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14 October 2009

Carnival of Indian Stocks : Dhanteras Edition

Happy Dhanteras to all the readers of the Carnival.

Dhanteras, for the uninitiated, is the hindu festival of prosperity wherein it is auspicious to buy an asset.

So lets start this edition with the most precious of assets - platinum.

Here is one for the passive investors - Investing Toolkit presents What’s A Stock Market Index? posted at Investing Toolkit.

And one for the risk averse - Jim presents Debt Management: 3 Suggestions posted at Help for Your Personal Finance.

Silicon Valley Blogger presents OptionsHouse Review: Low Commission Broker posted at The Digerati Life.

For the penny pinchers The Smarter Wallet presents Online Stock Brokers With Cheap Brokerage Fees posted at The Smarter Wallet

and KCLau presents What are Your Saving Habits? posted at KCLau's Money Tips and Can you claim insurance caused by AH1N1? posted at KCLau's Money Tips.

Oflate a lot of interest has been generated in India about forex trading. So Lucky presents Forex Training Free - There are a Lot of Forex Training Free on the Net, but still Not Enough posted at Forex Software Free - Indian Forex Software.

So once again wishing you a very Happy and Prosperous Dhanteras and Diwali.

22 September 2009

Déjà vu : I've Been There

I don't know about you but for the past couple of weeks I have been having a sense of Déjà vu. A thought that something similar had happened earlier, has been gnawing at my bones. Though my head tells me that something as extreme as 2007 may not happen but then why take a chance? So I went about investigating further.

Index Valuation
The Nifty is currently at a PE of 22.41 with 74% of the Nifty constituents (by weight) trading above this mark i.e 31 stocks by count. The balance 19 companies are from the cement, metals, BFSI and PSU Oil& Gas spaces - all historically low double digit or single digit PE sectors. Suffice it to say that the index is trading close to the danger mark. Have a look at the graphic given below. Notice the PE 20 line. 

Without fundamentals following the rise above the 20 mark, the move could be termed as euphoric, with catastrophic results for the retail investor. The cliff face that you see there is Jan 08, wherein not many of us were able to move out of the market. If you wanna climb this mountain be well equipped.

Relative Valuation
Let us assume that the complete EPS of the index i.e the sum of the EPS of all 50 companies of the Nifty is distributed amongst the shareholders as dividend. Then the dividend yield (currently 1.02%) would become 4.46%. Remember, the future EPS has a certain amount of risk embedded with it.

Compare this to the risk free rate i.e the yield on the long term govt security or the 10 year Govt of India Bond which currently stands at 7.06%, a difference of -2.6%. So rather than getting compensated for taking enhanced risk in equities you are losing money and in a riskier asset. 

On 06 Mar 09 the Nifty touched a low of 2539 and a PE of 12.44 i.e an yield of 8.19%. The 10 yr bond had an yield of 5.78%, a difference of 2.41%. Need I say it was the right time to invest. (Of course hindsight is always 20:20!). 

Now have a look the graphic given below.

So the better period of investment in the Indian stock market is past, unless the bond yield goes down to about 5 % or the Nifty PE falls to a safer level say 13-14. Preferable both together! I would then plough my savings right in!!

However liquidity is a beast which may take the market to a higher level from here like Sep 07 to Jan 08. For fall in liquidity watch for two indicators - appreciation of the rupee and rise in interest rates.

So should I sell - maybe not but definitely get rid of the weaker suits, hold the trumps. 
Should I buy - I would hold on to that cash.

19 September 2009


The Festival of Stocks is a blog carnival dedicated to collating the best, recent posts on stock market related topics. It includes fundamental research and commentary on specific stocks, industry analysis, ETFs, REITs, stock derivatives, and other related topics. Its originator is Fat Pitch Financials , where you can read the previous edition.

It is the privilege of Kuberkhana to present to you the 159th edition of the Festival of Stocks. In this edition, we have for you 12 articles on subjects ranging from the tactics to strategy adopted in the stock market, a couple of research reports and a host of issues related to personal finance. 


Jeff Rose presents One Year Ago and What it Means Now posted at Jeff Rose.

The Investor presents Are you lost in Neverland? posted at Monevator.


Investing Toolkit presents Why Trade In The Forex Market? posted at Investing Toolkit.

Research Reports

Personal Finance

13 September 2009


In the previous post (read here) we spoke about the business of IVRCL.  Here let us look at its fundamentals first and then the valuations.

The company has 13.35 cr shares with a face value of Rs 2 (after a 1:5 split in Mar 06) and a Book Value of Rs 135. The current market price is Rs 379.

Its turnover rose five times in four years i.e from Rs 1054 Cr to Rs 4983 Cr. At the current price its a Market cap : Sales of 1. Y-o-Y it is up 35 % from 3698 Cr. There is revenue visibility of upto 2.5 years . Q-o-Q the sales are up 17% despite Jun traditionally being a slow qtr. 

PAT rose 4.5 times in four years i.e from Rs 56 Cr to Rs 226 Cr. (Infra is typically a low margin(single digit) business).  EBIDTA at Rs 451 Cr translates to a margin of 9.06% down from 9.9 % last year and an EPS 0f 16.93. At the current margins the estimated EPS for FY 2010 would be 19.8.

Though the debt equity ratio at .77  is higher than what a typical conservative investor would be comfortable with (.5) , IVRCL has a Compund Leverage Factor of over 1 for the last two years, indicating a positive contribution of leverage towards the Return on Equity, which is currently at 12.5 %, down from 13.13% last year.

This company has consistently given a dividend for the last ten years!  

The current price of Rs 379 implies a TTM PE of 23.16 and a forward PE of 19.13. A shade more expensive than I am comfortable with. So - buy on dips is the mantra for this stock. Remember , the best things in the stock market come at a price!

12 September 2009


In the previous post (read here) I pointed you in the general direction of infrastructure spend in the country. Now we move on to the specifics. We discuss a company which dominates a crucial segment of the sector and has presence in a majority of them - IVRCL Infrastructure Ltd.

This company is a market leader in water and irrigation infrastructure development. It also has presence in transportation, building, industrial construction and power transmission. Of late it has also forayed into projects related to hydro power and railways. 

With 69 % of the order book being from the water and irrigation segment, it is correct to classify IVRCL as a 'Bridge over Troubled Waters' ! (I know Simon and Garfunkel will not agree to this allegory). But lets have a closer look here.

Water is a Rs 6000 Cr industry in India with waste water treatment (read here) and drinking water (read here) taking the lions' share at Rs 3000 Cr and Rs 2000 Cr respectively. This industry is growing at 18-20 % per annum. This is the dominant vertical for IVRCL wherein it constructs, owns and operates water projects. It executes lift irrigation and reservoir projects, drinking water and sewerage schemes,treatment plants and pipelines, main and distributary canal networks, industrial water solutions and desalination plants. Suffice it to say it has a diversified portfolio in this very important segment. We have in a previous post (read here) discussed the importance of water and how it impinges on life in general and businesses in particular.

Transportation is a segment which accounts for almost 5 % of the order book. In this segment IVRCL focuses on the ongoing NHAI projects which it is executing while bidding for the future road, rail, bridging and tunneling projects on a turnkey basis. It is also bidding for the dedicated rail freight corridor between Delhi and Mumbai as well as working on the Bangalore Metro.

The other segments and their contribution to the order book (Rs 13,682 Cr) is given in the graphic below.

Just as an aside, if you look for this company on www.Valueresearchonline.Com, a total of 120 mutual funds own this stock compared to 19 for GMR Inf (its closest rival). 

Having become acquainted with the business of IVRCL, in the next post we will have a closer look at its fundamentals IVRCL and the likely valuations.

07 September 2009


Legend has it that in 1928 a severe famine and drought hit the erstwhile princely state of Jodhpur. The then Maharaja Umaid Singh of Jodhpur was quite moved by the plight of the populace but did not think it a prudent policy to open the gates of the royal treasury. Instead the young Maharaja ordered construction of a Palace thus providing employment to thousands of subjects, ensuring free flow of liquidity, disposable income in the hands of the consumers and managing to pump start the economy.

Circa 1999 a similar action plan commenced with the Golden Quadrilateral at a cost of Rs 60,000 Cr. Since then, the infrastructure sector has not looked back, enabling it to remain the darling of the stock markets. Year 2008-09 the story remains the same, only the lead character has changed. Dominating the scene are power, irrigation, water management and other urban services. 

Industry Overview
The XI Five Year Plan envisages an investment of Rs 2,60,000 Cr in the seven sectors of power, roads, airport, oil & gas, ports, rail and urban infrastructure. 

Infrastructure construction grew 12% PA for the past five years. However due to the slowdown, this growth has fallen since the second half of 2008. Engineering and construction linked to real estate have been the worst affected. Irrigation, power, roads and water infrastructure being govt funded have been largely unaffected (at least in funds allocation!). 

These fund allocations include Rs 34,700 Cr for improvement of basic civic services like water supply, sewerage and storm water drainage in major cities. We have discussed the importance of these in a previous post (read here). For 5098 other towns, the govt has set aside Rs 12,300 Cr for improvement of civic services out of which Rs 7064 Cr is allocated for water services alone.

I am of course leading this discussion towards a specific company straddling most of tha dominant segments of the infrastructure sector. Watch this space for more.

02 September 2009


In a previous post (read here) we discussed the business profile of Network 18 with its integrated media play covering all aspects both vertically and horizontally. Must say it is quite an ambitious company.

However in this part we shall be discussing its fundamentals as a company and valuation as a stock.

While the sales dropped 30 % year on year, the expenses dropped 20 % only, largely due to doubling of administrative expenses. Running a media company is an expensive business, one not conducive to slowing economic trends.

While the operating business was profitable at Rs 36 Cr (an OPM of 36%), it was the Net Profit which took a hit( an actual loss of Rs 21 Cr ) against a profit of Rs 43 Cr last year. This was largely due to doubling of financial expenses from Rs 26 Cr to Rs 53 Cr. The quarterly picture is grimmer. Operating losses for three consecutive quarters.

This calls for a deeper look at the balance sheet which has taken a hit, on two counts. 

Firstly. An equity dilution via a Rights Issue and Preferential Allotment(which incidentally saw the promoter holding drop from 54 % to 49 %). Secondly. Unsecured loans of Rs 114.38 Cr. (Unsecured debt is generally at higher rates than secured debt).

The result of the above is a negative EPS of 2.7, a fall from the high of 8.55 last year when the stock was trading at Rs 204. This can of course be laid at the feet of the slowdown. However it only highlights the edge of the seat action in such stocks, something which only a strong stomach can digest.

I think the way to value such companies is to do a sum of the parts. The two major pieces of action are TV18 and IBN18. A 50% stake in the former and 39 % in the latter gives Rs 643 Cr and Rs 826 Cr respectively. This itself is a 58% upside from the current market cap of Rs 929 Cr. There are a host of other businesses as mentioned in my prior post on Network 18 (read here) most not worth a lot except a 5% stake in The Indian Film Company. Valuing all these businesses at a total of Rs 100 Cr and giving Network 18 a 20% discount for being a holding company, we arrive at a value of Rs 199/-(quite the Bata price it is!), which is a double from the prevailing market price. 

The Dampener
This analysis is not complete without the dampener I alluded to in a previous post. Firstly cash flow seems to be a serious problem with the group. However the more serious issues plaguing it are two - a lack of depth in the higher management and a lack of clarity on a number of issues. The board resembles that of a closely held company. For a company which lists 'Transparency' as a corporate governance philosophy, it is surprisingly opaque about a lot of issues. The Annual Report ignites more questions than it answers. There are a total of 81 companies that comprise the group. Does it have the management bandwidth to optimally run these or some of them are just some shell companies created for purposes other than the operations? Setpro 18 is listed as a wholly owned company. What does it do and is earning something for the shareholder? Why did Network 18 not comply with RBI norms of capital adequacy and concentration of investments? In view of the substantial losses of Rs 18.2 Cr to the company, why did the Managing Director take home a salary of Rs 1.146 Cr? Why was Rs 70 Cr raised as a short term loan, used for a long term investment? 

These are just some of the issues I highlighted here just to give a flavour of the dampener I had in mind. Suffice it to say, if one were to invest in this company, one must do so after significantly more research than normal.

31 August 2009


Congratulations are in order for Gautam, Alex and their team at MoneyVidya.Com for their excellant elevator pitch. Guys, our best wishes are with you. May you achieve all the success.

23 August 2009


In my previous post I had discussed a lesson (read here) that I had learnt from incorrect application of the wisdom shared by an investment guru - Peter Lynch. The stock in question was Network 18. 

Network 18 (NW 18) is a media conglomerate listed as a non-banking financial services company. It is essentially a holding company of the TV 18 group.

Its holdings can be divided into five lines of businesses :-
  1. Television
  2. Internet
  3. Publication
  4. News Content
  5. Films
In addition, it also runs some other related businesses which we'll see subsequently. Lets familiarise ourselves with the businesses first.

Television. This is the mainstay of the group. It is divided into two segments the business news and the general news and entertainment (GNE). CNBC TV18 and CNBC Awaaz are the business news channels while the GNE segment covers news with CNN-IBN, IBN 7 and the general entertainment with the Viacom 18 channels like Colors, MTV, Nickelodeon and VH1.

Internet. Primarily run under the Web 18 umbrella ( a subsidiary of TV 18), it has a whole host of free content sites like Moneycontrol.Com and In.Com etc. In addition it also runs two transaction sites - Yatra.Com and and two subscription based sites - PowerYourTrade.Com and JobStreet.Com.

Publication.  Infomedia 18, a listed subsidiary of TV 18 handles this end of the business. It publishes business magazines like the Forbes, Yellow Pages as also third party printing and publishing work and some special interest magazines.

Newscontent.  This is delivered by Newswire 18, a subsidiary of TV 18, in the form of real time data and news terminals, akin to Bloomberg.

Miscellaneous Businesses.  In addition, NW 18 directly runs an event management division (E18), a sports management division (Sports 18), media consultancy and a home shopping network (Homeshop 18). It also runs a subsidiary called Setpro 18 about which the management does not find it prudent enough to inform the shareholders. This is an indicator of an issue which I shall discuss subsequently.

Film.  The group's business interest in films is served by its affiliate The Indian Film Company.

 Got your head spinning didn't it? So let's try and clarify here. Two listed subsidiaries IBN18 ( for GNE) & TV18 (Business news , Internet business, publications and news content), films through affiliate the Indian film company and other businesses directly as divisions /subsidiaries. 

That's the lot. Go figure! 

Just kidding.  I think enough for one post.  In the next we will continue with the fundamentals and valuations.   

18 August 2009


When I started investing in equities, my 'Guru' told me to read, read and read more. So a good disciple that I was, I commenced reading on whatever 'literature' I could lay my hands on - directly or remotely associated with investments. (A sifted part of that reading is placed on my 'Shelfari' on the right side of the blog posts).

However the purpose of this post is not to give an expose' on my literary jaunts but to share a valueable lesson learnt.

In 2005, I read Peter Lynch's 'One Up On Wall Street'. Wonderfully written, lucid and jargon free, it appealed to me and I promptly wrote down all the lessons learnt. I proceeded to follow the underlying theme - use what you already know to make money in the market. Buy a stock whose product you use and like and you know a lot of people who feel the same way about it. Not in those many words but I gathered that was the general drift of the book.

That's pretty sound advice. Provided you can bridge the gap between knowing and doing. So I did! 

I have watched CNBC TV18 since - well probably back in 2000-01. I spent bulk of my TV hours watching it. My friends who invested did the same. Loads of my colleagues talked about it. I based a few of my early decisions on the discussions on its shows and liked the results too. The anchors are sophisticated, suave and critical without being offensive and not in the least pretentious.

So I went and bought the stock. Loads of it. I still like the channel. But not the stock. What happened? The annual report I read this time. Its amazing. Read about it in my next post.

11 July 2009


This is the time of the year when one reviews the investments made in the past to see how they are faring. One such company which recently came out with its Annual Results is Ador Welding. I had initiated a coverage on the stock as a value pick in Jul 08 when the index was at 4162 and the stock at Rs 141. The stock was valued, then at Rs 171.  You can read the report here.

Now the index is at 4003 (drop of 3.82%) while the stock is at Rs 122 ( a drop of 13.4%). It touched a 52 week high of Rs 160 and a low of Rs 74 while giving a dividend of Rs 4 ( a current dividend yield of 3.27%).

The under performance of the stock can be attributed to three factors:-
  1. Slowdown in the domestic economy causing drop in welding consumable prices.
  2. Sharp decline in Equipment and Project Engineering due to curtailment of capex plans.
  3. Export dependence on Oil producing countries where the slowdown is significant.
None of the factors mentioned above show a sign of change for the better, in the immediate future. Perhaps six months down the line things may be different but that would be contingent on a reasonable investment in infrastructure development in the country, easing of the liquidity situation and an up move in the global economic scenario. Tall order that.

However to be fair to the management, the company is continuing towards completion of its capex plans and gearing up(operationally) to take advantage of any positive up move. And all this it has done while keeping the company totally debt free giving it significant manoeuvre space if the situation so warrants.

Sales have dropped 13% and though the cost of materials has also reduced, the overall net profit has dropped 46%. Some part of it can be explained by the increased depreciation and a higher provision for taxation(which is surprising considering the 17% fall in gross profit!). If one carries out these tweaks on the P&L account, the net profit should be Rs 16.31 Cr instead of Rs 12.16 Cr and the EPS should be Rs 11.99 instead of Rs 8.94. 

At a cost of equity of 15 % and a growth rate of 10% the stock can be valued at Rs 125. However the adjusted value is Rs 155. 
The current PE 13.65 is high for a company with a market cap of Rs 166 Cr and ROE of 12%.  

The Verdict
Well, this company, like the market, has seen better times and is likely to do so in the future too. However at the current juncture it does'nt offer the 'moat' like quality that would make for a mouth watering treat for a Grahamite.

06 July 2009


I know it sounds cruel on this budget day to talk of festivels, what with the steep fall in stock prices. For the true Grahamites though a fall like this does look like a festival with some very mouthwatering prices. Buy when others are selling, sell when they are buying.

And speaking of Graham, fellow readers would enjoy reading this Festival of Stocks  . The site hosting it is dedicated Ben Graham and his "Intelligent Investor". It has a great collection of posts and articles.

I hope you enjoy reading it as much as I did.

05 July 2009


A lot of people, especially enterprising newcomers ask what to read in order to develop an understanding of fundamental analysis of companies and the stock market. 

I had put a list of my favourite books on the right hand side - books that I read over and over again, some as general direction finders others for specific inputs and research. Now thanks to Sumi @ Value Investing I have found a nice way of displaying the books on the blog.

I hope you all also benefit from these books, the way they I have - they changed my life.

27 June 2009


In the previous article of this series we had discussed the Price Earning Ratio and how to use it to filter stocks. I got a few very searching questions in the comments section. So I would request readers to go through those too. 

We now take the second step forward and one which could be a major stumbling stock for many an aspiring portfolio picks. If a stock fails this test, I would need towering logic to overrule it. 

All business is margin and it is the bottom line - the profit margin. The last word in the financial statement analysis and hence a major filter for us. Profit margins are of three types.

Gross Profit Margin
When a firm does business it gets paid for it(Revenue). For earning this revenue it spends some money which is called as Cost of Sales. Revenue - Cost of Sales is the Gross Profit. And Gross Profit divided by Revenue is Gross Profit Margin(GPM).

It is in percentage terms and hence normalised, permitting comparison across firms. A caveat - do not compare apples and oranges - try and compare two companies of the same kind. It may not be necessary that two firms in the same sector are compareable - e.g Infosys and TCS are compareable, Infosys, Helios & Matheson and Financial Technologies are not.

The comparison will reveal how effective is the company in keeping its costs in check. Are its executives playing around with shareholder value? (A sure shot indicator of this is - to what is executive compensation pegged to - Revenue or Profits). 

Operating Profit Margin
Mathematically it is Profit Before Interest and Taxes(PBIT or EBIT) divided by Sales.  Also termed as Return on Sales.

It is a very good indicator of the operating health of the company. It shows how well the firm is carrying out its core businesses. It disregards ( for the denominator) any revenue generated by non-core business activity like sale of asset or financial transaction gains. For the numerator, it omits expenses like taxation and interest which may skew the earnings due to say, a tax holiday given by the govt for a few years or a large debt on the books during initial years after setting up.

So I use it to evalute the following:-
  • New firms which are not yet profitable. eg. Cairn. 
  • A firm with an abnormally large debt.
  • A firm divesting part of its business or assets during the financial year.

Net Profit Margin (NPM)
Mathematically it equals the Net Proft(After taxation, interest etc) divided by the total revenue generated, multiplied by 100. 

This basically tells you how much money goes into the hands of the actual owners i.e, the shareholders after deducting all kinds of possible expenses per Rupee of revenue. It varies from industry to industry. A lower NPM does not necessarily mean a weak business - it could well be a conscious business strategy like for a discount retailer . A prime example in the indian context is Pantaloon Retail which operates on wafer thin margins. (For a detailed analysis of Pantaloon Retail read here)

A comparison between GPM and NPM can give you a good understanding of the cost structure of a company. However, all else being equal, the higher the NPM, better the firm.

In the next part of the series we shall delve into the Return on Equity - metric very close to the heart of many an equity investor.

Happy hunting !

26 June 2009


The heat is killing me and the electricity provider is not helping either, what with the power cuts and all that. To top that the Bhakra Nangal Board has said that it is going to either reduce or completely cut the water supply to Delhi, Harayana and Punjab as its reservoir is drying up for want of water. What do we have next? Water rationing? What impact does it have on our GDP and specific businesses?

We had initiated a discussion on this issue in Dec 08 in the post WATER, WATER EVERYWHERE BUT.....  with a view to explore the business opportunities available in the field. There are a few available today and many for a truly long term investor. This was followed by a detailed analysis of the situation in the post THE FROWN OF TETHYS AND OTHER STORIES, the premise being that a commodity which is essential for life itself and in such short supply shall exhibit tremendous business potential. That month being a december, not many throats were parched and probably hence a tepid reaction. Perhaps things would be different this time!

Now companies like Ion Exchange, L&T and Thermax come to mind easily. Worth a hard look.

19 June 2009

NIIT Tech Ltd : A Result Update Q4 Fy 08-09

I shudder to think about those days - the kind when no amount of logic could convince someone to buy a stock. And having bought one, you saw it go only one way - down. No fundamentals or technicals other than shorting worked. I am, of course, referrring to the period from Jan 08 to Mar 09.

In that period I started studying a stock called NIIT Tech Ltd. My first post on it in Jul 08 (A Gold Panner's Dream) showed it to be grossly undervalued. 

I still stand by it after the latest results of Q4 and my reasons are given below.

  • A 4 % increase in revenue despite the trying times.
  • A higher provision for taxation (Rs 22.4 Cr against Rs 13.8 Cr same qtr last year).
  • A high onsite-offshore mix of 60:40 implying higher billing rates.
  • An increase in revenue from the transportation and retail verticals (both potential high growth areas)
  • A reduced dependence on the top 5 clients.
  • Increased order flow of $170 Mn from US against $ 69 Mn last year. (Overall $312 Mn against $229 Mn last year). This is most heartening and an indicator of things to come - when the going gets tough, the tough get going!

  • 1% fall in Operating margins from 19 to 18%
  • A 15% drop in Net Profit resulting in a fall in EPS to Rs 19.56 from Rs 23.05  same qtr last year attributeable to increase in operating expenses and depreciation ( a non-cash expense and hence a positive). 

The trailing twelve months EPS is Rs 15.07 and it discounts the current market price of Rs 96 by 6.37 times. At a cost of equity of 15.7% and an expected growth rate of 12 %, the stock should be worth Rs 153, an upside of 60% from this level. 

12 June 2009


Someone once asked me - "How do you select a stock from the complete universe?". For me its a long journey and my infrequent blog posts bear testimony to it!. However its a journey worth undertaking to achieve satisfaction both intellectual and material. Well let me share it with you here and in subsequent parts.

Well begun is half won. Thats the importance of the first step. In many ways it is like anything first - first bike, first love. It stays with you for good or worse. For me it is PE. Price to earning ratio. For the lay investor, it equals the current market price divided by the Earning Per Share (EPS) . It comes in various shapes and sizes - 

Historic PE. This uses the EPS as given in the latest annual report and hence historic .i.e reflecting the previous financial years efforts. Using this puts one on a firm footing as the figures are - well, firm. The figures read over the past few years accurately reflect any cyclicality in the business, unless the business is cyclical within the year (like cement) in which case you would need a quaterly breakup of the EPS. I use it only as a start point of the analysis.

Forward PE. Along with Historic PE it completes the yin-yang pair. It is anything but firm as it includes some prediction, lots of (guess?) estimates and dollops of hope (and prayers, if given out by a young intern/analyst). This is used fairly late in the analysis when one has developed a finer sense of the business and is able to make reasonable assumptions of the revenue growth, operating and net margins and the general business environment.

TTM PE.  Trailing Twelve Months PE uses the EPS totalled for the last four quarters, regardless of the financial year. It gives a more realistic, accurate and current picture of the business. A favourite of mine (we all have our albatrosses, dont we?!).

Relative PE
On a stand alone basis, PE is just a number. Its relevance emerges only with relativity. Is PE of 5 low and 30 high? What if I say that oil and gas sector traditionally figures in single digits but telecom trades at higher than 20? So 5 and 30 are just numbers and ONGC@ 5 and Reliance Com@ 20 are like chalk and cheese. How about Reliance Com (30.44) and Bharti(21). So compare it relative to :-
  • Peers in the industry.
  • Its own historic values.
  • The PE of the index it is part of.
Any major variation must not be inexplicable. So why must Rel Com trade at a 45% premium to Bharti? Thats food for thought for you and a thought for another post for me. 

And last but not the least - there are situations where PE cannot be used - try comparing Cairn and ONGC by this metric.

In the next part of the series we shall delve into the bottom (line) - I meant the profit margins!

Happy hunting till then.

08 June 2009


You all must have noticed that I am an associate blogger of as stated by the button on the right hand side of the blog posts.

I joined the site as a curious onlooker about 4 1/2 months ago but grew to like it so much that I visit it almost everyday. I have been posting my blogs there too before I was invited to join as an associate. I enjoy the very comfortable environment of sharing and mentoring. So I thought I must take this opportunity to tell you why I like it and what are my key takeaways from it.

First and foremost it is a place where I can get the pulse of the investor community. What's in what's out. What's the new favourite who's being dropped - a general feel of the market. 

Digging deeper I find a strong group of experienced and wise investors who share their knowledge without fear or favour and from whom one can learn and grow.

And at the core I came across a dedicated, committed and savvy team of bloggers /entrepreneurs who have given us a unique platform from where to take off from. A sort of aircraft carrier in the middle of the vast ocean of the investment world.

So happy blogging and investing.

06 June 2009


Whenever I am in a quandry about my investments I go to my brother, philosopher and guide. Though I was in one today with this investment, I did not seek him out. Reason? I can clearly hear him say - "Its like putting money in a savings account, earning interest, being safe and seeing some capital appreciation". Thanks bro!!

The Business
Tata Investment Corporation(TICL) is a non banking finance company NBFC promoted by Tata Sons. 

It deals mainly with investment in shares, debentures, and other securities. It also undertakes capital and related customer services and financing of long-term investments in equity shares. In this it has a stated aim of increasing its investments in Tata Group companies.

Located in Mumbai, the company has investments in both, registered and unregistered entities. Among unregistered entities, it has investment in preference shares of Tata Auto Components (TACO) and Tata Sons. TACO is one of the leading auto-component providers in India, while Tata Sons has its fingers in all Tata pies including the cash cow, TCS where it is the majority stakeholder. TICL alongwith Tata Sons promotes Tata Mutual Fund and is also a chief stakeholder in Tata Securities, which distributes mutual funds and other investment related securities. 

The Financials
Tata Investment Corporation was rated by CRISIL, the highest rating of 'FAAA' since 1994 indicating maximum security in payment of interest and principal amounts. This rating has been affirmed every year since then and proves its credibility as a long term investment. That's Investment Rationale No 1 - 'being safe'.

TICL's revenue comes from dividend income and profit gained by selling investments. It has a portfolio with a book value of Rs. 1030 crore against a market cap of Rs 1418 Cr at the CMP of Rs 411. 

The company declared net profits after tax of Rs 186 Cr or Rs 54 per share in FY 2008-09. It is a debt free company with a dividend yield of 3.66 %. The table shown below highlights it. This is the Investment Rationale No 2 - 'akin to a saving bank account'.
The Valuations
An investment company like TICL is best valued using book value and an estimate of the current value of the investments. Something akin to an NAV on the basis of the market values of listed investments and the book values of unlisted investments. The managements' estimate as on 31 Mar 008 works out to Rs 805 per share, based on market values of the listed investments and the fair values of the unlisted investments after deducting tax, up from the previous year's Rs 588. At Rs 805 per share the company can be valued at Rs 2774 Cr against a market cap of Rs 1723 Cr (then) and Rs 1418 Cr (now) a discount of over 35%. That's Investment Rationale No 3 - likely capital appreciation.

The Caveat
Well besides the standard caveats for investments, this one calls for the heavy artillery. If you have a long term  horizon, lots of patience, not given to looking up the value of your investments too frequently and are looking at safety of investment prior to appreciation  but  do not want to put your money away in fixed income securities(and see IT and inflation erode your returns) then this is the stock you are looking for.

03 June 2009


The Lehmann collapse and its aftermath seriously jolted the IT services majors. This is very evident in the analysis of the annual results of these companies.

The results reflect the debilitating business environment. Over dependence of the sector on the US and Europe, a sort of wage arbitrage, has skewed the earning profile. A very high and rising unemployment rate (8.9% in the US in April) threatens to remove this wage benefit accruing to these firms. A constant stream of dollar investments in India strengthens the Rupee while reducing the attractiveness of the Sector. This is why the expectation from this sector was lowered so sharply in the period Sep 08 to Mar 09. The graph below reflects the dampened sentiment.

In such a challenging business environment, the IT Services majors were not able to improve their revenue numbers. The Big Three in fact faced a decline in revenue, quarter-on-quarter, in their organic numbers. However for TCS and Wipro, their acquisitions helped grow the top line. This lack of growth is attributable to two factors - lesser business volume and lower pricing.

So in order to overcome the lack of growth in revenue, the companies focused on reducing cost, largely by controlling Selling, General and Administrative costs and doing lesser on site work. This strategy has its inherent limitations as it cannot be stretched beyond a point.

The Bottom Line
Well the business is not likely to grow significantly in the near future. Savings will come only from cutting costs and reducing headcount (the single largest expense) and in a business which is designed for systemic efficiency, one may not have much scope for the former. Not a very bright future, it seems. 

20 May 2009


This is a take off from the post (  initiated by my fellow blogger TIP Guy.

Well the biggest mistake I have ever made (and I keep doing it again and again!) is to listen to the 'experts' on the prominent english business channels. I forget that they have a vested interest in the movement of a particular stock/ index. Their livelihood depends on it. Barring free publicity, they do not gain by telling me which stock to buy/sell. If the gain is not pecuniary its not capitalism. And here we all are talking about the epitome of capitalism - the stock market! Consider this. If I were an institutional investor and had invested a great deal of money and effort unearthing a gem of a stock, I would be looking to buy a very large quantity of the stock. That itself would send the stock price ascending, without me adding to it the rocket fuel of retail interest by coming on TV and proclaiming the discovery. I would keep it under wraps till I had cornered my share and then disclose.

The first part of this mismatch is intuitive- investing without adequate research and analysis. (Do I sound like a spook here - a RAW Guy - pun intended here too!) TIP Guy has brought out this issue succintly. I too succumb to this flaw on occasion. However what intrigues me is its antipode - having researched and analysed a stock to its bare bones, finding it investment grade and then not investing in it! It defies all logic. And why do I do that? I havent the foggiest. Perhaps its paralysis by analysis or it conforms to the old hindu saying - 'Saraswati and Lakshmi do not reside together'. i.e knowledge and wealth do not stay together.

Having identified and bought a good stock at rock bottom price, selling it off too soon simply due to the excitement of having made the right choice or the stock having hit an arbitrarily decided target. This list is endless - 400 Bharti at Rs 30, 150 L&T at Rs 140 (that 150 today would be 2400 by split/bonus). Both are examples when I had a 'target' of 25% per stock! Lots of investment advisors say that to sell on a target is disciplined investing. While that may be true for beginners, seasoned investors should play it differently. A sell decision , like a buy , should be a dictated by fundamentals. The two reasons to ignore the demands of fundamentals should be - a better opportunity or constraints of liquidity.

Well these were three of the most significant amongst loads of mistakes I have made in my last nine years of investing. I will not talk about the rest here else y'all will stop reading this!

09 May 2009


DLF traces its history to 1946 when it was founded by the Late Mr Raghavendra Singh and the current promoter, Mr KP Singh. However the milestone we are interested in is 1981, when DLF Universal commenced development of DLF City in Gurgaon. Gurgaon then, was ages away from what we now know it as. One used to wonder why someone would go so far away from Delhi to live. Especially considering that Dwarka, an address in Delhi (unlike Harayana for Gurgaon) and which had land, access and problems (water and electricity), similar to that of Gurgaon, was still not developed. Why and how this preferred order of development occurred (first farway Gurgaon and then Dwarka, the destination nearer to home) is a question that the Indian polity, bureaucracy and Mr KP Singh must answer someday. But that is a subject of another post.

With the development of Gurgaon, DLF passed from being an obscure rival of Ansals to being the premier real estate company in the country and after its IPO, one of the largest companies too. 

However, of late, it has been in the news for all the wrong reasons. First came the fall in realty prices. With it went the era of easy sales at any price asked. The stock price tanked, 'outperforming' the index on the way down also! A large number of questions were being asked - about its debt, its financial strength, the status of its ongoing projects and its very future.

The latest result i.e. for fiscal 2009 and the concomitant news flow also raises a number of red flags especially for a long term investor. But first an analysis of the result.

Net profit declined by 41% but the EBIDTA (Earnings before interest, depreciation, taxation and amortisation) margins were at 57% (down from 67%). Revenue declined 28% from Rs 7812 Cr to Rs 4629 Cr. All else remaining same, net profit should have declined by 33%. This higher than normal fall was attributed by the company to three issues :-

(a) Fall in margins from DLF Assets Ltd.
(b) One time price correction for existing buyers.
(c) A shift to affordable housing.

The Red Flags
Two out of the three issues mentioned above are potential red flags. 

Firstly. DLF Assets Ltd (DAL). This is a company owned by the promoters. It buys assets created by DLF and sells these in the market. At last count DAL owed DLF Rs 3382 Cr. Now let me understand this correctly. DLF sweats it out to create an asset (using my money as an investor). It then sells the asset to the promoters' personal company(DAL), at a price determined by .......????? DAL then sells these in the market. And it doesn't pay DLF back for goods it sold. This arrangement is interesting to say the least, and juicy (at least for the promoter). Not to forget the fact that DAL generates cash flow from lease rentals of commercial space 'bought' from DLF and tax free rental income from SEZs. I wonder why DLF can't do that? Instead DLF ventures into the totally 'related' business of wind farms. WOW!

Secondly. A one time price correction to existing buyers is like offering a discount after making a sale. The closest analogy I can think of is debt restructuring carried out by banks for a failing company. It also smacks of profiteering - on the part of the company when the going was good; and blackmail. This can be a potential catastrophe especially when DLF goes to sell similar assets again in the future (and in a softer market).

The Pink Ones. There are numerous issues which can be classified as 'Pink' - like withdrawal from two large projects totalling 327 Mn sq ft i.e. a fall of 43%, the likely 7% stake sale by the promoters and the Rs 16,358 Cr gross debt against a market capitalisation of Rs 40, 823 Cr. In addition, it is exiting from township projects in two states, a convention centre project in Delhi and other long gestation projects. Doesn't say much for foresight and sagacity.

The Bottom Line
The property market does not look to be changing course for the better, at the moment. Coupled with the red flag scenarios mentioned above and the 70% rise in the stock price since Mar 09, I would give this stock a wide berth for the moment.

02 May 2009


Whenever I speak to someone who is not an investor in the stock market (hereinafter called as the 'disbeliever'!), the oft heard refrain is that there is too much risk in the stock market. "See what happened last year", I am told before being given the 'look' which says, 'I know what I am doing with my money thank you. Nothing good ever came out of risking it in the market'.

There is risk in the stock market. 
As there is in bonds, realty, commodities and heck, even in gilt.

The first risk in the stock market is of expectation. If I expect the stock to give 20 % dividend and it gives 10%, well that's a risk I had taken when investing. This risk arises not out of the losses, a business is going to suffer but my lack of understanding of the issues at hand. Businesses will fluctuate and I must understand the fluctuations and invest accordingly. For if I understood that the business would not generate enough profit, I could either lower my purchase price or give it a go-by altogether.

So in order to lower my expectation risk, I have to :-
(a) Increase my depth of understanding.
(b) Be conservative in expectation/ assessment.
Both of the above are cornerstones of value investing.

The second risk a stock investor takes on is temporal. If I expect the stock to deliver 25% Compounded Average Growth Rate over five years and it does so for four of those and not for the fifth (remember 2003 to 2008!!), I run the risk of being forced by events (in this case, my cash flow requirements) to sell at an inopportune moment.

Temporal risk occurs as a result of loss of value of a stock. However, unless this value is realised through actual sale, it remains notional. Hence it stems from the DNA of the funds used. If they were meant for the college education of the daughter, t'were better if not invested or if invested, then extracted when the going was good and not be timed to perfection.

So in order to overcome temporal risk, I must be prepared to go to the mattresses and wait out for the long haul. Hence the need to invest in the stock market with money, the requirement of which, does not dictate your sell decision.

THE BOTTOM LINE. Invest in the market after understanding what you are doing, with money you do not need for the investment horizon.

AN ASIDE. One thing good about the concept of risk is that it allows a lot of people to earn their daily bread and then some more, by carrying the stage name of a 'risk manager'!


26 April 2009


Praj is an Indian company that offers solutions in bio-ethanol, bio-diesel, brewery plants and process equipment & systems. It is a knowledge based company with expertise and experience in Bioprocesses and engineering. 

The world of Biofuels is yet to attain its level of maturity and will continue to generate passion amongst both, ardent believers and detractors, equally. The classic food vs. fuel debate seems to be far from culmination. It presents conflicting ideas of livelihood versus survival. An investment in this company would depend on which side you want to lay your bets on. The price of oil is another reason why such an investment would make economic sense.

Praj is a 25 year old engineering company based out of Pune. It aims to apply biotech/ bio based tech for a sustainable future. The company is engaged in the design, manufacture, supply and commissioning of fermentation and distillation equipments for the manufacture of ethanol . It has a market share of 60 per cent and is a leader in ethanol plant and equipment manufacture.  The company, in collaboration with Vogellbusch Gmbh, Austria, introduced cascade continuous fermentation process. It also manufactures :-
(a) Plate head exchangers in collaboration with REHEAT, Sweden.
(b) Solvent recovery systems under the brand name 'Ecofine'.
(c) Pressure fermentation breweries in collaboration with Dab Brav Consult Gmbh, Germany. 

In 2005 it's R&D facility Matrix- the Innovation Center developed 'MashTone' a new bionutrient for the ethanol industry. In 2007 it announced a joint venture with engineering and construction company Aker Kvaerner and  with Brazilian Engineering Major for Ethanol Plants.

Its geographic spread across 40 countries on 5 continents creates a natural hedge. An expanding area of influence to include Phillipines, Mexico and partners in Europe and Brazil augment its India and US operations. Exports make up to 55% of its revenues but in the current recessionary scenario managing growth may not be easy. That the existing ethanol plants in the US have either shut shop or are underpowered demonstrates the slowdown in demand. The management expects to offset this against its EU and local operations. Starting 2011, 10% blending of fuel in the EU is to be completed by 2020. This coupled with the local and other global emerging standards on bio-fuels suggest a stable long term revenue projection.

On a revenue of Rs 774 Cr, Praj made an operating profit of Rs 158 Cr. Though at the operating level, it has maintained a margin of 20%, its net profit margin has dropped to 16% due to a higher outlay for taxation. This has resulted in a 15% drop in EPS, adequately reflected in the current market price of Rs 72.
Praj has been a debt free company for the past five years, managing its growth through internal accruals and an equity dilution in 07-08. This reflects in its consistently high Return on Equity which currently stands at about 44%.

The trailing twelve month EPS of 7.08 discounts the current market price of Rs 72 by 10.27(TTM PE) times. At a cost of equity of 14.75% the stock is currently valued at Rs 91. 

08 March 2009


Last year a very popular business TV channel awarded the Golden Peacock Award for Corporate Governance to Mr Raju of Satyam infamy. Very lately we also have the spectacle of the print and net based media going ga-ga over Nirmal Kotecha and his meteoric rise. Fortunately his unethical and illegal means now stand exposed. He was assisted in his misadventure by a senior journalist of a leading pink paper. Within the larger question of ethics, it also raises the issue of the standard of corporate governance and standard of journalism in India. It seems, how much ever we denigrate the western world for its culture of corporate greed and manipulation by media, we are no better or worse than them. 

And how does it affect you as an investor? Well in my view it raises the Cost of Equity. Simply put, lower standards of corporate governance implies higher risk entailed by the equity investor and hence a higher cost of equity. A sort of paying a higher insurance premium when sailing in troubled somalian waters to cover for the enhanced risk.

All in all, a clear negative for the stock market. The only positive takeway from these sordid affairs is the strength displayed by the Indian regulator and the systems put in place. Hopefully this will deter more such mis-adventurous finaglers. About the dishonesty in journalism, one can only pray that the power of media is wielded by more sincere and trustworthy hands.


I confess I always had a fondness for this company - pleasurable mix of finance and technology, not just in name but in deeds too. This company operates with the vision of 'bringing markets to masses' and has succeeded in doing so too. 

Financial Technologies (FT) is in the business of establishing an electronic equivalent of the trade route - it brings together the participants of the modern world markets in real time. This, it achieves through three lines of operations  :-
(a) Exchanges.
(b) Technology solutions.
(c) Financial Ecosystems.

Exchanges.  FT has its fingers in 8 fully baked exchange pies, with stakes ranging from 31 to 100% across India, Middle East, Singapore and Africa, dealing with spot and derivative trading in commodities, currencies, energy and carbon credit. The details are given in the table below.

There are three revenue streams for the exchanges business    :-
(a) Transaction fee - Based on charges per transaction and hence a direct correlation with the revenue of the exchange.
(b) Membership fee - This is a one time charge for and hence not a major contributor.
(c) Data Distribution - A recurring charge on the amount of data provided to the client.

Just to put things into perspective; MCX  which has a 77% market share clocks Rs 10,000 Cr per day which is more than the daily turnover of the BSE. DGCX does an easy Rs 1,000 Cr per day. Growth would come from increase in trading volumes, increase in the number of members and the inorganic growth of the exchanges.

Technology Solutions. The company provides three different types of solutions :-

(a) Exchange Solution. These include Price/Volume propositions for integrated turnkey solutions and Clearing and Settlement Solution.
(b) Brokerage Solution. It includes the near monopoly ODIN (90% share), Direct Market Access, MATCH multi-user, multi exchange and others straight through processing solutions, which are mission critical for stock exchange operations.
(c) Network Solution. A fully managed private network.

The tech solution business gets its revenues from the licences it gives out, the consulting and maintenance fee it charges and the charges for the messaging service provided. As these solutions provide for a wide range of market participants in the financial services business, to include brokerages, asset management companies, exchanges and banks, the revenue stream is a direct function of the range and depth of financial market activity.

Financial Ecosystems. This line of operation aims to augment the exchange business by attempting to capture the upstream and downstream transactions centered around the exchanges. These include:-
(a) NBHC. National Bulk Housing Corporation provides end to end 
commodity management and warehousing solutions.
(b) Atom Technologies develops tech for the retail payment processing 
(c) Riskkraft provides BFSI(Banking, financial services & insurance) domain
 consulting services.
(d) Tickerplant provides real time financial information.
(e) FTKMC is the knowledge center for the FT Group.

FT has always had a strong balance sheet. With a Debt Equity ratio at about .27 and a 
Compound Leverage Factor of 1.26, it is well poised to ride through the current storm.
Though year-on-year figures are not strictly comparable as FT sold a stake in MCX and 
received an extraordinary income of Rs 1209 Cr, a sales growth of 35 % and a very high 
Return on Equity of 65.42% ensures that the interest of the investor is well protected.

FT has a unique business model. It is indeed difficult to take a call on the stock by the 
standard valuation metrics. So lets mind the Pounds - the pennies would take care of 

MCX is the crown jewel of FT. Fidelity and Citigroup have a 9.21 and 5 % stake 
respectively in the exchange. Half of Fidelity's stake was bought at Rs 600 per share.
Citigroup got it dearer at Rs 1050. So using the conservative benchmark of the two, 
MCX may be valued at Rs 4690 Cr. (Fidelity as an FII cannot hold more than 5% now 
so it may have to divest 4.2%).

FT has reserves of Rs 1492 Cr and a Market Cap of Rs 2615 Cr at CMP Rs 570. So the 
complete business including MCX is available for Rs 1123 Cr! Now that's undervaluation!!

A multi-bagger? In-deed!


This blog should not be construed as investment advice, either on behalf of particular stocks or in regard to overall investment strategies. It is a site aimed at understanding competitive advantages and valuing businesses. The information provided here comes from publicly accessible sources, but errors in these sources and in transcription may occur. Any investment decisions you make should be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance, and liquidity needs.