy decision, because the buy decision usually comes with a big enough margin of safety. However, during the sale decision the market value may be stuck at Intrinsic Value minus 10%, making the investor quite jittery to sell.
I have been asked this question in a several different ways, but all essentially boil down to the point - when should one sell a stock ?
I agree with the point made by rajiv and several other readers - selling is more diffcult than buying. In addition, there is no clear cut formulae for selling. The process of selling is made even more diffcult by the various emotional and psychological factors involved in selling.

Emotional factors
Most the discussions and articles on investing rarely discuss emotions explicitly. I find that strange as anyone who has ever invested in the market can vouch for the emotional roller coaster. The rational aspect of selling is easy for a long term investor - sell when price crosses intrinsic value (or 10% below or above - take your pick of the number)

I have written on the above question earlier - see here. The is the rational way of deciding on when to sell.

Now this suggestion may have sounded irritating to some of you and rightly so. The reason this  advice, though rational, does not sound great is due to the emotions involved in selling.

There are two situations in which one is selling - one has made great gains in the stock and wants to capture some of the gains. Selling at this point is driven by the fear of losing the gain, which is counterbalanced by the desire to hold on to a stock which has treated you well and also by the doubt that there may be more upside to it.

The other situation in which one sells a stock is when one has lost money on the stock and wants to get rid of the piece of !!@##. In this situation the decision is driven by disgust.

These emotions are quite powerful and not easy to manage
All these emotions are nothing new, right ? Even if you have felt these emotions earlier, it does not mean that you are managing them well.
I maintain a spreadsheet of all my holding with the qty, intrinsic value estimate, current price and discount to the current price. At any point of time, when I am looking at my holding, I am looking at the instrinsic value and the discount to it. I ‘anchor’ myself to the instrinsic value. As a result if the stock is selling below the intrinsic value, I will continue to hold.

As the intrinsic value of the stock gets updated every quarter, I am not tied to a fixed value. If the business performs well, the intrinsic value goes up and so does the sell target. If the company performs badly, then the reverse happens.

So is this buy and hold ?
Buy and hold is most abused and misunderstood term (more on that in another post). My approach is not buy and hold, tops and bottom or any other term or title. The logic is simple - buy when something sells for less than intrinsic value, hold till it is below intrinsic value and sell when it is above it. Now if the intrinsic value grows faster than the price,  I will continue to hold.

Where’s the catch ?
The catch is in getting the fundamentals and intrinsic value estimate wrong. If you get that wrong and refuse to change your opinion, then you are toast.

But you lose money when the market drops !!
Yes, that does happen. If the market drops, my portfolio will drop with the market. I have yet to figure out how to keep jumping in and out of stocks and still keep my sanity. There is so much chatter and noise in the market, that it is easy to go nuts. My way of keep my sanity intact, has been to adopt the above approach.

Is this the best way ? no I will not claim that. However as I have a day job, I would rather lose a percentage points, than lose my job and maybe my sanity. Finally, I have yet to find another approach which relies on sensible and consistent logic and not on the opinion of others.

Our present 20s and 30s generation, of which I am part of, is very vibrant, inquisitive, and very progressive and has a desire to succeed in one way or the other. As they say, life is very fast in today’s India! The IT generation is very impatient which reflects the IT domain’s continuous changes in short one year. What is new today is considered to be obsolete in 2 years. Unfortunately, we fail to understand it is not same in investing.  Here are few interesting tidbits:

• We folks in 20s and 30s simply want to get things fast. We fail to realize wealth does not come fast. You can have an acquaintance at fast past, but friendship takes long time to build.
• Remember the euphoria of 2006 and 2007 where SENSEX zoomed to 21000 and easy 20%+ returns. We thought it will never go back to 9000. It did. The higher you go, the harder and faster is the fall.
• We focus on 40%+ returns since March 2009. But we fail to realize it is still 25% below its late 2007/early 2008 peak.
• After continued lows of 2008 and Satyam fiasco, many of the 20s and 30s investors have lost trust in long term investing. But we fail to realize, a failed ones are still in market albeit in different form. SENSEX is still there, players and experts are still there, and even Satyam is still there. If fundamentals are strong then it will continue to exist.
• We always talk about risk, but fail to really quantify it for our individual scenarios.
• Very few traders, trade with their own money. Most of the time it is other people’s money.

Over the past 10 years, markets have given an average 15% compounded return. However, we ignore 15% sustained return in our quest for that allusive one time 20 to 25% in short time. History shows that probability of trading returns are usually in very low single digits.

A slow and conservative strategy focusing on high quality, low risk stocks should (and will) significantly out-perform the short term approaches. Based on my analysis following are five low risk companies for a long term investor who is willing to look beyond 5 or 8 years.

1. NTPC
2. ONGC
3. Pidilite
4. Asian Paints
5. Hero Honda

The 20s and 30s investors must realize that the fast pace investing (or trading) does have potential high returns in a very short time. However, it also comes with very low probability of success and very high risk.

Sensex has given the first indication of weakness with a dip today and a quick dip might be an indication of possible weakness to come but in this market its better not to make a quick conclusion after a day or two.

Major trend change level is below 14750 on closing basis. 2-4 sessions closing below 15450 would give indication of momentum being reduced. Continue to be stock specifc and above all dont be leveraged or on margin. With many trading stops being triggered today the amount of cash in portfolio should increase and if not then look to reduce exposures by booking profits or small losses in new trades.

Stocks to watchout for :

Maha Seamless almost did 285 tgt with high of 284.

Sterlite stopped out.

Reliance did 2120 then stopped.

Shriram gave intra day move to 355.

Voltas stopped out.

Glenmark and Ganesh hold but do your own research as investment picks.

Have reduced lot of exposure in short term trades due to trailing stop hits for advisory clients.

No new stocks for short term as i would prefer to wait and watch the next few sessions.

Some Quickgyan for a read:

Of all the speculative blunders there are few greater than trying to average a losing game. Always sell what shows you a loss and keep what shows you a profit.

You don’t need to trade everyday - there is the plain fool, who does the wrong thing at all times everywhere, but there is also the dalal street fool, who thinks he must trade all the time. No man can have adequate reasons for buying or selling stocks daily – or sufficient knowledge to make his play an intelligent play.

Losing money is the least of my troubles. A loss never troubles me after i take it. I forget it overnight. But being wrong – not taking the loss – that is what does the damage to the pocket book and to the soul.

A speculator must concern himself with making money out of the market and not with insisting that the markets must agree with him. Never argue with it or ask for reasons or explanations.

• The speculator’s deadly enemies are: ignorance, greed, fear and hope
• you must always put a stoploss to preserve capital
• a small loss or several small losses can easily be made back with one large profit but when you let large losses run against you it is hard to get them back.
• the fear of the market is the beginning of wisdom.
• never average a loss rather buy on the way towards profits.
• the most important of all ( huge fno traders and margin traders. )
• when you make a trade you should never risk more then 10% of your capital and if u have a few losses reduce your units of trade.

This article was written by Nooresh. He also writes on his own blog at Technical View by Nooresh

Adani Power was priced in the range of Rs. 90 to Rs. 100 per share. It completed the subscription period and based on the NSE data; it was over subscribed by 20 times. My viewpoint is, its the herd mentality and craze continues. We individual investors never learn our lessons.

• This IPO is expected to fund the two out of four ongoing power projects. It has no operating history as of today.
• Since it is still under development, it does not have any revenue sources. On what basis was the price range set at Rs. 90 to Rs. 100. I am sure this is being valued at more than 30 P/E ratio (or perhaps even more) based on projected first two years of earnings.
• There will be a long wait before the company can have any positive cash flow. Breakeven in power sectors are longer than four to five years. This assumes projects complete on time.
• With all this risk I cannot fathom the pricing and valuation that we individual investors have to pay for IPO? Does it make any sense?

Indiabulls Power is another IPO that is in making and expected to hit market soon. In relative terms, it will be at a little disadvantage because Adani IPO pulled in large money out of investors, and hence available base will be relatively smaller.

• Parent company, Indiabulls Group, operates more than 100 subsidiaries, all from New Delhi. Quite intriguing, isn’t it?
• The company is showing earnings and dividends. Since these are still under development, I fail to understand where are the revenues coming from?
• Here again, it does not have any operative history and experience. All of its five development projects are expected to start coming online in second half of 2012, which is three years from now. The company will have to take debt to sustain itself until then or longer if projects get delayed. After that another three to five years for company to breakeven and have positive cash flow.
  

National Hydro Power Corporation (NHPC) is the third Power IPO expected to open in early August 2009. NHPC is Indian government’s public sector undertaking that primarily focuses on hydro-based power plants. The expected price range per share has been set at Rs. 30 to Rs. 36.

• It has an experience, it has a growing revenue source and it has demonstrated. Its EPS for last three years is Rs. 0.96 (2009), Rs. 0.97 (2008), and Rs. 0.87 (2007).
• The P/E ratio of is in the range of 31 to 37.
• In general, Hydro power plants are relatively more capital intensive on per MW basis than thermal power plants. They also have higher gestation period.
• While its fuel cost are practically nil, these plants have high risk of predictability for operational performance because of vagaries of water levels and monsoon. Therefore, these plants take relative more years to break even and generate positive cash flow.

Question is…

The existing well established, highly profitable, and extremely well run NTPC is available at lower valuations of approximately 22 P/E ratio based on 2009 earnings. Both Adani Power and Indiabulls Power have no operating history, and even then they are being priced at 30+ P/E. Agreed they are all potential future growth opportunities. However, individuals buying into these IPO as already paying higher valuations i.e. the future growth has already been priced into these values. Where is the potential for capital growth?

Similarly, the NHPC although profitable is being already priced at 30+ P/E ratio. Do we individual investors really expect to have still higher valuations? To me it looks like herd mentality at its best, everybody is looking to trade higher on speculation.

If you are a sane investor, would you buy NTPC or these new IPOs? What are your thoughts?

The market was pricing much worse earlier. For a period of few months, the company sold for almost its cash holdings without any value being given to any other assets.Now that the market has realised that the company is not headed for extinction, it has revalued the company to a certain extent.

At the same time, I do not have any illusions that the fundamentals of the company will suddenly turn completely. The company is in for some tough times till the demand returns back to the pre-crisis levels and accordingly the profit peak achieved over the last few years could take some time too.

However if one looks at the annual report, one can see that the company is doing a great job of managing the downturn. The company does not require much capex and has reduced the working capital too. The cash and equivalents are now up at almost 700 crs which comes to around 60% of the market. I personally don’t think the company is going bankrupt and hence plan to hold on.

Ashok leyland
I have written about the company earlier here and here. The company reported an almost 50% drop in sales and 80%+ drop in profits.

If you are interested in the company, I would encourage you to see the latest presentation by the company here. The company has taken pains to detail out the problems and how they are coping with the recession.

Ashok leyland has also been hit severly by the downturn and credit crunch. Although the demand is now stabilizing, the current quarter and maybe the next will continue to be hit due to inventory liquidation. The company books sales when it sells to the dealers. The slowdown in the demand has resulted in high inventory with the dealers which needs to be worked out. The only worrying factor in the results is the loss of market shares in HCV, especially in the mid segment.

The company’s results will continue to be hit for atleast a few quarters due to the slowdown and due to the depreciation cost of the capex which was put in place for the expected demand last year. As in LMW, I don’t think the company is going bankrupt and hence plan to hold on. At the same time Ashok leyland is not as cheap as LMW

Hinduja global
I have written on Hinduja global earlier (see here and here). My main concern was the high cash holding of the company which is being maintained in foreign sub. The company has since then tried to clarify the above fact (details of the cash holding are provided in the last quarter’s result).

In addition the company came out with a higher dividend and fairly good results in Mar 2009. As a result the stock has almost doubled since then. In the current quarter, the company reported a topline growth of 30% and bottom line growth of almost 80%. The company continues to perform well. My hesitation in building a large position still continue to be the corporate governance issues, even though the company is cheap by objective standards.

Gujarat gas
I have written on gujarat gas earlier (see here ). The company reported Q2 numbers and i am fairly satisfied with the numbers. The company has been facing a supply issue due to lower level of supplies from two long term sources.

The Q1 results were hit considerably due to the above shortage. The company has been able to secure some supply in the spot market to meet some of the demand. The topline grew by around 10%, though the volume dropped by around 5% during the same period.The bottom line grew by more than 10% if one eliminates the one time gain in last year’s result.

The company is doing quite well and I expect the profit growth to improve once additional sources of supply are tied up. Finally, the company has declared a 1:1 bonus issue. This does not change anything fundamentally other than higher dividends in the future. However the market has reacted positively and pushed up the stock price.

Jan 2008 - Whopee, I am getting rich. Just need to keep buying and selling and trading and I can retire! I am a genius!!!

March 2008 - I knew the market was overvalued, but then I am long term investor. So I am going hold onto my stocks during the this drop, maybe even buy more

Aug 2008 - The market is climbing again!! the bear market is over.

Nov 2008 - What happened ?!! oh boy, why did not sell in august. I have lost too much money. No point in selling

Feb 2008 - This is getting bad. Let me salvage whatever I can and move to fixed deposits. Even the CNBC guys are saying that

April 2008 - The market has risen a bit, but I am not worried. The market will drop once the election results are announced

May 2008 - The results were a surprise and missed the rally. I should have bought in Feb when the market was cheap. Let me wait

Jun 2008 - let me wait for the market to drop

July 2008 - Let me wait for the market to drop
….and the mental circus continues

I know I am exaggerating, but I know there are a lot of investors who went through the above mental roller coaster and will learn all the wrong things like

-        The market is a casino and one has to be able to predict the market in advance to make money
-        I should take more risk and should trade more frantically to make money
-        One needs to be glued to the TV to make money
-        All the losses are not my fault, though the gains were due to my brilliance

I have myself gone through some of the above emotions in the past. There is nothing wrong in experiencing all kinds of conflicting emotions during such volatile times. It will however not do an investor any good, if he or she does not learn the right lessons. Let me state a few things I learnt from bear markets in the past

-        There is only one person to blame for your losses - you
-        There is never a good or a bad time to buy stocks. If you can find a good company, which is undervalued, buying is a smarter decision than guessing what the market will do.
-        Prepare in advance - I have been guilty of being timid in the previous bear market. During 2001-2003 bear market, I lacked the self confidence of investing a meaningful amount of money even though I realized that the market and stocks were cheap. The reaction is understandable if you are new to the market and have suffered losses. After the bear market ended, I realized my mistake and make a mental plan of how much capital I would commit when the inevitable downturn came. During the current downturn, I was prepared psychologically to go ‘all in’ when the valuations became cheap.
-        Stop listening to markets forecast and silly predictions. They will cost you money in the long run
-        Learn continuously. You may make money by luck in the stock market, but will not keep it.
-        Stop looking backwards - I should have or would have done this is not relevant. The question is - knowing what I know now, what do I plan to do?

Yet no confirmatory moves but wishful thinking continues …. Let markets show u the way.

Sensex Technical View :

• NTPC , Welspun continue to look good for short term upmoves till they hold above 200. PFC 213 stop and pivot.
• Renuka gave a good entry point on 38% retracement to sub 120 levels ( could only advise small qty to clients ) and is now back close to highs. Multiple tops and resistance around 150. If the stock crosses above 150-154 with volumes could move up another 10-15% quickly.
• United Phosphorous is shaping well on charts buy on declines with a stop of 148 with a target price of 180-190 over next few weeks.
• EMAMI, HENKEL are the next FMCG stocks which are seeing buying volumes. The defensive picks seem to be on a roll. Investors can look towards the above after booking small gains in Godrej Consumers.

• Rolta buy above 143 ,
• RCOM above 285,
• Mcdowells above 980 ,
• GE Shipping above 260

Energy, Infrastructure and Banking stocks have the most commonly sold and the proportion of stock picks in these sectors which are to Buy rather than Sell, remain below historical avarages. Despite this phenomenon, IDFC remains one of the most favoured companies, illustrating a somewhat divided opinion on individual stocks within the Banking sector.

The average length of Buy picks continues to fall, demonstrating the community’s improved sentiment towards the medium term (6-12 month) outlook. However, we are still well above the historical average as the moneyvidya.com community is increasingly looking beyond 6 months to extract value from the market.

The proportion of picks which are to Buy a stock (rather than Sell one) continues to rise, and is now approaching a historical high as sentiment seems increasingly optimistic.

The results are good, though not spectacular. The company has shown an 18% year on year growth in volume and 25% growth in profit. The QoQ growth is -4% , mainly due to the seasonality of the sales. The company has been able to manage the costs well on yoy basis and reduce them from the previous quarter. The main reduction has been on material costs and elimination of the exchange variation losses.

So I should be doing handsprings and cartwheels ..right ? not exactly. I have written  earlier on anchoring and my failure to build a full position in maruti suzuki. So a 200%+ price increase is a simultenaous reason for me to smile and beat myself

Bharat electronics
I have writen about BEL earlier here . BEL recently announced Q1 results and reported 180%+ growth in net profits and a 10 fold increase in profits.

I am happy about the results, but not for the reasons you would expect. Let me explain – My key concern with BEL has been that the company has been booking majority of its sales in Q4 and a result was making almost 60-70% of its profit in the same quarter.

Now the company operates in a project kind of business and hence could be booking revenue based on percentage of completion method during Q4. As a result of the skew, the company had built up high recievables and hence higher working capital.

The company seems to be moving away from the above (need to confirm from the annual report) skew which is good as it would help in improving the cash flow and reduce work capital requirements. So the results are good, not due to the growth, but due to the reduction in the skew in the quarter by quarter revenue.

On an overall basis, the core business of the company is fairly immune from the recession and the company should continue to do well.

CRISIL
I have written about CRISIL earlier here. CRISIL reported its quartely results and reported a 17% increase in topline and 12% increase in the bottom line. The offshore research business continued to show growth inspite of the chaos in the international markets.

I am pretty happy with the results in view of the macro conditions in which these results were achieved. In addition the company reported a dividend of 25Rs/ share which amounts to a 50% payout. The company management is not hoarding the capital, which is a good thing.

CRISIL is one of the few companies with enormous competitive advantages. I have always wanted to buy this company, but was put off by the steep valuations. During the downturn, I was reading an article on buffett and was struck by a comment – buffett tends to read about companies even if he has no plans to buy the stock. If he likes the company, he mentally files it and waits for the right time when the price is right.

The above comment got me thinking and on going through my notes found my analysis of maruti and CRISIL. After a  quick analysis, I decided to pull the trigger.

Moral of the story (for me) – be prepared in advance. You never know when opportunity strikes !

FIIs continued to be active in the market and untill Thursday we have seen nine straight days of net purchases from overseas funds. All the main sectoral indices made gains this week with the majority advancing in the 2-3% range. The big gainers were Realty, IT and Metals sectors which all recorded heavy advances and gave solid support to the main benchmark indices.

The recent bouyancy has been driven in a large part by increasing optimism on the global scene with economic data continuing to be interpreted as showing a bottoming out process in most of the developed markets. The global cues have for the time being overridden concerns regarding the fiscal budget and the lack of major announcements regarding economic reforms, which had sparked the earlier post-budget correction.

Share and Enjoy:

]]> http://www.moneyvidya.com/blog/weekly-update-market-remains-bouyant-on-global-cues/feed/ http://www.moneyvidya.com/blog/weekly-update-market-remains-bouyant-on-global-cues/ http://feedproxy.google.com/~r/moneyvidya/~3/qsFfFT3zQyo/ http://www.moneyvidya.com/blog/calls-for-fri-23rd-july-by-moneyvidyacoms-top-investors/#comments Thu, 23 Jul 2009 08:23:43 +0000 Alex http://www.moneyvidya.com/blog/?p=2824 MoneyVidya.com’s unique rating system identifies the top stock pickers from all our members. Here is what our top investors are saying today;

Short Term:
itrade4profit (5/5 stars) – BUY Hyderabad Industries for 1 month with target of 312

Medium Term:
Sheels (5/5 stars) – BUY Rohit Ferro Tech for 1 year with a target of 80

Long Term:
p4hbai (5/5 stars) – BUY Bang Overseas 18 months with a target of 110

Check out more free stock picks and become a 5 star analyst yourself on MoneyVidya.com!

As markets have rallied over the last week, due to positive global cues, sentiment on moneyvidya.com seems to have followed suit. Buy picks have been the order of the day and a look at the % of picks which have been to Buy stocks clearly tells this story,

Consistent with the increasing appetite to Buy stocks we have seen a shortening of Timeframes on Buy recommendations. This is another sign of increasing optimism and is most acutely seen in the IT and Energy & Infrastructure sectors, which are typically amongst the most active on the site.

The most popular stocks this week have been Satyam Computer Services and Geodesic Information Services and this is part of a wider trend towards the IT sector, which has been the clear favourite this week.

IT stocks have generated almost 30% of all Buy picks with not a single sell recommendation being made. The majority of these picks are for less than 3 months and probably result from increased optimism regarding the overseas earnings potential of Indian IT firms, as developed economies show signs of improvement.

A long position in the IT sector with a 1-3 month timeframe seems to be the current community recommendation.

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