Sunday, February 25, 2018

Two out of favour sectors - Pharmaceuticals and Banks

People reading this blog must be able to see my recent investment activities and find that I have been selectively investing in two out of favour sectors in the last few months or more than a year I would say. The sectors are

  • Pharmaceuticals
  • Banks
In Pharmaceuticals, there is a clear harakiri where many company saw their share price going down by more than half including Lupin (2100 in Oct 2015 to 800 now), Sun Pharmaceuticals (1150 in April 2015 to 570 now), Dr Reddy's (4250 in August 2015 to 2170 now), Glenmark (1200 in August 2015 to 535 now).

I myself started investing in some of the well run companies such as Divi's Laboratories at 1000+ in 2015 and saw its price going down to 550. Luckily, I had some courage to keep buying at lower prices and average down so my average buying price kept getting lower and settling at 670 when I last bought some shares at 550. Today since the price is again at 1050+, I am having a decent profit.

Recently, I am still investing in some of the well known names such as Abbott, Sanofi, Suven Life Sciences etc... I am not buying them at bargain prices but they are fairly valued or sometimes 20-30% more than fairly valued but I don't think they are as bublicious as their counterparts in consumer space such as Hindustan Unilever or Britannia or Pidilite or Asian Paints.

In Banks, I did buy J&K Bank at 100 and had to sell at 80 to book losses. Today it is trading at 66. But I think I was early and now with NPA numbers of all the banks clearly available, the separation of wheat from the chaff has happened. The clear winners are only few such as HDFC Bank, Kotak Mahindra and Indusind Bank but there are second tier private banks which have got my attention including Karur Vysya Bank, Karnataka Bank, Federal Bank and South Indian Bank. NPAs of these banks are not as high as 10-20% similar to public sector banks but they are not as low as 1-3% which is the case for top run private banks that I mentioned above. There is some valuation measure available from the deal that happened in 2015 when Kotak acquired ING Vysya Bank at around 15K crore. After three years, similarly sized banks like Karur Vysya available at 8K crore, Karnataka available at 4K Crore and Federal Bank at twice the size available at 18K crore does look promising. These are all long term plays on the Indian economy. I hope they turn out to be good bets.

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Thursday, June 15, 2017

IST Ltd - Value Buy?

IST Ltd is an automotive parts supplier started in 1977. It supplies parts to many companies in and outside of India. Company also has a subsidiary Gurgaon Infospace which has set up an IT SEZ and most of the revenue of the company comes from the subsidiary.

The average ROCE of the company over the last 10 years is 23% while it is at 31% for the last 3 years. The company's main business of auto parts is not making any money. The biggest income is rent received from IT companies in their SEZ. Based on the latest financial results, the company has non-current assets worth INR 354 Crore, the net current assets are around INR 33 Crore and fixed assets are worth INR 139 Crore. So the company can be easily liquidated for INR 500 Crore+.

The biggest revenue source of the company is rent(lease) from SEZ to the tune of INR 75 Crore while the expenses are nil so all of this goes to the bottom line of the company. The company is getting some tax benefits so not paying full 35%+ taxes.

The promoters hold 74.99% in the company but not paying any dividends.

At the current market price of INR 1105, the company's total valuation is INR 650 Crore. The book value of the company is around INR 762 and the EPS is INR 140 so P/E is less than 8. Except for the lack of dividend, the company doesn't look very expensive.

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Saturday, June 10, 2017

UFO Moviez - Value buy?

UFO Moviez is India's largest digital cinema distribution network distributing movies through satellites and is also an in-cinema advertising platform.

The average ROCE of the company over the last 3 years is around 15% while RoE is 13%. As per the latest financial results here, the net current assets of the company stood at INR 125 Crore at the end of FY17. The company has fixed assets of INR 258 Crore and there is a goodwill on consolidation of INR 183 Crore. The company has large depreciation resulting in very high cash flow averaging INR 120 Crore per year in the last three years.

The company's latest presentation gives idea about the business model of the company. The company earns income from two main sources, telecast of movies through satellites and displaying ads during the intermission and at the start of movies in theatres. The company now distributes movies to more than 5000 digital screens in India and totally 6000+ screens in the world. The company's in-cinema advertising is being used in more than 3700+ screens. The average income from ad has increased from INR 1464 per second per screen in 2013 to 1732 per second per screen in 2017 and the average ad time has gone up from 2:46 minutes to 4:34 minutes. The company recently signed a contract to show ads on 300 screens of United Media Works. Recent Demonetisation took a big toll on the growth of the company and GST also might be a dampener for people to go for movies as taxes are going to increase.

The promoters hold around 28% shares and holding has decreased by a small percentage lately. The promoters seem shareholder friendly as dividend payout is around 45% for recent year (INR 10 for EPS of INR 22).

At the current market price of INR 380, the market cap of the company is around INR 1050 Crore which is less than 9 times its operating cash flow of last three years. The company's IPO came out in 2015 at INR 625 but all the money went to existing investors at that time. The business is very new but over time as number of multiplexes grow and they upgrade their technologies, chances are that this business will grow. So the stock is not a value buy but more a future play.
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Saturday, February 18, 2017

Age of Capital Destruction - Dance like it is 1999 in India?

This is a post not related to investing or stocks but more about the bubble going on in the startup world in India. I will talk about some companies but there is no offence intended towards them. Everyday you see bigger and bigger numbers coming up for investments in startups in India. The article Indian Startup Funding Report mentions that there were 815 deals with $3.5 B invested in first 9 months of 2016 compared to 639 deals with $7.3 B invested in same period in 2015. This shows that the amount has come down but the deals have increased. I don't have the financials of most of the companies but let's look at some numbers. The following figure shows the bleeding consumer startups in India.

Of all the companies, the only one that is profitable is BookMyShow. All the others are making losses. There are some publicly listed companies such as Infibeam, which are in e-commerce space and are profitable now and investing in right companies such as its recent investment in payment gateway, ccAvenue.

Now let's look at the recent investments made by BookMyShow:
Feb 2015 - BookMyShow acquires Eventifier for $2 M
Mar 2016 - BookMyShow acquires FanTain Sports
Jan 2017 - BookMyShow acquires MastiTickets
Feb 2017 - BookMyShow acquires 75% in TownScript

Now I don't have financials and acquisition numbers for all but the company which owns Eventifier, Spacebound Web Labs Private Limited, was founded by three people in 2013
Jazeel Ferry
Saud Bakhar
Nazim Zeeshan

The article about acquisition mentions UBM Tech, Clinton Foundation and Nasa as clients of Eventifier. If you search google for "Spacebound Web Labs Private Limited", you come across their 2016 financial results on Reliance Industries website (RIL owns Network 18, which owns majority stake in BookMyShow which owns Eventifier). The profit-loss account is as below in the above result:

With such large clients, the revenue of the company in 2015 was INR 711,721. Yes you read that right, it is not USD, it is INR. So the company earned $11K kind of revenue from Clinton Foundation and NASA, that is 2 years in operation since company was founded in 2013.

Let's look at the expenses which are INR 11,828,771. Yes you read that right, it is $170K out of which almost INR 4,562,981 went for paying 8 employees their wages (including founders). There were some extraordinary legal expenses due to merger in that year but even in FY16, numbers haven't improved much (revenue has gone down rather).

The second company Fantain Sports' financials are available here. It's balance sheet shows that the company's subscribed capital was INR 28 lakh till 2015 but it has increased to 2 Cr 10 lakh in 2016. The company's revenue increased from INR 10.28 lakh in 2015 to INR 41.19 lakh in 2016. At the same time total expenses rose from INR 22 lakh in 2015 to INR 1.01 Crore in 2016 resulting in losses for both the years. The financials of this looks better than that of Eventifier.

Apart from tax credits, I am not sure what benefits BookMyShow is going to get. This clearly shows 2015 was a scary year for startup investments in India. Similar stories would appear 5-7 years down the line when people would talk about large scale capital destruction that happened during these years. Please make sure you protect your capital rather then getting any return on your capital.

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Saturday, May 28, 2016

KSE - Value buy?

The company Kerala Solvent Extraction (now KSE) was established in the year 1963 and entered into cattle feed industry in the year 1976. The company later also entered into the business of milk procurement, processing and creating dairy products like ice-cream, ghee and packaged milk.

The average ROCE of the company over the last ten years is 30% while it is higher at 45% in the last three years. The company's net current assets at the end of FY2016 was 45 Cr. The operating cash flow of the company over the last ten years was average 12.11 Cr while higher at 15.78 Cr in last five years.

The promoter shareholding came down from more than 32% in FY2013 to less than 27% now. But that might be due to sharp increase in share price of the company. The same promoters increased their holding between FY2010 - FY2013.

At the current market price of INR 550, the company has a market cap of INR 180 Cr. The share price was trading around INR 250 between 2005-2013. During this time the book value of the company increased from INR 80 to INR 240 now. The company is not very cheap but not very expensive either. It might become attractive if price corrects by half.
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Sunday, May 22, 2016

Sumedha Fiscal Services - Value Buy?

The company was established in the year 1989. It provides a wide array of services including Investment Banking, Wealth Management and Broking Services.

The average ROCE of the company over the last 10 years is 28.29% and is lower at 20.31% in the last 3 years. The company has current assets to the tune of INR 20.13 Crore. The average operating cash flow of the company over the last five years is around INR 1 Crore. The company has remained profitable and paid dividends over the last 11 years.

The promoters hold 49.57% of the company on March 2016. It has increased from 46.86% in December 2015.

At the current market price of INR 14.7, the market cap of the company is INR 11.73 Crore. The stock price is barely trading higher than its price in year 2005 when it was trading between INR 8 and 9. The book value of the company has increased from INR 12 to INR 39 during these ten years, the EPS has gone up from INR 0.57 to INR 2. The company's valuation is below its net current assets. The company doesn't seem to be very expensive at this price.
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How markets can be very wrong

I had in previous post already mentioned names of several commodity companies Peabody Energy and Arch Coal. The graph on LA Times about Electricity produced from coal in the state of California is reproduced below:

It is clearly visible that something drastically changed in 2011 and the coal based electricity production fell off a cliff. The charts of both the companies' stock price is shown below:

Both the shares were trading at much higher prices in 2011 ($3250 for Arch Coal trading at $0.36 now, $72 for Peabody trading at $0.95 now) that means the market was not discounting the event of replacing coal with other cheaper options for producing electricity. Both the company's filed for bankruptcy recently.

How can market be right in 2011?
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Saturday, February 20, 2016

Carnage in Commodities

Many readers of this blog will see the investments I have made to the right of this post and find the names like Cairn India, GMDC, Maharashtra Seamless, MOIL, NMDC, OIL India and Tata Sponge Iron. Most of these I bought in the last one-two years thinking the shares are offering value but I have been beaten down by Mr Market and every month I am seeing newer lows for the share prices of these companies. The average buying price for these stocks is 220, 80, 204, 208, 90, 460, and 650 respectively while the current trading prices for the same are 130 (-40%), 56 (-30%), 136 (-33%), 185 (-10%), 91 (0%), 320 (-30%) and 375 (-43%). Even though the losses looks big, the number of stocks 7 make a very small percentage of my overall holding of 28 stocks, i.e. 25%. So the average loss of 26% on 25% of your holding comes to around 6.5% of your total investment which looks big if your portfolio is INR 1 Crore since 6.5% is 6.5 lakhs but minuscule amount of INR 65K if your portfolio is just INR 10 lakh. For me, the good news was that I invested higher percentage in non commodity companies with better conviction so the portfolio share of the commodity stocks is even lower at just 16% and the losses are just 4.5%. Even though value investors like me try to avoid capital loss, due to events not controlled by the investor, some losses are expected and I just need to minimize them.

If you look at the investments made by other gurus in commodity companies recently Gurus pile into commodities and What gurus are saying about commodities, most of them have lost money except in Gold. Peabody energy stock price has gone down from 25 to 2 in six months, Arch Coal went down from 2 to 0.5, Freeport Mcmoran going down from 10 to 7 with as low as 4 in January. Carl Icahn even had to sell his Apple Inc holdings recently at 30% correction from top price and his company Carl Icahn Enterprises was downgraded recently Carl Icahn Enterprises in danger of downgrading to junk due to heavy loan to value ratio.

I am not trying to defend myself here but what I am saying is that the errors are part of human decision making and the three words "Margin of Safety" ensures survival. I do try to put enough margin of safety in everything I buy. One of the recent examples of this was my purchase of Shilp Gravures at INR 46. The company's share price went on to reach INR 116 a month back but since it got notice from GPCB (Gujarat Pollution Control Board) to shut down the plant GPCB Notice, the price came down to INR 63 which is still higher than my purchase price.

If I still have conviction about my investments in these companies, I can average down but for many the equation has changed. For Cairn, a merger is announced with Vedanta and not sure what promoter would do with the cash present on Cairn's balance sheet. The oil price have come down from $60 to $30 since I bought these shares impacting the profitability. Oil India made huge investment to buy Videocon's Oil assets in Africa OIL and OVL invests in Africa. The transaction was done at a time when Gas prices were hovering near $4 while they are trading at $1.8 now. So times change and so do equations.

Be safe, be prepared.

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