My notes on Allahabad bank
About
Allahabad bank is one of the oldest banks in India with over 2000 branches. The bank’s branch network is predominant in UP, Bihar and other northern parts of the country. The bank also has 47 specialised branches for various business activities such as Industrial finance, Collection service, Treasury management etc. The Bank is a PSU bank
The bank was a basket case a few years back. I was reading a research report when the bank came out with an IPO in 2002. The bank had NPA of 10.5% which was actually a reduction from 15.1% in 1998. So technically the bank had a zero networth till 2002. The bank has improved its performance since then.
Financials
The Bank has improved its financials substantially in the last few years. The following Key parameters of the Bank have shown improvements from 2002 to 2007
ROE – 11.2 % to 22%
CAR – From 10.5% to 13%
Net NPA – from 10.5% to 0.9%
ROA – From 0.6% to 1.3%
Absolute Net NPA – from 1160 Cr to 315 Cr
Credit deposit ratio – from 48% to 65%
Income growth has been 15%+ for the last 5 years
Net profit has also grown by 20%+ per annum over the last 5 years
The following financial numbers have remained stable or not shown much of an improvement
Other income as a percentage of total assets
Provision ratio has dropped to 70%
Yield on asset – In line with fall in rates over the past few years.
Positives
- The key indicators such NPA, ROE, CAR, ROA, Credit deposit ratio, income and netprofit growth are good for the bank.
- The bank has been expanding its branch network and also getting into the international markets. In addition the bank has kept its NPA’s low in percentage terms and absolute level.
- The bank is also increasing the other income component. The other income which comprises of fee income, trading etc has grown at a much faster rate this year as compared to the Net interest income.
- Operating costs as a percentage of total income has dropped mainly due to reduction in manpower costs. The bank has thus become more efficient in the past few years.
Risks
The biggest risk for the bank is political interference. As the majority shareholder is our government, you can never be sure what hairbrained scheme they will come up with. In the past there have been loan melas, loan writeoff etc. This has reduced in the last few years, but you never know.
In addition the NPA are controlled. However the bank operates in UP, bihar etc. There is a small risk of the rise in the NPA.
Comparitive Valuation
The bank is currently selling at a PE of around 5 and a P/B of around 0.9. On a comparitive basis SBI sells for a PE of around 17 and P/B ratio of around 2.5. SBI is a bigger bank, but on Key parameters such as ROE (around 18% ) , Growth rates (net profit around 8% for last 5 years) etc is not much better than Allahabad bank.
The other top notch bank HDFC is priced at around 35 time PE and P/B of around 6.5. On certain parameters such NPA and growth the bank is ahead of Allahabad bank, however ROE is higher for Allahabad bank. Finally the market recognizes the qualilty of HDFC bank’s management and performance and has priced it accordingly
Conclusion
Allahabad bank is one those non-glamorous, dull stocks. However key to investing is not how sexy the stock is or how much sizzle it has, but whether you can buy a stock at a discount to intrinsic value.
Personally I feel the stock is a bit undervalued, however I have yet to make up my mind on it . I don’t see an immediate catalyst to unlock the value, however if management continue to perform as it has in the past 4-5 years, the returns should be decent.
Please see disclaimer
Monday, October 29, 2007
Allahabad Bank
My notes on Allahabad bank
About
Allahabad bank is one of the oldest banks in India with over 2000 branches. The bank’s branch network is predominant in UP, Bihar and other northern parts of the country. The bank also has 47 specialised branches for various business activities such as Industrial finance, Collection service, Treasury management etc. The Bank is a PSU bank
The bank was a basket case a few years back. I was reading a research report when the bank came out with an IPO in 2002. The bank had NPA of 10.5% which was actually a reduction from 15.1% in 1998. So technically the bank had a zero networth till 2002. The bank has improved its performance since then.
Financials
The Bank has improved its financials substantially in the last few years. The following Key parameters of the Bank have shown improvements from 2002 to 2007
ROE – 11.2 % to 22%
CAR – From 10.5% to 13%
Net NPA – from 10.5% to 0.9%
ROA – From 0.6% to 1.3%
Absolute Net NPA – from 1160 Cr to 315 Cr
Credit deposit ratio – from 48% to 65%
Income growth has been 15%+ for the last 5 years
Net profit has also grown by 20%+ per annum over the last 5 years
The following financial numbers have remained stable or not shown much of an improvement
Other income as a percentage of total assets
Provision ratio has dropped to 70%
Yield on asset – In line with fall in rates over the past few years.
Positives
- The key indicators such NPA, ROE, CAR, ROA, Credit deposit ratio, income and netprofit growth are good for the bank.
- The bank has been expanding its branch network and also getting into the international markets. In addition the bank has kept its NPA’s low in percentage terms and absolute level.
- The bank is also increasing the other income component. The other income which comprises of fee income, trading etc has grown at a much faster rate this year as compared to the Net interest income.
- Operating costs as a percentage of total income has dropped mainly due to reduction in manpower costs. The bank has thus become more efficient in the past few years.
Risks
The biggest risk for the bank is political interference. As the majority shareholder is our government, you can never be sure what hairbrained scheme they will come up with. In the past there have been loan melas, loan writeoff etc. This has reduced in the last few years, but you never know.
In addition the NPA are controlled. However the bank operates in UP, bihar etc. There is a small risk of the rise in the NPA.
Comparitive Valuation
The bank is currently selling at a PE of around 5 and a P/B of around 0.9. On a comparitive basis SBI sells for a PE of around 17 and P/B ratio of around 2.5. SBI is a bigger bank, but on Key parameters such as ROE (around 18% ) , Growth rates (net profit around 8% for last 5 years) etc is not much better than Allahabad bank.
The other top notch bank HDFC is priced at around 35 time PE and P/B of around 6.5. On certain parameters such NPA and growth the bank is ahead of Allahabad bank, however ROE is higher for Allahabad bank. Finally the market recognizes the qualilty of HDFC bank’s management and performance and has priced it accordingly
Conclusion
Allahabad bank is one those non-glamorous, dull stocks. However key to investing is not how sexy the stock is or how much sizzle it has, but whether you can buy a stock at a discount to intrinsic value.
Personally I feel the stock is a bit undervalued, however I have yet to make up my mind on it . I don’t see an immediate catalyst to unlock the value, however if management continue to perform as it has in the past 4-5 years, the returns should be decent.
Please see disclaimer
About
Allahabad bank is one of the oldest banks in India with over 2000 branches. The bank’s branch network is predominant in UP, Bihar and other northern parts of the country. The bank also has 47 specialised branches for various business activities such as Industrial finance, Collection service, Treasury management etc. The Bank is a PSU bank
The bank was a basket case a few years back. I was reading a research report when the bank came out with an IPO in 2002. The bank had NPA of 10.5% which was actually a reduction from 15.1% in 1998. So technically the bank had a zero networth till 2002. The bank has improved its performance since then.
Financials
The Bank has improved its financials substantially in the last few years. The following Key parameters of the Bank have shown improvements from 2002 to 2007
ROE – 11.2 % to 22%
CAR – From 10.5% to 13%
Net NPA – from 10.5% to 0.9%
ROA – From 0.6% to 1.3%
Absolute Net NPA – from 1160 Cr to 315 Cr
Credit deposit ratio – from 48% to 65%
Income growth has been 15%+ for the last 5 years
Net profit has also grown by 20%+ per annum over the last 5 years
The following financial numbers have remained stable or not shown much of an improvement
Other income as a percentage of total assets
Provision ratio has dropped to 70%
Yield on asset – In line with fall in rates over the past few years.
Positives
- The key indicators such NPA, ROE, CAR, ROA, Credit deposit ratio, income and netprofit growth are good for the bank.
- The bank has been expanding its branch network and also getting into the international markets. In addition the bank has kept its NPA’s low in percentage terms and absolute level.
- The bank is also increasing the other income component. The other income which comprises of fee income, trading etc has grown at a much faster rate this year as compared to the Net interest income.
- Operating costs as a percentage of total income has dropped mainly due to reduction in manpower costs. The bank has thus become more efficient in the past few years.
Risks
The biggest risk for the bank is political interference. As the majority shareholder is our government, you can never be sure what hairbrained scheme they will come up with. In the past there have been loan melas, loan writeoff etc. This has reduced in the last few years, but you never know.
In addition the NPA are controlled. However the bank operates in UP, bihar etc. There is a small risk of the rise in the NPA.
Comparitive Valuation
The bank is currently selling at a PE of around 5 and a P/B of around 0.9. On a comparitive basis SBI sells for a PE of around 17 and P/B ratio of around 2.5. SBI is a bigger bank, but on Key parameters such as ROE (around 18% ) , Growth rates (net profit around 8% for last 5 years) etc is not much better than Allahabad bank.
The other top notch bank HDFC is priced at around 35 time PE and P/B of around 6.5. On certain parameters such NPA and growth the bank is ahead of Allahabad bank, however ROE is higher for Allahabad bank. Finally the market recognizes the qualilty of HDFC bank’s management and performance and has priced it accordingly
Conclusion
Allahabad bank is one those non-glamorous, dull stocks. However key to investing is not how sexy the stock is or how much sizzle it has, but whether you can buy a stock at a discount to intrinsic value.
Personally I feel the stock is a bit undervalued, however I have yet to make up my mind on it . I don’t see an immediate catalyst to unlock the value, however if management continue to perform as it has in the past 4-5 years, the returns should be decent.
Please see disclaimer
Tuesday, October 23, 2007
The frustation with Value investing
I received the following comment from amit and can completely empathize with his frustation. Instead of replying via a comment, I thought of posting it as my reply is rather long winded. My reply is after amit’s comment.
Hello Rohit,
In 2005 i passed from my engineering course and joined a software MNC.As there was too much hype about stock markets i too got lured into it and had my Demat account.
Confused why i am writing this story,please read on.The next part was to do some investing and for that i wanted to earn big and fast.My first trade was buying Reliance pre split at 830/- a share.Many said it was overvalued and i wont gain from split.I had other thoughts,i have always had a fascination for reliance and i thought i was perfectly right.In fact i was and today that 830/- has zoomed to 5000/-.
The next thing i heard was value investing.And i hate the day i heard about this whole value investing funda.I started to read blogs of value investors and plz dont take otherwise they are so sick people that right from 8000 level of sensex they are saying that the market is overvalued and market will crash and only value investors will have the final say.Today market stands tall at 17500 and value investors are as usual worried.
And after devoting so much time to value investing i feel i have missed the bus from 8000 to 17500 in a big way.Guys who had simply invested in sensex (famous) stocks have made much much more than what i have made.
May be all this value investing will come handy when the market actually crashes and go in a bear phase.Seems that is not going to happen anytime sooner.
I m sorry for myself and for most value investors i guess.Most have lost.....agree or disagree i hold my view.........
Amit agarwal.
My response
Amit
I can understand your frustation. I will not try to ‘sell’ you the concept of value investing or justify it. I think that is something one has to decide for himself.
Let me first try to clarify (per my understanding) what value investing is not. It is not a system of predicting the market. I am not sure if anyone could have forseen this rise in the stock market from 3000 to 18000 (the market was at 3000 in May 2003). One can guess that the market will do well in broad terms, but it is very difficult to predict whether the market will be at 20000 or 25000 next year.
In addition, one can only estimate (probabilistically) how over valued or undervalued is the market . See my post on the same topic here. So if someone is sure that the market will tank soon or take off, take it with a pinch of salt (value investor or otherwise)
One important point to remember is that value investing does not work all the times. Over a 8-10 year period you can do well ( I am saying can and not will), but there will be phases when you will underperform the market, especially during bull markets. This is not a new phenomenon. Value investor got killed during the 1999-2000 dotcom bubble in the US. Warren buffett who is recognized as ‘the’ investor was assumed to have lost it and the press was writing him off. So if you want to follow value investing , be prepared to look like a fool sometimes. Also if you recommend an out of favor, value stock, your friends may smile (if they are polite and don’t want to laugh at your face).
Finally value investing is buying something for less than what it is worth. What can be more rational than buying something for less than it is worth…we buy all other stuff that way …except maybe stocks. The approach is simple but it is not easy. On the contrary it is emotionally very taxing. I have gone through the same phase myself. I started off in 1999-2000. I did not have experience then and saw my portfolio bleed as the market tanked. The stocks which I though were cheap, became cheaper …can you believe that concor sold at 5 times PE in 2003, blue star at 5 times and so on.
I was not able to understand the reason why the undervalued stocks I was holding were not appreciating then and why no analyst was even analysing or recommending them. It took 2-3 years for the stocks to be recognized and the value to be realised.
I have not regretted being a value investor over the last 10 years. I chased IT stocks in 2000 and lost money on that. I have found value investing to be a rational approach and from personal experience, a profitable one too.
I agree the last 3-4 years have been tough for value investors, where you may have lagged the market. Will it end soon and then everyone will convert to value investing and value investors will have the last laugh? I don’t know and frankly not concerned about it. I just prefer to follow a logical and rational approach, which is what value investing is about.
I would also recommend you to read this article by micheal mauboussin on process v/s outcome . See the matrix closely and I hope you realize that even when you follow a good process, the outcome will not always be favourable (but over time favourable)
One last suggestion – try to invest some portion of your portfolio in an index fund or a good mutual fund while you experiment with various investing styles and pick one eventually. Maybe that will reduce the regret.
Hello Rohit,
In 2005 i passed from my engineering course and joined a software MNC.As there was too much hype about stock markets i too got lured into it and had my Demat account.
Confused why i am writing this story,please read on.The next part was to do some investing and for that i wanted to earn big and fast.My first trade was buying Reliance pre split at 830/- a share.Many said it was overvalued and i wont gain from split.I had other thoughts,i have always had a fascination for reliance and i thought i was perfectly right.In fact i was and today that 830/- has zoomed to 5000/-.
The next thing i heard was value investing.And i hate the day i heard about this whole value investing funda.I started to read blogs of value investors and plz dont take otherwise they are so sick people that right from 8000 level of sensex they are saying that the market is overvalued and market will crash and only value investors will have the final say.Today market stands tall at 17500 and value investors are as usual worried.
And after devoting so much time to value investing i feel i have missed the bus from 8000 to 17500 in a big way.Guys who had simply invested in sensex (famous) stocks have made much much more than what i have made.
May be all this value investing will come handy when the market actually crashes and go in a bear phase.Seems that is not going to happen anytime sooner.
I m sorry for myself and for most value investors i guess.Most have lost.....agree or disagree i hold my view.........
Amit agarwal.
My response
Amit
I can understand your frustation. I will not try to ‘sell’ you the concept of value investing or justify it. I think that is something one has to decide for himself.
Let me first try to clarify (per my understanding) what value investing is not. It is not a system of predicting the market. I am not sure if anyone could have forseen this rise in the stock market from 3000 to 18000 (the market was at 3000 in May 2003). One can guess that the market will do well in broad terms, but it is very difficult to predict whether the market will be at 20000 or 25000 next year.
In addition, one can only estimate (probabilistically) how over valued or undervalued is the market . See my post on the same topic here. So if someone is sure that the market will tank soon or take off, take it with a pinch of salt (value investor or otherwise)
One important point to remember is that value investing does not work all the times. Over a 8-10 year period you can do well ( I am saying can and not will), but there will be phases when you will underperform the market, especially during bull markets. This is not a new phenomenon. Value investor got killed during the 1999-2000 dotcom bubble in the US. Warren buffett who is recognized as ‘the’ investor was assumed to have lost it and the press was writing him off. So if you want to follow value investing , be prepared to look like a fool sometimes. Also if you recommend an out of favor, value stock, your friends may smile (if they are polite and don’t want to laugh at your face).
Finally value investing is buying something for less than what it is worth. What can be more rational than buying something for less than it is worth…we buy all other stuff that way …except maybe stocks. The approach is simple but it is not easy. On the contrary it is emotionally very taxing. I have gone through the same phase myself. I started off in 1999-2000. I did not have experience then and saw my portfolio bleed as the market tanked. The stocks which I though were cheap, became cheaper …can you believe that concor sold at 5 times PE in 2003, blue star at 5 times and so on.
I was not able to understand the reason why the undervalued stocks I was holding were not appreciating then and why no analyst was even analysing or recommending them. It took 2-3 years for the stocks to be recognized and the value to be realised.
I have not regretted being a value investor over the last 10 years. I chased IT stocks in 2000 and lost money on that. I have found value investing to be a rational approach and from personal experience, a profitable one too.
I agree the last 3-4 years have been tough for value investors, where you may have lagged the market. Will it end soon and then everyone will convert to value investing and value investors will have the last laugh? I don’t know and frankly not concerned about it. I just prefer to follow a logical and rational approach, which is what value investing is about.
I would also recommend you to read this article by micheal mauboussin on process v/s outcome . See the matrix closely and I hope you realize that even when you follow a good process, the outcome will not always be favourable (but over time favourable)
One last suggestion – try to invest some portion of your portfolio in an index fund or a good mutual fund while you experiment with various investing styles and pick one eventually. Maybe that will reduce the regret.
please feel free to leave your response to amit's points in the comments
The frustation with Value investing
I received the following comment from amit and can completely empathize with his frustation. Instead of replying via a comment, I thought of posting it as my reply is rather long winded. My reply is after amit’s comment.
Hello Rohit,
In 2005 i passed from my engineering course and joined a software MNC.As there was too much hype about stock markets i too got lured into it and had my Demat account.
Confused why i am writing this story,please read on.The next part was to do some investing and for that i wanted to earn big and fast.My first trade was buying Reliance pre split at 830/- a share.Many said it was overvalued and i wont gain from split.I had other thoughts,i have always had a fascination for reliance and i thought i was perfectly right.In fact i was and today that 830/- has zoomed to 5000/-.
The next thing i heard was value investing.And i hate the day i heard about this whole value investing funda.I started to read blogs of value investors and plz dont take otherwise they are so sick people that right from 8000 level of sensex they are saying that the market is overvalued and market will crash and only value investors will have the final say.Today market stands tall at 17500 and value investors are as usual worried.
And after devoting so much time to value investing i feel i have missed the bus from 8000 to 17500 in a big way.Guys who had simply invested in sensex (famous) stocks have made much much more than what i have made.
May be all this value investing will come handy when the market actually crashes and go in a bear phase.Seems that is not going to happen anytime sooner.
I m sorry for myself and for most value investors i guess.Most have lost.....agree or disagree i hold my view.........
Amit agarwal.
My response
Amit
I can understand your frustation. I will not try to ‘sell’ you the concept of value investing or justify it. I think that is something one has to decide for himself.
Let me first try to clarify (per my understanding) what value investing is not. It is not a system of predicting the market. I am not sure if anyone could have forseen this rise in the stock market from 3000 to 18000 (the market was at 3000 in May 2003). One can guess that the market will do well in broad terms, but it is very difficult to predict whether the market will be at 20000 or 25000 next year.
In addition, one can only estimate (probabilistically) how over valued or undervalued is the market . See my post on the same topic here. So if someone is sure that the market will tank soon or take off, take it with a pinch of salt (value investor or otherwise)
One important point to remember is that value investing does not work all the times. Over a 8-10 year period you can do well ( I am saying can and not will), but there will be phases when you will underperform the market, especially during bull markets. This is not a new phenomenon. Value investor got killed during the 1999-2000 dotcom bubble in the US. Warren buffett who is recognized as ‘the’ investor was assumed to have lost it and the press was writing him off. So if you want to follow value investing , be prepared to look like a fool sometimes. Also if you recommend an out of favor, value stock, your friends may smile (if they are polite and don’t want to laugh at your face).
Finally value investing is buying something for less than what it is worth. What can be more rational than buying something for less than it is worth…we buy all other stuff that way …except maybe stocks. The approach is simple but it is not easy. On the contrary it is emotionally very taxing. I have gone through the same phase myself. I started off in 1999-2000. I did not have experience then and saw my portfolio bleed as the market tanked. The stocks which I though were cheap, became cheaper …can you believe that concor sold at 5 times PE in 2003, blue star at 5 times and so on.
I was not able to understand the reason why the undervalued stocks I was holding were not appreciating then and why no analyst was even analysing or recommending them. It took 2-3 years for the stocks to be recognized and the value to be realised.
I have not regretted being a value investor over the last 10 years. I chased IT stocks in 2000 and lost money on that. I have found value investing to be a rational approach and from personal experience, a profitable one too.
I agree the last 3-4 years have been tough for value investors, where you may have lagged the market. Will it end soon and then everyone will convert to value investing and value investors will have the last laugh? I don’t know and frankly not concerned about it. I just prefer to follow a logical and rational approach, which is what value investing is about.
I would also recommend you to read this article by micheal mauboussin on process v/s outcome . See the matrix closely and I hope you realize that even when you follow a good process, the outcome will not always be favourable (but over time favourable)
One last suggestion – try to invest some portion of your portfolio in an index fund or a good mutual fund while you experiment with various investing styles and pick one eventually. Maybe that will reduce the regret.
Hello Rohit,
In 2005 i passed from my engineering course and joined a software MNC.As there was too much hype about stock markets i too got lured into it and had my Demat account.
Confused why i am writing this story,please read on.The next part was to do some investing and for that i wanted to earn big and fast.My first trade was buying Reliance pre split at 830/- a share.Many said it was overvalued and i wont gain from split.I had other thoughts,i have always had a fascination for reliance and i thought i was perfectly right.In fact i was and today that 830/- has zoomed to 5000/-.
The next thing i heard was value investing.And i hate the day i heard about this whole value investing funda.I started to read blogs of value investors and plz dont take otherwise they are so sick people that right from 8000 level of sensex they are saying that the market is overvalued and market will crash and only value investors will have the final say.Today market stands tall at 17500 and value investors are as usual worried.
And after devoting so much time to value investing i feel i have missed the bus from 8000 to 17500 in a big way.Guys who had simply invested in sensex (famous) stocks have made much much more than what i have made.
May be all this value investing will come handy when the market actually crashes and go in a bear phase.Seems that is not going to happen anytime sooner.
I m sorry for myself and for most value investors i guess.Most have lost.....agree or disagree i hold my view.........
Amit agarwal.
My response
Amit
I can understand your frustation. I will not try to ‘sell’ you the concept of value investing or justify it. I think that is something one has to decide for himself.
Let me first try to clarify (per my understanding) what value investing is not. It is not a system of predicting the market. I am not sure if anyone could have forseen this rise in the stock market from 3000 to 18000 (the market was at 3000 in May 2003). One can guess that the market will do well in broad terms, but it is very difficult to predict whether the market will be at 20000 or 25000 next year.
In addition, one can only estimate (probabilistically) how over valued or undervalued is the market . See my post on the same topic here. So if someone is sure that the market will tank soon or take off, take it with a pinch of salt (value investor or otherwise)
One important point to remember is that value investing does not work all the times. Over a 8-10 year period you can do well ( I am saying can and not will), but there will be phases when you will underperform the market, especially during bull markets. This is not a new phenomenon. Value investor got killed during the 1999-2000 dotcom bubble in the US. Warren buffett who is recognized as ‘the’ investor was assumed to have lost it and the press was writing him off. So if you want to follow value investing , be prepared to look like a fool sometimes. Also if you recommend an out of favor, value stock, your friends may smile (if they are polite and don’t want to laugh at your face).
Finally value investing is buying something for less than what it is worth. What can be more rational than buying something for less than it is worth…we buy all other stuff that way …except maybe stocks. The approach is simple but it is not easy. On the contrary it is emotionally very taxing. I have gone through the same phase myself. I started off in 1999-2000. I did not have experience then and saw my portfolio bleed as the market tanked. The stocks which I though were cheap, became cheaper …can you believe that concor sold at 5 times PE in 2003, blue star at 5 times and so on.
I was not able to understand the reason why the undervalued stocks I was holding were not appreciating then and why no analyst was even analysing or recommending them. It took 2-3 years for the stocks to be recognized and the value to be realised.
I have not regretted being a value investor over the last 10 years. I chased IT stocks in 2000 and lost money on that. I have found value investing to be a rational approach and from personal experience, a profitable one too.
I agree the last 3-4 years have been tough for value investors, where you may have lagged the market. Will it end soon and then everyone will convert to value investing and value investors will have the last laugh? I don’t know and frankly not concerned about it. I just prefer to follow a logical and rational approach, which is what value investing is about.
I would also recommend you to read this article by micheal mauboussin on process v/s outcome . See the matrix closely and I hope you realize that even when you follow a good process, the outcome will not always be favourable (but over time favourable)
One last suggestion – try to invest some portion of your portfolio in an index fund or a good mutual fund while you experiment with various investing styles and pick one eventually. Maybe that will reduce the regret.
please feel free to leave your response to amit's points in the comments
Sunday, October 21, 2007
How to look at the market swings - Time horizon
I have been re-thinking my time horizon for investments for some time and have made some changes to it. The corresponding impact on my investment decisions and how I look at the market swings has been dramatic. My earlier time horizon was on an average 2-3 years. However I have now increased my time horizon to 10 years for my SIP component. The active portfolio component still has a horizon of 2-3 years.
I cannot understate the impact of extending or changing time horizon has on how one looks at market volatility, current events, investment ideas etc. Let me illustrate
10 year or more horizon – If you are in you 20’s, 30’s or even 40’s this time horizon makes sense. For a time horizon of 10 years, short term market movements have no importance. Over a 10 year horizon, if you are looking at index funds or well managed mutual funds, a small amount of overvaluation does not matter. These overvaluations would even out as long as one has not bought extensively during the peak. At the same time if you are investing via SIP (systematic investment plan), then during a 10 year or more period, there will be periods of recessions, market bubbles and all kinds of fluctuations. However the portfolio should perform well (see my post on the power of SIP here)
If like me, you are investing a portion of your portfolio with the above horizon, the current circus on PN notes, subprime crisis in US, oil price etc etc will not hold too much importance. If you feel that Indian companies as a whole will do well in the next 10-15 years, then find an ETF, get into an SIP and get on with other things in life
2-5 years – This is my active portfolio horizon. I tend to look for undervalued companies selling at 50% discount to intrinsic value and if the gap closes in 2-3 years, I have a 20-25% return per annum. For this horizon, current market events make a difference in the sense they provide me opportunities to buy stocks which have been beaten down for no reason. The more the better. Beyond that, it doesn’t matter whether the market will open 1% up or 1% down.
1 year or less – This is the time horizon for the aribitrage component of my portfolio. I have written about a few likely opportunities earlier. Here some corporate action such as buy back, rights issue, spin offs create an opportunity. In this component, current market level or events should not matter. The company specific developments are more important. However I have seen that sometimes market events can suddenly throw off the entire calculations and result in a loss. I am still not heavily into arbitrage and would not have more than 10% of my portfolio in it in the future.
1 day – 1 month – I do not operate in this horizon. Profitable or not, it is not my cup of tea and I do not have the stomach for it. This where all financial websites, TV channels’ and several blogs focus. In this time horizon the current PN issue, subprime in US and whether the market will open higher or lower on Monday may matter. Question to ask yourself – are the returns you are making commensurate with the effort?
All I can say is that if you decide to play this game, have the stomach for it and don’t risk too much capital.
I cannot understate the impact of extending or changing time horizon has on how one looks at market volatility, current events, investment ideas etc. Let me illustrate
10 year or more horizon – If you are in you 20’s, 30’s or even 40’s this time horizon makes sense. For a time horizon of 10 years, short term market movements have no importance. Over a 10 year horizon, if you are looking at index funds or well managed mutual funds, a small amount of overvaluation does not matter. These overvaluations would even out as long as one has not bought extensively during the peak. At the same time if you are investing via SIP (systematic investment plan), then during a 10 year or more period, there will be periods of recessions, market bubbles and all kinds of fluctuations. However the portfolio should perform well (see my post on the power of SIP here)
If like me, you are investing a portion of your portfolio with the above horizon, the current circus on PN notes, subprime crisis in US, oil price etc etc will not hold too much importance. If you feel that Indian companies as a whole will do well in the next 10-15 years, then find an ETF, get into an SIP and get on with other things in life
2-5 years – This is my active portfolio horizon. I tend to look for undervalued companies selling at 50% discount to intrinsic value and if the gap closes in 2-3 years, I have a 20-25% return per annum. For this horizon, current market events make a difference in the sense they provide me opportunities to buy stocks which have been beaten down for no reason. The more the better. Beyond that, it doesn’t matter whether the market will open 1% up or 1% down.
1 year or less – This is the time horizon for the aribitrage component of my portfolio. I have written about a few likely opportunities earlier. Here some corporate action such as buy back, rights issue, spin offs create an opportunity. In this component, current market level or events should not matter. The company specific developments are more important. However I have seen that sometimes market events can suddenly throw off the entire calculations and result in a loss. I am still not heavily into arbitrage and would not have more than 10% of my portfolio in it in the future.
1 day – 1 month – I do not operate in this horizon. Profitable or not, it is not my cup of tea and I do not have the stomach for it. This where all financial websites, TV channels’ and several blogs focus. In this time horizon the current PN issue, subprime in US and whether the market will open higher or lower on Monday may matter. Question to ask yourself – are the returns you are making commensurate with the effort?
All I can say is that if you decide to play this game, have the stomach for it and don’t risk too much capital.
I have been reading on some websites and blogs, stories of people who got into the market near the top and are now suffering losses. I can empathise with them as I have gone through the same. The problem is that most of us think we can tolerate losses, but when they really happen it is gut wrenching. The worst thing to happen is that such people get scared from the market for ever and never return back. That is definitely not good in the long term if you want to build a decent nest egg.
I think it is important for us to understand our risk tolerance and see which time horizon we want to operate in and take investment decisions accordingly. That ofcourse is easier said than done.
How to look at the market swings - Time horizon
I have been re-thinking my time horizon for investments for some time and have made some changes to it. The corresponding impact on my investment decisions and how I look at the market swings has been dramatic. My earlier time horizon was on an average 2-3 years. However I have now increased my time horizon to 10 years for my SIP component. The active portfolio component still has a horizon of 2-3 years.
I cannot understate the impact of extending or changing time horizon has on how one looks at market volatility, current events, investment ideas etc. Let me illustrate
10 year or more horizon – If you are in you 20’s, 30’s or even 40’s this time horizon makes sense. For a time horizon of 10 years, short term market movements have no importance. Over a 10 year horizon, if you are looking at index funds or well managed mutual funds, a small amount of overvaluation does not matter. These overvaluations would even out as long as one has not bought extensively during the peak. At the same time if you are investing via SIP (systematic investment plan), then during a 10 year or more period, there will be periods of recessions, market bubbles and all kinds of fluctuations. However the portfolio should perform well (see my post on the power of SIP here)
If like me, you are investing a portion of your portfolio with the above horizon, the current circus on PN notes, subprime crisis in US, oil price etc etc will not hold too much importance. If you feel that Indian companies as a whole will do well in the next 10-15 years, then find an ETF, get into an SIP and get on with other things in life
2-5 years – This is my active portfolio horizon. I tend to look for undervalued companies selling at 50% discount to intrinsic value and if the gap closes in 2-3 years, I have a 20-25% return per annum. For this horizon, current market events make a difference in the sense they provide me opportunities to buy stocks which have been beaten down for no reason. The more the better. Beyond that, it doesn’t matter whether the market will open 1% up or 1% down.
1 year or less – This is the time horizon for the aribitrage component of my portfolio. I have written about a few likely opportunities earlier. Here some corporate action such as buy back, rights issue, spin offs create an opportunity. In this component, current market level or events should not matter. The company specific developments are more important. However I have seen that sometimes market events can suddenly throw off the entire calculations and result in a loss. I am still not heavily into arbitrage and would not have more than 10% of my portfolio in it in the future.
1 day – 1 month – I do not operate in this horizon. Profitable or not, it is not my cup of tea and I do not have the stomach for it. This where all financial websites, TV channels’ and several blogs focus. In this time horizon the current PN issue, subprime in US and whether the market will open higher or lower on Monday may matter. Question to ask yourself – are the returns you are making commensurate with the effort?
All I can say is that if you decide to play this game, have the stomach for it and don’t risk too much capital.
I cannot understate the impact of extending or changing time horizon has on how one looks at market volatility, current events, investment ideas etc. Let me illustrate
10 year or more horizon – If you are in you 20’s, 30’s or even 40’s this time horizon makes sense. For a time horizon of 10 years, short term market movements have no importance. Over a 10 year horizon, if you are looking at index funds or well managed mutual funds, a small amount of overvaluation does not matter. These overvaluations would even out as long as one has not bought extensively during the peak. At the same time if you are investing via SIP (systematic investment plan), then during a 10 year or more period, there will be periods of recessions, market bubbles and all kinds of fluctuations. However the portfolio should perform well (see my post on the power of SIP here)
If like me, you are investing a portion of your portfolio with the above horizon, the current circus on PN notes, subprime crisis in US, oil price etc etc will not hold too much importance. If you feel that Indian companies as a whole will do well in the next 10-15 years, then find an ETF, get into an SIP and get on with other things in life
2-5 years – This is my active portfolio horizon. I tend to look for undervalued companies selling at 50% discount to intrinsic value and if the gap closes in 2-3 years, I have a 20-25% return per annum. For this horizon, current market events make a difference in the sense they provide me opportunities to buy stocks which have been beaten down for no reason. The more the better. Beyond that, it doesn’t matter whether the market will open 1% up or 1% down.
1 year or less – This is the time horizon for the aribitrage component of my portfolio. I have written about a few likely opportunities earlier. Here some corporate action such as buy back, rights issue, spin offs create an opportunity. In this component, current market level or events should not matter. The company specific developments are more important. However I have seen that sometimes market events can suddenly throw off the entire calculations and result in a loss. I am still not heavily into arbitrage and would not have more than 10% of my portfolio in it in the future.
1 day – 1 month – I do not operate in this horizon. Profitable or not, it is not my cup of tea and I do not have the stomach for it. This where all financial websites, TV channels’ and several blogs focus. In this time horizon the current PN issue, subprime in US and whether the market will open higher or lower on Monday may matter. Question to ask yourself – are the returns you are making commensurate with the effort?
All I can say is that if you decide to play this game, have the stomach for it and don’t risk too much capital.
I have been reading on some websites and blogs, stories of people who got into the market near the top and are now suffering losses. I can empathise with them as I have gone through the same. The problem is that most of us think we can tolerate losses, but when they really happen it is gut wrenching. The worst thing to happen is that such people get scared from the market for ever and never return back. That is definitely not good in the long term if you want to build a decent nest egg.
I think it is important for us to understand our risk tolerance and see which time horizon we want to operate in and take investment decisions accordingly. That ofcourse is easier said than done.
Tuesday, October 16, 2007
Banking
I have written earlier on banks
On valuation approach of banks
More thoughts on valuation of banks
Various factors to evaluate banks
Margin of safety and Banks
I recently posted on a Financial services company ‘sundaram Finance’ which has a business model similar to banks.
I have been analysing banks as a group, trying to understand their business models better. I found the following articles useful to understand the working of a bank
Asset liability management function of banks
Various factors in evaluating banks
NPA and various factors in understanding Bank NPA’s
A few additional thoughts on the business model of banks
- The traditional lending business of banks is now becoming a smaller portion of the business. The ‘other income’ portion which comes from various activities such as distribution of financial products, cash management etc is now becoming more important as this income is not sensitive to interest rate changes and requires less capital
- The % of other income to total profit is higher for the newer private banks than the PSU banks. In addition lower NPA and more profitable growth has resulted in a higher valuation for private banks such as HDFC, ICICI etc
- Banks have been consistently increasing the proportion of their variable rate products. This enables the bank to reduce their Asset liability mismatch.
- Banks profits, especially of PSU banks were subdued last year due to the increase in deposit rates. However PSU bank assets tend to follow the higher rates with a lag. Private banks are able to manage these fluctuations better through various derivative products. I think PSU banks are still lagging in this field. As a result it is likely that several PSU banks will see an expansion of margins as deposit rates stabilize and the Asset yields improve
- NPA’s in most PSU banks though higher than Private banks are still better than a few years ago
I have done a preliminary analysis of the various banks and have found Private sector banks to be fairly or in some cases slightly over-valued. However there are some PSU banks such as Allahabad bank, which I feel are undervalued. I will be posting on Allahabad bank and a few other banks later.
On valuation approach of banks
More thoughts on valuation of banks
Various factors to evaluate banks
Margin of safety and Banks
I recently posted on a Financial services company ‘sundaram Finance’ which has a business model similar to banks.
I have been analysing banks as a group, trying to understand their business models better. I found the following articles useful to understand the working of a bank
Asset liability management function of banks
Various factors in evaluating banks
NPA and various factors in understanding Bank NPA’s
A few additional thoughts on the business model of banks
- The traditional lending business of banks is now becoming a smaller portion of the business. The ‘other income’ portion which comes from various activities such as distribution of financial products, cash management etc is now becoming more important as this income is not sensitive to interest rate changes and requires less capital
- The % of other income to total profit is higher for the newer private banks than the PSU banks. In addition lower NPA and more profitable growth has resulted in a higher valuation for private banks such as HDFC, ICICI etc
- Banks have been consistently increasing the proportion of their variable rate products. This enables the bank to reduce their Asset liability mismatch.
- Banks profits, especially of PSU banks were subdued last year due to the increase in deposit rates. However PSU bank assets tend to follow the higher rates with a lag. Private banks are able to manage these fluctuations better through various derivative products. I think PSU banks are still lagging in this field. As a result it is likely that several PSU banks will see an expansion of margins as deposit rates stabilize and the Asset yields improve
- NPA’s in most PSU banks though higher than Private banks are still better than a few years ago
I have done a preliminary analysis of the various banks and have found Private sector banks to be fairly or in some cases slightly over-valued. However there are some PSU banks such as Allahabad bank, which I feel are undervalued. I will be posting on Allahabad bank and a few other banks later.
Banking
I have written earlier on banks
On valuation approach of banks
More thoughts on valuation of banks
Various factors to evaluate banks
Margin of safety and Banks
I recently posted on a Financial services company ‘sundaram Finance’ which has a business model similar to banks.
I have been analysing banks as a group, trying to understand their business models better. I found the following articles useful to understand the working of a bank
Asset liability management function of banks
Various factors in evaluating banks
NPA and various factors in understanding Bank NPA’s
A few additional thoughts on the business model of banks
- The traditional lending business of banks is now becoming a smaller portion of the business. The ‘other income’ portion which comes from various activities such as distribution of financial products, cash management etc is now becoming more important as this income is not sensitive to interest rate changes and requires less capital
- The % of other income to total profit is higher for the newer private banks than the PSU banks. In addition lower NPA and more profitable growth has resulted in a higher valuation for private banks such as HDFC, ICICI etc
- Banks have been consistently increasing the proportion of their variable rate products. This enables the bank to reduce their Asset liability mismatch.
- Banks profits, especially of PSU banks were subdued last year due to the increase in deposit rates. However PSU bank assets tend to follow the higher rates with a lag. Private banks are able to manage these fluctuations better through various derivative products. I think PSU banks are still lagging in this field. As a result it is likely that several PSU banks will see an expansion of margins as deposit rates stabilize and the Asset yields improve
- NPA’s in most PSU banks though higher than Private banks are still better than a few years ago
I have done a preliminary analysis of the various banks and have found Private sector banks to be fairly or in some cases slightly over-valued. However there are some PSU banks such as Allahabad bank, which I feel are undervalued. I will be posting on Allahabad bank and a few other banks later.
On valuation approach of banks
More thoughts on valuation of banks
Various factors to evaluate banks
Margin of safety and Banks
I recently posted on a Financial services company ‘sundaram Finance’ which has a business model similar to banks.
I have been analysing banks as a group, trying to understand their business models better. I found the following articles useful to understand the working of a bank
Asset liability management function of banks
Various factors in evaluating banks
NPA and various factors in understanding Bank NPA’s
A few additional thoughts on the business model of banks
- The traditional lending business of banks is now becoming a smaller portion of the business. The ‘other income’ portion which comes from various activities such as distribution of financial products, cash management etc is now becoming more important as this income is not sensitive to interest rate changes and requires less capital
- The % of other income to total profit is higher for the newer private banks than the PSU banks. In addition lower NPA and more profitable growth has resulted in a higher valuation for private banks such as HDFC, ICICI etc
- Banks have been consistently increasing the proportion of their variable rate products. This enables the bank to reduce their Asset liability mismatch.
- Banks profits, especially of PSU banks were subdued last year due to the increase in deposit rates. However PSU bank assets tend to follow the higher rates with a lag. Private banks are able to manage these fluctuations better through various derivative products. I think PSU banks are still lagging in this field. As a result it is likely that several PSU banks will see an expansion of margins as deposit rates stabilize and the Asset yields improve
- NPA’s in most PSU banks though higher than Private banks are still better than a few years ago
I have done a preliminary analysis of the various banks and have found Private sector banks to be fairly or in some cases slightly over-valued. However there are some PSU banks such as Allahabad bank, which I feel are undervalued. I will be posting on Allahabad bank and a few other banks later.
Saturday, October 13, 2007
How to make 6.4 lacs by investing 1000 per month
Is’nt the above title like a typical get rich quick scheme ? Frankly there is no magic in the above. The approach is very simple. The NSE or BSE index on an average has returned around 16-17% per annum for the last 10-15 years. So if one can invest via SIP (systematic investment plan) around 1000 Rs per month, it should amount to around 6.4 lacs after 10 years. This is with the assumption that the gain is evenly distributed ( @ 1.4 % per month) across the entire 120 month time period.
Ofcourse reality is not that convinient. However volatility generally helps in improving the overall returns in an SIP plan. So if one can maintain the discipline of investing 1000 per month irrespective of how the market is doing in the short term, it will work out in the long run.
Let me give a few scenarios (investing 1000/ month)
Anyone can follow this approach by regularly investing in an ETF or an index fund for the long term and come out well. Even better if you can find a mutual fund which can beat the market by 2-3% point.
So where’s the catch? well there is none really. The main problem is us. Think of it … where is the sex appeal or sizzle in this strategy. If you discuss this with your friend, do you think you will get anything more than a yawn? Who is going to be impressed with this approach ?
I know what comes to everyone’s mind (mine included), namely – I am a better investor. I can make 25% per annum and have beaten the daylights out of the market for last 2 years. Who wants this boring strategy, when I can do all kinds of fancy stuff, have fun at it and boast about it too. Maybe its true, but can you be sure?
So the question is – is it better to follow a known strategy and build a decent nest egg in the next 10-15 years, or try for the moon which may or may not happen.
I am not different than anyone else and tend to follow both approaches at the same time. I prefer not to discount a simple and effective approach. As a result a portion of my portfolio is always indexed and in SIP.
Ofcourse reality is not that convinient. However volatility generally helps in improving the overall returns in an SIP plan. So if one can maintain the discipline of investing 1000 per month irrespective of how the market is doing in the short term, it will work out in the long run.
Let me give a few scenarios (investing 1000/ month)
Anyone can follow this approach by regularly investing in an ETF or an index fund for the long term and come out well. Even better if you can find a mutual fund which can beat the market by 2-3% point.
So where’s the catch? well there is none really. The main problem is us. Think of it … where is the sex appeal or sizzle in this strategy. If you discuss this with your friend, do you think you will get anything more than a yawn? Who is going to be impressed with this approach ?
I know what comes to everyone’s mind (mine included), namely – I am a better investor. I can make 25% per annum and have beaten the daylights out of the market for last 2 years. Who wants this boring strategy, when I can do all kinds of fancy stuff, have fun at it and boast about it too. Maybe its true, but can you be sure?
So the question is – is it better to follow a known strategy and build a decent nest egg in the next 10-15 years, or try for the moon which may or may not happen.
I am not different than anyone else and tend to follow both approaches at the same time. I prefer not to discount a simple and effective approach. As a result a portion of my portfolio is always indexed and in SIP.
How to make 6.4 lacs by investing 1000 per month
Is’nt the above title like a typical get rich quick scheme ? Frankly there is no magic in the above. The approach is very simple. The NSE or BSE index on an average has returned around 16-17% per annum for the last 10-15 years. So if one can invest via SIP (systematic investment plan) around 1000 Rs per month, it should amount to around 6.4 lacs after 10 years. This is with the assumption that the gain is evenly distributed ( @ 1.4 % per month) across the entire 120 month time period.
Ofcourse reality is not that convinient. However volatility generally helps in improving the overall returns in an SIP plan. So if one can maintain the discipline of investing 1000 per month irrespective of how the market is doing in the short term, it will work out in the long run.
Let me give a few scenarios (investing 1000/ month)
Anyone can follow this approach by regularly investing in an ETF or an index fund for the long term and come out well. Even better if you can find a mutual fund which can beat the market by 2-3% point.
So where’s the catch? well there is none really. The main problem is us. Think of it … where is the sex appeal or sizzle in this strategy. If you discuss this with your friend, do you think you will get anything more than a yawn? Who is going to be impressed with this approach ?
I know what comes to everyone’s mind (mine included), namely – I am a better investor. I can make 25% per annum and have beaten the daylights out of the market for last 2 years. Who wants this boring strategy, when I can do all kinds of fancy stuff, have fun at it and boast about it too. Maybe its true, but can you be sure?
So the question is – is it better to follow a known strategy and build a decent nest egg in the next 10-15 years, or try for the moon which may or may not happen.
I am not different than anyone else and tend to follow both approaches at the same time. I prefer not to discount a simple and effective approach. As a result a portion of my portfolio is always indexed and in SIP.
Ofcourse reality is not that convinient. However volatility generally helps in improving the overall returns in an SIP plan. So if one can maintain the discipline of investing 1000 per month irrespective of how the market is doing in the short term, it will work out in the long run.
Let me give a few scenarios (investing 1000/ month)
Anyone can follow this approach by regularly investing in an ETF or an index fund for the long term and come out well. Even better if you can find a mutual fund which can beat the market by 2-3% point.
So where’s the catch? well there is none really. The main problem is us. Think of it … where is the sex appeal or sizzle in this strategy. If you discuss this with your friend, do you think you will get anything more than a yawn? Who is going to be impressed with this approach ?
I know what comes to everyone’s mind (mine included), namely – I am a better investor. I can make 25% per annum and have beaten the daylights out of the market for last 2 years. Who wants this boring strategy, when I can do all kinds of fancy stuff, have fun at it and boast about it too. Maybe its true, but can you be sure?
So the question is – is it better to follow a known strategy and build a decent nest egg in the next 10-15 years, or try for the moon which may or may not happen.
I am not different than anyone else and tend to follow both approaches at the same time. I prefer not to discount a simple and effective approach. As a result a portion of my portfolio is always indexed and in SIP.
Saturday, October 06, 2007
Analysis - Sundaram Finance
About
SF(sundaram finance) is an NBFC promoted by the same group which controls companies such sundaram clayton etc. The company is the business of hire purchase and leasing in the automotive sector. In addition the company has subsidiaries for housing finance, asset management, Infotech, insurance etc.
Financials
The company reported a consolidated revenue of 1100 crs with a growth of around 25%. The company has had decent topline and bottom line growth in double digits for the last 5-6 years. The ROE has improved around 10% to almost 15% now. The company also has extremely low NPA of around 0.5% and CAR ratio in excess of 12%.
The company has AAA ratings and has been able to get funding from banks and other institution at competitive rates.
Positives
The company is a well managed conservative company. It has show good growth in the last 5 years, with a decent ROE and low NPA. In addition the company has a strong brand name in its segment and a good distribution and marketing infrastructure which is important in the hire/purchase and lease business.
In addition the company is now expanding into new growth areas such as home finance, asset management and insurance. Several of these subsidiaries are now doing well and have turned profitable in the past few years
Risks
The core business of the company is still hire purchase and leasing in the auto sector. The auto sector has been in a growth phase in the last 5 years. As a result the company has been able to show good results and low NPA. However a downturn could slowdown the topline and bottom line and also increase the NPA’s.
The company is expanding into various financial services such as insurance, housing finance, infotech etc. These businesses are still new and have just turned profitable. However there are still risks in these businesses till they mature.
Valuation
It is important to do a sum of part valuation of the company as the company has several subsidiaries, JVs and associates. A conservative valuation would give the company a value of approximately 2000 Crs which is a 35% discount to the current mcap of 1275 Crs. An optimistic valuation would give a value of 2700 Crs which is more than double the current mcap.
To put it differently, the current mcap accounts for the parent company only and all the JV’s, subsidiary and associates are available for free.
The caveat however is that the investments in associates are mainly in group companies and it is unlikely that these holding would ever be sold. The company would be able to get good dividends from these holdings, but the full value is not likely to be realised.
SF(sundaram finance) is an NBFC promoted by the same group which controls companies such sundaram clayton etc. The company is the business of hire purchase and leasing in the automotive sector. In addition the company has subsidiaries for housing finance, asset management, Infotech, insurance etc.
Financials
The company reported a consolidated revenue of 1100 crs with a growth of around 25%. The company has had decent topline and bottom line growth in double digits for the last 5-6 years. The ROE has improved around 10% to almost 15% now. The company also has extremely low NPA of around 0.5% and CAR ratio in excess of 12%.
The company has AAA ratings and has been able to get funding from banks and other institution at competitive rates.
Positives
The company is a well managed conservative company. It has show good growth in the last 5 years, with a decent ROE and low NPA. In addition the company has a strong brand name in its segment and a good distribution and marketing infrastructure which is important in the hire/purchase and lease business.
In addition the company is now expanding into new growth areas such as home finance, asset management and insurance. Several of these subsidiaries are now doing well and have turned profitable in the past few years
Risks
The core business of the company is still hire purchase and leasing in the auto sector. The auto sector has been in a growth phase in the last 5 years. As a result the company has been able to show good results and low NPA. However a downturn could slowdown the topline and bottom line and also increase the NPA’s.
The company is expanding into various financial services such as insurance, housing finance, infotech etc. These businesses are still new and have just turned profitable. However there are still risks in these businesses till they mature.
Valuation
It is important to do a sum of part valuation of the company as the company has several subsidiaries, JVs and associates. A conservative valuation would give the company a value of approximately 2000 Crs which is a 35% discount to the current mcap of 1275 Crs. An optimistic valuation would give a value of 2700 Crs which is more than double the current mcap.
To put it differently, the current mcap accounts for the parent company only and all the JV’s, subsidiary and associates are available for free.
The caveat however is that the investments in associates are mainly in group companies and it is unlikely that these holding would ever be sold. The company would be able to get good dividends from these holdings, but the full value is not likely to be realised.
Analysis - Sundaram Finance
About
SF(sundaram finance) is an NBFC promoted by the same group which controls companies such sundaram clayton etc. The company is the business of hire purchase and leasing in the automotive sector. In addition the company has subsidiaries for housing finance, asset management, Infotech, insurance etc.
Financials
The company reported a consolidated revenue of 1100 crs with a growth of around 25%. The company has had decent topline and bottom line growth in double digits for the last 5-6 years. The ROE has improved around 10% to almost 15% now. The company also has extremely low NPA of around 0.5% and CAR ratio in excess of 12%.
The company has AAA ratings and has been able to get funding from banks and other institution at competitive rates.
Positives
The company is a well managed conservative company. It has show good growth in the last 5 years, with a decent ROE and low NPA. In addition the company has a strong brand name in its segment and a good distribution and marketing infrastructure which is important in the hire/purchase and lease business.
In addition the company is now expanding into new growth areas such as home finance, asset management and insurance. Several of these subsidiaries are now doing well and have turned profitable in the past few years
Risks
The core business of the company is still hire purchase and leasing in the auto sector. The auto sector has been in a growth phase in the last 5 years. As a result the company has been able to show good results and low NPA. However a downturn could slowdown the topline and bottom line and also increase the NPA’s.
The company is expanding into various financial services such as insurance, housing finance, infotech etc. These businesses are still new and have just turned profitable. However there are still risks in these businesses till they mature.
Valuation
It is important to do a sum of part valuation of the company as the company has several subsidiaries, JVs and associates. A conservative valuation would give the company a value of approximately 2000 Crs which is a 35% discount to the current mcap of 1275 Crs. An optimistic valuation would give a value of 2700 Crs which is more than double the current mcap.
To put it differently, the current mcap accounts for the parent company only and all the JV’s, subsidiary and associates are available for free.
The caveat however is that the investments in associates are mainly in group companies and it is unlikely that these holding would ever be sold. The company would be able to get good dividends from these holdings, but the full value is not likely to be realised.
SF(sundaram finance) is an NBFC promoted by the same group which controls companies such sundaram clayton etc. The company is the business of hire purchase and leasing in the automotive sector. In addition the company has subsidiaries for housing finance, asset management, Infotech, insurance etc.
Financials
The company reported a consolidated revenue of 1100 crs with a growth of around 25%. The company has had decent topline and bottom line growth in double digits for the last 5-6 years. The ROE has improved around 10% to almost 15% now. The company also has extremely low NPA of around 0.5% and CAR ratio in excess of 12%.
The company has AAA ratings and has been able to get funding from banks and other institution at competitive rates.
Positives
The company is a well managed conservative company. It has show good growth in the last 5 years, with a decent ROE and low NPA. In addition the company has a strong brand name in its segment and a good distribution and marketing infrastructure which is important in the hire/purchase and lease business.
In addition the company is now expanding into new growth areas such as home finance, asset management and insurance. Several of these subsidiaries are now doing well and have turned profitable in the past few years
Risks
The core business of the company is still hire purchase and leasing in the auto sector. The auto sector has been in a growth phase in the last 5 years. As a result the company has been able to show good results and low NPA. However a downturn could slowdown the topline and bottom line and also increase the NPA’s.
The company is expanding into various financial services such as insurance, housing finance, infotech etc. These businesses are still new and have just turned profitable. However there are still risks in these businesses till they mature.
Valuation
It is important to do a sum of part valuation of the company as the company has several subsidiaries, JVs and associates. A conservative valuation would give the company a value of approximately 2000 Crs which is a 35% discount to the current mcap of 1275 Crs. An optimistic valuation would give a value of 2700 Crs which is more than double the current mcap.
To put it differently, the current mcap accounts for the parent company only and all the JV’s, subsidiary and associates are available for free.
The caveat however is that the investments in associates are mainly in group companies and it is unlikely that these holding would ever be sold. The company would be able to get good dividends from these holdings, but the full value is not likely to be realised.
Monday, October 01, 2007
The Reliance effect
update : Oct 09
well, the euphoria has increased even more since i posted, which was just a few days back. Reliance and a few other stocks like L&T are the new dotcoms of 2007. I am getting a sense of deja-vu ..can see a replay of 2000 here, alteast the initial part. Soon we will have people justifying the current run-up saying how it is 'different' this time.
Personally, in this bi-polar market i can see quite a few undervalued stocks and would prefer to concentrate on them than get pulled into this frenzy.
The S&P CNX nifty (NSE index) has risen by around 13.2 % in the last one month with the main move happening after the fed rate cut on 18th. The funny thing is that all reliance stocks have shot up since then.
The following is the increase in the price of these stocks in the last one month
RIL – reliance industries – 20.5%
Reliance energy – 75%
RNRL – 115%
Reliance communication – 13.1%
Reliance Chemotex – 147%
RPL – 41%
So I guess anything with the name reliance is in a bull market. The industry does not matter, only the management should be with reliance.
I cannot figure out what is happening. There seems to be two markets now. One is in a bull phase consisting of reliance stocks and a few others, with the rest of the market more or less even. So my approach is to stay away from the overvalued stuff and hold or buy what seems undervalued. Ofcourse i am not into momentum trading, so this approach may not work for those who are into that.
Disclosure – I hold RIL and REL. So I have one portion of my portfolio galloping whereas the rest is barely moving.
well, the euphoria has increased even more since i posted, which was just a few days back. Reliance and a few other stocks like L&T are the new dotcoms of 2007. I am getting a sense of deja-vu ..can see a replay of 2000 here, alteast the initial part. Soon we will have people justifying the current run-up saying how it is 'different' this time.
Personally, in this bi-polar market i can see quite a few undervalued stocks and would prefer to concentrate on them than get pulled into this frenzy.
The S&P CNX nifty (NSE index) has risen by around 13.2 % in the last one month with the main move happening after the fed rate cut on 18th. The funny thing is that all reliance stocks have shot up since then.
The following is the increase in the price of these stocks in the last one month
RIL – reliance industries – 20.5%
Reliance energy – 75%
RNRL – 115%
Reliance communication – 13.1%
Reliance Chemotex – 147%
RPL – 41%
So I guess anything with the name reliance is in a bull market. The industry does not matter, only the management should be with reliance.
I cannot figure out what is happening. There seems to be two markets now. One is in a bull phase consisting of reliance stocks and a few others, with the rest of the market more or less even. So my approach is to stay away from the overvalued stuff and hold or buy what seems undervalued. Ofcourse i am not into momentum trading, so this approach may not work for those who are into that.
Disclosure – I hold RIL and REL. So I have one portion of my portfolio galloping whereas the rest is barely moving.
The Reliance effect
update : Oct 09
well, the euphoria has increased even more since i posted, which was just a few days back. Reliance and a few other stocks like L&T are the new dotcoms of 2007. I am getting a sense of deja-vu ..can see a replay of 2000 here, alteast the initial part. Soon we will have people justifying the current run-up saying how it is 'different' this time.
Personally, in this bi-polar market i can see quite a few undervalued stocks and would prefer to concentrate on them than get pulled into this frenzy.
The S&P CNX nifty (NSE index) has risen by around 13.2 % in the last one month with the main move happening after the fed rate cut on 18th. The funny thing is that all reliance stocks have shot up since then.
The following is the increase in the price of these stocks in the last one month
RIL – reliance industries – 20.5%
Reliance energy – 75%
RNRL – 115%
Reliance communication – 13.1%
Reliance Chemotex – 147%
RPL – 41%
So I guess anything with the name reliance is in a bull market. The industry does not matter, only the management should be with reliance.
I cannot figure out what is happening. There seems to be two markets now. One is in a bull phase consisting of reliance stocks and a few others, with the rest of the market more or less even. So my approach is to stay away from the overvalued stuff and hold or buy what seems undervalued. Ofcourse i am not into momentum trading, so this approach may not work for those who are into that.
Disclosure – I hold RIL and REL. So I have one portion of my portfolio galloping whereas the rest is barely moving.
well, the euphoria has increased even more since i posted, which was just a few days back. Reliance and a few other stocks like L&T are the new dotcoms of 2007. I am getting a sense of deja-vu ..can see a replay of 2000 here, alteast the initial part. Soon we will have people justifying the current run-up saying how it is 'different' this time.
Personally, in this bi-polar market i can see quite a few undervalued stocks and would prefer to concentrate on them than get pulled into this frenzy.
The S&P CNX nifty (NSE index) has risen by around 13.2 % in the last one month with the main move happening after the fed rate cut on 18th. The funny thing is that all reliance stocks have shot up since then.
The following is the increase in the price of these stocks in the last one month
RIL – reliance industries – 20.5%
Reliance energy – 75%
RNRL – 115%
Reliance communication – 13.1%
Reliance Chemotex – 147%
RPL – 41%
So I guess anything with the name reliance is in a bull market. The industry does not matter, only the management should be with reliance.
I cannot figure out what is happening. There seems to be two markets now. One is in a bull phase consisting of reliance stocks and a few others, with the rest of the market more or less even. So my approach is to stay away from the overvalued stuff and hold or buy what seems undervalued. Ofcourse i am not into momentum trading, so this approach may not work for those who are into that.
Disclosure – I hold RIL and REL. So I have one portion of my portfolio galloping whereas the rest is barely moving.
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