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.

Strange things happen in stock market (and off-market)

I am holding shares of a company 'Divyashakti Granites' for more than two years now. I had bought them at an average price of around INR 25 when the book value of the company was very high and even the net current assets are higher than the price. What I found was that in the month of June, there was an off-market transaction where somebody bought shares of the same company off-market for just INR 12. I have never seen something like this happening in any of my holdings earlier. The price of the scrip has moved from INR 25 to 31 now. This really is strange!!!!

Bubble Bubble

Lately, most of you have noticed that I am reducing my holdings in stocks and increasing cash. Many of the stocks I bought last year around August has appreciated by 100 - 200% and my portfolio has gone up decent enough in the last one year. But looking at valuations of some quality companies I can see a bubble like valuations being developed in some pockets of the stock market. See the following list:

Company	P/E	Price Gain 2009-2014	CAGR Gain 2009-2014
Page Industries	57	26 times	92%
Astral Poly Technik	35	30 times	97%
Kewal Kiran Clothing	33	18 times	78%
Eicher Motors	53	43 times	112%
Poly Medicure	27.5	46 times	115%
La Opala RG	37.4	70 times	134%

The list is very long. All the investors who took a plunge in blood bath of 2009 have been rewarded handsomely. The companies are from diverse range of industries but most of them were midcap-microcap in 2009 while today their market cap is sizeable now touching large cap valuations. I am warning investors that this is not going to end well.

Mazda Ltd - Value Buy

Mazda is an engineering company established in the year 1990. The company mainly manufactures vacuum systems and evaporators.

Financials
The average ROCE of the company over the last ten years is around 30% but it was lesser at 25% last year. The company has consistently paid dividend over the last 14 years. The company sold its valve division in FY11 for around 13 Crore which resulted in exceptional after tax income of 10.824 Crore. The company had investments to the tune of INR 18.8 Crore in mutual funds and short term investments at the end of FY13. Beyond this, the company had net current assets to the tune of INR 39.12 Crore in FY13. The company had negligible debt of INR 2.41 Crore at the end of FY13. So the current enterprise value of INR 45 Crore is way lower than the amount of 58 Crore at which the company can be liquidated.

Special Food Division
Company has started a food division which had a turnover of INR 8.52 Crore with an operating profit of INR 1.07 Crore in FY13. They are selling instant drink powder, fruit jam, ketchup and custard powder under the brand bcool.

Promoters
Promoters are very shareholder friendly and their stake in the company over the last one year has increased by more than 5% and most of the shares were acquired from open market between the price of INR 80 and 100.

Mutual Fund Holding
Very few mutual funds are holding the company.

Valuations
The company at the current market price of INR 102 is trading at much lower than its book value of INR 194. With a healthy cash flow of INR 10 Crore, the company is damn cheap at INR 45 Crore valuation given its investments and net current assets.

Plastiblends India - Value Buy

Plastiblends is India's largest manufacturer and exporter of colour and additive masterbatches and thermoplastic compounds for the plastic processing industry. It is part of Kolsite group which also has another listed company Kabra ExtrusionTechnik.

Financials
The average ROCE of the company over the last ten years is more than 20%. The number has been lower in recent years near 17% while it was much higher near 30% in the years between 2000-2003. The tide seem to have turned in the last two quarters and it looks like the good days are going to be back from this year.

Promoters
The promoters hold 59.91% in the company at the end of September 2013. The promoters are buying shares from the open market since last one year and increased their stake by more than 2% since last September when they held 56.84%.

Mutual Fund Holding
Some mutual funds were holding shares till last quarter but nobody holds it right now.

Valuations
The company's book value at the end of FY2013 was INR 90 so at the current market price of INR 88, it is trading below book value. Company has net current assets - debt worth INR 50 Crore while the market cap of the company is INR 115 Crore. The promoters are buying shares heavily from the market and so do I. I would recommend a buy on the company at this price.

Image courtesy of FreeDigitalPhotos.net

I was way early

On May 7, 2010; I had made a macro call on financial sector in India. Let's compare the results today after three years and four months. BSE BANKEX was trading at 10505.86 at that time while SENSEX was at 16769.11. Today SENSEX ended at 18234.66 while BSE BANKEX ended at 9871.35. That means during the last three years and four months SENSEX gained 8.74% while BSE BANKEX lost 6.04%, an underperformance of around 14.78%.

It is still too early and biased to consider myself vindicated since BSE BANKEX has crashed just recently. I had also warned about an impending banking crisis in India in September 2010 although it was too early. Being early is sometimes no different than being wrong.

Jindal Drilling and Industries: Update

On June 16, 2013, I had written about Jindal Drilling and Industries. I myself trusted the promoters and went ahead and invested in the company at a share price of INR 187 as you can see in my recent investment activity.

Unfortunately, the promoters are becoming more and more non-transparent. The promoters secretly announced another round of preferential allotment, bigger than last year and probably at a much lower price, which unfortunately hasn't been disclosed yet. Last year, the company called for an EGM and then at a price disclosed to shareholders, made allotment of 27,50,000 shares which diluted the company's equity by 12% and increased promoter holding from 53.83% to 58.78%. Now allotting 33,00,000 shares would dilute the equity more by 12.85% and after the allotment, promoter holding again would go up to 63.63%. The amount of money the company is getting for this dilution may be just 130 crore. And remember, the promoters sold their 10.47% stake to one of the citigroup company in 2008 at exorbitant price of INR 1000+ which got them around INR 150 crore. So they are again bying the stake in the company by shelling out lesser amount to get higher stake.

The minority shareholder is not even being thought about. Since the price of the share is depressed, it would be a good idea to go for rights issue the way Tata Motors did in 2009. And when a minority shareholder does not subscribe to rights shares, promoter can replace it and increase his stake in the company. But this is not TATA. This is JINDAL.

I would recommend to stay away from people who has got sudden wealth leading to corruption. I myself is rethinking my own purchase of this company. Happy investing!!!!

Jindal Drilling and Industries : Ben Graham Value Play?

Jindal Drilling and Industries was incorporated in the year 1983 with a focus on providing quality Offshore Drilling, Horizontal and Directional Drilling and allied services.

Financials
The company's average ROCE over the last ten years has been around 21%. The number fell to 16% last year. The company at the end of FY13 did not have any long term debt and the net current assets amounted to INR 262.34 crore. The company also has investements in joint ventures to the tune of INR 114.2 crore and has given loans to the tune of INR 207.03 crore.

Promoters
Promoters held very high stake to the tune of 83.48% in the company till December 2007. One of the citigroup company then acquired 10.47% stake at a price of 1000+ on 25 Jan 2008 when the share price touched all time high of 1088 (split adjusted) that brought the promoter holding down to 74.74%. The promotors held near 75% stake till March 2011. Then some holders were moved out of promoters to public (Bhagyalaxmi Finlease & Investment Pvt Ltd, Satellite Merchants Pvt Ltd, Babul Holding Pvt Ltd) so the promoter holding came down to 53.03% in June 2011. The promoters since are increasing stake in the company when their holding increased to 53.83% in Sept 2012 at a price anywhere between 250-350. Something really strange happened. Even though the company had good cash at the end of FY12 on its balance sheet, the promoters did a preferential allotment to themselves at a price of INR 280 in October 2012 raising around INR 77 crore. This has brought promoter holding to 58.78% in the latest quarter. The citigroup company that acquired shares at the peak had to sell them at loss in November-December 2010 at half the price (Who says FIIs are intelligent?).

Mutual Fund Holdings
Not a single mutual fund holds the shares right now.

Valuations
The book value of the company is INR 216 so the share at the current market price of INR 190 is trading below book value. Everything else looks good except for the fishy transaction of the promoters doing preferential allotment. The company also pays very negligible dividend. The shares of the company can be bought if you feel promoters are not cheating on you.

Image courtesy of domdeen / FreeDigitalPhotos.net