Eimco Elecon - A Ben Graham value play

The eimco elecon engineering company was incorporated in 1974 as a joint venture between ELECON group and the indian public.

Financials
The average ROCE of the company over the last five years is 15.728% with average operating profit margin of 18.984%. The margins were highest in the years between 2007 and 2009 and in years 2000 and 2001. Net profit margin too were highest in years 2008, 2000 and 2001, in low double digits. The margins have shrinked to 7.2% in 2011 which is lowest in the last 13 years. This shows that the business is under severe margin pressure but still the margins are much higher than the average for all the companies in India. The company is debt free with (net current assets + investments) worth INR 114.05 crore. The assets turnover ratio of the company decreased from 1.81 to 1.06 between 2002 and 2006 but the same has improved again to 2.00 in FY2011. The company had negative cash-flow in FY2009 but the average operating cash-flow over the last five years is equal to the net-profit reported by the company. So the company is providing proper depreciation and not over-reporting the profits.

The company's average total income has risen from INR 72.98 crore between FY00-FY02 to INR 167.49 crore between FY09-FY11, i.e. 9.67% compounded annually. The net profits during the same time has risen from INR 8.653 crore in FY00-FY02 to INR 13.81 crore, i.e. 5.33% compounded annually. The company had three down years in profits over the last ten years, FY03 down by 45.27%, FY06 down by 5.83% and FY10 down by 16%. The revenues declined in two consecutive years in FY06 by 7.24% and in FY07 by 3%.

Promoters
The company is a family owned business and promoters hold 74.05% of the shares as of June 2011. The promoters increased their stake from 73.17% in the quarter ending December 2008. Dividend payout ratio of the company is 20% of the net profit which is less but is fine.


Mutual Fund Holding
As of June 2011, only HDFC growth fund holds this shares and that too bought at INR 216 in 2007 and INR 300 in 2006.


Valuations
The company's book value is INR 242 so the company at the CMP of INR 185 is trading below book-value as well as below its net current assets of INR 113 crore. The trailing twelve months EPS is INR 21.9 so the P/E comes at 8.45. I would recommend a buy on this company.


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Sensex Nifty EPS after FY11 results

It seems all the results are out and the Sensex EPS as of 6 June stands at 18420.11/19.58=940.76. The Nifty EPS stands at 5532.05/20.43=270.78. This compares with 828.5 on 27 May 2010 for Sensex, i.e. an increase of 13.55% YoY and 239.4 for Nifty, i.e. 13.1% increase YoY.

Sensex EPS drops after SBI results

I had tried to give an early indication of Sensex EPS for the year 2011 in an earlier post. I had assumed that since around 46% of the companies; that are part of the Sensex; had announced results that increased EPS by 12.6% YoY, there will be some more gains in EPS when all the companies finish reporting their results. Today SBI announced their horrible results for the year ended March 2011 and the Sensex EPS; which was prevailing at somewhere around 933 (18345.03/19.66) yesterday; dropped to 924 (18137.35/19.63) today. Nifty still does not seem to be reflecting it. This result was before the interest rate hikes of 25 bps of January 2011 and 50 bps of May 2011 since the bad loans take at least 90 days/three months to come into banks' books. God help those analysts predicting an EPS of 1200 or more for FY12 (1100 for FY11 by Rakesh J, 1070 for FY11 by Motilal Oswal, 1250 for FY12 by Raamdeo, 1345 by UBS and 1100 for FY11 and 1250 for FY12 by Credit Suisse). Those who are finding PSU banks cheap on P/B or P/E basis need to rethink about the correctness of the results being published by UBI, Bank of Baroda, PNB, Canara Bank, IOB, Indian Bank, Allahabad Bank, Central Bank of India and Andhra Bank. I had already written about a coming banking crisis in India in September 2010 and I still stick to it.

Is this the end of MSFT?

This is the first time I am posting on a company not listed in India. I am talking about Microsoft. This post is inspired by Microsoft's buyout of Skype for $8.5 billions. Many of the big companies that are favourite of speculators get to a point where their dominance is threatened by creative destruction that is the core of capitalism. Microsoft has dominated tech industry for more than thirty years now. But over the last ten years, the growth of internet has just shaken the ground below this bellwether company. The company has meager presence in this area and is struggling to build products that make its presence felt on internet. The last time the company was this desperate was in 1997-98 which resulted into buyout of Hotmail at exorbitant price of $400 million in January 1998. I don't have the data for the revenue and profitability of this acquisition over the last fourteen years, but Microsoft share price did get a boost from $15 to $25 in a span of just eight months. The price today is still hovering at $25 and change after almost thirteen years.

Even the current internet division in Microsoft is bleeding with heavy losses with annualized loss number to the tune of $3B(billions with a B). The PC sales declined annualized 4% in the last quarter although the notebook sales increased and with the prevalence of virtual machines, operating system sales may not match one-to-one with hardware sales since many virtual machines can run on a single hardware server.

I am working in technology sector and not in Microsoft so my opinion may be biased. So take this with a pinch of salt. There is a famous call from Bill Gates on Kodak in 1991 when its share price was hovering around $30. When asked about Kodak, Bill Gates said, "Kodak is toast". The share price did go up to $90 and today going for $2 and change. Will he say the same thing for Microsoft today?

How great companies outperform index over time?

Many a times so called analysts mark companies in FMCG and Pharma sectors as defensive. But if we look at the returns generated by these companies over long term, they are many a times much better than the returns generated from index. Today, I will describe two good companies from FMCG sector which have shown the same kind of characteristics over the last 10 years. The first is Nestle and the other one is Glaxosmithkline Consumer Healthcare. If you look at the returns generated by these companies over the last ten years, they can be summarized as shown in the following table:

* Average price

Company	Price 2002-03	Price 2007	Price 2011
Sensex	3000	18000	19000
Nestle	500	1100	3500
Glaxo Consumer	250	550	2200

You can see that during the bull market till 2007, both the companies underperfomed the Sensex by a hugh margin but after 3 more years, they are now outperforming the index. The Sensex generated returns of more than 40% compounded annually between 2002-03 and 2007 and many of the stocks like L&T, Reliance and BHEL went up by more than 25 to 50 times. The returns generated from both these stocks were of the order of 15-20% at best during those times. But the situation has changed over the last three years, all the stocks that generated great returns earlier are still trading 30-40% below their 2007 peak while these companies multiplied their returns and generated more than 40% returns compounded annually during the last three and a half years while the Sensex hasn't moved much. It is just in hindsight that somebody would have bought L&T and Reliance in 2003, sold them in 2007 and bought Nestle and Glaxo from that money. But buying good companies at great prices never turns out to be a bad deal.
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Where will Sensex EPS be after FY11 results?

Following table shows the list of companies that have already announced their FY11 results along with their weightage in Sensex as of May 3, 2011.

Company	Weightage
Reliance	11.45
Infosys	9.58
ICICI Bank	8.29
HDFC Bank	5.61
TCS	4.5
Wipro	1.81
Jindal Steel	1.8
Sterlite	1.79
Maruti	1.24

In total, 46.07% of the companies have announced their results so far and the Sensex value and P/E stands at 18534.69 and 19.87 respectively resulting into an EPS of 932.8. This compares with Sensex EPS of 828.5 on May 27, 2010. Thus, the Sensex EPS has increased by 12.6% over the last one year with 54% of the results still pending to be released, this at a time when the nominal economy is growing at a rate of 20%+ with 8% real GDP and 12% inflation. Not a pretty picture!!!

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Is TCS really doing better than Infosys?

The financial media is ripe with the articles of praise for TCS and Infosys seems to have lost its glory over the last one year. See the headlines below:

• TCS takes over Infosys (livemint)
• TCS Infosys treading different paths (livemint)
• TCS topples Infosys as the most valued IT company (trak)
• TCS tops Infosys (DNA)

Most of the analysts are not looking at the results of companies with sharp eyes. See the following table:
* 9 months FY11

Year	Infosys			TCS
	PBT	Tax	Tax/PBT	PBT	Tax	Tax/PBT
2007	4249	386	9.08	4876.59	663.96	13.61
2008	5344	685	12.82	5812.33	786.31	13.53
2009	6907	919	13.31	6095.37	838.95	13.76
2010	7899	1681	21.28	8197.61	1196.97	14.60
2011	9313	2490	26.74	7812.19*	1367.08*	17.5

If we forget about the quarterly movements of revenues then over the last 6 years, Infosys consolidated revenue increased from 7129.65 Crore in FY05 to 27501 Crore in FY11. During the same time TCS revenue increased from 9748.47 Crore in FY05 to estimated around 37000 Crore in FY11, not much difference between the two in terms of growth.

The annual report of Infosys clearly provides details about the expiry of tax exemption due to Software Technology Park(STP) scheme of government of India. There were five big centers (Bangalore, Pune, Mysore, Hyderabad, and Chandigarh) whose tax exemption expired in 2009 and there are three more (Chennai, Bhubaneshwar and Mangalore) whose exemption expired in 2010 and so the effective tax rate for Infosys has increased from 13.31% to 26.74% over the last two years. If the tax rate had remained the same, Infosys EPS this year would have been higher by INR 20. Due to new SEZ policy of government, the tax rate may again go down a bit due to lower MAT rates on SEZ and Infosys annual report does mention five centers whose tax exemption expires after 2020. On the other hand, TCS annual report does not give any information about this but STP is going to expire in March 2011 so TCS' tax ratio is likely to move higher in the next year which not a single analyst seems to be talking about right now.

Yes; the operating profit margin of TCS has caught up with that of Infosys over the last two years but I doubt they can do better than Infosys going forward. Let's see.

Being too far ahead of your time is indistinguishable from being wrong
 - Howard Marks

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An humble investor

I was reading the transcript of Warren Buffett's interview with Financial Crisis Inquiry Commission and the following quote made me feel humble:

I can tell you it’s very hard to change. I was at Solomon (laughs) and it, the nature of Wall Street is that overall it makes a lot of money relative to the number of people involved, relative to the IQ of the people involved and relative to the energy expended.They work hard, they’re bright, but they aren’t, they don’t work that much harder or that much brighter than somebody that, you know, is building a dam someplace, you know, or a whole lot of other jobs. But in a market system it pays off very, very big, you know. And it, in effect, you know, boxing pays off very big now compared to what it did when the only auditorium we had was 25,000 seats at Madison Square Garden and now you’ve cable television so you can put a couple of, you know, lightweights who you’ll never of again, you know, on pay per view and they’ll get millions for it now. Market systems produce strange results and Wall Street, in general, the capital markets are so big, there’s so much money, taking a small percentage results in a huge amount of money per capita in terms of the people that work in it. And they’re not inclined to give it up.

I have never heard a doctor saying that what he is doing is not harder then what a person working as a garbage collector is doing. A lawyer will never be able to accept what he is doing is not harder than what a cook is doing. An architect would never be able to convince himself ever that what he is doing is not harder than what a barber is doing.

Here is a man who has been working in the investment industry for more than 55 years and he thinks people in his field are not doing work harder than what a man building a dam is. Kudos to his humility and modesty.

I would suggest you read the whole transcript.