Sunday, August 3, 2014

Beware of Frauds

I wanted investors to know about a strange company called 'Parekh Aluminex'. I had told my wife in 2007-2008 how can a company keep growing its revenue, debt and profits all at a steady pace of 30% per year, year after year forever. I wanted to dig deep to find the recent 95% drop in price in company's shares and then came across the article "The curious case of Parekh Aluminex" which saved all my efforts of writing. Please go ahead and read it.

Another one that I found was 'Hanung Toys and Textiles'. There were people recommending a buy on this company here and here. The company's share price has corrected by more than 90%.

Another ones that can be added to the list are 'Opto Circuits' and 'KS Oils' but not from fraud perspective and more from wrong management perspective.

The amount of debt that just these these companies had amount to around INR 5000+ crore and there are many such unlisted companies. God save the indian banking sector.

Update: I might add companies like Kwality in near future as my mother-in-law called me up to buy the company and when I looked at the financials, it feels like another Parekh Aluminex.
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25 comments:

mayur said...

Hi Chinmay,
Can you highlights the points that made you to buy Indo Borax?
Thanks

Chinmay said...

Hi Mayur,

The initial calculation shows company's market cap lower than net current assets. Recent buy-back (at average price of 125) giving positive signs from promoters. Company with ten year record of paying dividends. No big debt.

Karthikraja K said...

after Indo Borax company Buy back, Whether EPS will increase due to Less Equite shares issued?
Is it also improve the ROE due to less Share Holder funds?
But Company reserves will reduce and hence Book value? Kindly correct me if i am wrong.
Commodity chemicals are cyclical and cant be hold for long term as passive investor. Please explain.

Chinmay said...

Hi Karthikraja,

The best time for a company to buy back is when the price is below its book value. Say total issued shares are 100 with a book value of 100 but price is trading at 80. So networth is INR 10,000 while market cap is INR 8,000. If 5% equity is bought back at market price (5 shares at 80), it requires just INR 400 (4% of net worth). After buy-back, the remaining shares are 95 and the networth is 9600 so the book-value increases to 101.05, i.e. an increase of 1.05% compared to what it was before buy back.

Many companies did follow above steps in the carnage of 2001-2002 including Blue-Star, Reliance etc... After ten years the rest of the shares multiplied in prices many fold.

10-15 years is a long time. A chemical commodity cycle cannot last for this long so the company doesn't look that cyclical but they have seen increase in operating profit margin so there can be a negative impact on it.

mayur said...

Thanks for the prompt reply on Indo Borax.
No my same questions foes for next 2 picks - Coral Labs - looks interesting.
Haldyn Glass - Flat recent results

So what points makes those Buy again.

Earlier you used to post details before buying the stocks which you stopped now? any specific reason?

Karthikraja K said...

Hi Chinmay,
Your purchase on Haldyn Glass @ 18.75 is intriguing to me. You are pure Value investor. How Haldyn fits into your checklist? Growth decline and Fraud charges on employee ( 2012)...? Please answer the Puzzle. Thank you.

Also Ultra Micro caps are also not fit to your checklists, then how Coral Lab?

Chinmay said...

@Mayur

You can read my earlier post on Indo Borax in 2011. I had not invested in the company at that time at INR 81. But when I saw company buying back its own shares at INR 125, I took the plunge at INR 140.

@Karthikraja,

Haldyn has good dividend yield and net current assets are around INR 50 crore compared to the market cap of 90 crore at Rs 18.75. Company has generated more than 90 crore of operating cash flow in the last five years.

For a value investor, large, mid, small and micro caps do not matter. The only thing that matters is value. Even anuh pharma was a micro cap a year back (100 crore market cap) and today will surely fit mid cap.

Chinmay said...

@Mayur

Forgot to put the link for indo borax article

http://www.indiavalueinvest.in/2011/01/indo-borax-ben-graham-value-play.html

@Karthikraja

Coral Laboratories - promoters were buying last year at 60. I wanted to buy at 105 but missed since the stock was on upper circuit for 4 days. But I still took the plunge since margin of safety was there.

Rational Mind said...

Hi,

very nice blog on classic value investing style..may I have your mail ID?

Rational Mind said...

Hi,

what are some of the books in investing that you liked, beside of course, ben graham's work?

Karthikraja K said...

Chinmay,
What is your view on Telecom Secor? like in other country, we may pay for even incoming. There wont be Price war in future because of M&A. Is it good to have exposure now?

Also for Haldyn Glass, Depreciation is very Big and it creates a drag of lower Nat margin? how you view Depreciation. also Capex is inevitabel for Mfg company. So Depreciation also continuing one.

Chinmay said...

Hi Karthikraja,

I consider telecom sector as out of my circle of competence. It is a changing utility like business.

Regarding haldyn glass, even though depreciation is big, price to earnings is not that high. Let's see how it turns out.

mayur said...

Hi Chinmay,
Indo Borax rocking each day, have booked 30% profits from 100 shares I bought initially. Thanks for bringing good gem and explaining logic behind buying.

May I ask you to provide reasons/ explanation for your recent picks :-

Sun TV
Shilp Gravure

Thanks again!
Happy investing

Karthikraja K said...

Hi Chinmay,
What is the Target you are keeping for Coral an dIndo Borax? Instead of asking individual scrips, How you arrive Targets for Shares ( topic for new Post)?

Also Sun Tv is under the 2G scam issue with intensified CBI reports, Do you think this is the Worst time for entry? Also Huge Fund selling.

How Shilp Gravure fits to your Checklist of selection? are you comfortable with Circle of comeptence with Industry? Please throw some light?

thank you
Karthik

Govi said...

Why haven't you considered Graphite India so far? It is a perfect value stock.

Nirav Karia said...

Wht. Abt new post....

Chinmay said...

Hi Karthikraja,

Typically, I have found that small/mid cap stocks trading at more than 3-4 times book value gives a good exit point. Coral has 140 book value and Indo Borax has 208 book value. So you can expect exit points of 400-500 for coral and 600-700 for indo borax to be good exits. This doesn't mean they are buy at the current price of 170 and 265 since there is no margin of safety. It also doesn't mean they will reach the target price.

Regarding Sun TV, I bought MCX at 295 last year when NSEL scam broke out. I exited it at 865 a month back. Company without any debt giving 3% dividend with 12 times cash flow would not be a money loser over long term.

Regarding circle of competence, I have found myself to be doing well with chemicals, engineering, auto ancillaries. I don't have big exposure to the Shilp Gravures though.

Karthikraja K said...

Is Godfrey superior in value than VST/ITC in Balance sheet parameters? Please throw some light.

Also Tata Sponge lost its coal block and it has run up too much from 300 to 690? Is it due to Less PE and P/B? Request your View on it.

Karthikraja K said...

Hi Chinmay
Plz reply during ur free time...are you going to add more Godfrey and Tata sponge during this melt down...

Chinmay said...

Hi Karthikraja, I will surely buy more if the price of both Tata Sponge and Godfrey Phillip goes down in this melt down. I bought Tata Sponge purely based on balance sheet. I did not have any idea about it losing coal mine. I only read about it after you pointed it out. The liquidation value of the company today is 550 Crore without including fixed assets. So the current valuation of 1000 Crore is 4.5 times cash flow of 100 Crore if we exclude net current assets.

I think compared to VST and ITC both, Godfrey offers better valuation with an MNC brand i.e. Marlboro.

Karthikraja K said...

Hi chinmay,
Pl suggest on followings.
Is it time to book Coral and Anuh?
Is it good to average on Tata Sponge, also i could not get your rationale for buying on it?
Godfrey is deteriorating lot on every quarter in all parameters, What is ur take?

Thank you for your time.


Chinmay said...

Hi Karthik,

I think Anuh has run up a lot and I have already started booking profits. Short term capital gain tax is what is prohibiting me from selling. Coral is still not that expensive as in my previous comments I had put exit point at 400-500 so nearing those levels.

Tata sponge and Godfrey has seen their business turn down after I bought them. You can do an SIP on them especially when they go down substantially.

mayur said...

Hi Karthik,

Can you pls throw some light on 2 tiny stocks you picked up recently - 1. manali Petro & Texmo Pipes?? would liike to now what has encouraged you to bought those?

mayur said...

you seems to be very bullish on Sun tv, which is highly under influence of politics space.
Agreed that is fundamentals are strong but lagginng due to FM renewal issue / satellite rights pending with Court...any particular reason behind adding so aggressively??

Chinmay said...

Hi Mayur,

This is a one and a half year old post. See that when the political cloud went out (Jaylalitha died and CBI case against Marans got revoked), I have seen almost 150% gain in my investment. You always need to buy when things are hazy. If you wait for clear picture, the party already gets over.

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