Branded Apparel Sector - Part 3

This is part 3 in the series of article discussing Branded Apparel Sector. The previous parts are here:

• Part 1
• Part 2

Zodiac Clothing Company

Zodiac is a 26 year old clothing company. The company mainly manufactured shirts but is now selling trousers and accessories like belt, ties and handkerchiefs too.

Branded Apparel Sector - Part 2

This is part 2 in the series of article discussing Branded Apparel Sector. The previous parts are here:

• Part 1

Trent

This is a Tata Group Company running branded apparel stores under the brand of "Westside".

Branded Apparel Sector - Part 1

The textile sector in India is one of the biggest employment generators. There are several different industries that are part of a chain of processes involved in creating the final product, an apparel. These include

• Spinning
• Weaving/Knitting
• Finishing - Dyeing and Printing
• Accessories - buttons, zippers, elastic etc...
• Chemicals - dye etc...
• Retail distribution

Sometimes number two (or even five) is better than number one

This is a long post with some examples. This post is to highlight the fact that it is not always number one in any particular industry, either in terms of sales or profits, who is the best. There might be special situations when some company down the rank in terms of sales and profits doing better than the leaders in its industry.

Sensex Nifty EPS after Q2FY11

Sensex ended at 19691.84 on 23rd November with P/E at 22.47. This gives Sensex EPS of 876.36. Nifty ended at 6010 on 22nd November with P/E at 23.98. This gives Nifty EPS of 250.62. This compares with Sensex EPS of 781.98 and Nifty EPS of 230.38 after Q2FY10. Thus Sensex EPS has increased by 12.07% and Nifty EPS by 8.78%. If the first two quarter numbers are anything to go by, the Sensex EPS at the end of FY11 should be 12% higher than last year's 828.5, i.e. somewhere around 930 and Nifty EPS should be 8.78% higher than last year's 239.64, i.e. around 260. Compare this with analyst's estimates of 1100 by Rakesh J, Motilal Oswal and Credit Suisse. This requires EPS growth of 25.52% in just two quarters, i.e. 51% compounded annually. All the best to analysts.

It is contrary to human nature for investors to take extreme precautions against future collapse when current conditions make for optimism. - Benjamin Graham

SEC (Securities and Exchange Commission) agrees with me!!!

Please read the title again. The SEC here is the securities and exchange commission, the counterpart of SEBI in the US. Am I kidding? No. Read the article here. Exactly one year and three months back, I had pointed it out that Buffett has made two mistakes and not one. It is not just Conoco Phillips but also Kraft which was a mistake by Warren Buffett. SEC has sent a letter to Berkshire Hathway asking why the losses in Kraft have not been written down and the company is still holding them at purchase price? The CFO has replied that they believe that the share price would recover above their buying price in one or two years. So Berkshire do not get any capital gains for four-five years since the buying of Kraft took place somewhere in 2006-07. Even Buffett is not perfect.

I don't want to know the price of the stock prior to my analysis. I want to do the work and estimate a value for the stock and then compare that to the current offering price. If I know the price in advance it may influence my analysis. - Warren Buffett

Bull Market Mania is back

I have written about good and bad buy-backs in the past. Recently there were some more announcements that didn't make sense to me:

1. Lakshmi Machine Works announced to buy-back shares at a maximum price of INR 2045 per share aggregating an amount not exceeding INR 226.71 Crore. 
2. CRISIL announced to buy-back shares at a maximum price of INR 6500 at an aggregate amount not exceeding INR 80 Crore

According to me, both these buy-backs do not make sense since they are at a much higher P/B ratio at around 3 times for LMW and 12 times for CRISIL, much higher P/E ratio, i.e. more than 20 times for both the companies and much lower dividend yield, less than 2% for both. If buy-backs happen at or around book-value, the book-value of the rest of the shares increase or remain same which is positive for the company over long term. CRISIL's share price is hovering near life-time high and that of LMW is also not that cheap. These are not the times to buy-back shares. Investor wealth is seriously getting damaged here. A dividend distribution would have made more sense for both the companies even after DDT.

Principle for the untrained security buyer: Do no put money in a low-grade enterprise on any terms.
Principle for the securities analyst: Nearly every issue might conceivably be cheap in one price range and dear in another. - Benjamin Graham

Is banking crisis very near in India?

Markets are more insane at two times, near the top and near the bottom. Right now the markets does not look like near the bottom. So we can conclude that the former is a more likely scenario. The recent run-up in Sensex and Nifty has mostly been fueled by two sectors having a big weight in both the indices, Banks and IT. Since IT is something difficult to analyze, I am trying to find the insanity of Mr Market in valuing banks. Consider following companies from BSE500

Company	Debt March 2010	Networth March 2010	EBITDA (TTM)	Interest Payment (TTM)
3i Infotech	1608.1	895.1	274.06	98.97
Aban Offshore	3153.15	2172.93	868.96	336.85
ABG Shipyard	2897.44	1122	503.55	158.96
Adhunik Metallic	1218.49	615.5	273.09	121.61
Adani Enterprises	3471.31	1970.1	489.3	177.57
Alok Industries	8509.68	2716.02	1372.9	606.39
Amtek Auto	3352.51	2592.7	491.24	113.6
Arvind	1870.58	1421.06	341.18	164.71
Bajaj Hindusthan	3075.15	2293.67	630.16	207.38
Bharti Shipyard	2292.8	850.83	329.15	125.38
Dalmia Cement	2850.41	1377.65	417.64	196.13
DLF	12637.86	12830.01	2153.66	949.22
Era Infra	2482.03	1456.59	708.13	271.01
Essar Oil	10353.73	4673.65	1506	1193
Ispat Industries	7351.05	2031.88	1616.95	1017.87
Jaiprakash Associates	17908.71	8500.72	2985.64	1161.84
Jet Airways	13896.98	2641.98	1638.52	1023.88
Kingfisher Airlines	5665.56	-2125.34	-462.73	1247.33
Mercator Lines	1473.47	1053.94	183.03	91.97
Moser Baer	2183.43	1692.02	508.3	183.92

and there are many more like Videocon, SKumars, Rei Agro, Shiv Vani, which makes my fingers tired. We are talking about debts to the tune of more than 2 lakh Crore, which are at stake here. Most of the above companies' net worth are below their debt. All are running highly leveraged business. Interest cover (EBITDA/Interest) has fallen below 4 for most of the companies and are near 2-3 in the latest quarter. This at a time when interest rates in India are at historically low. Just 50% hike in interest rates (i.e. from 7% to say 10.5%) would make it difficult many of the companies to pay their interest. This combined with a hit to profit margins may result a big blow to Indian companies and finally to Indian banks. Be ready for a jolt.

Security analysis does not seek to determine exactly what is the intrinsic value of a given security. It needs only to establish that the value is considerably higher or considerably lower than the market price. - Benjamin Graham

Elegant Marbles - A Ben Graham value play

I was looking at the list of companies trading below their book value and came across Elegant Marbles and Granites. The company's share is trading at INR 47. The company has equity worth INR 4.5 Crore of 45,00,000 shares of face value INR 10. This translates into a market capitalization of INR 21.15 Crore.

Negatives:

1. The company's business is not anything to write home about. The company is in a very competitive industry and profit margins are not high. The OPM varied between 3-7% in the last five years
2. Over the last ten years, company has paid dividend in each year except the year 2002. 
3. The company has mostly remained profitable except in 2005 when the company had an operating loss but due to other income the company remained profitable at net level. 
4. The tax/PBT is also less compared to 30% tax rate without any incentives. Tax/PBT was less than 10% in four out of the last five years.

How long is Long-Term?

I have already done a lot of bashing of mutual funds here, here, here and here. This post is one more addition to the already long list. I was studying a company called Vimta Labs lately. The company is a 20 year old pharmaceutical company in India. I was looking at the company's latest shareholding pattern and found that some of the mutual funds are holding large amount of shares in this company. The shares were getting traded on BSE at INR 32 and change with the total market cap of the company around INR 75 Crore. Since most of the mutual fund are holding shares of around 1-3%, I thought this to be their meager investment compared to their total Assets Under Management (AUM). But I was wrong as usual. Why? The mutual funds had invested in the company when the market cap of the company was somewhere around INR 275 Crore. Got a shock? See the history of the company's share price movement here. The company was trading at INR 255 in March 2006, just after a 5:1 split and a preferential allotment. The company issued some 4064690 shares of INR 190 to following entities as preferential allotment in March 2006:
1. India Fund, Blackstone group, 1165395
2. Voyager Fund, Mauritius, 1102925
3. Minivet, Mauritius, 466155
4. Franklin India smaller companies fund, 886810
5. Franklin India Prima Fund, 443405

Hungry for more?

It seems that the bull run in India that started in 2004 has made more and more businessmen hungry for getting rich. As if they are not satisfied with the current overvaluation of stocks, they want to push for higher and higher valuations, by doing anything they can. How can you judge? Read the following on NSE:

Gateway Distriparks Limited has informed the Exchange that the Board of Directors of the Company at its meeting held on September 04, 2010: (a) Approved the payment of Special dividend (Interim) @ 10% (ie. Re.1.00/- per equity share of Rs.10/- each) for the financial year 2010-11, to mark the successful conclusion of the discussions with the Blackstone group which has resulted in Blackstone investing Rs 300 Crore in our subsidiary, Gateway Rail Freight Limited (GRFL). This is the largest private equity investment in the GDL group to date.

The basic idea behind raising money from outside is that the company does not have enough money to put in new venture itself and the opportunity is there to earn better than the cost of capital. When the company shell out INR 12.5 Crore (including DDT) as dividend to shareholders, that gives the impression that the company does not have a better use of this money to earn over the cost of capital. At the same time if the company collects INR 300 Crore from private investors, it is not just contradictory but it is a real gimmick to keep investor interest in the company. This blog over the last few months is pointing out again and again that the Indian stock market has entered a bubble and as for every bubble, this will end in tears too. Happy Investing!!!!

Security prices and yields are not determined by any exact mathematical calculation of the expected risk but they depend rather upon the popularity of the issue. - Benjamin Graham

Some comparison

Recently I got hold of some old lectures of Walter Schloss, a renowed value investor who was only noticed by Wall Street when Warren Buffett mentioned his name in "The superinvestors of Graham and Doddsville". One of his letters talks about overvaluation in Blue-chip stocks sometime around May 1956. He talks about four companies namely, General Electric, Dow Chemical, Minnesota Mining (3M) and Minneapolis Honeywell. Here is a snippet from the article:

Dow chemical, based on its current price, is selling at 49 times is earnings for the past 10 years. Similarly, Minnesota Mining is presently selling at 61 times its last 10 years earnings, 51 times its last 5 years earnings and 32 times its 1955 earnings.

One of the four companies (General Electric) is distributing nearly all its current earnings and still only yields 3.1%.

How this can be compared with our current valuations? See some of my previous post on overvaluation in FMCG and Pharma here. I am repeating the table here with some additions:

Share	Market Cap (INR Cr)	TTM P/E	P/E of 10 Year Average EPS
3M India	3860	41.23	87.5
ABB	16525	58.4	61.8
Asian Paints	26950	30.6	96.1
BHEL	116900	27	67.8
Bosch	18870	25.37	51.5
Colgate	11275	24.8	66.5
Crompton Greaves	19500	22.7	78.2
Cummins India	14450	32.8	65.9
Dabur	18509	35.69	82.25
Exide	12760	25.85	87
Godrej Consumer Products	9860	29	83
HDFC Bank	100000	34	91.9
Infosys	159650	25.95	55.7
Marico	7550	32.6	70
Nestle	30630	43.7	94.4
Titan	13400	46.75	164.35

Even companies like Bajaj Electrical, Hawkins cooker and TTK Prestige are trading at 60-70 times last 10 years earnings. Nestle, which nearly pays all its earnings as dividends, yields just 1.55% at the current price. Remember that the price-wise correction wasn't very severe in US. But over the next 24 years, i.e. till 1980, the index just managed to double from 500 to around 1000, a return of less then 3% compounded annually. Investor would have got dividends though to satisfy himself. May God Bless Indian Investor at this time.

It appears to be a financial axiom that whenever there is money to invest, it is invested; and if the owner cannot find a good security yielding a fair return, he will invariably buy a poor one. But a prudent and intelligent investor should be able to avoid this temptation. - Benjamin Graham

Mr Market is noticing us

A few days back I had pointed out Mr Market's discrepancy in valuing two companies with almost the same kind of business profile. It seems that Mr Market has taken notice of our findings and the discrepancy and gap is reducing. I am talking about valuation gap between Titagarh Wagons and Texmaco. The market capitalization of Titagarh Wagons was 625 Crore at the time of writing previous article compared to 1717 Crore of Texmaco. Now Titagarh Wagon's market cap has gone up to 770 Crore while that of Texmaco has remained stagnant. Thus Titagarh Wagon share price has appreciated by 23.2% and that too in a span of just over three months. Our assumption was that Titagarh is undervalued by around 40% compared to Texmaco and we were expecting a market cap of around 1050 Crore for Titagarh which translates in to share price of around 550. Let's see if we get there or not.

You will not be right simply because a large number of people momentarily agree with you. You will not be right simply because important people agree with you. You will be right, over the course of many transactions, if your hypotheses are correct, your facts are correct, and your reasoning is correct. - Warren Buffett

Sensex - Nifty EPS - almost flat

It seems that quarter after quarter, I am providing the same post again and again. I had talked about Sensex-Nifty EPS not increasing in my last post.The same thing is being repeated after this quarter results too. Sensex EPS today stands at 18217.44/21.62=842.62 and Nifty EPS at 5467.85/23.07=237.01. This compares with 828.5 for Sensex EPS and 239.64 for Nifty EPS reported on 29 May. Sensex EPS has grown by 1.7% in the quarter, i.e. 6.5% annualized and Nifty EPS has contracted by 1.1%, i.e. 4.4% annualized. Be cautious!!!!

Bloodbath in Biscuits?

At one end, FMCG companies like Nestle and Dabur are reporting highest ever net profit margin (NPM) of almost 13-14%, and at the other end, biscuits company like Britannia had the lowest net profit margins of the decade last year. The net profit margin last year was 3.4%. The company reported net profit of 116.5 Crore on sales of 3424.6 Crore. The consolidated numbers are worse than the standalone one. Even the operating profit margin (OPM) was just 5.07%, operating profit of 173.7 Crore on sales of 3424.6 Crore. I had recommended buying Britannia at 1350 in July 2008. After two years, the share price has appreciated to 2120 today. The company has paid Rs 40 and 25 as dividend last year and this year respectively. The company also issued debentures worth Rs 170 on 1:1 ratio to the stock. Thus the total gains for a shareholder is 2120+40+25+170=2355 on an investment of just Rs 1350 giving a return of 74.4% in two years, i.e. 30%+ compounded returns. Since the stock price is out of sync with the fundamentals, I would suggest investors to book profits at these levels. You can see in "Recent Investment Activity" section that I have been selling Britannia shares since last few days.

Speculative stock movements are carried too far in both directions, frequently in the general market and at all times in at least some of the individual issues.

Contrarian Indicators

When my blog is talking about bubble in FMCG and Pharma, Jayakumar of prime securities has started recommending them. He talks about Asian Paints, Nestle and Glaxosmithkline Pharmaceuticals, all of which have been shown to enter a bubble territory recently on this blog.

How has his recommendation in the past turned out to be? He recommended Bharati Shipyard in January 2010 at a price of 220-230 and said it would be a multibagger for the year 2010. The stock price is still hovering around 235 and change. Thomas cook was recommended in the same article trading at 70-75 and is hovering at 69 and change right now. Sugar space was recommended in the article with a retail sugar price touching 60-65 which was hovering at 50 then. The prices have come off to 30 and sugar companies are bleeding. Balrampur chini was at 140 and going for 83 and change right now. Bajaj Hindustan was 230 and going for 115 and change right now.

He also recommended Nestle and Asian Paints in the same article which were trading at 2500 and 1800 respectively. They have given satisfactory returns where Nestle has appreciated by 20% and Asian Paints has appreciated by around 45%. But they do not seem cheap right now.

Would you want to listen to him?

Any intelligent person, with a good head for figures, should have a veritable picnic on Wall Street, battening off other people’s foolishness. - Benjamin Graham

Is FMCG a bubble?

I have written about bubble forming in Large Cap Pharma in the past. Is the same happening with FMCG? Let's look at the following table and see:

Share	Market Cap (INR Cr)	TTM P/E	P/E of 5 Year Average EPS	P/E of 10 Year Average EPS
Nestle	28432	42.5	54.8	87.6
Dabur	18140	36	52.6	80.6
Colgate	11550	25.5	36.8	68.1
Marico	7595	32.8	48.1	71
Asian Paints	24135	32.4	59	88.9

I have to remind investors here about the valuation of companies with a lot of enthusiasm at the peak of the Sensex level in January 2008. Almost all companies are appearing near the bubble territory. At the bottom in April 2003/2004, following were the valuations:

* bottomed in April 2004
Share	Market Cap (INR Cr)	TTM P/E	P/E of 5 Year Average EPS
Nestle*	4821	18.32	28.2
Dabur	1055	11.6	14.6
Colgate*	1630	18.4	25.6
Asian Paints	2085	15	19.85

Be cautious!!!

Buying a neglected and therefore undervalued issue for profit generally proves a protracted and patience-trying experience. And selling short a too popular and therefore overvalued issue is apt to be a test not only of one’s courage and stamina but also of the depth of one’s pocketbook. - Benjamin Graham

Is change coming?

I had written about two industries, computer software and credit rating agencies in the previous article in September 2009. I had argued that both the industries are providing a service/product which is very important for other industries but both of them do not want to take any liability of the service they are providing.

The game, at least for the rating agencies, seems to be changing. The Dodd-Frank Financial Regulation Bill makes the credit-rating agencies liable for the advice they give and it will be easier to sue them if the bond does not perform up to the stated rating. It took almost 100 years to make the rating agencies accountable for their service.

The shares of Moody's have fallen by more than 70% from top in 2007. Even Buffett admitted he should have sold more shares of Moody's earlier. The Indian stock market seem to be unaware of the consequences since CRISIL and ICRA stocks are making new highs. Is market wrong here?

Since the computer software industry is new, I guess it will take 50 more years for them to become accountable.

The analyst must pay respectful attention to the judgement of the market place and to the enterprises which it strongly favours, but he must retain an independent and critical viewpoint. Nor should he hesitate to condemn the popular and espouse the unpopular when reasons sufficiently weighty and convincing are at hand. - Benjamin Graham

Some auto-ancillary stocks have still way to go

Recently, I was delighted to see a big run up in share price of an auto ancillary company, ZF Steering Gear. The company came out with its quarterly earnings on July 14, 2010 and the share price went up from INR 300 to INR 390 in less than ten trading sessions. But I still feel the company has a long way to go before it runs out of steam. Why? The reason is the past performance. The company's share price is still more than 10% below the August 2005 high of INR 450. The profits have climbed from INR 20.5 Crore in FY2005-06 to INR 36.19 on TTM basis and is expected to do at least INR 45 crore this year. The book value of the company has increased from INR 77 in FY2005-06 to INR 150 FY2010. Thus P/E has contracted from around 20 to less than 10 and P/B has contracted from 5.8 to around 2.6. Disclosure: I have a long position in the stock.

Investors are well advised to buy a business that's so good that a dummy can run it, because sooner or later a dummy will run it. - Peter Lynch

Crows everywhere are equally black

The crows here are nothing but financial media, be it print, TV or now websites. See the following article Stocks which are expensive but still good for investors. Isn't the title itself contradictory? How can expensive stocks be good for investors?

There has been a lot of media bashing lately from bloggers across the world especially value investors like Barel Karsan and controversial bloggers like Zero Hedge.

The title of my article sums up the facts clearly so I don't need to explain much.

Sound investment principles produce generally sound results. -Benjamin Graham