Thursday, February 24, 2011

Statement of lifetime

Following is a statement from K V Kamath, one of the most respectable and experienced banker in India
We can't afford to raise interest rates any more.

The statement was said in an interview with economic times on 10 October 2010.

I have a tendency to keep statements of famous individuals in my blog noted down with the date when I feel the person is saying this due to his vested interest and I strongly disagree with his statement. As per my own understanding, the US Treasury yields bottomed (and not topped) in the second week of October. The lending rates in India has gone up by more than 150 basis points (1.5%) since this statement and I think there is more to come.

Earlier, I already noted down one of the statement from Mr Deepak Parekh of HDFC on May 5, 2010. Some of these statements might become famous along with the person just like the famous statement from Irving Fisher before the great depression
Stock prices have reached what looks like a permanently high plateau.
Bookmark and Share

Are insiders fool?

Generally when the Sensex/Nifty trades at more than 20 times earnings, the insider buying to selling ratio remains very low. But when a stock become cheap, promoters buy shares of their own company, both to provide confidence as well as increase their stake in the company at a bargain prices. I had seen this happening a lot between October 2008 - May 2009. Banco Products, Sarla Performance Fibers, Precision Pipes & Profiles Company, Asahi Songwon, ZF Steering Gear and many other companies' promoters bought heavily to increase their holding in their companies. All these companies have generated extraordinary gains since the bottom in March 2009. Banco Products has gone up from INR 15 to INR 70, Sarla Peformance from INR 30 to INR 115 today, Precision Pipes from INR 35 to INR 100 today, Asahi Songwon from INR 13 to INR 68 today and ZF Steering has gone up from INR 100 to INR 295 today. Contradictory to general perception, even at this Sensex/Nifty levels, some of the promoters who were not able to increase their holdings at rock bottom prices in March 2009 have bought shares in their own company between September 2010 and February 2011 and their shares are available today below their own buying price. Some of the examples are given below in the table:
CompanyNo of Shares Bought (% Equity)Average PriceCurrent Price
Dynemic Products92563 (0.817%)22.8822.8
Wimplast65547 (1.09%)193.15160
Ador Welding23117 (0.17%)164-201167
Garware Wall Ropes23718 (0.1%)74.1758
Patels Airtemp33703 (0.665%)NA69
There might be more companies than what have been mentioned here. BSE/NSE does not provide a clean interface to easily find out the way to get insider buy/sell information. This clearly shows that there is a large gap in terms of valuation between Sensex/Nifty and small cap companies. When big companies are trading at 25-40 times earnings, the promoters of small-cap companies are not finding any takers. Some of the selling pressure is coming due to large institutional investor (read LIC) liquidating their stake in a company (read Garware Wall). Promoters may be trying to provide a floor to that.
I don’t think man should have to learn easy lessons in such a hard fashion. You should be able to learn not to pee on an electrified fence without actually trying it. - Charlie Munger
Image: jscreationzs /
Bookmark and Share

Monday, February 21, 2011

Are good days going to come back again?

Here is a snippet of the article in economic times dated 30 March 2001 with my own emphasis highlighted in bold letters:

While the market may have belied the hopes of investors looking for capital appreciation, the sharp downturn in prices has raised the dividend yield for many companies. With the annual results fast approaching, dividend income from companies may prove to be a source of steady income for investors.
Consider the case of Blue Star, for instance. The company has been paying dividend consistently for the last three years. With the dividend declared last year at Rs 5 per share and the current market price at Rs 30, the dividend yield works out to as high as 16.5 per cent. Even if the company pays Rs 3.5 as dividend this year, the dividend yield still stands at 11.5 per cent, which is tax-free.
This is not all. There are many others like Kirloskar Oil, VIP Industries, GNFC, Tat Finance, Wellwin Industries and Bank of Punjab, which have a consistent dividend-paying record over the years and an attractive dividend yield of 10 to 13 per cent based on their current prices. In some cases like Pentamedia, Paper products and Avanti Feeds, there has also been a gradual increase in their dividend pay-out over the years.
Of all the 4,000 plus companies listed on the BSE, there are around 775 profit-making firms, which have a consistent dividend paying track record for the last three years. While some companies have a very low dividend yield, others run the risk of not being able to repeat their past performance. In a detailed study, ET tried to identify companies which may provide attractive dividend yields, assuming they maintain their past dividend paying record. Taking a cut-off for the dividend yield at 10 per cent or more, based on the dividend paid last year, and by including only those companies with a positive net profit growth in the trailing 12-month period, compared to the previous year, the list was pruned to just 80.
Since liquidity is of paramount importance, only those companies were selected which had an average daily volume of atleast 500 shares and market cap above Rs 10 crores. In many cases, the volumes have dried up in the current market scenario.
The final list had around 20 companies. Ashok Leyland Finance is at the top with a dividend yield of 16.7 per cent, followed by Blue Star with 16.5 per cent and Garware Wall Ropes with 16.1 per cent. It is the tax-free nature of dividends which make share attractive, compared with the falling interest rates on other fixed income instruments. Also, with the finance minister reducing the tax on the dividend paid out by companies from 20 to 10 per cent in the current Budget, it is possible that some corporates may even increase their dividend pay-out.
The only risk involved in dividend pay-out on shares is that of a capital loss. This is because there is a time lag between the dividend declaration date and the actual payment date, which could be as much as three months. Capital could thus erode in the intervening period. Also, in some cases, the volumes are quite low, due to which there remains a risk of not being able to exit.
Returns Flight

Company FY '00 Div (%) FY '99 Div (%) FY '98 Div (%) TTM NP Chg (%) Latest Price (Rs) Div Yield (%)
Ashok Leyland Fin 40 40 50 39 24.0 16.7
Blue Star 50 35 35 10 30.4 16.5
Garware-Wall Ropes 20 20 18 17 12.4 16.1
Goetze (India) 25 20 40 9 18.3 13.7
Wellwin 25 25 22.5 55 19.5 12.8
VIP 25 25 25 35 19.8 12.6
Pentamedia 120 70 55 1 95.7 12.5
Avanti Feeds 35 25 18 37 29.1 12.0
Lakshmi Auto 25 30 30 23 21.0 11.9
Advani Oerlikon 15 25 25 130 13.2 11.4
City Union Bank 25 20 25 7 22.2 11.3
Varun Shipping 14 14 21 1 12.5 11.2
GNFC 25 22 22 4 22.4 11.2
Tata Sponge Iron 20 10 18 100 18.0 11.1
Bajaj Auto Fin 30 25 2 4 27.8 10.8
Kirloskar Oil 35 35 35 49 32.6 10.8
Tata Finance 45 40 40 12 42.0 10.7
Bank of Punjab 15 14 14 46 14.6 10.3
Tata Yokogawa 32.5 32.5 30 23 31.9 10.2
TTM - Trailing 12 months, NP-Net Profits

Not every company in this list turn out to be a good investment. Blue star share price multiplied from INR 30 to INR 1700 today (5:1 split with price of INR 340 today) and Advani Oerlikon (Ador Welding) going up from INR 13 to INR 170 today but Varun Shipping is still languishing at INR 30.  I would like to remind investors that at the bottom in March 2009, many small cap companies were available at similar valuations, IMPAL @ 120 giving dividend of INR 12 yielding 10%, Garware Wall Ropes @ 25 giving dividend of 2.5 yielding 10% and many more such companies.

Is Mr Market going to give this kind of opportunity again in 2011?

Smart doesn't always equal rational.

Image: renjith krishnan /

Bookmark and Share

Thursday, February 17, 2011

Why book value matters?

Most of the value investor understands the importance of book value in determining the intrinsic value of a company. Book value represents the hard assets including its inventory, fixed assets minus depreciation and its cash/receivables minus all the liabilities like provisions, accounts payable etc...Ben Graham suggests not to pay much higher than book value while buying shares of a company.

If this criterion is strictly followed, there might be some set of companies that an investor may not be able to invest in ever. These companies include FMCG firms like Nestle, HUL and GSK Consumer since they distribute most of their earnings as dividends and so the book value of the company does not increase much. These companies also work sometimes on negative working capital so their book value will be very less compared to their earning power and so their intrinsic value can only be calculated based on their earning power.

But in bull markets, like the one we are in, investor enthusiasm stops differentiation between these companies and average small/mid cap companies. See the following table for the examples:

* 2006 numbers
CompanyBook Value March 2005EPS March 2005Share Price September 2005P/B September 2005P/E September 2005Book Value March 2010TTM EPSShare Price TodayP/B TodayP/E today
Ador Welding63.3619.952604.113108.4521.221701.578
GMM Pfaudler36.395.21116.943.2122.4562.98.07941.511.65
GM Breweries25.63*14.3*117*4.57*8.18*60.1217.73101.81.695.74
India Nippon122.422.86286.52.3412.53187.1730.952421.297.82
Gateway Distriparks62.39*7.88*131.4*2.1*16.67*61.917.41201.9416.22
TV Today35.582.8396.152.733.9752.56-7.17621.18NA
Voith Paper141.1517.222001.4211.61217.8121.442000.929.33

Most of the companies were purely trading at that time based on their earning power and the importance of book value was completely ignored by Mr Market. After more than five years, they are trading at prices lower than what they were trading at in 2005. The loss is not even compensated from dividends since capital erosion is far more than the cash received by an investor from dividends. The story may not end here. In the bear market of 2001-2002, these vary companies were trading at a steep discount to their book value and the same may happen when the next bear market comes. This doesn't mean the investor should shy from buying these names since the loss would be a notional loss unlike the loss that has happened over the last five years which is real.

The typical experience of the speculator is one of temporary profit and ultimate loss. - Benjamin Graham
Image: jscreationzs /
Bookmark and Share

Saturday, February 5, 2011

Sensex Nifty preliminary EPS after Q3FY11

While there are some companies, like Tata Steel, Tata Motors, M&M and Unitech still left to announce their Q3FY11 numbers, the preliminary EPS for Sensex and Nifty can still be calculated. Sensex ended at 18008.15 with a P/E of 19.78 which gives Sensex EPS of 910.42. The Nifty ended at 5395.75 with a P/E of 20.67 which gives Nifty EPS of 261.05. This compares with Sensex EPS of 876.36 and Nifty EPS of 250.62 at the end of Q2FY11 and Sensex EPS of 806.81 and Nifty EPS of 232.5 at the end of Q3FY10.Thus Sensex EPS has grown by 12.84% compared to last year while Nifty EPS has grown by 12.28%. This too in a year when the whole economy grew by more than 20% in nominal (inflation 12% + real 8%) terms. Now try to think how the EPS would grow to 1250 in five quarters, i.e. 28.86% compounded annually? If it cannot, then ask samir arora why he thinks Sensex is trading at 14.5-15 times FY12 earnings?

Image: renjith krishnan /
Bookmark and Share
Related Posts with Thumbnails