SEC (Securities and Exchange Commission) agrees with me!!!

Please read the title again. The SEC here is the securities and exchange commission, the counterpart of SEBI in the US. Am I kidding? No. Read the article here. Exactly one year and three months back, I had pointed it out that Buffett has made two mistakes and not one. It is not just Conoco Phillips but also Kraft which was a mistake by Warren Buffett. SEC has sent a letter to Berkshire Hathway asking why the losses in Kraft have not been written down and the company is still holding them at purchase price? The CFO has replied that they believe that the share price would recover above their buying price in one or two years. So Berkshire do not get any capital gains for four-five years since the buying of Kraft took place somewhere in 2006-07. Even Buffett is not perfect.

I don't want to know the price of the stock prior to my analysis. I want to do the work and estimate a value for the stock and then compare that to the current offering price. If I know the price in advance it may influence my analysis. - Warren Buffett

Bull Market Mania is back

I have written about good and bad buy-backs in the past. Recently there were some more announcements that didn't make sense to me:

1. Lakshmi Machine Works announced to buy-back shares at a maximum price of INR 2045 per share aggregating an amount not exceeding INR 226.71 Crore. 
2. CRISIL announced to buy-back shares at a maximum price of INR 6500 at an aggregate amount not exceeding INR 80 Crore

According to me, both these buy-backs do not make sense since they are at a much higher P/B ratio at around 3 times for LMW and 12 times for CRISIL, much higher P/E ratio, i.e. more than 20 times for both the companies and much lower dividend yield, less than 2% for both. If buy-backs happen at or around book-value, the book-value of the rest of the shares increase or remain same which is positive for the company over long term. CRISIL's share price is hovering near life-time high and that of LMW is also not that cheap. These are not the times to buy-back shares. Investor wealth is seriously getting damaged here. A dividend distribution would have made more sense for both the companies even after DDT.

Principle for the untrained security buyer: Do no put money in a low-grade enterprise on any terms.
Principle for the securities analyst: Nearly every issue might conceivably be cheap in one price range and dear in another. - Benjamin Graham

Is banking crisis very near in India?

Markets are more insane at two times, near the top and near the bottom. Right now the markets does not look like near the bottom. So we can conclude that the former is a more likely scenario. The recent run-up in Sensex and Nifty has mostly been fueled by two sectors having a big weight in both the indices, Banks and IT. Since IT is something difficult to analyze, I am trying to find the insanity of Mr Market in valuing banks. Consider following companies from BSE500

Company	Debt March 2010	Networth March 2010	EBITDA (TTM)	Interest Payment (TTM)
3i Infotech	1608.1	895.1	274.06	98.97
Aban Offshore	3153.15	2172.93	868.96	336.85
ABG Shipyard	2897.44	1122	503.55	158.96
Adhunik Metallic	1218.49	615.5	273.09	121.61
Adani Enterprises	3471.31	1970.1	489.3	177.57
Alok Industries	8509.68	2716.02	1372.9	606.39
Amtek Auto	3352.51	2592.7	491.24	113.6
Arvind	1870.58	1421.06	341.18	164.71
Bajaj Hindusthan	3075.15	2293.67	630.16	207.38
Bharti Shipyard	2292.8	850.83	329.15	125.38
Dalmia Cement	2850.41	1377.65	417.64	196.13
DLF	12637.86	12830.01	2153.66	949.22
Era Infra	2482.03	1456.59	708.13	271.01
Essar Oil	10353.73	4673.65	1506	1193
Ispat Industries	7351.05	2031.88	1616.95	1017.87
Jaiprakash Associates	17908.71	8500.72	2985.64	1161.84
Jet Airways	13896.98	2641.98	1638.52	1023.88
Kingfisher Airlines	5665.56	-2125.34	-462.73	1247.33
Mercator Lines	1473.47	1053.94	183.03	91.97
Moser Baer	2183.43	1692.02	508.3	183.92

and there are many more like Videocon, SKumars, Rei Agro, Shiv Vani, which makes my fingers tired. We are talking about debts to the tune of more than 2 lakh Crore, which are at stake here. Most of the above companies' net worth are below their debt. All are running highly leveraged business. Interest cover (EBITDA/Interest) has fallen below 4 for most of the companies and are near 2-3 in the latest quarter. This at a time when interest rates in India are at historically low. Just 50% hike in interest rates (i.e. from 7% to say 10.5%) would make it difficult many of the companies to pay their interest. This combined with a hit to profit margins may result a big blow to Indian companies and finally to Indian banks. Be ready for a jolt.

Security analysis does not seek to determine exactly what is the intrinsic value of a given security. It needs only to establish that the value is considerably higher or considerably lower than the market price. - Benjamin Graham

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