KSE - Value buy?

The company Kerala Solvent Extraction (now KSE) was established in the year 1963 and entered into cattle feed industry in the year 1976. The company later also entered into the business of milk procurement, processing and creating dairy products like ice-cream, ghee and packaged milk.

Financials
The average ROCE of the company over the last ten years is 30% while it is higher at 45% in the last three years. The company's net current assets at the end of FY2016 was 45 Cr. The operating cash flow of the company over the last ten years was average 12.11 Cr while higher at 15.78 Cr in last five years.

Shareholding
The promoter shareholding came down from more than 32% in FY2013 to less than 27% now. But that might be due to sharp increase in share price of the company. The same promoters increased their holding between FY2010 - FY2013.

Valuations
At the current market price of INR 550, the company has a market cap of INR 180 Cr. The share price was trading around INR 250 between 2005-2013. During this time the book value of the company increased from INR 80 to INR 240 now. The company is not very cheap but not very expensive either. It might become attractive if price corrects by half.

Sumedha Fiscal Services - Value Buy?

The company was established in the year 1989. It provides a wide array of services including Investment Banking, Wealth Management and Broking Services.

Financials
The average ROCE of the company over the last 10 years is 28.29% and is lower at 20.31% in the last 3 years. The company has current assets to the tune of INR 20.13 Crore. The average operating cash flow of the company over the last five years is around INR 1 Crore. The company has remained profitable and paid dividends over the last 11 years.

Shareholding
The promoters hold 49.57% of the company on March 2016. It has increased from 46.86% in December 2015.

Valuations
At the current market price of INR 14.7, the market cap of the company is INR 11.73 Crore. The stock price is barely trading higher than its price in year 2005 when it was trading between INR 8 and 9. The book value of the company has increased from INR 12 to INR 39 during these ten years, the EPS has gone up from INR 0.57 to INR 2. The company's valuation is below its net current assets. The company doesn't seem to be very expensive at this price.

How markets can be very wrong

I had in previous post already mentioned names of several commodity companies Peabody Energy and Arch Coal. The graph on LA Times about Electricity produced from coal in the state of California is reproduced below:

It is clearly visible that something drastically changed in 2011 and the coal based electricity production fell off a cliff. The charts of both the companies' stock price is shown below:

Both the shares were trading at much higher prices in 2011 ($3250 for Arch Coal trading at $0.36 now, $72 for Peabody trading at $0.95 now) that means the market was not discounting the event of replacing coal with other cheaper options for producing electricity. Both the company's filed for bankruptcy recently.

How can market be right in 2011?

Carnage in Commodities

Many readers of this blog will see the investments I have made to the right of this post and find the names like Cairn India, GMDC, Maharashtra Seamless, MOIL, NMDC, OIL India and Tata Sponge Iron. Most of these I bought in the last one-two years thinking the shares are offering value but I have been beaten down by Mr Market and every month I am seeing newer lows for the share prices of these companies. The average buying price for these stocks is 220, 80, 204, 208, 90, 460, and 650 respectively while the current trading prices for the same are 130 (-40%), 56 (-30%), 136 (-33%), 185 (-10%), 91 (0%), 320 (-30%) and 375 (-43%). Even though the losses looks big, the number of stocks 7 make a very small percentage of my overall holding of 28 stocks, i.e. 25%. So the average loss of 26% on 25% of your holding comes to around 6.5% of your total investment which looks big if your portfolio is INR 1 Crore since 6.5% is 6.5 lakhs but minuscule amount of INR 65K if your portfolio is just INR 10 lakh. For me, the good news was that I invested higher percentage in non commodity companies with better conviction so the portfolio share of the commodity stocks is even lower at just 16% and the losses are just 4.5%. Even though value investors like me try to avoid capital loss, due to events not controlled by the investor, some losses are expected and I just need to minimize them.

If you look at the investments made by other gurus in commodity companies recently Gurus pile into commodities and What gurus are saying about commodities, most of them have lost money except in Gold. Peabody energy stock price has gone down from 25 to 2 in six months, Arch Coal went down from 2 to 0.5, Freeport Mcmoran going down from 10 to 7 with as low as 4 in January. Carl Icahn even had to sell his Apple Inc holdings recently at 30% correction from top price and his company Carl Icahn Enterprises was downgraded recently Carl Icahn Enterprises in danger of downgrading to junk due to heavy loan to value ratio.

I am not trying to defend myself here but what I am saying is that the errors are part of human decision making and the three words "Margin of Safety" ensures survival. I do try to put enough margin of safety in everything I buy. One of the recent examples of this was my purchase of Shilp Gravures at INR 46. The company's share price went on to reach INR 116 a month back but since it got notice from GPCB (Gujarat Pollution Control Board) to shut down the plant GPCB Notice, the price came down to INR 63 which is still higher than my purchase price.

If I still have conviction about my investments in these companies, I can average down but for many the equation has changed. For Cairn, a merger is announced with Vedanta and not sure what promoter would do with the cash present on Cairn's balance sheet. The oil price have come down from $60 to $30 since I bought these shares impacting the profitability. Oil India made huge investment to buy Videocon's Oil assets in Africa OIL and OVL invests in Africa. The transaction was done at a time when Gas prices were hovering near $4 while they are trading at $1.8 now. So times change and so do equations.

Be safe, be prepared.

International Travel House - Value buy?

The company was established in the year 1981. The company is an associate company of ITC. It offers a bouquet of travel services including car rental, Indian and International holidays, business travel, etc... While looking at the company I found that it is based in Pune, the city where I live.

Financials
The average ROCE of the company over the last 10 years is 28.38% and is lower at 27.45% in the last 3 years. The company has current assets to the tune of INR 98 Crore. The average operating cash flow of the company over the last five years is around INR 18.4 Crore. The company has remained profitable and paid dividends over the last 15 years.

Shareholding
The promoters hold 61.69% of the company.

Valuations
At the current market price of INR 195, the market cap of the company is INR 156 Crore. The stock price is barely trading higher than its price in year 2006 when it was trading between INR 140 and 240. This is about 10 years of no capital gain. The book value of the company has increased from INR 58 to INR 182 during these ten years, the EPS has gone up from INR 8.75 to INR 23. If we remove the net current assets from the market cap, the rest of the company is available at INR 58 Crore which is less than 4 times operating cash flow. The company doesn't seem to be very expensive at this price.