180 Stocks

Day 36 (Surya Roshni)

180Stocks — Wed, 07 Jan 2015 00:00:00 +0530

I was recently told about Surya Roshni, primarily due to our PM's push for using LED bulbs.

Surya Roshni started as a small tube making unit in the year 1973. Today, Surya has emerged as a vast conglomerate by being the largest in the steel segment and second largest in the realm of lighting. Surya has ventured into various other latitudes of success like fans, cold rolled strips and PVC pipes etc.

Company has a market capitalization of 450 Cr (and a debt of 900 Cr). Average net profits over last 5 years is 57 Cr (and average operating profits of around 200 Cr). Being a leader in both the primary segments, steel pipes and lighting, the earnings are healthy and maintainable ¹.

What is bad about the company?

The company has a very low dividend payout. A part of the reasons is the need for regular plant upgradation (such as CFL plant in 2010, STIC in 2012, and again a 150 Cr expansion in current year, probably for LEDs and fans). Over the years, these huge capital expenditures have contributed little to shareholders. Until 2008-09, company used to have an asset turnover of around 5 times, with operating margins of around 7%. With these capital expenditures, the asset turnover has decreased to 3 times, and margins improved slightly to 8%. Overall, a huge dampner to the capital employed. Since these expansions needed a lot of debt, the net profits in the hands of shareholders have decreased over last 5 years, even though the operating profits have doubled.

What I find interesting?

The income statement of the company has many fixed-cost line items, primarily interest expense and depreciation expense. Ben Graham terms these as "companies with speculative capital structure." An increase of 15% in operating profits (which company has usually had) should cause an increase of 50% in PBT. With the push of government on LEDs, this can happen.

On the valuations front, the enterprise value of 1350 Crores and market capitalization of 450 Crores is not bad compared to the net block and the scale of operations ². It does provide a cushion on the down side.

Overall, I might not deploy a high concentration on the stock and will monitor the biannually balance sheets to look for debt reduction and check on further expansions.

Both ICRA and CARE, have given a positive rating to the company's borrowings. ↩
Net block includes a revaluation reserve of 185 Crores. Promoters had bought shares at Rs.111 in 2011 through open offer (current price is Rs.102). ↩

Day 35 (Vardhman Acrylics)

180Stocks — Mon, 03 Nov 2014 00:00:00 +0530

One of my friends recently mentioned about Vardhman Acrylics. The company manufactures Acrylic Fibre (AF) - a sort of commodity product, but with only 5 major manufacturers in India. What attracted me about the company were its valuations.

The company earns a recurring interest income of around 6 Crores. The average operating profits (i.e. excluding income from investments) of the company over last 5 years have been 39 Crores (after depreciation, but before tax).

For a moment, lets ignore all the investments on balance sheet (of over 200 Crores) and just compound the above two revenue streams:

Interest income:  6 Crores x 10X = 60 Crores
Operating income: 39 Crores x 8X = 320 Crores
----------------------------------------------
TOTAL VALUE:    380 Crores

The company currently has a market capitalization of Rs.197 Crores and is almost debt free. It looks a fifty-cent-dollar-bill based on both the earnings as well as balance sheet.

Catches

The biggest problem with the company is that it has never paid dividends. Over last 5 years, the company has earned over 170 Crores. Neither of these profits have been distributed as dividends, nor redeployed into the business. All of it has been invested into bonds and mutual funds. As per the latest balance sheet, the company has over 233 Crores of investments. The most stressing point of Graham has been on dividends. Rarely have the companies rewarded the investors by retaining the profits with themselves.

Another point of concern might be the high value of related party transactions. The company is promoted by Vardhman Textiles, which holds ~75% of company's equity. Around 50% of the sale (255 Crores of the total sales of 510 Crores) is made to this holding company - Vardhman Textiles. Though it is risky from the pricing point of view, it assures the company of 50% of its current sales. The pricing of the sales appears to be unbaised.

Triggers and Developments

Few developments which make the stock interesting are:

Recent buy-backs: The company has bought back around 1.55 crore shares @11.50. With the increasing interest income and decreasing number of outstanding shares, the EPS should increase going forward.
Stability in exchange rates: Since 2011-12, the company has been incurring an average 4 Crores of exchange fluctuation losses on ACN import. This can normalize going forward.
Promoter buying: Vardhman Textiles has been consistently increase its stake in the company over the years. After the recent buy-backs, I wish and hope for a maiden dividend in future.

The recent quarterly results have not shown the interest income in other income. I will try to get more info around it. Overall it is a very interesting stock to track.

Day 34 (Sunil Hitech)

180Stocks — Fri, 23 May 2014 00:00:00 +0530

Chapter 43 of Security Analysis talks about bargains trading below their liquidation value. One of the stocks that looked interesting in this category was Sunil Hitech Engineers Ltd.

Sunil Hitech is engaged in the niche segment of Fabrication, Erection & Testing and Commissioning of Bunkers, ESPs, Boilers, TG sets in the Power Plants, both in Private & Public sector.

Though the company has a huge debt of around Rs.370 crores, the market capitalization of Rs.131 crores looked interesting. Against this, the company carries net current assets of over 600 crores.

Using the rules of valuation for companies with "speculative capital structure" as prescribed in the Chapter 40 of the book, I valued the company as a whole at around Rs.500 crores ¹. The current valuation of the company is Rs.501 crores (370 + 131). Due to the high leveraging, an improvement in the operating margins, or recovery of receivables, or new bulk-orders in can increase the bottom-line significantly.

As I began to dig more into the stock, however, a great example of financial engineering sprang up.

Last year the company passed a resolution to allot 80 lac preferential warrants convertible into shares to the promoters and FIIs. The company currently has a total of 1.2 crore outstanding shares. That is a dilution of over 66% for the minority share holders. Further interesting points about these warrants are that they are priced at Rs.73 per warrant. Of this, only 25% is to be paid at the time of allotment of warrant, and the rest 75% at the time of conversion. The quarterly results published by the company don't show the diluted EPS (probably because the warrants haven't been allotted yet).

After considering the diluted equity, the fair value per shares dropped by half - the stock ceased to looked exciting even from the "speculative" angles.

The valuation of Rs.500 crores is on the upper side based on the optimism of new government. ↩

Day 33 (Grasim and India Nippon)

180Stocks — Wed, 21 May 2014 00:00:00 +0530

I continued with my search for companies available at low market capitalization to average earnings of last 10 years. A couple of interesting names sprang up: Grasim Industries and India Nippon.

Grasim Industries looked specifically interesting based on the consistent consolidated earnings. Interestingly, the company has a 60% stake in UltraTech Cement. This alone values to 38,593 crores. The current market capitalization of Grasim is 27,839 crores. It was the low dividend payout, complexity of balance sheet (due to various businesses and subsidiaries) and a prejudice against the promoters that drove me away.

Another interesting name was India Nippon Electricals ¹.

India Nippon is a joint venture between Lucas Indian Service Ltd, a wholly-owned subsidiary of Lucas-TVS Ltd and Kokusan Denki Co. Ltd, Japan - a group company of Hitachi Japan, to manufacture Electronic Ignition Systems for two-wheelers, three wheelers and portable engines. Over the years the company has enlarged its customer base and now supplies to most of the manufacturers of two-wheelers, three wheelers and gensets.

The company has a better dividend payout and a stream of consistent earnings. The stock has a decent dividend yield of 4.21%, but nothing attractive beyond that. The profits have remained the same over 10 years, the return on equity has been low at ~14% (due to large amount of investments) and the valuations look fair at the market capitalization of 240 crores.

Will give both of the above a skip.

The company has nothing to do with 'Nippo' the popular battery brand. That is a different listed company called Indo-National Ltd. ↩

Day 32 (Aptech)

180Stocks — Mon, 12 May 2014 00:00:00 +0530

I ran a screen for companies with low price to average earnings of last 5 years. Aptech Ltd. attracted me because of a high dividend yield (over 7%) and some known brand name.

Business

Aptech has two main streams of businesses – Individual training and Enterprise Business.

Under Individual Training, Aptech offers career and professional training through its Aptech Computer Education, Arena Animation & Maya Academy of Advanced Cinematics (both in Animation & Multimedia), Aptech Hardware & Networking Academy, Aptech Aviation & Hospitality Academy and Aptech English Learning Academy brands.

Enterprise business includes Content Development (Aptech Learning Services), Training and Assessment Solutions for Corporates & Institutions (Aptech Training Solutions, Aptech Assessment & Testing Solutions).

As per the last investor's presentation, the enterprise business contributes around 20% of the revenue.

The business of computer education looks attractive to me. Most of the company's revenue come from animation and computer education courses. Unlike specialized coaching centers for competitive exams, these courses are more methodological and do not depend on the specialization of a particular local teacher. The company prepares the educational content and provides it to its franchisees for a royalty. This is more of a fixed cost and does not increase in proportion to the revenues. This is evident from an increase in the margins over the years as the company has entered new geographies.

For students, though the company does not provide a degree, the certificates provided matter more than the certificates from local computer institutes because of a better visibility of the "Aptech" brand.

I wanted to understand why other education businesses including Educomp failed. This Forbes article provided a hint for that:

“The risk is that this technology sales model becomes akin to the sub-prime mortgage scenario that caused the credit crisis in the US. Like in the US where loans were given to people who did not have the repayment capacity, there is some danger that ambitious schools looking for a magic bullet are buying hardware and software they ultimately can’t afford,” says Karan Khemka, a partner with Parthenon, a strategic advisory firm with a special focus on education.

“It is the job of a financing institution, not an educational services vendor, to finance a school. Otherwise you end up bearing business risk, execution risk and financing risk. That’s too much to bear,”

The above risk looks low because Aptech maintains an asset light balance-sheet and carries no debt.

Financial overview

Recently, Aptech started paying dividends and has increased the interim dividends from Rs.1.5 to Rs.2.5 per share.

The company also bought-back shares worth 88,97,861 at average Rs.67 during the last financial year.

Market cap (3.989 cr sh. @ 74):      295.18 Crores.
Total Tangible Assets (2014):        266.15 Crores.

5 Year Average Earnings (PBT):        37.61 Crores.
Yield:                                12.74%
Yield on Max Earnings:                24.73%

CMP:                                  74.00
EPS:                                   6.35
Dividend per share (interim):          4.50
(final dividend is awaited)

Speculative side

Company has 110.84 Crores in a private investment in China. Till 2009, the investment was a joint venture, as a result its profits were consolidated in Aptech's results. Since 2010, Aptech exchanged the 50% stake in the joint venture for a 22.40% stake in the venture's holding company. Financial details about the company are not available. This investment now only receives periodic dividends ¹.

Summary

Overall Aptech has an speculative appeal with a limited downside (due to an attractive dividend yield and a consistent business). If the company is able to maintain the growth trend and keep up the dividend payouts, the stock can easily double from here over 3 years. A surprise dividend from the China investment can also provide a good upside.

The investment paid a dividend of total 82 crores in 2011 and 2012. No dividend was paid in 2009, 2010, 2013 and 2014. ↩

Day 31 (Kothari Petrochemicals)

180Stocks — Thu, 21 Nov 2013 00:00:00 +0530

Chapter 29 of Security Analysis talks about dividend payouts. After reading the chapter, I was set to find companies with more than 50% dividend payouts. One of the interesting names that came up was Kothari Petrochemicals.

Company's brief from ICRA's report:

At the current market cap of ~50 crores, the company provides a dividend yield of 9%. Recent quarters have been much better than last year (net profit of 11 crores during trailing 12 months vs 5.21 crores during FY2013.) Thus if the company maintains the payout ratio of over 50%, then the resulting yield will be attractively over 10%.

On the business end, not much history is available. The margins in the business are very low (~5%), and the annual report isn't much optimistic either. The return on capital employed has staggered due to the increases in the fixed assets ¹.

On the valuation front, the stock looks very interesting (primarily due to the seductive dividend yield). What the company ends up doing with the year's profits should determine the fate of the stock. If the company distributes the profits as dividends, it will improve the credibility and trust in the management. And if the company invests the profits in the un-required fixed assets (as it did in 2011-12), then the markets will probably label the management as crooked.

The company increased fixed assets by 27 crores in 2012. Around 14 crores was for a "building on lease" (which gets a rent of 1.23 crores) and 13 crores was for a windmill. The windmill was disposed off in 2013 for 9 crores. The net loss seems to be around 2 crores (after depreciation) charged to income and loss account in 2013. ↩

Day 30 (APM Industries)

180Stocks — Mon, 18 Nov 2013 00:00:00 +0530

I picked up APM Industries today. It is available at two times earnings and half the book value. The market capitalization of the company is Rs.55 Crores.

Company's profile from CARE Report:

APM was promoted as Ajay Paper Mills Private Limited in September 1973, by taking over the partnership business of M/s Prayagdas Kanhaiyalal & Co. The company had two divisions viz paper and textile. The paper division was closed down in 1987.

The name of the company was changed to present name in April 1990. The company is engaged in the manufacturing of synthetic blended yarn comprising polyester/viscose, polyester 100%, acrylic 100% and acrylic/viscose yarn with an installed capacity of 50,336 spindles as on March 31, 2012.

Company has a revaluation reserve of Rs.67 Crores ¹. The adjusted net-worth (after removing the revaluation reserve, i.e. 153 - 67) is Rs.86 crores. It still looks at a substantial discount to the book value.

In the September 2013 balance sheet, the company's borrowing have have further reduced to 18 crores from 25 crores. The company has also declared an interim dividend of Rs.1 per share. The total dividend for last 12 months is Rs.2 and provides a lucrative yield of 8% ².

The attractiveness is primarily because of the increase in earnings over last couple of years. The revenue has grown from 200 crores in 2010 to around 300 crores, but the operating profits have more than doubled and net profits have around quadrupled. CARE's 2012 report provides some insights:

It will be interesting to see if the company is able to maintain the OPM over 10% in long run. I believe that the consistency in profits can reward something big, and the downside looks limited because of an attractive yield.

The revaluation was done in 2009 against the leasehold land (with a remaining lease period of 80 years). Since it is a leasehold land, it might not be salable and therefore I adjusted the revaluation amount from the net-worth. ↩
In FY'13, the company had declared an interim dividend of Rs.0.60 and finial dividend of Rs.1. ↩
Orient Sintex Ltd. (name often mentioned on the company's website) is a dormant company as per mca.gov.in. ↩

Day 29 (TCIL)

180Stocks — Fri, 18 Oct 2013 00:00:00 +0530

Today I studied Transport Corporation of India (TCIL). It attracted as a "Graham and Dodd" kind of idea.

About TCIL from CRISIL's report:

TCIL is among the leading integrated logistic service providers in India and the only player in India’s logistics industry to offer the entire range of services, such as multi-mode transportation services comprising road, rail, sea, and air transportation. Its business risk profile is also supported by a strong infrastructure backbone and relevant partnerships in the logistics sector. Furthermore, with operations across four key logistic segments: freight, express cargo (XPS),supply chain solutions (SCS), and coastal shipping, TCIL’s revenue profile is fairly diversified. In 2012-13 (refers to financial year, April 1 to March 31) freight, XPS, SCS and coastal shipping contributed 40 per cent, 28 per cent, 26 per cent and 5 per cent, respectively, to TCIL’s overall revenues.

The market capitalization of the company is around 370 Crores against the book net-worth of 405 Crores. The company witnessed a revenue growth of around 20% each year from 2003 to 2007; followed by a moderate growth till 2011; and a nominal growth during the last two years. Following a similar trend, the price to book value went upto 4 times during the period of growth. It is after 10 years that the stock has gone below its book value.

I began with the analysis of the net-worth and assets. Reserves included a revaluation reserve of 14 crores on the face. But in 2008, 41 crores was transferred from revaluation reserve to other capital reserve directly. Thus the total revaluation reserve comes to 55 crores. Company has book investments of 33 crores, of which around 20 crores has been invested in subsidiaries. For arriving at an estimate economic net-worth, I reduced this amount too. Thus economic net-worth comes to around 330 crores.

On the interesting side, the share of higher margin divisions (XPS and SCS) has been increasing over the last couple of years. With the economic turnaround and growth in freight division, the stock can provide good returns.

Sticking to the book rules, I will keep an eye on the stock and re-evaluate if the capitalization falls another 15-20% from here. Till then I feel KCP Sugar and Tata Sponge remain a better alternative.

Day 28 (Somany Ceramics)

180Stocks — Wed, 16 Oct 2013 00:00:00 +0530

Somany Ceramics is an interesting company to evaluate against 15 point checklist of Philip Fisher.

The company has been growing amazingly at over 26% for last 5 years. This has been largely achieved by incorporating an asset light model, by outsourcing much of the manufacturing (50% of the turnover is from outsourced manufacturing). During the last couple of years, with the introduction of digital printing, the unorganized sector in ceramics has grown at a good pace. Somany compounded largely on it by getting into joint-ventures with these unorganized manufactures, and focusing on sales and branding. The detailed annual reports hint of a "fortunate and able" management.

Over the last few years the company has tried to enter into sanitary-wares too through their "Aquaware" brand. This has contributed little to the revenues and profits currently.

On the research front, the company received a patent for "VC Shield" in 2009. VC Shield has higher realizations and contributes over 100 crores in the revenues. Apart from this, the company has been enthusiastic about introducing latest machines, and pursuing licences and certifications. During the year the company as also filed another patent for slip resistant tiles.

While the revenues have been increasing, the concerning thing has been the decreasing margins. The margins have fallen from 10-12% till 2010 to current 7%. This has been primarily due to increase in raw-material costs.

From ICRA's report:

[The major concern is the] highly competitive nature of the tile industry marked by the presence of both large and organised players as well as numerous small scale tile manufacturers, centred largely around Morbi, which continue to operate with leaner cost structure. The company’s margins will be vulnerable to rise in input costs, especially power and gas.

The company is also the net foreign exchange spender. The last quarter results included MTM losses of 1.73 crores.

Overall, the company looks very interesting and will keep a close look on it.

Day 27

180Stocks — Tue, 15 Oct 2013 00:00:00 +0530

I continued with Philip Fisher's 15 point checklist today.

The first point is "potential to make possible a sizable increase in sales." Fisher suggests finding companies which have been growing in past. For this he recommends to check for growth in blocks (and not on year-on-year basis).

growth should not be judged on annual basis but, say, by taking units of several years each.

I took the 9 years historical data and computed a list of companies having sales growth of over 20% in the blocks of 3 years each. I filtered the list to restrict the stocks upto PE of 15 and debt to equity ratios of less than 0.75.

Browsed through the annual reports of few of them, but in most cases it was some one-off item. Few names that looked interesting are Somany Ceramics and Global Spirits.

Will try to look at these and few other names over the next few days.

Day 26

180Stocks — Sun, 13 Oct 2013 00:00:00 +0530

In the introductory chapters of "Common Stocks and Uncommon Profits", Philip Fisher looks at inflation in terms of money depreciation over a long period. I computed the parallel figures for Indian environment.

The average rate of inflation in India has been 8.07%. Thus in 10 years, the purchasing power depreciates by 54%, and in 20 years it depreciates by 77%.

The initial chapters also talked about why a good growth company must be investing in research and provided a few scuttlebutt techniques. Will try to find atleast one company which has been investing in research and try to apply the scuttlebutt techniques in the upcoming week.

In stocks, I had a look at Bharat Agri Fertilizers and Reality. The numbers look interesting, but the profits are mainly from the real-estate business. I couldn't find their website or much details about their projects. Thus left the analysis after a cursory glance.

Day 25

180Stocks — Sat, 12 Oct 2013 00:00:00 +0530

Prof.Bakshi shared a very insightful presentation today. While his earlier article did discuss about the better returns in "great businesses", in this new article he explains why cigar-butt investing doesn't work and why even at a PE of 25 times, the valuations are still cheap.

Main takeaways

Two reasons why cigar-butts don't work

In a difficult business, no sooner is one problem solved than another surfaces - never is there just one cockroach in the kitchen.

Time is the friend of the wonderful business, the enemy of the mediocre. [i.e. in the low quality business the return on capital is very low. Thus for each passing by year where the value doesn't unlock, the rise in the intrinsic value is only marginal. While in the case of high quality businesses, as the return on capital is high, the intrinsic value nears the high paid price.]

The reasons why Graham & Dodd advocated on "buying cheap" was because of "powerful temporary effect upon all business through the variations of the economic cycle." Thus during a temporary shift in the economic cycle the growth suddenly disappears and the stocks are beaten down. This is "guarded against by unvarying insistence upon the reasonableness of the price paid for each purchase." [Pg.367 of Security Analysis]

The above is true for most of the businesses. In-fact the "great businesses" are GREAT because they rarely witness the "variations of the economic cycle" as they are largely recession-proof.

Calculating intrinsic value

intrinsic value - the figure indicating what all of our constituent businesses are rationally worth. With perfect foresight, this number can be calculated by taking all future cash flows of a business - in and out - and discounting them at prevailing interest rates.

This was an interesting learning on how we can use the concept of DCF for reverse-engineering. By using the actual earnings of last few years we can know have the "perfect foresight" and market expectations on an historical date.

Another interesting part was about using the actual discount rates for future calculations.

Buffett does not add a risk premium. Instead, he relies on his single-minded focus on companies with consistent and predictable earnings and on the margin of safety that comes from buying at a substantial discount in the first place.

Graham & Dodd criticised DCF as it involved "assuming certain vital facts about future earnings, distribution policy and interest rates" [Pg.364 of the Security Analysis]

What are great businesses

Companies that have a established track record of delivering high owner earnings in relation to capital.

[...] Projects where profitability is high and overwhelmingly likely to succeed.

[...] Businesses that have enduring competitive advantages backed by demonstrated consistent earning power, and it so happens that those types of businesses happen to be concentrated in sectors having persistent CFROI's.

Graham & Dodd too appreciated the results of successful growth investing. But they maintained that "identification of growth company is not so simple a matter as it may appear. It cannot be accomplished solely by an examination of the statistics and records but requires a considerable supplement of special investigation and of business judgement... the real question is whether or not all careful and intelligent investors can follow this policy with fair success."

Graham and Dodd classified the companies as great companies which "participate in general record of growth so that they combine the advantages of a long period of upbuilding and an exceptional ability to expand later."

On the stock front, I wasn't able to study any new stocks but the ones that were mentioned in the presentation itself.

Day 24

180Stocks — Fri, 11 Oct 2013 00:00:00 +0530

Felt a bit tired and wanted to keep it easy today.

Today I picked up "Common Stocks and Uncommon Profits", by Philip A. Fisher, to keep a pace with both value and growth investing.

On initial reading of the "theory of common-stocks" it seemed to be strictly against the trend/growth investing. But going through it again hinted that trend and growth investing are not the same thing.

The instability of individual companies (in case of value investing) may conceivably be offset by means of thoroughgoing diversification. More- over, the trend of earnings, although most dangerous as a sole basis for selection, may prove a useful indication of investment merit.

The theory also asserts:

that the investor who can success- fully identify such “growth companies” when their shares are available at reasonable prices is certain to do superlatively well with his capital.

Thus I thought that it is a proper time to keep a pace with both the books.

The initial preface of the book provided two quantitative measures:

Above-average sales organization (something also seen on day 17).
Worth-while profit margin.

The second point of "worth-while" profit margin filtered out few pending companies from the list: Hind Industries and Unique Organics. Both have a brilliantly growing top-line and exports, but the margins have been terrible (less than 5%).

Day 23 (KCP Sugar)

180Stocks — Wed, 09 Oct 2013 00:00:00 +0530

Another of the interesting and cyclical company that was long pending in the list was KCP Sugar.

I analysed the company on the same parameters as Tata Sponge.

The Company is engaged in the manufacture and marketing of wide range of products that can be broadly classified under three groups:

(1) Sugar (contributing over 90% of revenue)
(2) Bio-products
(3) Engineering unit for manufacture of solid liquid seperation equipments through its subsidering.

Market capitalization: 192.21 Crores
10 Years average earnings: 26 Crores
Net worth: 230 Crores

The company's profits started declining (from PBT of 96 crores in 2006 to 7 crores in 2008) when the "sugar cycle reversed due to high supply and low demand" in 2008.

After a long time the market capitalization of the company has fallen below the net-worth. At the same time the company has reduced the debt by half (from sub 100 crores to sub 50 crores).

Another interesting development in the industry is deregulation of sugar prices and supply.

Together these provide an exciting opportunity in the stock. To derive some intrinsic valuation, I followed the easy technique of compounding the 10 year average earnings by risk free rate = 26 / (8.75%) = 297 Crores.

In the upcoming days I would try to improve upon the concepts of intrinsic value as I further read the book.

Day 22 (Tata Sponge)

180Stocks — Tue, 08 Oct 2013 00:00:00 +0530

Today I continued with the "Theory of Common-Stock Investment" from the Security Analysis. The thing that striked me the most was this passage:

My aim for the day was to find one such company which is "long established, well financed, important in its industry and presumably destined to stay in business and make profits indefinitely in the future, but that have no speculative or growth appeal"

Tata Sponge seemed to fit well into that definition. The company has an average earnings of Rs.70 crores over last decade and the market capitalization is Rs.450 crores. The net-worth is 640 crores.

Off this net-worth of 640 crores, Rs.361 crores is in fixed deposits and investments. Thus funds used in operations are around 278 crores (with 161 crores of depreciated fixed assets) ¹ .

Over last few years, the operating margins of the company have reduced from 30% levels to current 13% levels. This has been mainly because of the high raw-material prices (58% of cost in 2008 vs 75% of cost in 2013).

From the above volume data it doesn't look that the company is going through a permanent bad phase. The down-swing looks purely cyclical, though it is hard to estimate how long it can continue.

Overall it does look like a company where there has been no recent growth, and the valuations have depressed for this reason.

Some concerns:

What kind of upside are we looking for in such cases (i.e. what is the good selling point)? (I would give the intrisic value of around 600 crores based on 3 kilns and the cash, though much will depend on how the company goes on to deploy this cash).
How long can it take to unlock the value (or rather how long can the depressed cycles continue)?

I guess the answers to the above too must be somewhere in this excellent book.

The excessive cash is presumably for the development of Radhikapur Coal Block. ↩

Day 21 (De Nora)

180Stocks — Mon, 07 Oct 2013 00:00:00 +0530

I screened for companies based on the "Theory of Common-Stock Investment".

One of the names that came up was De Nora. The company's balance sheet looked interesting as the company had bought-back shares in the last two years at Rs.92 (current price is Rs.101). The dividend payout also looked very attractive (with yield of 7%). But going through quarterly results, it turned out that there was a one time profit of 6.21 Crores during September 2012 and that was deviating the ratios. On removing the income from that quarter, the average earnings shot-up.

Most other companies in the list too had similar one-off items, or the companies were in their dying stages. It was still interesting to go through the annual reports of some of them to know about their reasons for downfall.

Day 20 (Jenburkt)

180Stocks — Sun, 06 Oct 2013 00:00:00 +0530

Have been stuck with fever and thus would keep it short today.

One of the companies which attracted me recently was Jenburkt Pharma. The company has a brilliant dividend yield of 6.25% and a consistent dividend record.

Jenburkt is engaged in manufacturing and marketing of speciality and high quality pharmaceutical formulations and healthcare products.

To come-up with some valuation, I took the last year's dividend and compounded it at historical growth rate.

The last year dividend was Rs.4.20. Required rate of return: 20%. Lowest historical growth rate of profits: 17%.

Thus I came up with a value of 4.20 * 100 / (20-17) = 140. At current price of 66 it looked quite attractive.

The above was all wrong.

There was a good discussion about the company and its products. It seems the company's products have a tremendous competition. Probably the strength lies in the company's distribution network or sales team. Over the years these hasn't been much sales growth (just 13% in 10 years). But the OPM margins have shown a consistent up-trend (increased from 7% to current 15%).

If there was one thing that had a real impact from yesterday's post, then it was to take average earnings for the calculations. If we take the average earnings, then the valuations no longer look too attractive and the dividends growth rate looks improbable.

In last 4 annual reports the management has been talking about growth opportunities but the same haven't translated much in the financials.

Day 19 (Theory and OCCL)

180Stocks — Sat, 05 Oct 2013 00:00:00 +0530

Today I began with the "Theory of Common-Stock Investment" from the Security Analysis book. I always related Graham only with deep-value/distressed/liquidation investing, but in this chapter Graham discusses and compares about the growth/trend investing too.

The chapter defines [value] investments as the ones which have:

a suitable and established dividend return,

a stable and adequate earnings record, and

a satisfactory backing of tangible assets.

In growth/trend investing:

Two of the three elements above stated lost nearly all their significance, and the third, the earnings record, took on an entirely novel complexion. The new theory or principle may be summed up in the sentence: “The value of a common stock depends entirely upon what it will earn in the future.” From this dictum the following corollaries were drawn:

That the dividend rate should have slight bearing upon the value.

That since no relationship apparently existed between assets and earning power, the asset value was entirely devoid of importance.

That past earnings were significant only to the extent that they indicated what changes in the earnings were likely to take place in the future.

Graham even says that it was a "sound premise used to support an unsound conclusion." The prices rise "for the simple reason that common-stocks earned more than they paid out in dividends and thus the reinvested earnings added to their worth."

Thus the trend/growth theory is attractive as long as "common-stocks earned more than the bond-interest rate upon their cost. This would be true, typically, of a stock earning $10 and selling at 100." The moment we start paying 20-40 times earnings, the "earning power is no greater than the bond-inter- est rate, without the extra protection afforded by a prior claim." The analysis of the balance sheet and earnings is still stressed upon.

One company that looks close to the concepts of "investing" is Oriental Carbon & Chemicals.

The company provides a dividend yield of 5% (and more than 4% yield for each of the last 4 years dividends). Thus the company has "suitable and established" dividend return.
The 10 years average earnings have been 14.54 crores and 5 years average earnings have been stable at 25 crores ¹ . On the market capitalization of 98 crores the earnings are adequate.
Market capitalization is almost half of the net-worth of 170 crores. Thus there is a satisfactory backing of tangible assets.

Due to paucity of time I was not able to make adjustments of "economic earnings" for each year. On the balance sheet too I only made the obvious adjustments. ↩

Day 18

180Stocks — Fri, 04 Oct 2013 00:00:00 +0530

Today I wanted to study KCP Sugars. It is supposed to be more of a commodity and cyclical play. But it required too much data to process and make sense off. Thus even after collecting many of the pieces and articles related to KCP Sugars, I decided to postpone it and end the day with something simpler.

I screened for companies which had an average growth of more than 20% in atleast 5 years in the last decade. It was an impressive list and most of the multi-baggers (where PE got re-rated) were in the list (along with many not-so-good names). I sorted the list on PE, excluded large caps and did a quick scan of initial names.

Most of the companies were government companies. I skipped over them. Most others were textile related. One that did attract a little was Ganesha Ecosphere. It has an interesting business of "recycling of post consumer PET bottle waste into Recycled Poyester Staple Fibre (RPSF)."

The annual reports were fairly detailed. What quickly drove me away was consistent equity dilution, promoters pledging, high debt (with scope for more borrowing in future) and low tax.

Day 17 (Virat Industries)

180Stocks — Thu, 03 Oct 2013 00:00:00 +0530

Today I began with screening for companies having good return on capital, providing decent interest coverage ratio and paying out dividends.

One of the interesting companies that came up was Virat Industries. I specifically liked the detailed annual reports and the business details the company provided ¹ . On the fundamental side, the stock provides a good dividend yield of 6%. The company is debt-free, has 1.5 crores of cash (against a market capitalization of 11.76 crores), decent return ratios and a consistent performance record ² .

At the PE of 4.5 and price near the book value, the stock surely looked very attractive (the promoters too have been buying small quantities). I went on to discuss the company with an expert.

I was asked to compare the company with Arex Industries and Premco Global. Arex has amazing operating cashflows (more than the company's market capitalization for each of the last 4 years).

The problem with these companies is not the operations or valuations, but the scale of opportunities. These business are too competitive in nature (due to a commodity product) and it is hard to scale their turnover beyond a size. In textile, this is further compounded due to competition from Bangladesh and China.

He explained that if we are going into small-caps, then we should look for superior returns. Look for businesses which have potential of growing at more than 20% year-on-year due to the advantage of their small size. Otherwise we are only aiming at average returns, which can be obtained from safer large-cap stocks too.

This surely clicked to me. Their might be some mis-pricing in these stocks, but that reminds me of the essay by Charlie Munger:

Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you're not going to make much different than a 6% return—even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you'll end up with a fine result.

So the trick is getting into better businesses.

Over last decade, Virat's stock has given modest 15% returns, and Arex stock has gone nowhere in the last 5 years, both inline with their businesses performances.

Jason Zweig wrote a wonderful essay on the good communication by the companies: The Tale of Two Washingtons ↩
2011 had an abnormally low OPM (of 5% against 23% the year before, but the same can be blamed to the abnormal rise in the cotton yarn prices: Cotton price chart ↩

Day 16 (Alicon)

180Stocks — Wed, 02 Oct 2013 00:00:00 +0530

Today I began with another small-cap stock, Alicon Castalloy.

"Alicon Castalloy is one of the largest integrated aluminium casting manufacturing units in India offering end-to-end solutions across the entire value chain, and delivering best-in- class aluminium castings - Gravity, Low Pressure and Sand Casting."

The valuations of the company look over-beaten. The per-share book value is Rs.86 and the stock quotes at Rs.50. The company has a market capitalization of Rs.53 crores; the net-profit in FY13 was 16.87 crores (i.e. the PE of 3.15 times). The cash-flows are decent, and the company has been consistently paying out dividends (with the current yield of 3%).

The company has a high debt, but CRISIL has given a stable A- rating.

The primary concerns seem to be the decreasing margins from 20% levels in early 2000s to current 10% levels. The overseas subsidiaries have been burning cash, though recent quarters look better. Going forward, there are reports which talk about upcoming expansions. Another increase in debt can impact the bottom-line negatively.

Overall, the prospects of the company largely depend on better margins and growth. Current valuations seem to have already discounted much of the risks, and it looks interesting to me at these levels.

Day 15 (Acrysil)

180Stocks — Tue, 01 Oct 2013 00:00:00 +0530

Acrysil is a small-cap company with market capitalization of only 53 crores. The company makes quartz kitchen sinks and says that "we are the only company in all of Asia - and one of just a few companies worldwide – manufacturing quartz kitchen sinks to global standards of quality, durability and visual appeal. We have no competition in its class in India."

~80% of the revenues of the company comes from exports. Till 2011, the company had good margins of more than 20%. Over last few years the gross margins declined to 16% and coupled with higher interest costs, the bottom-line shrinked (even though revenues had a moderate growth).

Recently the company posted a very good June quarter and that got me interested into the stock. The company has had a good revenue growth and improvement in the margins can reward big. The management seems pretty ambitious about the growth in the annual reports.

I would tag the stock as a risky bet but with good potential rewards. The things which I find very risky are:

The ambitious future plans: Company aims to be the "undisputed ‘No 1’ position – the top-most one-stop brand for every requirement in kitchen products – every fitting, accessory, appliance and utility."

For this, the company plans "to further increase domestic sales by launching new models, catering to new projects and aggressive promotion."

Weak financials: The cash-flows are relatively weak with around 70% realisation of the operating profits over last 5 years. The tax payout is also relative low at 20%.

Other things: The company has 4 subsidiaries (with a couple of them in losses). The company does not post the consolidated results on the quarterly basis. I also found the managerial remuneration to be on a higher side (20% of the net-profits). In 2008 the company came up with a preferential allotment to promoters and diluted 15% of the stake of the other shareholders.

With the kinds of ambitions and historical growth, the company does look interesting. The new lines of products and new-brand building can take some time to break-even and thus I will keep a close eye on the margins and debt levels in the upcoming quarters.

Day 14 (Kewal Kiran)

180Stocks — Mon, 30 Sep 2013 00:00:00 +0530

Today I went through the brilliant Killer Puzzle shared by Prof. Bakshi.

The company has an excellent set of financials, with the pre-tax returns of 64% on the net operating assets. The returns are supported by clean cash-flows and dividends.

The main questions were:

How is the company able to earn extra-ordinary margins (of over 25%)?
Are these margins maintainable?
How should the company be valued?

Since the company came with the IPO in 2006, I began with the red-herring prospectus to understand the reasons for IPO.

I also went through the articles on Spykar and Kuotons to learn from their failures. It was mostly the rapid pace at which they opened stores and took debt. Thus increasing the operational costs of rents and inventory.

Kewal Kiran seems to be doing okay on that front. Arvind's Flying Machine closely resembles the company's segment, but the raw-material cost is 50% in contrast to 40% in case of Kiran. Thus there must be some operating efficiencies too in the case of Kewal Kiran.

In an old discussion on a forum, one of the comments (from Prof. Neeraj Marathe) said:

Their business model is a lot different from others. What they do is SELL the entire inventory to the franchisee (shop owner). This reduces a lot of working capital, explaining the better balance sheet.

Secondly, whenever there are a lot of stores added (not their own), you will see a jump in sales. This is cause the franchisee has to set up shop with about Rs.20 lakh worth of clothes..(i talked with the shop owner near my place) whether the shop manages to sell the clothes to customer or not, KKCL books the sales. (nothing wrong in it..quite a good policy)

The discussion from IVY League summarises the business best:

“We must look at fashion and not garments as a business. Fashion is all about marketing, trends, understanding the consumers, social changes, and what’s going to sell. You need not necessarily produce what’s going to sell. You could outsource it. GAP does not produce a single garment in-house. Lacoste which is available all over the world employs only 53 employees. They don’t make or sell a single product.”

Overall, I love the company's balance-sheet and the business model. But I am unable to find a proper valuation for it. In next few days I will try to compare it with CERA, which looks cheaper.

I still have a few doubts and concerns:

Why so high margins? (I visited one of their K-Lounge in city and didn't get a very good feel).
The high number of stores closing recently.

Day 13

180Stocks — Thu, 05 Sep 2013 00:00:00 +0530

After a little gap, I resumed with Suven Life Sciences Ltd today.

The company primarily has 3 main segments:

CRAMS (Contract Research & Manufacturing): "brings in new technologies and cost savings in manufacturing"
DDDSS (Drug Discovery & Development Support System): "brings in speed in preclinical development and clinical trials thus reducing time and money spent"
Research & Development: "brings in innovation" in the field of Central Nervous System (CNS)

The company has had a consistent revenue growth of over 25% during the last few years. The profits too have shown a geometric growth during this period. 90% of the company's revenue is from exports, and primarily comes from CRAMS segment.

The margins of the company have been abnormally high in the CRAMS segment. The same might be attributed to the unique research work the company has been doing in CNS segment. The rupee depreciation should also be highly rewarding for the company.

Another exciting thing about the company is the upcoming "addition of a new green field site at Vizag with an outlay of around Rs 100crs which in turn adds to the growth and profitability in the years to come." With all this innovation, patents, research and USFDA approvals, the company looks attractive at a market capitalization of Rs.528 Crores.

However, there are a few points which make me give a miss to this stock:

The amalgamation of Asian Clinic Trails in 2007 is an interesting one. I feel that the company overpaid (in form of equity shares worth more than 30 Crores at that time) for an acquisition of net assets worth 2.73 crores. The resulting promoter's equity raised from 54.5% to 61.5%, while also created additional reserves in the books.
As per the FY 2013 annual report, the company has a surplus bank balance and deposits of over 20 crores. I see it as a weak financial management to have a corresponding borrowings of ~100 crores.
The stock has been far too volatile along with huge volumes.

Day 12

180Stocks — Mon, 19 Aug 2013 00:00:00 +0530

I studied Premco Global Ltd today. It is a manufacturer "of Woven and Knitted Elastic and non-Elastic Narrow Fabric and Webbing (4mm-250mm), and caters to the apparel, lingerie, sports-related, medical, footwear, luggage, furnishing, and automotive industries."

This is a hyper competitive market with slow growth and low margins. But the company has posted phenomenal profits during the last few quarters. The current market capitalization of the company is 8.20 crores, providing a dividend yield of 7% (the company has been consistent with the dividends) and trading at around 1 time its trailing-12-months profits.

I went through the company's annual reports of last few years, but it don't provide much business details. The annual report of 2013 is awaited. Couldn't find the annual reports of Sky Industries Ltd too, which (claims to be the largest manufacturer in this field).

Keypoints from notes and other reports: The company has 4 plants and the book value is around 3 times the market price. Around 50% of the company's revenues are from exports. The promoters did a small preferential allotment at Rs.28 per share in 2012-13.

The interesting thing is that though the high profits have repeated and continued in last 4 quarters, the price has dropped by 20%. Don't know if this was because the stock came under the call-auction mechanism, or because the markets are not expecting the margins to sustain. Either way, even if the margins do not sustain, the company will still be at a PE of 3 with a good dividend track record.

Annual report of 2013 will be something to look forward. How the company utilizes the new profit funds (over 6 crores in last 3 quarters) and how long the margins sustain will be worth digging into.

This detailed blogpost provides some more details.

Day 11

180Stocks — Thu, 15 Aug 2013 00:00:00 +0530

The company I studied today was PI Industries Ltd. It was part of the peer comparison in CRISIL's report on Dhanuka Industries which I studied on day 6.

The company has issued new shares during each of the last 4 years. Thus it required some efforts to prepare the adjusted net profit figures and to evaluate the issues.

The company has two main verticals. In domestic market it sells the agri-input products (agro-chemicals, fertilizers and plant nutrients), and does the contract research and manufacturing (CRAMS) for its foreign clients.

Last year, the company raised 117 crores through a qualified-institutional-placement (QIP), by issuing the shares at 609.60 (dilution of 8%). The funds being used to setup a new facility at Jambusar SEZ to "provide a fillip to the export volumes."

Historically, the company has had an asset-turnover of around 4 times (current net block is of 480 crores). If the capacities are utilized and the company is able to get the export orders, then it can see a turnover of around 2000 crores in a few years (FY 2013's turnover was 1245 crores and FY14Q1 turnover was 400 crores).

The current market capitalization of the company is 1758 crores. Based on the annualized earnings of last quarter, the company is at a forward PE of around 10-12 times.

There isn't a high margin of safety and visibility at these levels, but it is a stock I will keep an eye on.

Day 10

180Stocks — Tue, 13 Aug 2013 00:00:00 +0530

Today I shuffled through several companies trading at their multi-year lows. Some businesses were pure cyclical and some were too complex to understand. In the end International Conveyors Ltd. looked interesting. Its market capitalization has been on a down-slide from 250 crore levels to 67 crores, while the top-line has shown a consistent growth.

Company is "one of the country’s largest PVC Belting exporters to USA and Canada. Company enjoys India’s leading 40% share in the PVC Conveyor Belting market for underground mines. The company’s manufacturing facilities are located in Aurangabad, Maharashtra that has the largest manufacturing facility in the world."

I began with the company's 2007 annual report. That year the top-line had grown by 39% and the bottom-line had more than doubled. Company had an impressive order-book of over 20 crores (40% of 2007s sales) and it expected "to report two years of straight growth: a 40 per cent revenue increase in 2007-08 followed by 40 per cent in 2008-09."

The balance sheet reported an increase in loan from 13 crores to 30 crores. Simultaneously, there was an increase in the gross block from 7 crores to 26 crores. That year, the company had added 19 crores of windmills funded out of debt.

The results were seen in over the next couple of years. While the topline did grow over 30% in 2008, the bottom-line decreased by half under the interest pressure. Subsequently, in 2009, the company raised money through warrants to pay back the loan.

As per the 2012 annual report, the loan has again risen to 39 crores (from 19 crores in 2010) and another windmill of 8.74 crores has been added to the gross block.

Day 9

180Stocks — Mon, 12 Aug 2013 00:00:00 +0530

Today I studied Dynemic Products Ltd, which can be an example of cigar butt investing.

This company has a market capitalization of 16 crores. It is "into manufacturing of food color, lake color, D&C colors, salt free dyes, dye intermediates which is used as an essential ingredient of food, drug, cosmetic, personal care and FMCG industry."

This is a highly competitive business due to its commodity nature. Company's 10-year-average growth rate is only 17% in-spite of a major expansion in 2008 (company came up with an IPO in 2006). There have been constant margin pressures over last few years and the operating margins have fallen from 16% to 11% levels. The 10-year-average profit growth rate has been only 14.58%.

In 2013 annual report, the company says the lower margins are "largely attributed to MEE plant, which has incurred Rs.4.57 cores on working capital this year and Rs.47 lacs on fixed assets which is a step ahead for pollution control and GPCB norms."

The MEE plant is a regulatory requirement and impacts the company negatively as unorganized/small competitors are not required to comply with it.

On the valuation side, the stock looks over-beaten. The company came up with an IPO in 2006 at Rs.35 (valuing the company at 39 crores and 10 times its earnings). The company has paid consistent dividends of around 1.5 crores each year and provides a dividend yield of 9%. The current price is around half its book value and the rupee depreciation should be a big positive for the company (as 70% of the company's revenue are from exports).

I would still give the company a miss primarily because of slow growth, low return ratios, lower booked depreciation and highly volatile quarters. Though the stock returns look attractive in micro-caps, I would prefer Gulshan Polyols over it.

Day 8

180Stocks — Thu, 08 Aug 2013 00:00:00 +0530

It is interesting to study the companies which are leaders in their fields. One such company which often comes up on screens is Himatsingka Seide Ltd.

CRISIL's report describes them the best:

The Himatsingka group has been a leading manufacturer and the largest exporter of silk and silk-blended drapery and upholstery fabrics in India for the past eight years. The group, backed by its team of designers in India, the US, and Europe, offers more than 10,000 products, and can create 1500 products annually. It has further established itself in the home textiles segment, where it was already present with high-end drapery and upholstery products, through its bed linen business. The bed linen operations, which are fully integrated with a manufacturing unit at Hassan (Karnataka), three acquired global distribution companies, and a retail arm with 14 stores, account for about 90 per cent of the Himatsingka group’s total revenues.

The exciting thing about the company is its market capitalization of just 273 crores. The top-line and EBIDT levels have been pretty strong in comparison to the valuations.

In 2006, the company raised money through GDRs and the net worth stood at around 600 crores (and has stayed at around same levels until 2013). Since then, the company has done aggressive overseas acquisitions which tightly integrates with the company's production. This has led to the creation of 532 crores of (intangible) goodwill in the balance sheet.

The real problem has been the derivate losses on the company's foreign currency contracts. In 2009, the company posted a loss of 74 crores.

(Extract from the 2009 annual report)

The financial performance during the year has been primarily impacted by a Rs. 43 crore loss attributable to closure / provisioning on account of foreign exchange derivative contracts, a Rs 18 crore loss incurred on account of foreign exchange translation/realization and a loss of Rs. 15 crore on account of the stabilization of the Bed Linen plant in the first half of the financial year.

I am not sure whether the loss was a one time item or can repeat again (considering there is again a similar volatility in exchange rates). There is still a foreign currency loan of $136 lacs, hedging contracts outstanding of more than $200 lacs and a little extra-volatility can take the bottom-line in any direction. As there are far too many components involved, I convinced myself to watch this stock only from a distance, even though it looked very attractive.

I still wanted to know why the losses occurred and how does accounting work in foreign exchange contracts. 2008's dollar vs rupee chart told a part of the story and this article provided a good commentary. But the real gem was this article by Dolphy D'Souza which explained the hedge accounting, knock-in & knockouts and the role of Swiss Franc.

Day 7

180Stocks — Tue, 06 Aug 2013 00:00:00 +0530

I studied Gulshan Polyols today. This company is amongst the largest producers ¹ of sorbitol and calcium carbonate in India. The interesting thing about the company is its slow-growing-boring-business on one side, and the extreme low valuation on the other.

About 50% of the company's revenue come from sorbitol and 40% from calcium carbonate. The company has a clientele of large corporates ² including Colgate, Unilever, Asian Paints etc. But the revenue growth has been nominal at 7-15%.

On the valuations side, the company is available at a market capitalization of just 48 crores. There is a cash of 28 crores on the balance sheet, and the last year's net profit was 24 crores. Cash flow from operations for each of the last 5 years has been more than 20 crores. Company has been consistently paying the dividends and I really couldn't dig anything negative about the management (i.e. no subsidiaries, related party transactions, preferential allotments, windmills or insider trading). The company also has 6 plants (in 5 states), 150 acres of land and has a workforce of over 1500 employees. CARE has consistently given a A/A1 rating to the company's borrowings.

Among the large negatives, I could only find the low rate of taxation. Will try to collect more details about it and do some groundwork.

Both Gulshan Polyols and Kasyap claim to be the largest producers of Sorbitol in India ↩
Previous post relating to companies with large clients but slow growth. ↩

Day 6

180Stocks — Mon, 05 Aug 2013 00:00:00 +0530

Today I picked up Dhanuka Agritech Ltd. It "manufactures a wide range of agro-chemicals like herbicides, insecticides, fungicides, miticides, plant growth regulators in various forms – liquid, dust, powder and granules. The Company has a pan-India presence through its marketing offices in all major states in India, with a network of more than 7,000 distributors/ dealers"

Over the years the company has had a good steady growth of around 15% in top-line and 25% in bottom-line. The company introduces new brands and products each year, and has many technical tie-ups with international companies like Nissan, DuPont, Dow, FMC etc.

The interesting thing in the company's 2013 annual report was its expansion plan:

Your Company has bought 10 acres of land at Keshwana in Rajasthan for setting up a new manufacturing unit of International standards with maximum automation. The expected capex is to the tune of Rs.45-50 crores. The unit is expected to be operational by 2014 and will triple the existing manufacturing capacity.

Your Company has been allotted approx. 1,50,000 sq.mtr. Industrial plot in Dahej, which is a Chemical zone in Gujarat, for future expansion.

This would help your Company to achieve its objective of robust growth.

Historically the company has had a very good asset-turnover ratio (with sales of 646 crores on the net block of just 40 crores). The reason has been the 'formulation' manufacturing:

'Formulation' manufacturers: These are manufacturers of final product from technical grade pesticides (the usable form of pesticides). This is quite an asset light model and serves mostly B2C segment.

The above expansion can be a big trigger if the capacities are utilized. The company has also signed Amitabh Bachan as its brand ambassador recently. This too may provide a good growth going forward.

The company's current market capitalization is 675 crores. The business has a good ROE of over 25%, but the stock price is 2.5 times its book value. The major risk is the company's import exposure of more than 30 percent of its raw material costs. It will be interesting to see if the company is able to pass on the recent rupee depreciation in its price sensitive market.

CRISIL's report has reported the company as fairly valued at the current levels.

Regarding Ashiana Housing's value of constructed area, I couldn't find the details regarding it in the given reports. Will try to send a mail regarding it to the company.

Day 5

180Stocks — Fri, 02 Aug 2013 00:00:00 +0530

The two stocks, Financial Technologies and MCX, had another free-fall today. It was tempting to analyze them. The two primary questions were:

How impactful can be the damage of NSEL for Financial Tech?
Why is MCX falling?

Finding answer to both of the above was almost impossible. Sometime in the future the things might look obvious in the hindsight, but for now, they remain unanswered. From the various discussions, it was pretty clear that it was not the case of "unjustified pessimism."

The events are best covered by CapitalMind and Prof. Bakshi.

There was a conference call of Ashiana Housing later during the day. Brief inputs told that this is a real estate company which is clean. At current levels, most real-estate companies look deeply under-valued, but hardly any of them want to share the wealth with their shareholders. It is clearly reflected by other real-estate companies' profit margins which are around 15%. Ashiana is among the few which have the margins of over 26% and which also provide proper pricing details on their website.

I began with 2013 numbers as the revenues have dropped by almost half. The 2013 annual report answered: "the year 2013 was low as expected. The reason being the change in accounting policy from POC (percentage of completion) to the contract completion method." This is a conservative accounting policy and seems to have hit the company even more as most of their earlier projects have just completed, and the new ones have just begun. The company recommends to use ECA (equivalent constructed area) and cash from operations as better comparative indicators.

The company does seem to have a very good brand benefit. They don't sell through brokers (instead incentivizes the buyer if he comes through referral), restrict reselling upto 60% payment (approx 1.5 years) and treat land as raw-material (and not build up land banks). These can provide a very long term benefit to a company.

Valuation wise, the company has a market capitalization of 360 Crores. There is a cash of 52 crores and a small loan of 11 crores. Thus the enterprise value is 319 crores. Against this, the company has an inventory of 231 crores. I am unsure about how much of it is the value of constructed area. I am also unsure about the percentage of constructed area to total salable area. The clarity on these two figures can give a good estimate about the value of total project, and consequently about the margin of safety available.

Qualitatively the company looks great to keep an eye on. I will try to collect more details about the missing two figures tomorrow.

P.s: Found this interesting article while digging the above.

Day 4

180Stocks — Thu, 01 Aug 2013 00:00:00 +0530

I looked at Astral Microwave on Day 2, while looking at defense companies. The stock looked interesting as it was showing a very good year-on-year growth and yet available at a multi-year low (at a market capitalization of 276 crores).

I began reading the company's 2006 annual report. It was an exceptional year as the company's top-line grew by over 50%. Net profit that year was of 37 crores (and has stayed below it until 2013). That year company declared a 1:1 bonus (along with a stock split in 5:1 ratio). The R&D expenditure was 18% of revenue and the annual report was pretty optimistic about the future.

I looked at the historical price chart to find that the market had been even more optimistic and had valued the company at whooping 1000 crores (37 times its annual earnings).

Next year, company reported the "end of major production orders of ground based radar sub-system which dominated both the top line and bottom line growth of the company in the last two financial years."

Lesson of the day was never to overpay for a stock, no matter how tempting the prospects might be.

At current levels, the stock is at 7 times its earnings, has book orders of 1000+ crores "executable in the next 24 to 30 months" and the promoters are buying. Words in the annual report (2012) have become more cautious and it does not seem that one might be "overpaying" at these levels. But, I will still like to miss this opportunity and will look for businesses which are lesser dependent on government.

Day 3

180Stocks — Wed, 31 Jul 2013 00:00:00 +0530

Today I started with Tinplate Company of India Ltd. It is a Tata Enterprise and the "largest indigenous producer of tin coated and tin free steel sheets in India". The company has been in the business for over 90 years. Yet the market capitalization is only 358 crores.

It is a coincidence that today only I got a copy of the latest Capital Market magazine. The cover story is "small forever." The article covers the case-studies of Ultramarine & Pigments and Paper Products Ltd. Both the companies have been into their business for decades, and yet have failed to scale.

In case of Ultramarine, "though the company has reported profit over the last one decade; out of last 10 years, it reported decline in profit in five years." The reason associated is "over-dependence on few clients."

Paper Products has multiple big FMCG clients including Levers, Nestle, Cadbury, Coca Cola etc. Yet the company hasn't been able to scale as it "is sandwiched between big customers on one hand and is a commodity play on the other hand."

It is interesting to see that in both of the above cases, the companies were in a sort of commodity business and that their clients were big corporations. Thus the other party got to dictate the terms.

Coming back to Tinplate Company, tinplate is widely used in packaging industry. Infact 55% of the domestic demand is met through imports. But it is the other substitutes (tetra pack, pet, plastics as well as non-prime tin) that pose a major substitution threat due to their cost competitiveness. It is very similar to the above two cases of commodities and big customers. There is some hope for good growth in top-line but the growth in bottom-line looks doubtful. Valuations too don't look too cheap to provide a good margin of safety at these levels.

Yesterday I also talked about Astra Microwave while studying defense stocks. Well, I will need to delay it again for tomorrow.

Day 2

180Stocks — Tue, 30 Jul 2013 00:00:00 +0530

One of my friends is in army and wants to invest into stocks. While talking to him over phone, I started looking at the listed companies into defense.

I began with Zen Technologies. The company manufactures simulators and has a market capitalization of only 60 crores. The earnings have been very volatile over the years (63 crores in 2009 vs 17 crores in 2011 vs 100 crores in 2012 vs 40 crores in 2013). The company has an order book of 37 crores and an OPM of around 30% (also very volatile). Company's recent buy back did bring some excitement, but it was a minor quantity of 17000 shares (0.19%). Due to the volatility in earnings of the company, I found it hard to derive some valuations for it.

CARE's report on Zen Technology mentioned about Bharat Electronics among the listed peers.

Bharat Electronics is a PSU. It "primarily manufactures advanced electronic products for the Indian Armed Forces." Market cap is just around 9000 crores with a cash of around 5000 crores in the March'13 balance sheet. The annual profits are around 900 crores. This makes it a very attractive stock to follow.

But the risk here, as is with all the other PSUs, is that there are elections within the next 12 months. The experts believe that the cash from balance sheets of the PSUs will suddenly disappear. Some unnecessary deal, merger, expansion, subsidiary etc will happen and the cash will be gone.

Barring the last year, the sales growth have been slow in the company. There are risks about the cash management, and a large distrust in promoters. For these reasons, I will watch this stock from a distance.

Astra Microwave looked good among other peers. I will cover it tomorrow.

Day 1

180Stocks — Mon, 29 Jul 2013 00:00:00 +0530

What is this about?

Jennifer wanted to master web-development in 180 days. The way she proceeded was to build 1 website each day. That is crazy, and the results are fabulous.

I want to try the same craziness on stocks. Over the next half year, I will try to learn more about investing concepts, businesses and industries. Each day I will try to study at least 1 company and write a brief post about it.

Day 1:

I picked up Kaveri Seeds for today. It is a seasonal company and its results are due within a week or two.

The company has an excellent business. It provides high quality hybrid seeds which increases the crop's yield. In 2008, it introduced revolutionary hybrid BT-Cotton seeds, which provided wonderful returns not only to the farmers but also to the shareholders.

In the 2007 annual report company mentioned that "once a hybrid seed is developed and introduced, its acceptability gradually declines from year to year." Five years later, in the 2012 annual report it says "cotton, considered by many as a mature market, we expect to gain market share because of our differentiated and high-yielding hybrid seeds portfolio." At the same time the company is optimistic about the developments in hybrid rice.

The balance sheet of the company is one of the most amazing ones. Of the total 858 crores of assets, 253 crores is financed from advance from customers. Another 237 crores is financed from creditors. June quarter is the most important quarter for the company and thus the closing stock from March balance sheet gives a good estimate about the upcoming results. The March'13 inventory is Rs.491 crores (against 303 crores previous year). Going by these and the good monsoons, I estimate June sales to grow by anything between 30% to 75%.

Based on the above numbers, the forward PE is of around 9 to 12 times. At current PE of 16 (market cap of 2131 crores), it seems that the market has already discounted this upcoming quarter's growth.

One thing that makes me concerned is that the company's annual report does not talk much about the business process. For a 2000 crore company, I expected the details about how the company's seeds are better and the differences in yields (some statistical and quantitative data). I also expected more details about the reasons for the robust growths (i.e whether the company expanded in new states or was it some real yield magic). Another little danger area is of lower taxation. This is one area where the peers (I checked Bayer Cropscience) seem more transparent about the processes and paying higher taxes.

There is enough ground work available and I will take a little time to go through it. As it is a start, I find it hard to derive some intrinsic value for the company and thus will pick up a little smaller company for the next update.