Monday, April 26, 2010

Company in stratosphere?

I was analyzing a particular company named Mcnally Bharat Engineering recently and found its valuations reaching stratosphere without any reasons. The company seems to have a very large order book of the size of INR 5000 Crore but the financials of the company are not at all anything to write home about. The company paid more than INR 48 Crore of interest in FY2008-09 and has already paid INR 34.58 Crore worth of interest in the last three quarters of this financial year. Surprisingly the company's total debt stood at around INR 150 Crore at the end of FY2009. I am unable to understand why the company should pay so much interest on so little debt. Most probably the working capital debt is very high since the balance sheet mentions current liabilities of INR 643.77 Crore and sundry debtors of INR 652.17 Crore. Till last year, the company's PBDIT (Profit Before Depreciation, Interest, and Tax) at INR 102.2 Crore was more than twice that of interest payment of 48.42 Crore. But in the last two quarters, it has fallen below the ratio of two. Generally, bonds of a company are good if this ratio is at least 4. And this is at a time when the company is having the best environment for its business. As mentioned in the Security Analysis Chapter VII, bonds of a company should be bought based on any one of the two things: the character of the company's business or the ability of the company to weather destruction in demand. This particular company does not fall in the first category since Capital Goods is a highly cyclical business. So the company must have a lot of margin of safety to pay its debt during recessions which is missing from the financials of the company. If the bonds of a company are not safe, how can an investor give INR 1125 Crore worth of valuation to its equity? I would provide an update to this analysis when there is an article in any of the online media community about default of this company. Stay away from this company!!!

The analyst must take possible future changes into account, but his primary aim is not so much to profit from them, as to guard against them. - Benjamin Graham
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Why so much discrepancy?

I am talking about valuations of two companies whose name I will mention at the end of the article. First I would provide comparison of the companies based on their financial statements. Have a look at the following table:

ParameterCompany ACompany B
Market Capitalization1717 Crore625 Crore
Price/Earnings (TTM)20.712.8
Dividend Yield0.56%1.48%
Debt/Equity Ratio0.240.03
Average Sales of five Years585 Crore350 Crore
Average Profits of five Years42 Crore35 Crore
Price/(Profits of five Years)4117.86
Average ROCE of five Years24.7531.1
Price/(Net Current Assets)17.51.98

If I tell you that the first company made 4701 units of a product and the second company made 3597 units of the same product during FY2008-09, don't you think the second company is undervalued compared to the valuation of the first company? The name of the first company is Texmaco and the second one is Titagarh Wagons. The product they make is Railway Wagons. Texmaco earned 75% of its total sales from this segment while Titagarh Wagons earned around 95%. Both the companies' future depends on the spending of Indian Railway and now also private sector container transport companies. But according to me, Titagarh Wagons is undervalued by at least 40% compared to Texmaco.

In the field of common stocks, the danger of paying the wrong price is almost as great as that of buying the wrong issue. - Benjamin Graham
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Tuesday, April 20, 2010

Property Bubble Continuing

National Housing Bank (NHB - wholly owned by Reserve Bank of India or RBI) launched RESIDEX on July 10, 2007. The pilot study covered 5 cities namely Delhi, Mumbai, Kolkata, Bengaluru and Bhopal but has now been extended to 15 cities and ultimately will be extended to 63 cities that comes under JNNURM(Jawaharlal Nehru National Urban Renewal Mission). Looking at the dataset provided for 15 cities for the last two years, we can conclude that property bubble in some cities has continued. Cities like Hyderabad, Bengaluru, Jaipur and Kochi has seen a correction in property prices ranging from 10%(Kochi) to 42%(Bengaluru) from peak, while the other cities like Bhopal (39%), Faridabad (36%) and Kolkata (59%) has continued to make higher property prices in the last year. Since the data is already one year old, the prices right now might be already much higher than what is shown in the dataset.

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Thursday, April 15, 2010

Cement Sector : Contradictory Articles

As an investor, I keep reading financial news on several websites. One of them is LiveMint. Recently I saw two articles completely contradictory to each other about cement sector:
It is just two days and the same website shows different views about a particular sector. Please see that the first article is from Sharekhan and the second one is from Religare Hichens Harrison. Different views is what makes Market.
If there is a difficulty or a doubt, the security should be declined. -  Walter Bagehot
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Friday, April 9, 2010

I was off by 70%

In the post in May 2009, I felt vindicated on my call of Nifty touching 3800 and Sensex touching 12000. But whatever next I predicted, i.e. Nifty touching 3150 and Sensex touching 10500, I was off by around 70% since 1.7*3150=5355 and 1.7*10500=17850. What can be the reason? There are many:
  • Indian economy is doing better than expected and corporate results too are better than predicted.
  • There was a lot of pent up demand in Indian economy which can easily be seen in Auto numbers.
  • I was thinking of a lot of increase in interest rates (around 250 bps or 2.5%) in a short period of time due to high inflation. This has not materialized due to enough liquidity in the system and reluctance of RBI from raising interest rates. RBI has refrained from raising rates due to various reasons, one of them being the threat of heavy capital inflow in Indian debt if the interest rate differential from developed nation becomes very high.
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Monday, April 5, 2010

New Features at BSEPlus

Over the last few years of investing in Indian stock market, I had observed that an Indian investor had a pretty hard time getting data related to companies. The sources of data has increased in the last two years and that has helped investors like me to get more information about a company. One of the sources of this is the oldest stock exchange in Asia, i.e. BSE. BSE launched BSE Plus in 2009 which has improved the data visibility of companies.

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