Wednesday, February 25, 2009

What three-four years can do to a business

Year 2004
The exports from this sector has more than doubled between 1998 and 2003. The stock prices of companies have gone up by 5 times between 1998 and 2003. Everybody is enthusiastic about the sector and the companies. The financial web sites are recommending the sector here
EquityMaster 1
EquityMaster 2

Year 2005
The companies have become more enthusiastic. The demand is growing and everybody is investing heavily to increase capacities. The stock prices of companies are up by 3.5 times on an average in the last year itself. See the talking here
Financial Express 1
Financial Express 2

Year 2006
The stocks have gone up by 2-3 times in the last year itself. Now the financial analysts have started looking at the stocks and the sector. They are recommending investors to buy the stocks after the stocks have gone up by more than 30-50 times in 7 years. See how they are talking here
Management Paradise

Fast forward to Year 2008
The stocks are down by average 90%. The stocks the analysts recommended in 2006 are down by 50 to 80% too. See the impact of world recession on the sector here
Economic Times
Express India

Financial Analysts are the last to recommend a good stock. Don't listen to them.
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Tuesday, February 10, 2009

Investors in Midcap stocks got a raw Deal

Investors in several midcap stocks are looking at a price the stocks had in mid 90's. Following is the small list that I had seen so far

CompanyHigh PriceYearCurrent Price/Equivalent Afert Bonus or Splits or Rights
Kabra Extrusion160199270/140
Elgi Equipments500199730/600
Ador Welding205199686/130
Savita Chemicals2501994125/210
Automotive Axles125199685/85
Balmer Lawrie3501992230/275

The companys' fundamentals have improved a lot and also their profits and earnings per share. The market was pretty bullish on these stocks in mid 90's and is very bearish at this time, both unwarranted it seems. All of these companies have paid continuous dividends over the last 10 years and their balance sheet do not contain big debt but their prices reflect the most pessimism.
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Wednesday, February 4, 2009

Zydus Wellness - Is there value?

One of the renowned value investors, Seth Klarman, focuses on complex securities because most of the investors stay away from such opportunities either because they don't know that it is an opportunity or because they want to avoid complex opportunities since the outcomes may not be favourable. Zydus Wellness, erstwhile known as Carnation Nutra Analogue Foods, seems such a complex opportunity. Cadila Healthcare acquired the 14.96% stake in Carnation Nutra in March 2006 at INR 150. There was an open offer for 20% at INR 150 and Cadila's shareholding somehow increased to 60%. Today it stands at 62.66%.

The current equity capital of Carnation Nutra is INR 5.5751 Cr. Since the Zydus Cadila has transferred its Consumer Products Division to Carnation Nutra, it is going to issue 3,34,96,989 new shares to Cadila Healthcare Shareholders. Thus the total equity capital of the company after the new issuance would stand at INR 39.072 Crore made up of 3.9072 Crore equity shares of face value INR 10. The Presentation shows that the consumer products division had a revenue of INR 154 Crore including the complete INR 56.3 Crore of Carnation Nutra. The EBITDA was INR 30 Crore which may lead to a net profit of INR 18 Crore after removing depreciation and tax expenses considering that there were no significant interest burden in the latest results. This amounts to an EPS of 18/3.94=4.6 and at the current market price of INR 69, it is a P/E of 15. But the latest results show a different picture. The total revenue of Zydus Wellness was INR 117.33 Crore and net profit was INR 13.5 Crore. If this is annualized, the EPS turns out to be INR 13.8 and P/E goes down to 5. But I suspect that the Everyuth business might be seasonal as in the case of Emami and most of the revenue is incurred in this quarter itself. This I am deducing from the presentation since the whole consumer business excluding Carnation had a revenue of INR 100 Crore in 2008. Let's see how things turn.

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Next BlueStar or CRISIL?

As discussed in my previous post here, I went through the list of high dividend paying companies. The criterion was to have a minimum yield of 5%. There were 336 companies matching the criteria. To find the next BlueStar or CRISIL, I eliminated companies with following critiera:
1. The company is very small. If it has revenue less than INR 100 Crore and/or profits less than INR 10 Crore. This removed 19 companies.
2. The company has a lot of debt, i.e. more than half its networth. This removed 161 companies.
3. The company is not paying dividend consistently. This include companies which paid special dividend to make yield more than 5%.
4. Companies whose business model can't be trusted to remain sustainable, i.e. Aftek, Gulf Oil Corp etc. This eliminated 8 companies.
5. The companies whose earnings will be negative this year. This eliminated 16 companies.
6. The company is a bank. This eliminated 10 companies.

I was left with a list of 71 companies to keep an eye on. Some of them include Royal Orchid Hotels, Mangalam Cement, Ador Welding, VST Industries, HCL Infosystems, Lakshmi Machine Works, GNFC, Plastiblends, etc. The companies in these list are from sectors ranging from Hotels to Cement, from Engineering to Tobacco, from IT to Fertilizers. Take your pick.
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Monday, February 2, 2009

Sensex - Nifty EPS

As can be seen at BSE, SENSEX earnings has declined to 721 and as per the NSE website, Nifty Earnings has declined to 210. Everybody was expecting Sensex earnings of INR 1000. Nobody till September 2008 said openly that Sensex earnings will decline in 2009, so much for the analysis!!!!!
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When buy-back makes more sense?

There are a lot of companies announcing buy-back these days. I would like to put here some points which helps investors differentiate between good and bad buy-backs. According to SEBI rules, a company can buy-back shares upto 10% of its networth without any EGM. To buy-back shares upto 25% of networth, the company needs to get shareholder permission in an EGM which most companies avoid. Let's take four examples two of which I consider good and two of which I consider improper:

Good Ones:

1. Blue Star in 2002-2003: The company bought back 23,35,606 shares at an average price of INR 65.4 for an aggregate amount of 15.27 Cr. This reduced the equity capital of the company from INR 20.3228 Cr to INR 17.9872 Cr, a reduction by 11.5%. Thus by utilizing just 10% of the networth of the company, the equity capital was reduced by 11.5%. This was one of the greatest buyback in the history of Indian Stock Market.

2. Britannia in 2001-2004: The company bought back 38,60,287 shares between June 2001 and September 2004 for a consideration of INR 225 Crore an average price of INR 582, at which the market cap of the company would be around INR 1500 Crore. The networth of the company was around 500 Crore. Thus the company used 45% of its networth to buyback 14.2% of its equity capital, not a great buyback but I would consider a good buyback.

Improper Ones:
1. I have already discussed one of the recent improper buybacks Here

2. The other buyback I consider improper is that of Reliance Infrastructure. The company bought back 87,60,000 Shares for a consideration of INR 795.53 Crore at an average price of INR 908. The company's net worth is around INR 11.7K Crore and debt of 5K Crore which leads to a net book value of 6.7K Crore. The company spent 11.8% of the net book value to reduce the equity by 3.7%, a meager proportion.

To me, among the latest buyback announcements, only FDC makes sense, but since it is part of my portfolio, I would avoid commenting more on it.
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