Value investing in the Indian stock market

My strategy in this extended bull market

2006-10-14T02:57:00.000+05:30

The Indian stock market has now been bullish for quite some time -- enough, I guess, for the current situation to be described as an extended bull market. Though there have been some hiccups on the way, stock prices have in general been on the rise for quite some time now. As a result, it is now tough to find fairly priced stocks -- at least, I am now unable to find any fairly priced stock. Now this is quite possibly because I am not looking well enough -- there may be some stock that hasn't yet caught the fancy of Mr. Market, though its fundamentals are good. But frankly, none of the stocks in my shortlist (which has over 500 stocks as of last count) qualify as fairly priced, as per my definition of fairly priced. And I have money with me to invest, money which keeps idly accumulating in my bank account as I look in vain for good stocks. What do I do in this situation? Here is what I have decided to do, and am doing :

First and foremost, do not put my money in any stock that is not worth the money. Buy a stock only if it is fairly valued. It may be the case that I am not able to find a single stock to buy in the next five years, because the bull run is relentless. Then so be it. There is really no point in buying at an unjustifiable price. Also, as long as the market as a whole continues to be overpriced, don't put money in equity-based mutual funds. Find some other avenue to put my funds in, till I can find reasonably priced stocks to buy. Maybe invest in a flat which I can rent out at a reasonable (here is that word again!) rate.
Keep looking for opportunities to buy. If I am patient enough, I am likely to find some stock occasionally that is beaten down for some transient reason or the other (nothing to do with its fundamentals), at least occasionally. Be alert so that I can grab these when they come along. Yahoo! India's portfolio trackers are a great tool here -- they help me in quickly assessing whether something has come into the "buyable" range, without spending too much time -- five minutes a day are more than enough.
Be cautious that my definition of a "reasonable price" does not change, even if I have to wait an indefinite amount of time to find a reasonably priced stock. My objective is not just to do something in the stock market -- it is to identify and accumulate fairly priced stocks. So buying and selling, by themselves, are not the least rewarding to me.
Give a hard look at each of my supposedly good companies (those that I own) once in a while, to see if they have performed according to my expectations. If they have not, make use of the bull market to dispose of them at a fair profit.
Don't be tempted to sell off good stocks, even if they become overpriced, unless I find another opportunity -- not necessarily in stocks -- to invest the proceeds of the sale. Most of my value stocks give a fair amount of dividend income, that should be sufficient reason to hold on to them as long as there are no other investment opportunities.

On a related note, I strongly suspect that this bull run will not last much longer, for the simple reason that someone has to run out of money. At the very least, within the next year or two, I think that there will be a major drop -- even if temporary -- in the market. The ensuing panic -- which will be of princely proportions :-) -- will allow me to buy many good stocks at fair enough prices, and some at really dirt cheap rates. I am eagerly waiting for that crash to happen -- that is when I will get back my delayed satisfaction with interest!!

Scorecard - Oct 2006

2006-10-10T02:41:00.000+05:30

Here I am, back after a long lay-off due to various personal reasons! I did not buy any shares during September and October 2005. Here is how my shares have performed so far. This is a full list of the shares I bought from Jan to Oct 2005. Last updated on Oct 9, 2006. Next update due end of Oct 2006. The previous scorecard is here.

Name of the company	Bought on	Price (Rs.)	Price as of last update date (see above) (Rs.)	Dividend received per share (Rs.)	Total returns per share (Rs.)	Absolute returns(%)
Kabra Extrusiontechnik Ltd	12 Jan 2005	60.03	109.85	3.5	53.32	88.82
TNPL	19 Jan 2005	58.17	101.05	4.25	47.13	81.02
Cosmo Films	23 Mar 2005	59.30	97.25	3.5	41.45	69.90
MTNL	24 Mar 2005	122.81	160.95	2.5	40.64	33.10
Tamilnadu Petroproducts	29 Mar 2005	20.10	21.30	1	2.20	10.95
PNB Gilts	14 Apr 2005	18.09	19.70	0.80	2.41	13.32
Bongaigaon Refineries	18 Jul 2005	87.64	58.95	8.70	-19.99	-22.81
GTL Ltd	23 Aug 2005	97.49	141.25	1.80	45.56	46.73
GE Shipping	23 Aug 2005	171.30	301.15	4	133.85	78.14
Bongaigaon Refineries	25 Aug 2005	78.69	58.95	2.70	-17.04	-21.65

Stocks I bought in August 2005

2006-04-19T01:19:00.000+05:30

GTL Ltd

This is a network engineering and IT services company. I bought this stock mainly because at the price I bought, the stock was available at nearly half the book value. Also, the company had been doing well over the past few years, with steadily rising profits.

GE Shipping

The Great Eastern Shipping Company is a major shipping services company. The reasons why I bought this stock are:

Dividend Yield: At the price I bought, the dividend yield was above 5.25%, which compares favourably with the savings bank rate. Also, the company had been paying increasing dividends over the last few years.
Price/Book Value: At the price I bought, the stock was available at a mere 1.5 times its book value.

Bongaigaon Refinery and Petrochemicals Ltd.

The same reasons as here, plus the share price went down without any significant downturn in the company's performance.

Scorecard - Mar 2006

2006-03-31T23:42:00.000+05:30

Here is how my shares have performed so far. This is a full list of the shares I bought from Jan to Aug 2005. Last updated on Mar 31, 2006. Next update due end of Apr 2006. The previous scorecard is here.

Name of the company	Bought on	Price (Rs.)	Price as of last update date (see above) (Rs.)	Dividend received per share (Rs.)	Total returns per share (Rs.)	Absolute returns(%)
Kabra Extrusiontechnik Ltd	12 Jan 2005	60.03	109.55	3.5	53.02	88.32
TNPL	19 Jan 2005	58.17	116.65	4.25	61.23	105.26
Cosmo Films	23 Mar 2005	59.30	69.30	3.5	13.50	22.77
MTNL	24 Mar 2005	122.81	183.70	2.5	63.39	51.62
Tamilnadu Petroproducts	29 Mar 2005	20.10	21.30	1	2.20	10.95
PNB Gilts	14 Apr 2005	18.09	19.55	0.80	2.26	12.49
Bongaigaon Refineries	18 Jul 2005	87.64	65.65	6	-15.99	-18.25
GTL Ltd	23 Aug 2005	97.49	146.00	1.80	50.31	51.61
GE Shipping	23 Aug 2005	171.30	261.65	4	94.35	55.08
Bongaigaon Refineries	25 Aug 2005	78.69	65.65	0	-13.04	-19.86

Stocks I bought in July 2005

2006-03-14T00:14:00.000+05:30

Bongaigaon Refinery and Petrochemicals Ltd

This is an oil refining company based in Asom, with the Government of India as the major shareholder (nearly 75%).

The main reason this stock appealed to me is its high dividend yield: it paid out Rs.12 per share in 2004-05, which works out to more than 13.5% yield at the price I bought. In 2003-04, the dividend per share was Rs.7.70, which corresponds to a yield of nearly 8.8% at my price. Being a government-owned company (and the government in question being perennially short of funds), I think it safe to assume that if the company makes a profit, then a significant amount of that profit would be paid out as dividend. And the company has indeed been making a profit in the last few years.

Since I bought the stock, the company has paid out an interim dividend of Rs.6/- per share, a 6.85% yield on my price.

Scorecard - Feb 2006

2006-02-28T23:01:00.000+05:30

Here is how my shares have performed so far. This is a full list of the shares I bought from Jan to Jul 2005. Last updated on Feb 28, 2005. Next update due end of Mar 2006. The previous scorecard is here.

Name of the company	Bought on	Price (Rs.)	Price as of last update date (see above) (Rs.)	Dividend received per share (Rs.)	Total returns per share (Rs.)	Absolute returns(%)
Kabra Extrusiontechnik Ltd	12 Jan 2005	60.03	85.50	3.5	28.97	48.26
TNPL	19 Jan 2005	58.17	104.70	2.75	49.28	84.72
Cosmo Films	23 Mar 2005	59.30	72.10	3.5	16.30	27.49
MTNL	24 Mar 2005	122.81	142.65	0	19.84	16.16
Tamilnadu Petroproducts	29 Mar 2005	20.10	22.00	1	2.90	14.43
PNB Gilts	14 Apr 2005	18.09	20.70	0.80	3.41	18.85
Bongaigaon Refineries	18 Jul 2005	87.64	68.40	6	-13.24	-15.11

Scorecard - Jan 2006

2006-01-29T00:32:00.000+05:30

Here is how my shares have performed so far. This is a full list of the shares I bought from Jan to Jun 2005. Last updated on Jan 27, 2005. Next update due end of Feb 2006. The previous scorecard is here.

Name of the company	Bought on	Price (Rs.)	Price as of last update date (see above) (Rs.)	Dividend received per share (Rs.)	Total returns per share (Rs.)	Absolute returns(%)
Kabra Extrusiontechnik Ltd	12 Jan 2005	60.03	103.90	3.5	47.37	78.9
TNPL	19 Jan 2005	58.17	94.00	2.75	38.58	66.3
Cosmo Films	23 Mar 2005	59.30	78.45	3.5	22.65	38.2
MTNL	24 Mar 2005	122.81	142.35	0	19.54	15.9
Tamilnadu Petroproducts	29 Mar 2005	20.10	25.35	1	6.25	31.1
PNB Gilts	14 Apr 2005	18.09	22.60	0	4.51	24.9

Stocks I bought in April 2005

2005-12-26T02:03:00.000+05:30

PNB Gilts

This subsidiary of Punjab National Bank is a Primary Dealer in Government of India securities. This stock appealed to me because:

The company has been paying dividends ever since it came out with its IPO in 2000, and the dividend yield is good:

The company paid dividends at 14%, 18%, 24%, 25% and 25% from 1999-2000 to 2003-2004.

At 25%, the dividend yield at the price which I bought is around 13.8%, which is nearly twice the fixed deposit rates.

The book value per share is more than twice the price I paid.
At the price I bought, the P/E ratio is about two and a quarter.

Update

The company performed badly in 2004-2005 in its primary business, which is that of dealing in Government securities. This was mainly because of the fall in interest rates before and during the year. As a result, the company posted a net loss in 04-05, and consequently didn't pay a dividend.

However -- and this is what makes me think this is one amazing company,

The company was able to absorb the losses using the carried-over surpluses from the previous year.
Seeing that the downturn in interest rates may continue for a while, the company has proactively diversified into related activities, resulting in a profit for the first quarter of 2005-2006.

I see PNB Gilts as one example of an exceptionally well-managed company. I am planning to write an entry exclusively on what makes this company exceptional.

More Updates The company is back to making profits, and, true to form, has given out an interim dividend of 80 paise per share, which works out to around 4% yield on my cost price.

Scorecard - Dec 2005

2005-12-23T04:02:00.000+05:30

Here is how my shares have performed so far. This is a full list of the shares I bought from Jan to Jun 2005. Last updated on Dec 22, 2005. Here is the next scorecard. This is the first scorecard.

Name of the company	Bought on	Price (Rs.)	Price as of last update date (see above) (Rs.)	Dividend received per share (Rs.)	Total returns per share (Rs.)	Annualised returns(%)
Kabra Extrusiontechnik Ltd	12 Jan 2005	60.03	123.30	3.5	66.77	117.5
TNPL	19 Jan 2005	58.17	89.10	2.75	33.68	62.5
Cosmo Films	23 Mar 2005	59.30	70.05	3.5	14.25	32.5
MTNL	24 Mar 2005	122.81	143.10	0	20.29	22.3
Tamilnadu Petroproducts	29 Mar 2005	20.10	24.60	1	4.50	30.8
PNB Gilts	14 Apr 2005	18.09	19.80	0	1.71	12.7

Stocks I bought in March 2005

2005-12-23T03:26:00.000+05:30

I picked up three stocks in March 2005. Here I explain my rationale behind buying these.

Cosmo Films

I bought this stock in the third week of March. The company is the largest Indian manufacturer and exporter of Polypropylene films. I felt this was a good buy because:

The company has been paying dividend consistently in the recent past, and the dividend yield is good:

The company has paid dividends ranging from 35% to 45% over the last three years for which dividend data is available.
At 35%, the dividend yield at the price which I bought is around 6%, which compares favourably with the shorter term fixed deposit rates.
The book value per share is around 10% higher than the price I paid.
At the price I bought, the P/E ratio is only slightly above 3.

MTNL

I bought this stock in the third week of March. The company is the primary provider of telephony services in the two metropolitan cities of Delhi and Mumbai. The reasons for selecting this stock are:

The company has been paying dividend consistently in the recent past, and the dividend yield is passable:

The company has paid a 45% dividend over the last three years for which dividend data is available.
At 45%, the dividend yield at the price which I bought is around 3.7%, which compares favourably with the savings bank interest rate.
The book value per share is around 33% higher than the price I paid.
At the price I bought, the P/E ratio is around 6.75.

Tamilnadu Petroproducts Ltd

I bought this stock in the last week of March. The company is in the petrochemical products business. The reasons for selecting this stock are:

The company has been paying dividend consistently in the recent past, and the dividend yield is good:

The company has paid a 12.5% dividend over the last three years for which dividend data is available.
At 12.5%, the dividend yield at the price which I bought is 6.25%, which compares favourably with fixed deposit rates.
The book value per share is more than twice the price I paid.
At the price I bought, the P/E ratio is around 8.

Updates coming soon...

2005-12-21T05:34:00.000+05:30

After a long hiatus, I have decided to start updating this blog again.

A lot of interesting things have happened after my last update -- for one, the Sensex has gone up by about 30% within a span of ten months or so -- and my approach to picking shares to buy has changed, partly in response to the bull market.

I now have a new criterion for selecting stocks -- the old one was turning out to be difficult to sustain, what with most of the stocks catching the fancy of the market, and I had to fine-tune my criteria to keep my value watch-list from drying up -- and it looks promising so far. I have been buying stocks all along, of late using the new criterion to spot the low-priced ones.

I have also come around to the view that it might be a good idea to publish the names of the stocks I buy, albeit after a sufficiently long "cooling off" period, so that I can easily keep track of changes in their market values. I am thinking of keeping a scorecard of how my stocks did, updated once every 3 months or so. I would only name stocks that I bought at least six months earlier, in keeping with my views on the bad effects of publishing stock names.

More on these and other topics anon. Watch this space for more updates within the next day or two....

Stocks I bought in January 2005

2005-02-26T20:01:00.000+05:30

I picked up two stocks in January 2005. In this note, I explain the value considerations behind these picks.

Kabra Extrusiontechnik Ltd

I bought this stock in the second week of January. The company manufactures machines that process plastic. The main reasons why I felt this was a good buy are :

The company has been paying dividend consistently, and the dividend yield is good :

Dividend data is available for the last four years, and the company has paid a 35% dividend during the last three years.The year before that, it paid a 30% dividend.
The 35% dividend corresponds to a dividend yield of around 5.8% at the price I bought. Which is only slightly below par with current Fixed Deposit rates.

The book value of per share is around one and a half times the price which I paid.
At the price I bought, the P/E ratio is only slightly above 5.

TNPL

I bought this stock in the third week of January. The company is one of the largest paper manufacturers in the country. The main reasons why I felt this was a good buy are :

The company has been paying dividend consistently, and the dividend yield is satisfactory :

Dividend data is available for the last three years, and the company has paid a 28% dividend during this period.
The 28% dividend corresponds to a dividend yield of around 4.7% at the price I bought. Which is not far below current Fixed Deposit rates.

The book value is about 10% more than the price which I paid.
At the price I bought, the P/E ratio is around 7.

I have higher hopes for Kabra Extrusiontechnik than for TNPL, both because of its better past performance, and because it has much more room to expand than TNPL. Also, the promoters of Kabra Extrusiontechnik have a much higher stake in it than the promoters of TNPL have in it.

Rethink on publishing stock names...

2005-01-24T07:58:00.000+05:30

On second thoughts, I have decided not to publish the names of the stocks which I buy (But see the blog dated Dec 21, 2005. In short, I have decided to publish the names, after a cooling off period). Instead, I would be using a notation which will denote the year of purchase and the ordinal number of the purchase. Example : S1-05 for the first stock I bought in year 2005. Rationale:

I don't want run the risk of influencing the price of the stocks I have purchased, especially if the influence results in the price going up. Suppose this blog comes to the notice of other people who put their money into the stock market. From what I have seen, an amazingly large proportion of this population firmly believes that following stock recommendations (the source is irrelevant, as long as it is someone else than themselves) is the (only!) way to make money from stock markets. So, if a sufficiently large number from this group happens to come across this blog, it is almost certain that a number of them would start following these recommendations, especially if my past record happens to be good(which I hope it would be!). In other words, publishing a stock in these columns may be a cause for a (probably short-lived) rise in its price. Which would obviously go against my interests.
My emphasis is on the methods used to choose a stock, rather than on the specific stock that was chosen As such, publishing the stock name doesn't add any value to the blog. Indeed, it might even detract from the little instructional value that it may have for those keen on value investing.

On outstanding shares, and a warning about splits

2005-01-24T07:35:00.000+05:30

'Outstanding' doesn't have its usual meaning here -- Every share issued (and not subsequently extinguished) by any company is an outstanding share of that company. In short, the phrase 'the number of outstanding shares' has, for all purposes, the same meaning as the phrase 'the number of shares'. This number is available from the latest Balance Sheet -- look at the schedule for the entry titled 'Share Capital' or some such. Be aware, however, that this number is invalidated by any action of the company, subsequent to the 'As At' date of the Balance Sheet, that changes the number of outstanding shares. Beware especially of share splits, since they would skew the numbers in a way which would fool someone depending on the Balance Sheet data to calculate per-share values. An easy (but perhaps not foolproof) way of finding if a split has happened after the date of the last Balance Sheet is to see if there has been an abrupt (as in Rs.100 to Rs.5 from one trading day to the next) fall in the price of the share -- a 20:1 split would cause the price to fall to approximately one-twentieth of its pre-split price. And if the researcher overlooks such a split, the post-split per-share ratios would look very attractive, since (s)he would then ascribe to a share the price of one share and the value of twenty!

Why a fall in share prices is almost invariably a good thing

2005-01-24T07:18:00.000+05:30

When I buy a stock at a certain price, I do so because my research has convinced me that at that price, the portion of the company which the share represents is a good buy. In other words, when I spend Rs.50 for buying a share of ABC Ltd., I do so because my perusal of the financial records of the company has convinced me that I am getting (say) Rs.75 worth of 'things' when I buy that share. In the simplest (and most unlikely!)case, the company would have that much cash to show for each share, after paying off all its debtors. For ABC Ltd, that would be the case if, for example, it had 1 Lakh shares outstanding, and as per its Balance Sheet for the latest year,

Its Net Current Assets is positive,
Its Fixed Assets are positive(!), and
Share Holder's Funds minus Loan Funds = Rs. 75 Lakh.

This would mean that by giving Rs.50 for a share of ABC Ltd, I am getting the rights to Rs.75 from the cash reserves of the company. Which certainly seems to be a good bargain. Now suppose that after I bought the stock, its market price went down, say, by 10%. Is that good or bad for me? Assuming that nothing has happened that would have a significant detrimental effect on the company's current value or its long-term future prospects, I would say the fall in price is a good thing for me. Reason : if the share was a good buy at Rs.50, it should be a better buy at Rs.45. It is of no consequence that the market thinks badly of the share, as long as its judgement is not based on what has happened to the company. So, if the price of a stock which I have bought after due diligence falls due to the market's whims alone, it is a good thing for me. I should be happy, and get ready to buy more of the company at the reduced, and therefore more attractive, price. The catch here is, of course, that I don't have an infinite amount of money at my disposal to keep buying the stock at every percentage point fall in its market price. So I adopt the second best approach -- keep buying equal-rupee-valued lots of the share after every n% fall in its price, compared to the average price at which I hold it. The larger the resources I have to buy the lots, the lesser the value of n. At my current state of finances, I would put n to be from 10 to 20, depending on the historical price swings of the share -- the more the swings, the greater the value of n, but never more than 20.

Some useful links

2005-01-10T08:20:00.000+05:30

For preliminary screening of stocks based on their financial performance, I use the (mostly!) excellent database on Indian companies maintained by www.myiris.com. For getting price information, I use the Yahoo! listings of Indian stocks. In those cases where the latest information about a company is not available at myiris, or where the available information is patchy/looks shaky, I look up the more dependable, but less user-friendly, EDIFAR database maintained by SEBI. In those cases where a company which seems to be attractively priced compared to its valuation looks shady (for some reason), I consult the very helpful watchoutinvestors.com site supported by the Investor Education and Protection Fund, for the history of punitive actions/complaints against the company.

DISCLAIMER

2005-01-08T16:00:00.000+05:30

1. There are no guarantees, implied or otherwise, associated with the stock picks that I publish : they are for my own record, no more and no less. 2. I publish a stock pick after I have already bought it at the indicated price.

The Basics

2005-01-08T15:42:00.000+05:30

Read Benjamin Graham's The Intelligent Investor for the definitive description of value investing.
For an inspirational account of how value investing has actually worked, read Warren Buffet's article (available online, adopted from a speech he gave) The Superinvestors of Graham-and-Doddsville.
Read on to find how I fare in applying the principles described by the book to the Indian stock market.