We got the first victim today

Just after two days of posting the names of companies which may have trouble paying their debt, we have got the first in Slowdown-hit Ispat defaults on loan repayment to UTI.

Indian Banks are in for a tough time - Part 2

Extending the article Indian Banks are in for a tough time, I am giving here the list of companies in BSE 500 which may face severe pressure going forward paying their debt:

Company	Sector	Debt
Alok Industries	Textiles	5767
Asahi India	Infrastructure	1391
Bhushan Steel	Steel	5718
Era Constructions	Infrastructure	1447
Essar Oil	Refinery	10015
GTL Infrastructure	Infrastructure	2475
Hotel Leela	Hotels	2035
Ispat Industries	Steel	7225
Jaiprakash Associates	Infrastructure	8234
Jet Airways	Airline	12015
Jindal Stainless	Steel	4290
Orchid Chemicals	Chemicals	1953
Strides Arcolab	Pharmaceuticals	1063
Unitech	Real Estate	8117
Varun Shipping	Shipping	2200

Let's see who defaults first. The list only includes companies with debt more than 1K Crore. Asahi India, Alok Industries, Era and Strides are repeated from BSE SMALL CAP.

Will blindly following Buffett help?

I would like to point out the difference of investing in US and India. Buffett's investment in two sectors - namely Publishing and Retail have been the most profitable. Buffett even remembers a missed opportunity - WalMart - in 1996 which caused a loss of profit of more than $10 Billion to Berkshire Hathaway. The Washington Post Company has been the investment of Buffett's life.

When I compared the performances of Indian publishing and retail companies, I feel the companies are not investment grade except few. Taking the retail first, Indiabulls Retails Services, Shopper's Stop made losses last quarter (Indiabulls Retails previously known as Pyramid Retail has never made profits) and Pantaloon Retail had an interest payment of 68 Cr compared to net profit of 36 Cr. Only Titan, Trent and Provogue are spared (of which Titan and Provogue are part of the famous R's portfolio). This may be due to high cost of Real Estate and high interest rates. In publishing ROCE's of Jagran Prakashan, Deccan Chronicle Holdings, HT Media and Infomedia are nothing to write home about. So if Buffett had been an Indian, he would have stayed away from these businesses.

The lesson is "Do Your Homework".

Indian Banks are in for a tough time

After the slowdown comes default. I am talking about lending of banks to corporates. I went through BSE SMALL CAP index companies to find out which of the companies are vulnerable and can default on their debts. Following is the list:

Company	Sector	Debt
Abhishek Industries	Textiles	1285.59
Alok Industries	Textiles	5767.31
Ankur Drugs	Phramaceuticals	618.14
Asahi India	Glass	1391.43
Bajaj Hindustan Sugar	Sugar	919.42
Era Infra	Infrastructure	1447.09
Piramal Glass	Glass	732.3
Rajasthan Spinning & Weaving Mills	Textiles	1064.41
Stride Arcolab	Pharmaceuticals	1062.77

I have included only those with debt more than 500 Cr. There are many with debts between 250 and 500 Cr. And also notice that these are small companies in BSE SMALL CAP and not in BSE 500. Similar examples will be found in BSE 500 too but might be lesser. The banks which would have lent to these companies will see their NPAs rise in the next one year. Most of them are from beaten down sectors like textiles, sugar and Infrastructure. I will keep track of these companies.

Graham would love this market

One of the criterion for choosing a company to invest in for Graham was that the price is below 2/3rd of the net working capital (cash or net worth + inventory - debt). I wasn't able to collect the inventory but just by looking at cash - debt, I found that out of 557 companies in BSE SMALL CAP index, 54 was meeting Graham criterion. Some of them are,

Company Name
Aftek
Ahmednagar Forgings
Andhra Petro
Avaya Global
Balasore Allyos
BLB
BSEL Infra
Carol Info
Consolidated Finvest
D-Link India
Dhanus Tech
G V Films
Ganesh Housing
Hexaware
Hinduja Ventures
HTMT Global
ITD Cementation
Jindal Photo
Jindal Polyfilm
Jindal Southwest Holdings
Jupitor Bioscience
Kernex Micro
Kolte Patil
Kothari Products
Krishna Lifestyle
Llyod Electric & Eng
Logix Micro
Lok Housing
Maharastra Scooters
Manaksia
Mascon Global
Megasoft
Micro Inks
Midday Multimedia
Nitco Tiles
Om Metal Infra
House of Pearl Fashion
Prajay Engineers
Prime Securities
Prithvi Info
Saregama India
Sasken Communication
SEAMAC
Silverline
Suraj Diamonds
Sujana Tower
Technocraft
Teledata
Triton Corp
Vaibhav Gems
Vakrangee Software
Vikas WSP
Vimta Labs
Zylog System

Some of these names like Aftek, Silverline, Teledata, are untouchables since they do not have a good history. But Lloyd Electric, Sasken, Vimta Labs, Vaibhav Gems, Micro Inks, Hexaware, Avaya Global, D-Link India were renowned names once. I haven't looked at these companies' P&L account to know whether the intrinsic value of the company is increasing or decreasing, but the running business of these companies is available for free.

Are stock markets efficient?

I would like to describe story of a company named Gulf Oil Corporation. The company had following consolidated profit/loss account in the last 5 years:

Year	Revenue	Profit
2004	415.51	22.62
2005	473.41	17.9
2006	507.25	15.59
2007	668.66	11.05
2008	838.16	36.77

At the height of 2003-2008 bull run in May 2006, the market capitalization of the company was around 3385 Cr, the same is around 231 Cr after a split of 5:1 and price correcting to INR 30. What the f**k? I don't know if any real estate is involved in this. The same is the case for MMTC. MMTC hardly had profits of around 200 Cr last year but its market capitalization was 2.84 lakh Cr (more than ONGC which earned profits of 20000 Cr last year) in November 2007. Even today it has a market cap of around 65000 Cr, this is more than ITC which earned 3200 Cr as profits last year. If the market has overpaid for these stocks on upside, it is bound to underpay for many other stocks on the downside. Be ready to buy those.

Something out of the box

There is gloom and doom everywhere. In this kind of time, I want to stick my neck out and say Sensex will touch 12500 (Nifty 3800) in the next 9 months, i.e. by July 2009.

Will history repeat - Part II ?

On May 22, 2008 I wrote an article about past Nifty levels with respect to its P/E (Will history repeat?). The fact is that I assumed that the bottom for the market would be reached in a span of 18 months but this correction came out to be much severe than anticipated. It has been only 10 months and the Nifty has reached a P/E of 13.15 on 19 October at a level of 3074.35, EPS being 233.79. If past is any indication and this quarter's earnings do not give much boost to Nifty EPS, than the bottom may come at around 2450-2535 at a P/E of 10.48/10.85. Past is just an indicator and history may be re-written, i.e. Nifty may go below P/E of 10 and reach 2000. Panic situation has started to appear on the faces of investors, brokers and analysts. People have started thanking God that they sold some stocks at 15-20K on Sensex. Everybody has started predicting new low levels for Sensex ranging from 7K to 8.5K. There is blood everywhere. I remember at this stage a statement made by Mr. Buffett in an interview with Forbes magazine in 1973 when Dow went to a P/E of 6-7. When asked how he feels right now, Buffett replied, "An oversexed guy in a whorehouse". Every value investor should feel the same right now in India.