Monday, August 31, 2009

More Insider Selling

The insiders seem to differ from mutual fund managers. MF Managers are buying like mad and insiders are selling as if there is no tomorrow. Here are some more disclosures: JM Financial, Piramal Healthcare, DLF 1 and 2, Aptech, Lupin, Oracle Financial, IL&FS Investment Managers 1, 2 and 3, Ambuja Cements 1 and 2 and Voltamp 1 and 2.
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Sunday, August 30, 2009

Has buffett made two mistakes and not one?

Buffett admitted in his 2008 Berkshire Annual Letter to shareholders that he made a mistake buying Conoco Phillips shares at the peak oil price. Looking at Berkshire's complete portfolio it seems Buffett has made one more mistake, that of buying Kraft shares. (This is my own opinion so take it with a pinch of salt.) The reason is pretty clear. The company's last ten year history shows that the company's moat is becoming weaker and weaker year after year. The net profit margins have shrunk from double digits to less than 5%. ROE has declined from low teens to around 8.5% which is way lower than the average of its competitors. Kellogg's has ROE of 79%, with a net profit margin of 9%, General Mills has ROE of 25% with an NPM of 9% and H J HEINZ also has better ROE and profit margins than Kraft. If inflation is a big concern due to pumping of liquidity by federal reserve, than interest payment on 18B USD worth of debt that Kraft has accumulated for acquiring businesses is going to eat up a lot of profits in the near future. The competitors are smaller compared to Kraft in terms of size but that do not make them vulnerable. Let us see how this investment turns out for Berkshire.
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Saturday, August 22, 2009

How irrational markets can remain?

I will provide two examples of irrational markets.

The first one is of Timken India. This is a bearing manufacturer. It was started as a joint venture between Timken USA and Tata Steel both holding 40%. In 1999, Tiken USA acquired the remaining 40% stake from Tata Steel. During the boom times of 2005-2008, the share price hovered between INR 120 and INR 180, almost 5 to 7 times its price of INR 25 in 2003. Till CY2007, the company's EPS never went above INR 6. Thus the company was always trading above P/E of 20 and never fell into the value criteria. Fast forward to future and the company made EPS of INR 8.32 in CY2008 and the price fell to INR 50 during the carnage of October 2008, very near to its book value of INR 47. The market cap of the company at that price was just INR 320 Crore. Even today, the share price is hovering around INR 90 with a market cap of INR 575 Crore. The TTM profit is INR 48.96 Crore making a P/E of 11.75.

The other company I want to talk about is Fedders Lloyd. The company's share price in 2006-2008 bull market traded anywhere between INR 100 and 200. The company made an EPS of INR 6.26 in FY2007 ending in June 2007. Thus the P/E ratio was never below 20 making the share out of investment horizon for value investors. Fast forward to future and the company made an EPS of INR 7.28 and INR 4.12 for FY2008 and FY2009. The share price in October 2008 fell as low as INR 16, a P/E of just 2.2. The market cap of the company at that price was just INR 50 Crore while net current assets stood at INR 160 Crore and debt at just INR 75 Crore. If you had liquidated the company, you would still have got 95 Crore and more for its real estate and plant machinery. The share price has run up to INR 37 and even today the P/E ratio is just 8.98 with market cap just INR 110 Crore.

Can you guess from this how many good years' of earnings the stocks were discounting in the bull market of 2005-2008? There are many such examples and I have already talked about some of them like Gulf Oil, etc. earlier. Whenever somebody quotes a price to you, take it with a pinch of salt. Even if everybody agrees with him.
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Saturday, August 8, 2009

Insiders selling more?

Recently I saw a lot of insider selling. Ambuja Cements, Wipro, M&M, IL&FS Investment Managers, Paper Products, and Kotak Mahindra Bank are some in the list. There are many more that you can find out here.
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Thursday, August 6, 2009

Which sector will create new lows in next correction?

People might get surprised by the title of this post since nobody is talking of any correction in the stock markets right now. When the Sensex went to 8K in October 2008 and touched it again in March 2009, most of the sectors corrected heavily from their lifetime peak. L&T was down from INR 2300 to INR 560 (75%), BHEL was down from INR 2925 to INR 1000 (65%), NTPC went down from INR 290 to INR 115 (60%), etc. etc. Which sectors still looks very expensive and can go down more in the next correction? The more may not be in prices but may be in P/Es, i.e. since earnings will grow from say 10 to 15, price may go to 105 instead of 100 but P/E will be at 7 instead of 10 in the last correction.

The first and foremost that I see is Power. Utilities generally do not trade in high P/E multiples. They are doing it in India right now due to high growth lying ahead. But that growth may not come in the companies who are already generating power. New players will enter the space and take the share out of the existing players' pie. Thus the enthusiasm of investors will not come true about power companies. NTPC, Tata Power, BHEL and Reliance Infra fall under this sector.

Oil & Gas is a commodity and can trade at a P/E of single digits. So RIL and ONGC can clearly make new lows, may be not in terms of prices but can be in terms of P/E.

FMCG remained in low twenties even when the Sensex was trading at almost single digit P/E. They can correct more and they have a reason too, monsoon. HUL and ITC fall under this sector.

Cement will have some pressure since prices have started correcting. This is not a dent in profits, this is a dent in revenues. Grasim, Jaiprakash Associates and ACC will get impacted.

We are talking about almost 40% of the index constituents. Be cautious. I am posting this on 9th August but since I started preparing it on 6th August, the date of posting is coming up as 6th August.
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Is Sensex Cheap? - Part 2

I had put an estimate of thirty Sensex companies in the first part of this article. It seems that the first quarter results are out and there are surprises - both positive and negative. I want to revise the estimate as below. Also Ranbaxy has been replaced with Hero Honda Motors.

CompanyNet Profit FY2010EFree FloatFree Float Profit
HDFC Bank26500.852252.5
Hero Honda18000.5900
ICICI Bank400014000
Jaiprakash Associates11000.55605
Sun Pharma15000.4600
Tata Motors12500.55687.5
Tata Power17500.71225
Tata Steel50000.73500


The major increase is coming from Cement (ACC, Grasim and JP Associates), Auto (M&M and Hero Honda), Tech (Infosys, Wipro, TCS), Power (NTPC, Tata Power) and Banks (SBI). The major decrease is coming from Oil and Gas (RIL) and FMCG (Unilever). The market cap of Sensex EOD - 5 August 2009 is INR 11,60,461 Crore at the index level of 15903.83. This makes a forward P/E of 16.7 not as cheap as it was when we estimated in May. The EPS comes out to be 952, 3.5% higher than 920, what we estimated last. Remember that many companies have diluted their shares or are looking to dilute. These include Tata Steel, DLF, Tata Power, RINFRA, Sterlite and HDFC. Some of that dilution has already been in the Sensex Market Cap. The last time we took the data, Sensex was at 13589.23 with Market cap of 981352. The latest index was 15903.83 with a market cap of 1160461. Thus index has increased by 17.03% but market cap has risen by 18.25%, i.e. 1.18% more.

People are still talking about 1050-1100 EPS of Sensex in 2010. I am not sure where they are getting their estimates from. This is still too early to comment since only Q1 results are out and three quarters left to go.
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Tuesday, August 4, 2009

Sensex-Nifty EPS after Q1 FY2010

Sensex EPS increased from 762 at the end of FY2009 to 771.5 after Q1 FY2010. Nifty EPS increased from 214.9 to 223.4 after Q1 FY2010. Thus Sensex EPS increase is almost 1.2% while that of Nifty is 3.95%.
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Monday, August 3, 2009

How dividend policy affects investors?

Most of the shareholders want that the company they have invested in churns out higher and higher dividends year after year. A company with a higher payout ratio (dividend / EPS) is favored over the one with a lower dividend payout ratio. But this fallacy has severe long term implications which most short-term investor overlook. Let's take examples of two companies in almost similar sector: Tata Motors and Maruti Suzuki Motors, the former has a high dividend payout ratio compared to the latter. Did it translate to higher returns for an individual investor?

Tata Motors has over the last six years paid 8 + 12.5 + 13 + 15 + 15 + 6 = INR 69.5 as dividend while Maruti Suzuki has paid 1.5 + 2 + 3.5 + 4.5 + 5 + 3.5 = INR 20 as dividend. Tata Motors had rights issue in May 2008 where one share of INR 300 was allotted for every six held in the company. Thus the shareholders had to pump in INR 50 per share back into the company. So out of INR 69.5 of dividend obtained from the company, INR 50 was paid back leaving just INR 19.5, less than that of Suzuki's INR 20.

In terms of capital gains, Tata Motors have appreciated by -12% from 1 April 2004 till date while Maruti Suzuki has appreciated by 185% in the same time frame. Maruti's share price has gone up from around INR 500 to INR 1425 as of today while that of Tata Motors has languished from INR 485 to INR 425.

Even in terms of balance sheet of both the companies, Suzuki stands out. Tata Motors increased its debt from INR 1698 Crore in FY2004 to a whopping INR 34974 Crore (USD 7 billion - more than its standalone revenue a year back) in FY2009. Even excluding the debt increased to acquire JLR, the debt position at the end of March 2008 was at INR 11585 Crore. While Maruti increased its debt from INR 312 Crore to INR 900 Crore at the end of March 2008 (data for March 2009 not available). The interest burden of Tata Motors has increased from INR 194 Crore in FY2004 to INR 743 Crore in FY2008. Including JLR debt, the interest outgo is INR 1931 Crore in FY2009. Maruti's interest outgo has increased from INR 45 Crore in FY2004 to INR 56 Crore in FY2009.

If Tata Motors had been conservative in dividend policy and given out only INR 20 as dividend over the last six years, they would have saved at least to the tune of INR 2150 Crore which would have reduced their debt, reduced their interest outgo by at least INR 175 Crore and made their balance sheet much stronger.

Have a long term investment horizon.
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