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