I received this excellent question from prabhakar via email and have taken the liberty of posting the reply on the blog.
Hi rohit,
I have a query that's bothering me a lot for quite some time now. Let me clarify at the outset that i believe in value investing(Buy something good way below its intrinsic value),no doubts about it.
Now i am stuck between two schools of thought here.
1) The Warren Buffett way -- Buy a "great company" that is stable, when there is temporary trouble and it is selling below its intrinsic worth. Your returns will be decent(no multibaggers here) and compounded long term it work out well for you.
2) The Rakesh Jhunjhunwala way -Buy companies that are selling below intrinsic worth but that have a huge potential to scale big. You possibly get a multibagger here or you dont get anywhere.Example would be Titan & Pantaloon retail that he bought when they were relatively unknown.
Now the question is should we sacrifice multibagger potential for something that is stable?Or should we have both types of stocks in our portfolio.Whats your opinion?Which of the two philosophies is better?
Let me know your views if you find time.
I have thought along the lines of this question for quite some time and can reply from my personal perspective. Let me caution you – The answer to this question is very personal and depends on your own skills and beliefs.
I believe both the styles are equally good and can provide good returns. I would actually extend the question to RJ or WB or Benjamin graham (BG) style or a combination of each.
Key points of each approach
There are some key elements to each of these approaches. Benjamin graham’s (BG) approach is a very quantitative approach to value investing. The selection of an undervalued company is done based on various quantitative criteria such as low PE ratio, Market cap less than net current asset etc. There is a low to almost non-existent focus on the nature and quality of business. This approach is easy to follow, low risk and requires ample diversification.
WB’s approach takes elements of Graham’s approach such as margin of safety etc. However this approach relies less on the quantitative elements of the company and more on the qualitative elements of the business such as sustainable competitive advantage. The undervaluation is due to temporary factors such as losing a customer or some scandal, which has caused the earnings to drop in the short term. However the long-term prospects are still intact and hence the company is a good bet. WB’s approach focuses on the certainty of the long-term prospects of the company.
RJ’s approach builds further on WB’s approach. Here you are looking at companies, which are not undervalued by the traditional measures such as PE, DCF etc. The value lies in the business model and what the company will develop into.
Some Indian examples
A typical graham style company would be Denso or Cheviot Company. Here the company is selling for less than cash on the books or close to it. These companies are cheap by the traditional valuation measures.
A WB type investment could be GSK consumer or Concor or maybe Asian paints. These companies have a long operating history. They have a predictable business model and some competitive advantage. It is easy to look at the long term history of the business and project it to arrive at some measure of value. This investment approach is more difficult than the Graham style investing as it depends on the qualitative aspects of the business too. However it is possible to follow this style as it has quantitative elements to it and does not require a very deep understanding of business models.
An RJ type investment could be pantaloon or titan. This approach to investing requires a very deep understanding of business models and an appreciation of the qualitative aspects of business such as management quality, addressable opportunity etc. The current numbers of the company will not help you make a decision. If you get it right, the rewards are huge.
In addition RJ is moving deeper into this style by investing in smaller and smaller companies at an early stage (VC style) where the risk-rewards are higher.
So which is it ?
For me it is the BG or WB style. My skills have not matured enough for the RJ style of investing. I have looked at titan in the past and could not see the value. The reason I could not see value was due to my own shortcomings.
You may notice that my core portfolio is based on the WB style of investing, where as the other portfolio is based on the BG style of investing. I don’t have an RJ style investment at all and it is possible that I may never reach that level to make that type of an investment.
A common mistake
Don’t get me wrong on these examples. Yes bank, ICSA, Pyramid saimira and Dish TV are some examples, which fall under the RJ style of investing. The current numbers do not show an obvious undervaluation. The value lies in the future prospects of the business. Some of these companies have a new business model and if you can figure it out correctly, then you will make it big on these stocks.
I have however stayed away from these stocks as they are outside my competency.
I have seen a lot of new investors look at RJ’s philosophy and apply it to their picks. There is nothing wrong with it if you have it figured out and have the results and confidence to follow it. However I personally would not recommend following this approach till you have the knowledge, skill and temperament to follow it.
RJ’s approach is not for the faint hearted who is not ready to do his homework. RJ's approach is easy to understand, but quite diffcult to execute and that where his genius lies.
Wednesday, October 29, 2008
Warren buffett or Rakesh Jhunjhunwala style ?
I received this excellent question from prabhakar via email and have taken the liberty of posting the reply on the blog.
Hi rohit,
I have a query that's bothering me a lot for quite some time now. Let me clarify at the outset that i believe in value investing(Buy something good way below its intrinsic value),no doubts about it.
Now i am stuck between two schools of thought here.
1) The Warren Buffett way -- Buy a "great company" that is stable, when there is temporary trouble and it is selling below its intrinsic worth. Your returns will be decent(no multibaggers here) and compounded long term it work out well for you.
2) The Rakesh Jhunjhunwala way -Buy companies that are selling below intrinsic worth but that have a huge potential to scale big. You possibly get a multibagger here or you dont get anywhere.Example would be Titan & Pantaloon retail that he bought when they were relatively unknown.
Now the question is should we sacrifice multibagger potential for something that is stable?Or should we have both types of stocks in our portfolio.Whats your opinion?Which of the two philosophies is better?
Let me know your views if you find time.
I have thought along the lines of this question for quite some time and can reply from my personal perspective. Let me caution you – The answer to this question is very personal and depends on your own skills and beliefs.
I believe both the styles are equally good and can provide good returns. I would actually extend the question to RJ or WB or Benjamin graham (BG) style or a combination of each.
Key points of each approach
There are some key elements to each of these approaches. Benjamin graham’s (BG) approach is a very quantitative approach to value investing. The selection of an undervalued company is done based on various quantitative criteria such as low PE ratio, Market cap less than net current asset etc. There is a low to almost non-existent focus on the nature and quality of business. This approach is easy to follow, low risk and requires ample diversification.
WB’s approach takes elements of Graham’s approach such as margin of safety etc. However this approach relies less on the quantitative elements of the company and more on the qualitative elements of the business such as sustainable competitive advantage. The undervaluation is due to temporary factors such as losing a customer or some scandal, which has caused the earnings to drop in the short term. However the long-term prospects are still intact and hence the company is a good bet. WB’s approach focuses on the certainty of the long-term prospects of the company.
RJ’s approach builds further on WB’s approach. Here you are looking at companies, which are not undervalued by the traditional measures such as PE, DCF etc. The value lies in the business model and what the company will develop into.
Some Indian examples
A typical graham style company would be Denso or Cheviot Company. Here the company is selling for less than cash on the books or close to it. These companies are cheap by the traditional valuation measures.
A WB type investment could be GSK consumer or Concor or maybe Asian paints. These companies have a long operating history. They have a predictable business model and some competitive advantage. It is easy to look at the long term history of the business and project it to arrive at some measure of value. This investment approach is more difficult than the Graham style investing as it depends on the qualitative aspects of the business too. However it is possible to follow this style as it has quantitative elements to it and does not require a very deep understanding of business models.
An RJ type investment could be pantaloon or titan. This approach to investing requires a very deep understanding of business models and an appreciation of the qualitative aspects of business such as management quality, addressable opportunity etc. The current numbers of the company will not help you make a decision. If you get it right, the rewards are huge.
In addition RJ is moving deeper into this style by investing in smaller and smaller companies at an early stage (VC style) where the risk-rewards are higher.
So which is it ?
For me it is the BG or WB style. My skills have not matured enough for the RJ style of investing. I have looked at titan in the past and could not see the value. The reason I could not see value was due to my own shortcomings.
You may notice that my core portfolio is based on the WB style of investing, where as the other portfolio is based on the BG style of investing. I don’t have an RJ style investment at all and it is possible that I may never reach that level to make that type of an investment.
A common mistake
Don’t get me wrong on these examples. Yes bank, ICSA, Pyramid saimira and Dish TV are some examples, which fall under the RJ style of investing. The current numbers do not show an obvious undervaluation. The value lies in the future prospects of the business. Some of these companies have a new business model and if you can figure it out correctly, then you will make it big on these stocks.
I have however stayed away from these stocks as they are outside my competency.
I have seen a lot of new investors look at RJ’s philosophy and apply it to their picks. There is nothing wrong with it if you have it figured out and have the results and confidence to follow it. However I personally would not recommend following this approach till you have the knowledge, skill and temperament to follow it.
RJ’s approach is not for the faint hearted who is not ready to do his homework. RJ's approach is easy to understand, but quite diffcult to execute and that where his genius lies.
Hi rohit,
I have a query that's bothering me a lot for quite some time now. Let me clarify at the outset that i believe in value investing(Buy something good way below its intrinsic value),no doubts about it.
Now i am stuck between two schools of thought here.
1) The Warren Buffett way -- Buy a "great company" that is stable, when there is temporary trouble and it is selling below its intrinsic worth. Your returns will be decent(no multibaggers here) and compounded long term it work out well for you.
2) The Rakesh Jhunjhunwala way -Buy companies that are selling below intrinsic worth but that have a huge potential to scale big. You possibly get a multibagger here or you dont get anywhere.Example would be Titan & Pantaloon retail that he bought when they were relatively unknown.
Now the question is should we sacrifice multibagger potential for something that is stable?Or should we have both types of stocks in our portfolio.Whats your opinion?Which of the two philosophies is better?
Let me know your views if you find time.
I have thought along the lines of this question for quite some time and can reply from my personal perspective. Let me caution you – The answer to this question is very personal and depends on your own skills and beliefs.
I believe both the styles are equally good and can provide good returns. I would actually extend the question to RJ or WB or Benjamin graham (BG) style or a combination of each.
Key points of each approach
There are some key elements to each of these approaches. Benjamin graham’s (BG) approach is a very quantitative approach to value investing. The selection of an undervalued company is done based on various quantitative criteria such as low PE ratio, Market cap less than net current asset etc. There is a low to almost non-existent focus on the nature and quality of business. This approach is easy to follow, low risk and requires ample diversification.
WB’s approach takes elements of Graham’s approach such as margin of safety etc. However this approach relies less on the quantitative elements of the company and more on the qualitative elements of the business such as sustainable competitive advantage. The undervaluation is due to temporary factors such as losing a customer or some scandal, which has caused the earnings to drop in the short term. However the long-term prospects are still intact and hence the company is a good bet. WB’s approach focuses on the certainty of the long-term prospects of the company.
RJ’s approach builds further on WB’s approach. Here you are looking at companies, which are not undervalued by the traditional measures such as PE, DCF etc. The value lies in the business model and what the company will develop into.
Some Indian examples
A typical graham style company would be Denso or Cheviot Company. Here the company is selling for less than cash on the books or close to it. These companies are cheap by the traditional valuation measures.
A WB type investment could be GSK consumer or Concor or maybe Asian paints. These companies have a long operating history. They have a predictable business model and some competitive advantage. It is easy to look at the long term history of the business and project it to arrive at some measure of value. This investment approach is more difficult than the Graham style investing as it depends on the qualitative aspects of the business too. However it is possible to follow this style as it has quantitative elements to it and does not require a very deep understanding of business models.
An RJ type investment could be pantaloon or titan. This approach to investing requires a very deep understanding of business models and an appreciation of the qualitative aspects of business such as management quality, addressable opportunity etc. The current numbers of the company will not help you make a decision. If you get it right, the rewards are huge.
In addition RJ is moving deeper into this style by investing in smaller and smaller companies at an early stage (VC style) where the risk-rewards are higher.
So which is it ?
For me it is the BG or WB style. My skills have not matured enough for the RJ style of investing. I have looked at titan in the past and could not see the value. The reason I could not see value was due to my own shortcomings.
You may notice that my core portfolio is based on the WB style of investing, where as the other portfolio is based on the BG style of investing. I don’t have an RJ style investment at all and it is possible that I may never reach that level to make that type of an investment.
A common mistake
Don’t get me wrong on these examples. Yes bank, ICSA, Pyramid saimira and Dish TV are some examples, which fall under the RJ style of investing. The current numbers do not show an obvious undervaluation. The value lies in the future prospects of the business. Some of these companies have a new business model and if you can figure it out correctly, then you will make it big on these stocks.
I have however stayed away from these stocks as they are outside my competency.
I have seen a lot of new investors look at RJ’s philosophy and apply it to their picks. There is nothing wrong with it if you have it figured out and have the results and confidence to follow it. However I personally would not recommend following this approach till you have the knowledge, skill and temperament to follow it.
RJ’s approach is not for the faint hearted who is not ready to do his homework. RJ's approach is easy to understand, but quite diffcult to execute and that where his genius lies.
Saturday, October 25, 2008
Portfolio details
I have received a lot of emails and comments asking me about the composition of my portfolio. I have discussed most of the stocks, which form my holdings on the blog. It would be strange if I said a stock was attractive and went and bought something else. However there still seems to be quite a bit of curiosity.
I have decided to disclose my portfolio after multiple requests for the sake of transparency. I am uncomfortable discussing my portfolio and its performance on the blog as the key purpose of this blog is to share my learnings and not to provide tips or boast about my performance.
So here goes –
Some disclaimers
1. I am not recomending any stocks in this list. Please read the disclaimer at the end of my blog ..blah blah blah. You get the point
2. My portfolio is usually stable. But considering the way the market is dropping, it has become volatile not only in terms of value but in terms of holdings too. The problem now is not of finding undervalued stocks, but of picking the best among the undervalued ones. On top of that, with every crash, new ideas keep popping up. So this list will definitely change in the next few months
3. I am not obliged to disclose any stocks I add or drop in the future. I may or may not disclose what I buy or sell. So please do not buy based on this list below.
4. I am fine with a 70% success rate, i.e 7 out of 10 of my ideas working out. I typically don’t lose much as I keep a margin of safety in my purchases. So although some of the picks may not work out as planned, I have been able to do quite well on a complete portfolio basis.
Core portfolio (all stocks are planned to be equal wieghted even if they are not now)
Balmer lawrie
Gujarat gas
Novartis
Lakshmi machine works
Bharat electronics
Ashok leyland
Asian paints
Merck
NIIT tech + Patni (in combination will be a single position)
Honda siel
Concor
Grindwell norton
GSK consumer (on watch list)
Graham style portfolio (smaller positions, cheap stocks)
VST
Ultramarine pigments
India nippon
Manugraph (on watch list)
Cheviot company
HTMT global
Denso india
I may be building positions in some of these ideas in the subsequent months. I may also decide to drop some if I find more attractive ideas.
Added point: I am very particular about valuation (after everything else checks out) . I will rarely create a meaningful position unless the price is right. So please keep in mind that the analysis date is not the date on which i created a full position. It is only the date when I finished analysis. The average price in each case varies depending on when I started building the position.
I will not be disclosing anything more on my portfolio beyond what I have done already and I hope all of you would understand that.
I have decided to disclose my portfolio after multiple requests for the sake of transparency. I am uncomfortable discussing my portfolio and its performance on the blog as the key purpose of this blog is to share my learnings and not to provide tips or boast about my performance.
So here goes –
Some disclaimers
1. I am not recomending any stocks in this list. Please read the disclaimer at the end of my blog ..blah blah blah. You get the point
2. My portfolio is usually stable. But considering the way the market is dropping, it has become volatile not only in terms of value but in terms of holdings too. The problem now is not of finding undervalued stocks, but of picking the best among the undervalued ones. On top of that, with every crash, new ideas keep popping up. So this list will definitely change in the next few months
3. I am not obliged to disclose any stocks I add or drop in the future. I may or may not disclose what I buy or sell. So please do not buy based on this list below.
4. I am fine with a 70% success rate, i.e 7 out of 10 of my ideas working out. I typically don’t lose much as I keep a margin of safety in my purchases. So although some of the picks may not work out as planned, I have been able to do quite well on a complete portfolio basis.
Core portfolio (all stocks are planned to be equal wieghted even if they are not now)
Balmer lawrie
Gujarat gas
Novartis
Lakshmi machine works
Bharat electronics
Ashok leyland
Asian paints
Merck
NIIT tech + Patni (in combination will be a single position)
Honda siel
Concor
Grindwell norton
GSK consumer (on watch list)
Graham style portfolio (smaller positions, cheap stocks)
VST
Ultramarine pigments
India nippon
Manugraph (on watch list)
Cheviot company
HTMT global
Denso india
I may be building positions in some of these ideas in the subsequent months. I may also decide to drop some if I find more attractive ideas.
Added point: I am very particular about valuation (after everything else checks out) . I will rarely create a meaningful position unless the price is right. So please keep in mind that the analysis date is not the date on which i created a full position. It is only the date when I finished analysis. The average price in each case varies depending on when I started building the position.
I will not be disclosing anything more on my portfolio beyond what I have done already and I hope all of you would understand that.
Portfolio details
I have received a lot of emails and comments asking me about the composition of my portfolio. I have discussed most of the stocks, which form my holdings on the blog. It would be strange if I said a stock was attractive and went and bought something else. However there still seems to be quite a bit of curiosity.
I have decided to disclose my portfolio after multiple requests for the sake of transparency. I am uncomfortable discussing my portfolio and its performance on the blog as the key purpose of this blog is to share my learnings and not to provide tips or boast about my performance.
So here goes –
Some disclaimers
1. I am not recomending any stocks in this list. Please read the disclaimer at the end of my blog ..blah blah blah. You get the point
2. My portfolio is usually stable. But considering the way the market is dropping, it has become volatile not only in terms of value but in terms of holdings too. The problem now is not of finding undervalued stocks, but of picking the best among the undervalued ones. On top of that, with every crash, new ideas keep popping up. So this list will definitely change in the next few months
3. I am not obliged to disclose any stocks I add or drop in the future. I may or may not disclose what I buy or sell. So please do not buy based on this list below.
4. I am fine with a 70% success rate, i.e 7 out of 10 of my ideas working out. I typically don’t lose much as I keep a margin of safety in my purchases. So although some of the picks may not work out as planned, I have been able to do quite well on a complete portfolio basis.
Core portfolio (all stocks are planned to be equal wieghted even if they are not now)
Balmer lawrie
Gujarat gas
Novartis
Lakshmi machine works
Bharat electronics
Ashok leyland
Asian paints
Merck
NIIT tech + Patni (in combination will be a single position)
Honda siel
Concor
Grindwell norton
GSK consumer (on watch list)
Graham style portfolio (smaller positions, cheap stocks)
VST
Ultramarine pigments
India nippon
Manugraph (on watch list)
Cheviot company
HTMT global
Denso india
I may be building positions in some of these ideas in the subsequent months. I may also decide to drop some if I find more attractive ideas.
Added point: I am very particular about valuation (after everything else checks out) . I will rarely create a meaningful position unless the price is right. So please keep in mind that the analysis date is not the date on which i created a full position. It is only the date when I finished analysis. The average price in each case varies depending on when I started building the position.
I will not be disclosing anything more on my portfolio beyond what I have done already and I hope all of you would understand that.
I have decided to disclose my portfolio after multiple requests for the sake of transparency. I am uncomfortable discussing my portfolio and its performance on the blog as the key purpose of this blog is to share my learnings and not to provide tips or boast about my performance.
So here goes –
Some disclaimers
1. I am not recomending any stocks in this list. Please read the disclaimer at the end of my blog ..blah blah blah. You get the point
2. My portfolio is usually stable. But considering the way the market is dropping, it has become volatile not only in terms of value but in terms of holdings too. The problem now is not of finding undervalued stocks, but of picking the best among the undervalued ones. On top of that, with every crash, new ideas keep popping up. So this list will definitely change in the next few months
3. I am not obliged to disclose any stocks I add or drop in the future. I may or may not disclose what I buy or sell. So please do not buy based on this list below.
4. I am fine with a 70% success rate, i.e 7 out of 10 of my ideas working out. I typically don’t lose much as I keep a margin of safety in my purchases. So although some of the picks may not work out as planned, I have been able to do quite well on a complete portfolio basis.
Core portfolio (all stocks are planned to be equal wieghted even if they are not now)
Balmer lawrie
Gujarat gas
Novartis
Lakshmi machine works
Bharat electronics
Ashok leyland
Asian paints
Merck
NIIT tech + Patni (in combination will be a single position)
Honda siel
Concor
Grindwell norton
GSK consumer (on watch list)
Graham style portfolio (smaller positions, cheap stocks)
VST
Ultramarine pigments
India nippon
Manugraph (on watch list)
Cheviot company
HTMT global
Denso india
I may be building positions in some of these ideas in the subsequent months. I may also decide to drop some if I find more attractive ideas.
Added point: I am very particular about valuation (after everything else checks out) . I will rarely create a meaningful position unless the price is right. So please keep in mind that the analysis date is not the date on which i created a full position. It is only the date when I finished analysis. The average price in each case varies depending on when I started building the position.
I will not be disclosing anything more on my portfolio beyond what I have done already and I hope all of you would understand that.
Tuesday, October 21, 2008
Question on the graham styled portfolio and an investment idea
I wrote in the previous post that I have changed my portfolio design and split it into two categories. The first group is the core portfolio which contains the long term ideas where the intrinsic value is increasing and I feel strongly about the long term prospects.
The second group called the graham portfolio, named after the dean of value investing – benjamin graham, will contain the statistically cheap stocks. These stocks are cheap by various measures such as PE ratio, Mcap less than net current assets etc.
I received the following question from manish and thought of replying to via a post
Also I will be curious to know your strategies for these two portfolios. Will you be looking for a certain percentage of gain (say 50%) for Graham Style stocks and exit. I believe you will keep holding Core Portfolio forever (until business is intact).
The graham portfolio would be at best 20-25% of my total portfolio. The percentage is not fixed and will depend on the number of attractive ideas I can find.
I will not looking at a percentage gain to exit these stocks. For me the sell decision would be based on two factors – If the stock is selling at or 90% of intrinsic value I will sell the stock. In addition if the fundamentals deteriorate considerably or if the valuation gap does not close in 2-3 years, I may decide to bail out.
The holding period for the core portfolio could be longer as the intrinsic value of the companies is also growing. So unless the stock is grossly overpriced, I may continue holding a stock for some time.
Lesser analysis
In terms of analysis, I spend a considerable amount of time on the stocks in my core portfolio. However for the graham ideas, I am looking at cheap, obviously undervalued stocks and hence the extent of analysis would be less. I would be balancing the risk by diversifying more in the graham portfolio. The graham portfolio is an opportunistic reaction to the market crash.
An idea: HTMT Global
HTMT global is an IT/BPO company. Hinduja TMT (now called Hinduja ventures) demerged their IT/BPO business in 2006 and merged that into HTMT Global from Oct 2006.
Financials
HTMT global had a revenue of around 673 Crs in 2008 and a net profit of around 87.4 Crs. The company had a net profit margin on a consolidated basis of around 13% and an ROE of around 26% on invested capital. The total capital is around 823 Crs and a net cash of around 430 crs on the balance sheet (held in the subsidiary)
HTMT global on standalone basis (excluding subsidiaries) earned 367 Crs and a net profit of around 58.8 Crs. The company had a net margin of around 16% on a standalone basis. The lower margins on a consolidated basis is due to the Subsidiary ‘Affina’, which was turned around during the year.
Growth numbers are not representative as the demerger happened in the middle of 2007, however the company has been growing in excess of 30%.
Positives
The company is doing quite well and has been expanding the scope of its operation in terms of headcount, new clients etc. Athough the numbers are not comparable, the company has shown almost 50% growth per annum for the last 7 years (although from a small base – see pg 6 of annual report). The company has a cash of almost 470 crs (Q1 09) which has been earmarked for accquisitions and should add value to the company
The financials are quite good, with good free cash flow and a good dividend payout of almost 100%.
Finally the valuation is amazing. The company is being priced for less than cash on the books which means that the company worth more dead than alive
Negatives
Hindujas control this company and are not know for corporate governance. In addition the credit crunch and recession could hurt the company’s growth. However in the long term this should increase the offshoring.
Conclusion
Unless you believe that the company is worth less than cash, you cannot justify the valuations. One likely reason for the crash in price is the sell-offs by FII’s.
I am still looking for more negatives on the company, but cannot find any. One has to keep in mind that the stock price is assuming worse than bankruptcy. Personally, I am looking at this stock for my Graham portfolio.
The second group called the graham portfolio, named after the dean of value investing – benjamin graham, will contain the statistically cheap stocks. These stocks are cheap by various measures such as PE ratio, Mcap less than net current assets etc.
I received the following question from manish and thought of replying to via a post
Also I will be curious to know your strategies for these two portfolios. Will you be looking for a certain percentage of gain (say 50%) for Graham Style stocks and exit. I believe you will keep holding Core Portfolio forever (until business is intact).
The graham portfolio would be at best 20-25% of my total portfolio. The percentage is not fixed and will depend on the number of attractive ideas I can find.
I will not looking at a percentage gain to exit these stocks. For me the sell decision would be based on two factors – If the stock is selling at or 90% of intrinsic value I will sell the stock. In addition if the fundamentals deteriorate considerably or if the valuation gap does not close in 2-3 years, I may decide to bail out.
The holding period for the core portfolio could be longer as the intrinsic value of the companies is also growing. So unless the stock is grossly overpriced, I may continue holding a stock for some time.
Lesser analysis
In terms of analysis, I spend a considerable amount of time on the stocks in my core portfolio. However for the graham ideas, I am looking at cheap, obviously undervalued stocks and hence the extent of analysis would be less. I would be balancing the risk by diversifying more in the graham portfolio. The graham portfolio is an opportunistic reaction to the market crash.
An idea: HTMT Global
HTMT global is an IT/BPO company. Hinduja TMT (now called Hinduja ventures) demerged their IT/BPO business in 2006 and merged that into HTMT Global from Oct 2006.
Financials
HTMT global had a revenue of around 673 Crs in 2008 and a net profit of around 87.4 Crs. The company had a net profit margin on a consolidated basis of around 13% and an ROE of around 26% on invested capital. The total capital is around 823 Crs and a net cash of around 430 crs on the balance sheet (held in the subsidiary)
HTMT global on standalone basis (excluding subsidiaries) earned 367 Crs and a net profit of around 58.8 Crs. The company had a net margin of around 16% on a standalone basis. The lower margins on a consolidated basis is due to the Subsidiary ‘Affina’, which was turned around during the year.
Growth numbers are not representative as the demerger happened in the middle of 2007, however the company has been growing in excess of 30%.
Positives
The company is doing quite well and has been expanding the scope of its operation in terms of headcount, new clients etc. Athough the numbers are not comparable, the company has shown almost 50% growth per annum for the last 7 years (although from a small base – see pg 6 of annual report). The company has a cash of almost 470 crs (Q1 09) which has been earmarked for accquisitions and should add value to the company
The financials are quite good, with good free cash flow and a good dividend payout of almost 100%.
Finally the valuation is amazing. The company is being priced for less than cash on the books which means that the company worth more dead than alive
Negatives
Hindujas control this company and are not know for corporate governance. In addition the credit crunch and recession could hurt the company’s growth. However in the long term this should increase the offshoring.
Conclusion
Unless you believe that the company is worth less than cash, you cannot justify the valuations. One likely reason for the crash in price is the sell-offs by FII’s.
I am still looking for more negatives on the company, but cannot find any. One has to keep in mind that the stock price is assuming worse than bankruptcy. Personally, I am looking at this stock for my Graham portfolio.
Question on the graham styled portfolio and an investment idea
I wrote in the previous post that I have changed my portfolio design and split it into two categories. The first group is the core portfolio which contains the long term ideas where the intrinsic value is increasing and I feel strongly about the long term prospects.
The second group called the graham portfolio, named after the dean of value investing – benjamin graham, will contain the statistically cheap stocks. These stocks are cheap by various measures such as PE ratio, Mcap less than net current assets etc.
I received the following question from manish and thought of replying to via a post
Also I will be curious to know your strategies for these two portfolios. Will you be looking for a certain percentage of gain (say 50%) for Graham Style stocks and exit. I believe you will keep holding Core Portfolio forever (until business is intact).
The graham portfolio would be at best 20-25% of my total portfolio. The percentage is not fixed and will depend on the number of attractive ideas I can find.
I will not looking at a percentage gain to exit these stocks. For me the sell decision would be based on two factors – If the stock is selling at or 90% of intrinsic value I will sell the stock. In addition if the fundamentals deteriorate considerably or if the valuation gap does not close in 2-3 years, I may decide to bail out.
The holding period for the core portfolio could be longer as the intrinsic value of the companies is also growing. So unless the stock is grossly overpriced, I may continue holding a stock for some time.
Lesser analysis
In terms of analysis, I spend a considerable amount of time on the stocks in my core portfolio. However for the graham ideas, I am looking at cheap, obviously undervalued stocks and hence the extent of analysis would be less. I would be balancing the risk by diversifying more in the graham portfolio. The graham portfolio is an opportunistic reaction to the market crash.
An idea: HTMT Global
HTMT global is an IT/BPO company. Hinduja TMT (now called Hinduja ventures) demerged their IT/BPO business in 2006 and merged that into HTMT Global from Oct 2006.
Financials
HTMT global had a revenue of around 673 Crs in 2008 and a net profit of around 87.4 Crs. The company had a net profit margin on a consolidated basis of around 13% and an ROE of around 26% on invested capital. The total capital is around 823 Crs and a net cash of around 430 crs on the balance sheet (held in the subsidiary)
HTMT global on standalone basis (excluding subsidiaries) earned 367 Crs and a net profit of around 58.8 Crs. The company had a net margin of around 16% on a standalone basis. The lower margins on a consolidated basis is due to the Subsidiary ‘Affina’, which was turned around during the year.
Growth numbers are not representative as the demerger happened in the middle of 2007, however the company has been growing in excess of 30%.
Positives
The company is doing quite well and has been expanding the scope of its operation in terms of headcount, new clients etc. Athough the numbers are not comparable, the company has shown almost 50% growth per annum for the last 7 years (although from a small base – see pg 6 of annual report). The company has a cash of almost 470 crs (Q1 09) which has been earmarked for accquisitions and should add value to the company
The financials are quite good, with good free cash flow and a good dividend payout of almost 100%.
Finally the valuation is amazing. The company is being priced for less than cash on the books which means that the company worth more dead than alive
Negatives
Hindujas control this company and are not know for corporate governance. In addition the credit crunch and recession could hurt the company’s growth. However in the long term this should increase the offshoring.
Conclusion
Unless you believe that the company is worth less than cash, you cannot justify the valuations. One likely reason for the crash in price is the sell-offs by FII’s.
I am still looking for more negatives on the company, but cannot find any. One has to keep in mind that the stock price is assuming worse than bankruptcy. Personally, I am looking at this stock for my Graham portfolio.
The second group called the graham portfolio, named after the dean of value investing – benjamin graham, will contain the statistically cheap stocks. These stocks are cheap by various measures such as PE ratio, Mcap less than net current assets etc.
I received the following question from manish and thought of replying to via a post
Also I will be curious to know your strategies for these two portfolios. Will you be looking for a certain percentage of gain (say 50%) for Graham Style stocks and exit. I believe you will keep holding Core Portfolio forever (until business is intact).
The graham portfolio would be at best 20-25% of my total portfolio. The percentage is not fixed and will depend on the number of attractive ideas I can find.
I will not looking at a percentage gain to exit these stocks. For me the sell decision would be based on two factors – If the stock is selling at or 90% of intrinsic value I will sell the stock. In addition if the fundamentals deteriorate considerably or if the valuation gap does not close in 2-3 years, I may decide to bail out.
The holding period for the core portfolio could be longer as the intrinsic value of the companies is also growing. So unless the stock is grossly overpriced, I may continue holding a stock for some time.
Lesser analysis
In terms of analysis, I spend a considerable amount of time on the stocks in my core portfolio. However for the graham ideas, I am looking at cheap, obviously undervalued stocks and hence the extent of analysis would be less. I would be balancing the risk by diversifying more in the graham portfolio. The graham portfolio is an opportunistic reaction to the market crash.
An idea: HTMT Global
HTMT global is an IT/BPO company. Hinduja TMT (now called Hinduja ventures) demerged their IT/BPO business in 2006 and merged that into HTMT Global from Oct 2006.
Financials
HTMT global had a revenue of around 673 Crs in 2008 and a net profit of around 87.4 Crs. The company had a net profit margin on a consolidated basis of around 13% and an ROE of around 26% on invested capital. The total capital is around 823 Crs and a net cash of around 430 crs on the balance sheet (held in the subsidiary)
HTMT global on standalone basis (excluding subsidiaries) earned 367 Crs and a net profit of around 58.8 Crs. The company had a net margin of around 16% on a standalone basis. The lower margins on a consolidated basis is due to the Subsidiary ‘Affina’, which was turned around during the year.
Growth numbers are not representative as the demerger happened in the middle of 2007, however the company has been growing in excess of 30%.
Positives
The company is doing quite well and has been expanding the scope of its operation in terms of headcount, new clients etc. Athough the numbers are not comparable, the company has shown almost 50% growth per annum for the last 7 years (although from a small base – see pg 6 of annual report). The company has a cash of almost 470 crs (Q1 09) which has been earmarked for accquisitions and should add value to the company
The financials are quite good, with good free cash flow and a good dividend payout of almost 100%.
Finally the valuation is amazing. The company is being priced for less than cash on the books which means that the company worth more dead than alive
Negatives
Hindujas control this company and are not know for corporate governance. In addition the credit crunch and recession could hurt the company’s growth. However in the long term this should increase the offshoring.
Conclusion
Unless you believe that the company is worth less than cash, you cannot justify the valuations. One likely reason for the crash in price is the sell-offs by FII’s.
I am still looking for more negatives on the company, but cannot find any. One has to keep in mind that the stock price is assuming worse than bankruptcy. Personally, I am looking at this stock for my Graham portfolio.
Thursday, October 16, 2008
Change in portfolio structure
Over the past few months I have modified my portfolio structure a bit. I have now divided my portfolio into two portions. The core portfolio, consists of companies where the intrinsic value is increasing and i have a higher level of confidence about the company. The other portion is more of a graham style portfolio. This consists of companies which are extremely cheap based on the various measures such as market cap less than cash on book, ultra low PE or market cap less than net current assets.
The core portfolio is a larger portion of my total portfolio and has companies, for which I have done a deeper and detailed analysis. The ‘graham’ portfolio on the other hand consists of the ‘cheap’ ideas. These companies may not score high on corporate governance or may not be a great businesses, but they are insanely cheap.
The idea behind this ‘cheap’ stock portfolio is to take advantage of the large number of opportunities, which are coming up in the market now. Ofcourse the number of stocks I plan to hold in the ‘graham’ styled portfolio could be between 15-20 or even higher versus 10-12 in the core portfolio.
So why this disclosure?
I will post on such cheap companies as time permits. I am planning to add them under the category of ‘graham’ type stocks – cheap stocks, but not necessarily great companies.
This type of value investing is also called cigar butt investing and it was developed in 1920s by the dean of value investing – Benjamin graham. This type of investing is low risk, involves quite a bit of diversification and works best during bear markets.
So please don’t be surprised if I post on ‘not so great, but cheap’ companies. One can get decent returns from such a portfolio, provided you have adequate diversification.
The core portfolio is a larger portion of my total portfolio and has companies, for which I have done a deeper and detailed analysis. The ‘graham’ portfolio on the other hand consists of the ‘cheap’ ideas. These companies may not score high on corporate governance or may not be a great businesses, but they are insanely cheap.
The idea behind this ‘cheap’ stock portfolio is to take advantage of the large number of opportunities, which are coming up in the market now. Ofcourse the number of stocks I plan to hold in the ‘graham’ styled portfolio could be between 15-20 or even higher versus 10-12 in the core portfolio.
So why this disclosure?
I will post on such cheap companies as time permits. I am planning to add them under the category of ‘graham’ type stocks – cheap stocks, but not necessarily great companies.
This type of value investing is also called cigar butt investing and it was developed in 1920s by the dean of value investing – Benjamin graham. This type of investing is low risk, involves quite a bit of diversification and works best during bear markets.
So please don’t be surprised if I post on ‘not so great, but cheap’ companies. One can get decent returns from such a portfolio, provided you have adequate diversification.
Is the stock undervalued?
I am getting several comments and emails asking whether so and so stock looks cheap. The odds of a stock being cheap these days are very high. If you pick 10 stocks randomly, I bet 5 will be cheap. However the question most of us should be asking is not whether the stock is cheap, but whether one understands the company well enough and will have the emotional fortitude to withstand another 20% drop in the stock price.
Change in portfolio structure
Over the past few months I have modified my portfolio structure a bit. I have now divided my portfolio into two portions. The core portfolio, consists of companies where the intrinsic value is increasing and i have a higher level of confidence about the company. The other portion is more of a graham style portfolio. This consists of companies which are extremely cheap based on the various measures such as market cap less than cash on book, ultra low PE or market cap less than net current assets.
The core portfolio is a larger portion of my total portfolio and has companies, for which I have done a deeper and detailed analysis. The ‘graham’ portfolio on the other hand consists of the ‘cheap’ ideas. These companies may not score high on corporate governance or may not be a great businesses, but they are insanely cheap.
The idea behind this ‘cheap’ stock portfolio is to take advantage of the large number of opportunities, which are coming up in the market now. Ofcourse the number of stocks I plan to hold in the ‘graham’ styled portfolio could be between 15-20 or even higher versus 10-12 in the core portfolio.
So why this disclosure?
I will post on such cheap companies as time permits. I am planning to add them under the category of ‘graham’ type stocks – cheap stocks, but not necessarily great companies.
This type of value investing is also called cigar butt investing and it was developed in 1920s by the dean of value investing – Benjamin graham. This type of investing is low risk, involves quite a bit of diversification and works best during bear markets.
So please don’t be surprised if I post on ‘not so great, but cheap’ companies. One can get decent returns from such a portfolio, provided you have adequate diversification.
The core portfolio is a larger portion of my total portfolio and has companies, for which I have done a deeper and detailed analysis. The ‘graham’ portfolio on the other hand consists of the ‘cheap’ ideas. These companies may not score high on corporate governance or may not be a great businesses, but they are insanely cheap.
The idea behind this ‘cheap’ stock portfolio is to take advantage of the large number of opportunities, which are coming up in the market now. Ofcourse the number of stocks I plan to hold in the ‘graham’ styled portfolio could be between 15-20 or even higher versus 10-12 in the core portfolio.
So why this disclosure?
I will post on such cheap companies as time permits. I am planning to add them under the category of ‘graham’ type stocks – cheap stocks, but not necessarily great companies.
This type of value investing is also called cigar butt investing and it was developed in 1920s by the dean of value investing – Benjamin graham. This type of investing is low risk, involves quite a bit of diversification and works best during bear markets.
So please don’t be surprised if I post on ‘not so great, but cheap’ companies. One can get decent returns from such a portfolio, provided you have adequate diversification.
Is the stock undervalued?
I am getting several comments and emails asking whether so and so stock looks cheap. The odds of a stock being cheap these days are very high. If you pick 10 stocks randomly, I bet 5 will be cheap. However the question most of us should be asking is not whether the stock is cheap, but whether one understands the company well enough and will have the emotional fortitude to withstand another 20% drop in the stock price.
Sunday, October 12, 2008
Analysis : Lakshmi machine works
About
Lakshmi machine works is the biggest textile machinery supplier with a market share of around 60% of the indian market. In addition the company also has a machine tool and foundry division which together contribute to less than 10% of the total revenue.
The company’s main market is india and is one of the lowest cost suppliers in the country. In addition the company is also planning to setup a unit in china for textile machinery and is also focussing on the other divisions
Financials
The company’s performance has improved in the last 5 years. This improvement has been on the backdrop of an upcycle in the textile business and the removal of the Textile quotas in the international markets.
The company’s ROE has improved from around 8% to around 30%. The sales increased 4 times during this period. In addition the net profit has gone up by 10 times due to the increase in the net margins from 4.7% to around 10%+ during the same period.
A more commendable improvement has been the improvement in the Wcap turns. The company has become working capital negative and now has almost 600+ crs on the balance. As a result of this improvement the company has a very lean balance sheet where out of the total 800 Crs, only 200 Crs is the invested capital. Due to this the Asset turns is very high at 11.5.
Positives
The company is a one of lowest cost producers in the industry. In addition the company has improved its capital efficiency dramatically during this upcycle. This improvement has come as a result of the improvement in inventory turns and recievable turns.
In addition the company has seen an improvement in net margins due to elimination of interest expenses and other overheads. This has come about inspite of increase in RM prices.
The company is also spending almost 1% of revenue on R&D which is a good, but a higher spend could be better. The company has a decent order book too.
In addition the company expects a replacement demand of around 28 Mn and new demand of around 29 Mn due to growth of the textile industry (page 24 of Annual report)
Risks
The risks are painfully obvious. The textile industry was hit initially due to rupee appreciation and then due to the credit crisis. During such times, CAPEX expenditure is usually put on hold or delayed. As a result the company expects the demand to drop by 10 to 20% in the current year.
Due to demand drop in the international market, other foreign manufacturers could become more aggressive in the India impacting the profitability of the company.
Competitive analysis
The Industry has decent entry barriers. LMW has fairly depreciated investments which would require quite a bit of investment by any new player. In addition LMW also has the benefit of economies of scale due to which it has lower cost in the industry
There is a certain amount of Lock-in too as once a textile producer buys the machinery from one supplier, it would tend to continue with it as there are cost benefits in terms of maintenance, training and CAPEX.
There are also learning curve barriers and contractual commitment barriers in the industry. In all, LMW enjoys a certain amount of competitive advantage in the industry which also shows up as high market share and high ROE.
Valuation
The company has almost 600Crs+ cash on the book. Net of the cash, the valuation is around 200-300 Crs. The net profit for last year was around 240 Crs out of which the other income was around 60 crs. As a result the core income was around 160 crs. Even under a sceanrio where the net profit drops by 50%, the current valuation is around 2-3 times the depressed profit.
A DCF (discounted cash flow) analysis assuming a growth of 7-8% and net margins of 8-10% gives an intrinsic value of around 4500. The current price is around 20% of this value
Scenario analysis
The above DCF analysis can be done with varying assumptions of growth and net margins.
If the company grows at 8% and has 8% margins during the next 7-8 years, the value is around 3900. This looks like a fairly conservative scenario for the next few years. Even with an extremely low margin of 5% for the next 7-8 years the value comes to 2000.
The above scenarios assume that 2009 and part of 2010 would be bad with net profit dropping by 50%.
conclusion
The company has been priced as if it will be out of business soon. The company is being valued at 250-300 Crs net of cash for all the fixed assets, intellectual property, customer relationships etc. In effect the market is saying that company will shut down in the next 1-2 years.
The credit crisis and subsequent recession in the textile industry is bound to impact companies like LMW. However this is part of a normal business cycle. Capital good are the first to bear the brunt of a recession. However that does not mean that the industry is heading for extinction. The pricing however seems to be pointing to that scenario
Some Q&A
I am putting some possible questions and answers which could be on your mind
Q1: The textile industry is in recession and the outlook is cloudy. Should we not wait till it becomes clear ?
The future is never completely clear. If it was clear in 2007 that the textile industry would be in recession in 2009, the stock price would not have gone up to 3000+. In 2007 the market was pricing the stock for a glorious future and now is pricing for complete disaster. The reality is always in between
Q2: The price could drop further. Should I wait for a better price?
The stock is selling at around 30-40% of intrinsic value. No one can predict how much lower it can go. I personally think bottom fishing is a waste of time. Time and energy should be spent on understanding the company, its industry and the future economics of the company than trying to get the last 10% in terms of price
Q3: All the stock analyst and gurus have sell recommendation on the stock. What makes you think you are right and all the others are wrong?
I don’t know if I am right or not. What I like are the odds. There is a high probability that the company and its stock could do well in the future. How well, I don’t know. I could be wrong too. However this is not the only stock in my portfolio. The reason for having a diversified portfolio is that I may be wrong 30-40% of the time and still do well on an overall basis. In addition the downside on the stock is protected as the company is now selling at very low valuations and is priced for disaster.
Q4: The volumes are low and stock is exhibiting weakness
Lets give the stock some horlicks :) ..how does it matter if you plan to hold the stock for the long term. If the volumes are low and there is weakness, it is a good time to buy. When everything clear up, and optimisim and strenght returns it would a good time to sell.
Q5: The technicals for the stock are weak
Huh !! sorry we are from a different planet !!
Lakshmi machine works is the biggest textile machinery supplier with a market share of around 60% of the indian market. In addition the company also has a machine tool and foundry division which together contribute to less than 10% of the total revenue.
The company’s main market is india and is one of the lowest cost suppliers in the country. In addition the company is also planning to setup a unit in china for textile machinery and is also focussing on the other divisions
Financials
The company’s performance has improved in the last 5 years. This improvement has been on the backdrop of an upcycle in the textile business and the removal of the Textile quotas in the international markets.
The company’s ROE has improved from around 8% to around 30%. The sales increased 4 times during this period. In addition the net profit has gone up by 10 times due to the increase in the net margins from 4.7% to around 10%+ during the same period.
A more commendable improvement has been the improvement in the Wcap turns. The company has become working capital negative and now has almost 600+ crs on the balance. As a result of this improvement the company has a very lean balance sheet where out of the total 800 Crs, only 200 Crs is the invested capital. Due to this the Asset turns is very high at 11.5.
Positives
The company is a one of lowest cost producers in the industry. In addition the company has improved its capital efficiency dramatically during this upcycle. This improvement has come as a result of the improvement in inventory turns and recievable turns.
In addition the company has seen an improvement in net margins due to elimination of interest expenses and other overheads. This has come about inspite of increase in RM prices.
The company is also spending almost 1% of revenue on R&D which is a good, but a higher spend could be better. The company has a decent order book too.
In addition the company expects a replacement demand of around 28 Mn and new demand of around 29 Mn due to growth of the textile industry (page 24 of Annual report)
Risks
The risks are painfully obvious. The textile industry was hit initially due to rupee appreciation and then due to the credit crisis. During such times, CAPEX expenditure is usually put on hold or delayed. As a result the company expects the demand to drop by 10 to 20% in the current year.
Due to demand drop in the international market, other foreign manufacturers could become more aggressive in the India impacting the profitability of the company.
Competitive analysis
The Industry has decent entry barriers. LMW has fairly depreciated investments which would require quite a bit of investment by any new player. In addition LMW also has the benefit of economies of scale due to which it has lower cost in the industry
There is a certain amount of Lock-in too as once a textile producer buys the machinery from one supplier, it would tend to continue with it as there are cost benefits in terms of maintenance, training and CAPEX.
There are also learning curve barriers and contractual commitment barriers in the industry. In all, LMW enjoys a certain amount of competitive advantage in the industry which also shows up as high market share and high ROE.
Valuation
The company has almost 600Crs+ cash on the book. Net of the cash, the valuation is around 200-300 Crs. The net profit for last year was around 240 Crs out of which the other income was around 60 crs. As a result the core income was around 160 crs. Even under a sceanrio where the net profit drops by 50%, the current valuation is around 2-3 times the depressed profit.
A DCF (discounted cash flow) analysis assuming a growth of 7-8% and net margins of 8-10% gives an intrinsic value of around 4500. The current price is around 20% of this value
Scenario analysis
The above DCF analysis can be done with varying assumptions of growth and net margins.
If the company grows at 8% and has 8% margins during the next 7-8 years, the value is around 3900. This looks like a fairly conservative scenario for the next few years. Even with an extremely low margin of 5% for the next 7-8 years the value comes to 2000.
The above scenarios assume that 2009 and part of 2010 would be bad with net profit dropping by 50%.
conclusion
The company has been priced as if it will be out of business soon. The company is being valued at 250-300 Crs net of cash for all the fixed assets, intellectual property, customer relationships etc. In effect the market is saying that company will shut down in the next 1-2 years.
The credit crisis and subsequent recession in the textile industry is bound to impact companies like LMW. However this is part of a normal business cycle. Capital good are the first to bear the brunt of a recession. However that does not mean that the industry is heading for extinction. The pricing however seems to be pointing to that scenario
Some Q&A
I am putting some possible questions and answers which could be on your mind
Q1: The textile industry is in recession and the outlook is cloudy. Should we not wait till it becomes clear ?
The future is never completely clear. If it was clear in 2007 that the textile industry would be in recession in 2009, the stock price would not have gone up to 3000+. In 2007 the market was pricing the stock for a glorious future and now is pricing for complete disaster. The reality is always in between
Q2: The price could drop further. Should I wait for a better price?
The stock is selling at around 30-40% of intrinsic value. No one can predict how much lower it can go. I personally think bottom fishing is a waste of time. Time and energy should be spent on understanding the company, its industry and the future economics of the company than trying to get the last 10% in terms of price
Q3: All the stock analyst and gurus have sell recommendation on the stock. What makes you think you are right and all the others are wrong?
I don’t know if I am right or not. What I like are the odds. There is a high probability that the company and its stock could do well in the future. How well, I don’t know. I could be wrong too. However this is not the only stock in my portfolio. The reason for having a diversified portfolio is that I may be wrong 30-40% of the time and still do well on an overall basis. In addition the downside on the stock is protected as the company is now selling at very low valuations and is priced for disaster.
Q4: The volumes are low and stock is exhibiting weakness
Lets give the stock some horlicks :) ..how does it matter if you plan to hold the stock for the long term. If the volumes are low and there is weakness, it is a good time to buy. When everything clear up, and optimisim and strenght returns it would a good time to sell.
Q5: The technicals for the stock are weak
Huh !! sorry we are from a different planet !!
Analysis : Lakshmi machine works
About
Lakshmi machine works is the biggest textile machinery supplier with a market share of around 60% of the indian market. In addition the company also has a machine tool and foundry division which together contribute to less than 10% of the total revenue.
The company’s main market is india and is one of the lowest cost suppliers in the country. In addition the company is also planning to setup a unit in china for textile machinery and is also focussing on the other divisions
Financials
The company’s performance has improved in the last 5 years. This improvement has been on the backdrop of an upcycle in the textile business and the removal of the Textile quotas in the international markets.
The company’s ROE has improved from around 8% to around 30%. The sales increased 4 times during this period. In addition the net profit has gone up by 10 times due to the increase in the net margins from 4.7% to around 10%+ during the same period.
A more commendable improvement has been the improvement in the Wcap turns. The company has become working capital negative and now has almost 600+ crs on the balance. As a result of this improvement the company has a very lean balance sheet where out of the total 800 Crs, only 200 Crs is the invested capital. Due to this the Asset turns is very high at 11.5.
Positives
The company is a one of lowest cost producers in the industry. In addition the company has improved its capital efficiency dramatically during this upcycle. This improvement has come as a result of the improvement in inventory turns and recievable turns.
In addition the company has seen an improvement in net margins due to elimination of interest expenses and other overheads. This has come about inspite of increase in RM prices.
The company is also spending almost 1% of revenue on R&D which is a good, but a higher spend could be better. The company has a decent order book too.
In addition the company expects a replacement demand of around 28 Mn and new demand of around 29 Mn due to growth of the textile industry (page 24 of Annual report)
Risks
The risks are painfully obvious. The textile industry was hit initially due to rupee appreciation and then due to the credit crisis. During such times, CAPEX expenditure is usually put on hold or delayed. As a result the company expects the demand to drop by 10 to 20% in the current year.
Due to demand drop in the international market, other foreign manufacturers could become more aggressive in the India impacting the profitability of the company.
Competitive analysis
The Industry has decent entry barriers. LMW has fairly depreciated investments which would require quite a bit of investment by any new player. In addition LMW also has the benefit of economies of scale due to which it has lower cost in the industry
There is a certain amount of Lock-in too as once a textile producer buys the machinery from one supplier, it would tend to continue with it as there are cost benefits in terms of maintenance, training and CAPEX.
There are also learning curve barriers and contractual commitment barriers in the industry. In all, LMW enjoys a certain amount of competitive advantage in the industry which also shows up as high market share and high ROE.
Valuation
The company has almost 600Crs+ cash on the book. Net of the cash, the valuation is around 200-300 Crs. The net profit for last year was around 240 Crs out of which the other income was around 60 crs. As a result the core income was around 160 crs. Even under a sceanrio where the net profit drops by 50%, the current valuation is around 2-3 times the depressed profit.
A DCF (discounted cash flow) analysis assuming a growth of 7-8% and net margins of 8-10% gives an intrinsic value of around 4500. The current price is around 20% of this value
Scenario analysis
The above DCF analysis can be done with varying assumptions of growth and net margins.
If the company grows at 8% and has 8% margins during the next 7-8 years, the value is around 3900. This looks like a fairly conservative scenario for the next few years. Even with an extremely low margin of 5% for the next 7-8 years the value comes to 2000.
The above scenarios assume that 2009 and part of 2010 would be bad with net profit dropping by 50%.
conclusion
The company has been priced as if it will be out of business soon. The company is being valued at 250-300 Crs net of cash for all the fixed assets, intellectual property, customer relationships etc. In effect the market is saying that company will shut down in the next 1-2 years.
The credit crisis and subsequent recession in the textile industry is bound to impact companies like LMW. However this is part of a normal business cycle. Capital good are the first to bear the brunt of a recession. However that does not mean that the industry is heading for extinction. The pricing however seems to be pointing to that scenario
Some Q&A
I am putting some possible questions and answers which could be on your mind
Q1: The textile industry is in recession and the outlook is cloudy. Should we not wait till it becomes clear ?
The future is never completely clear. If it was clear in 2007 that the textile industry would be in recession in 2009, the stock price would not have gone up to 3000+. In 2007 the market was pricing the stock for a glorious future and now is pricing for complete disaster. The reality is always in between
Q2: The price could drop further. Should I wait for a better price?
The stock is selling at around 30-40% of intrinsic value. No one can predict how much lower it can go. I personally think bottom fishing is a waste of time. Time and energy should be spent on understanding the company, its industry and the future economics of the company than trying to get the last 10% in terms of price
Q3: All the stock analyst and gurus have sell recommendation on the stock. What makes you think you are right and all the others are wrong?
I don’t know if I am right or not. What I like are the odds. There is a high probability that the company and its stock could do well in the future. How well, I don’t know. I could be wrong too. However this is not the only stock in my portfolio. The reason for having a diversified portfolio is that I may be wrong 30-40% of the time and still do well on an overall basis. In addition the downside on the stock is protected as the company is now selling at very low valuations and is priced for disaster.
Q4: The volumes are low and stock is exhibiting weakness
Lets give the stock some horlicks :) ..how does it matter if you plan to hold the stock for the long term. If the volumes are low and there is weakness, it is a good time to buy. When everything clear up, and optimisim and strenght returns it would a good time to sell.
Q5: The technicals for the stock are weak
Huh !! sorry we are from a different planet !!
Lakshmi machine works is the biggest textile machinery supplier with a market share of around 60% of the indian market. In addition the company also has a machine tool and foundry division which together contribute to less than 10% of the total revenue.
The company’s main market is india and is one of the lowest cost suppliers in the country. In addition the company is also planning to setup a unit in china for textile machinery and is also focussing on the other divisions
Financials
The company’s performance has improved in the last 5 years. This improvement has been on the backdrop of an upcycle in the textile business and the removal of the Textile quotas in the international markets.
The company’s ROE has improved from around 8% to around 30%. The sales increased 4 times during this period. In addition the net profit has gone up by 10 times due to the increase in the net margins from 4.7% to around 10%+ during the same period.
A more commendable improvement has been the improvement in the Wcap turns. The company has become working capital negative and now has almost 600+ crs on the balance. As a result of this improvement the company has a very lean balance sheet where out of the total 800 Crs, only 200 Crs is the invested capital. Due to this the Asset turns is very high at 11.5.
Positives
The company is a one of lowest cost producers in the industry. In addition the company has improved its capital efficiency dramatically during this upcycle. This improvement has come as a result of the improvement in inventory turns and recievable turns.
In addition the company has seen an improvement in net margins due to elimination of interest expenses and other overheads. This has come about inspite of increase in RM prices.
The company is also spending almost 1% of revenue on R&D which is a good, but a higher spend could be better. The company has a decent order book too.
In addition the company expects a replacement demand of around 28 Mn and new demand of around 29 Mn due to growth of the textile industry (page 24 of Annual report)
Risks
The risks are painfully obvious. The textile industry was hit initially due to rupee appreciation and then due to the credit crisis. During such times, CAPEX expenditure is usually put on hold or delayed. As a result the company expects the demand to drop by 10 to 20% in the current year.
Due to demand drop in the international market, other foreign manufacturers could become more aggressive in the India impacting the profitability of the company.
Competitive analysis
The Industry has decent entry barriers. LMW has fairly depreciated investments which would require quite a bit of investment by any new player. In addition LMW also has the benefit of economies of scale due to which it has lower cost in the industry
There is a certain amount of Lock-in too as once a textile producer buys the machinery from one supplier, it would tend to continue with it as there are cost benefits in terms of maintenance, training and CAPEX.
There are also learning curve barriers and contractual commitment barriers in the industry. In all, LMW enjoys a certain amount of competitive advantage in the industry which also shows up as high market share and high ROE.
Valuation
The company has almost 600Crs+ cash on the book. Net of the cash, the valuation is around 200-300 Crs. The net profit for last year was around 240 Crs out of which the other income was around 60 crs. As a result the core income was around 160 crs. Even under a sceanrio where the net profit drops by 50%, the current valuation is around 2-3 times the depressed profit.
A DCF (discounted cash flow) analysis assuming a growth of 7-8% and net margins of 8-10% gives an intrinsic value of around 4500. The current price is around 20% of this value
Scenario analysis
The above DCF analysis can be done with varying assumptions of growth and net margins.
If the company grows at 8% and has 8% margins during the next 7-8 years, the value is around 3900. This looks like a fairly conservative scenario for the next few years. Even with an extremely low margin of 5% for the next 7-8 years the value comes to 2000.
The above scenarios assume that 2009 and part of 2010 would be bad with net profit dropping by 50%.
conclusion
The company has been priced as if it will be out of business soon. The company is being valued at 250-300 Crs net of cash for all the fixed assets, intellectual property, customer relationships etc. In effect the market is saying that company will shut down in the next 1-2 years.
The credit crisis and subsequent recession in the textile industry is bound to impact companies like LMW. However this is part of a normal business cycle. Capital good are the first to bear the brunt of a recession. However that does not mean that the industry is heading for extinction. The pricing however seems to be pointing to that scenario
Some Q&A
I am putting some possible questions and answers which could be on your mind
Q1: The textile industry is in recession and the outlook is cloudy. Should we not wait till it becomes clear ?
The future is never completely clear. If it was clear in 2007 that the textile industry would be in recession in 2009, the stock price would not have gone up to 3000+. In 2007 the market was pricing the stock for a glorious future and now is pricing for complete disaster. The reality is always in between
Q2: The price could drop further. Should I wait for a better price?
The stock is selling at around 30-40% of intrinsic value. No one can predict how much lower it can go. I personally think bottom fishing is a waste of time. Time and energy should be spent on understanding the company, its industry and the future economics of the company than trying to get the last 10% in terms of price
Q3: All the stock analyst and gurus have sell recommendation on the stock. What makes you think you are right and all the others are wrong?
I don’t know if I am right or not. What I like are the odds. There is a high probability that the company and its stock could do well in the future. How well, I don’t know. I could be wrong too. However this is not the only stock in my portfolio. The reason for having a diversified portfolio is that I may be wrong 30-40% of the time and still do well on an overall basis. In addition the downside on the stock is protected as the company is now selling at very low valuations and is priced for disaster.
Q4: The volumes are low and stock is exhibiting weakness
Lets give the stock some horlicks :) ..how does it matter if you plan to hold the stock for the long term. If the volumes are low and there is weakness, it is a good time to buy. When everything clear up, and optimisim and strenght returns it would a good time to sell.
Q5: The technicals for the stock are weak
Huh !! sorry we are from a different planet !!
Tuesday, October 07, 2008
Buying in bear markets
I have been getting several questions of this type
- what should be my buying strategy ?
- Should I buy immediately or wait for the bottom?
- Is the price of stock ABC good for buying or should I wait?
I have very simple approach and answer to all the above questions (from my perspective)
Step 1: understand the company well. Have confidence on your analysis
Step 2: Evaluate intrinsic value. Be realisitic in your evaluation. Be neither too pessimistic or too optimistic
Step 3: check price. If selling below intrinsic value (I personally prefer 50% below intrinsic value, you can choose your own number), buy. Otherwise do nothing
Step 4 : Every quarter analyse the results of the company and check if your assumptions are still valid. Recalculate intrinsic value if required.
Personally I decide on the position size and then invest around 40-50% of the full position if the price meets my criteria in step3. The rest of the buying is done in the next couple of months.
This approach cuts both ways. In a rising market, I am unable to build a full position. In a bear market, I am able to average down on price. However while I am doing this I am not looking at the overall market levels or trying bottom fishing. I personally think bottom fishing is a futile exercise and a 5-10% difference in the price will not matter in the long run. If it does, then one is cutting it real close
Do not invest
There is caveat to the above suggestion. If you do not understand the company well, cannot evaluate the intrinsic value or do not have confidence on your analysis, please don’t invest. A bull market is forgiving and you may make money inspite of poor analysis. However a bear market is brutal. If you analyse a company incorrectly or do not have the confidence, the market will not bail you out.
Finally, if you ask for the all time best strategy – Create an SIP (systematic investment plan) on the index for the next 15 years and don’t disturb it.
What I am looking at now?
The market is moving pretty fast these days. As a result I have been reviewing my holdings and looking at new companies. As I plan to keep the total number of holdings fixed (more on that later), I am comparing new ideas with the exisiting ones. A new idea has to be more attractive than an exisiting one, to get into the portfolio (and push out the less attractive stock)
Some companies I am looking at
Lakshmi machine works
Ingersoll rand
ICSA (later)
SKF bearing
HTMT global (cash bargain)
Denso india
Sonata software
Torrent software
The above list is not a recommendation list. It is just a list of stocks I am looking at and may or may not invest in any one of them. I will post on stocks which I find attractive when I complete the analysis and am able to write a post on it.
- what should be my buying strategy ?
- Should I buy immediately or wait for the bottom?
- Is the price of stock ABC good for buying or should I wait?
I have very simple approach and answer to all the above questions (from my perspective)
Step 1: understand the company well. Have confidence on your analysis
Step 2: Evaluate intrinsic value. Be realisitic in your evaluation. Be neither too pessimistic or too optimistic
Step 3: check price. If selling below intrinsic value (I personally prefer 50% below intrinsic value, you can choose your own number), buy. Otherwise do nothing
Step 4 : Every quarter analyse the results of the company and check if your assumptions are still valid. Recalculate intrinsic value if required.
Personally I decide on the position size and then invest around 40-50% of the full position if the price meets my criteria in step3. The rest of the buying is done in the next couple of months.
This approach cuts both ways. In a rising market, I am unable to build a full position. In a bear market, I am able to average down on price. However while I am doing this I am not looking at the overall market levels or trying bottom fishing. I personally think bottom fishing is a futile exercise and a 5-10% difference in the price will not matter in the long run. If it does, then one is cutting it real close
Do not invest
There is caveat to the above suggestion. If you do not understand the company well, cannot evaluate the intrinsic value or do not have confidence on your analysis, please don’t invest. A bull market is forgiving and you may make money inspite of poor analysis. However a bear market is brutal. If you analyse a company incorrectly or do not have the confidence, the market will not bail you out.
Finally, if you ask for the all time best strategy – Create an SIP (systematic investment plan) on the index for the next 15 years and don’t disturb it.
What I am looking at now?
The market is moving pretty fast these days. As a result I have been reviewing my holdings and looking at new companies. As I plan to keep the total number of holdings fixed (more on that later), I am comparing new ideas with the exisiting ones. A new idea has to be more attractive than an exisiting one, to get into the portfolio (and push out the less attractive stock)
Some companies I am looking at
Lakshmi machine works
Ingersoll rand
ICSA (later)
SKF bearing
HTMT global (cash bargain)
Denso india
Sonata software
Torrent software
The above list is not a recommendation list. It is just a list of stocks I am looking at and may or may not invest in any one of them. I will post on stocks which I find attractive when I complete the analysis and am able to write a post on it.
Buying in bear markets
I have been getting several questions of this type
- what should be my buying strategy ?
- Should I buy immediately or wait for the bottom?
- Is the price of stock ABC good for buying or should I wait?
I have very simple approach and answer to all the above questions (from my perspective)
Step 1: understand the company well. Have confidence on your analysis
Step 2: Evaluate intrinsic value. Be realisitic in your evaluation. Be neither too pessimistic or too optimistic
Step 3: check price. If selling below intrinsic value (I personally prefer 50% below intrinsic value, you can choose your own number), buy. Otherwise do nothing
Step 4 : Every quarter analyse the results of the company and check if your assumptions are still valid. Recalculate intrinsic value if required.
Personally I decide on the position size and then invest around 40-50% of the full position if the price meets my criteria in step3. The rest of the buying is done in the next couple of months.
This approach cuts both ways. In a rising market, I am unable to build a full position. In a bear market, I am able to average down on price. However while I am doing this I am not looking at the overall market levels or trying bottom fishing. I personally think bottom fishing is a futile exercise and a 5-10% difference in the price will not matter in the long run. If it does, then one is cutting it real close
Do not invest
There is caveat to the above suggestion. If you do not understand the company well, cannot evaluate the intrinsic value or do not have confidence on your analysis, please don’t invest. A bull market is forgiving and you may make money inspite of poor analysis. However a bear market is brutal. If you analyse a company incorrectly or do not have the confidence, the market will not bail you out.
Finally, if you ask for the all time best strategy – Create an SIP (systematic investment plan) on the index for the next 15 years and don’t disturb it.
What I am looking at now?
The market is moving pretty fast these days. As a result I have been reviewing my holdings and looking at new companies. As I plan to keep the total number of holdings fixed (more on that later), I am comparing new ideas with the exisiting ones. A new idea has to be more attractive than an exisiting one, to get into the portfolio (and push out the less attractive stock)
Some companies I am looking at
Lakshmi machine works
Ingersoll rand
ICSA (later)
SKF bearing
HTMT global (cash bargain)
Denso india
Sonata software
Torrent software
The above list is not a recommendation list. It is just a list of stocks I am looking at and may or may not invest in any one of them. I will post on stocks which I find attractive when I complete the analysis and am able to write a post on it.
- what should be my buying strategy ?
- Should I buy immediately or wait for the bottom?
- Is the price of stock ABC good for buying or should I wait?
I have very simple approach and answer to all the above questions (from my perspective)
Step 1: understand the company well. Have confidence on your analysis
Step 2: Evaluate intrinsic value. Be realisitic in your evaluation. Be neither too pessimistic or too optimistic
Step 3: check price. If selling below intrinsic value (I personally prefer 50% below intrinsic value, you can choose your own number), buy. Otherwise do nothing
Step 4 : Every quarter analyse the results of the company and check if your assumptions are still valid. Recalculate intrinsic value if required.
Personally I decide on the position size and then invest around 40-50% of the full position if the price meets my criteria in step3. The rest of the buying is done in the next couple of months.
This approach cuts both ways. In a rising market, I am unable to build a full position. In a bear market, I am able to average down on price. However while I am doing this I am not looking at the overall market levels or trying bottom fishing. I personally think bottom fishing is a futile exercise and a 5-10% difference in the price will not matter in the long run. If it does, then one is cutting it real close
Do not invest
There is caveat to the above suggestion. If you do not understand the company well, cannot evaluate the intrinsic value or do not have confidence on your analysis, please don’t invest. A bull market is forgiving and you may make money inspite of poor analysis. However a bear market is brutal. If you analyse a company incorrectly or do not have the confidence, the market will not bail you out.
Finally, if you ask for the all time best strategy – Create an SIP (systematic investment plan) on the index for the next 15 years and don’t disturb it.
What I am looking at now?
The market is moving pretty fast these days. As a result I have been reviewing my holdings and looking at new companies. As I plan to keep the total number of holdings fixed (more on that later), I am comparing new ideas with the exisiting ones. A new idea has to be more attractive than an exisiting one, to get into the portfolio (and push out the less attractive stock)
Some companies I am looking at
Lakshmi machine works
Ingersoll rand
ICSA (later)
SKF bearing
HTMT global (cash bargain)
Denso india
Sonata software
Torrent software
The above list is not a recommendation list. It is just a list of stocks I am looking at and may or may not invest in any one of them. I will post on stocks which I find attractive when I complete the analysis and am able to write a post on it.
Saturday, October 04, 2008
Regarding personal emails to me
I have been getting personal emails for quite sometime. The volume has now gone up considerably now. Although i try to respond to each and every email i get, that may always not be the case. So if anyone of you have written to me and not heard back, my apologies. I may have missed out on the email if it landed in my spam folder or it may still be in the queue. I am not being rude, intentionally.
I receive a lot of requests seeking my view on specific stocks. If you have been around this blog for some time, you may have noticed that any point of time I have around 10-15 ideas. I typically look at companies and end up rejecting most either as they are out of my circle of competence or there is something wrong fundamentally or the valuation is too high. As a result I may not have an idea of the company being highlighted in the email.
In order to provide a decent response, I have to invest 3-4 hrs of my time to arrive at some conclusion. As investing is not a profession, I cannot devote as much time as I would like to. So I would request you to be patient with my response. Finally time is key constraint for me (I do have a life beyond investing :) ), so my approach is to focus on a few decent companies and not spread myself thin.
I am currently analysing the Annual reports of some of the companies I hold and would then start looking at new companies, preferably in the list which was provided to me in response to an earlier post (I have not forgotten about it).
I assume most of you are aware of RSS. RSS allows you get my posts directly in a feed reader such as google or you can subscribe via email too (don’t worry, I will not spam you). You can subscribe to this blog via ‘subscribe’ option on the sidebar. In addition, I typically update twitter with what I am reading or planning to post. You can follow me via this link.
I receive a lot of requests seeking my view on specific stocks. If you have been around this blog for some time, you may have noticed that any point of time I have around 10-15 ideas. I typically look at companies and end up rejecting most either as they are out of my circle of competence or there is something wrong fundamentally or the valuation is too high. As a result I may not have an idea of the company being highlighted in the email.
In order to provide a decent response, I have to invest 3-4 hrs of my time to arrive at some conclusion. As investing is not a profession, I cannot devote as much time as I would like to. So I would request you to be patient with my response. Finally time is key constraint for me (I do have a life beyond investing :) ), so my approach is to focus on a few decent companies and not spread myself thin.
I am currently analysing the Annual reports of some of the companies I hold and would then start looking at new companies, preferably in the list which was provided to me in response to an earlier post (I have not forgotten about it).
I assume most of you are aware of RSS. RSS allows you get my posts directly in a feed reader such as google or you can subscribe via email too (don’t worry, I will not spam you). You can subscribe to this blog via ‘subscribe’ option on the sidebar. In addition, I typically update twitter with what I am reading or planning to post. You can follow me via this link.
Regarding personal emails to me
I have been getting personal emails for quite sometime. The volume has now gone up considerably now. Although i try to respond to each and every email i get, that may always not be the case. So if anyone of you have written to me and not heard back, my apologies. I may have missed out on the email if it landed in my spam folder or it may still be in the queue. I am not being rude, intentionally.
I receive a lot of requests seeking my view on specific stocks. If you have been around this blog for some time, you may have noticed that any point of time I have around 10-15 ideas. I typically look at companies and end up rejecting most either as they are out of my circle of competence or there is something wrong fundamentally or the valuation is too high. As a result I may not have an idea of the company being highlighted in the email.
In order to provide a decent response, I have to invest 3-4 hrs of my time to arrive at some conclusion. As investing is not a profession, I cannot devote as much time as I would like to. So I would request you to be patient with my response. Finally time is key constraint for me (I do have a life beyond investing :) ), so my approach is to focus on a few decent companies and not spread myself thin.
I am currently analysing the Annual reports of some of the companies I hold and would then start looking at new companies, preferably in the list which was provided to me in response to an earlier post (I have not forgotten about it).
I assume most of you are aware of RSS. RSS allows you get my posts directly in a feed reader such as google or you can subscribe via email too (don’t worry, I will not spam you). You can subscribe to this blog via ‘subscribe’ option on the sidebar. In addition, I typically update twitter with what I am reading or planning to post. You can follow me via this link.
I receive a lot of requests seeking my view on specific stocks. If you have been around this blog for some time, you may have noticed that any point of time I have around 10-15 ideas. I typically look at companies and end up rejecting most either as they are out of my circle of competence or there is something wrong fundamentally or the valuation is too high. As a result I may not have an idea of the company being highlighted in the email.
In order to provide a decent response, I have to invest 3-4 hrs of my time to arrive at some conclusion. As investing is not a profession, I cannot devote as much time as I would like to. So I would request you to be patient with my response. Finally time is key constraint for me (I do have a life beyond investing :) ), so my approach is to focus on a few decent companies and not spread myself thin.
I am currently analysing the Annual reports of some of the companies I hold and would then start looking at new companies, preferably in the list which was provided to me in response to an earlier post (I have not forgotten about it).
I assume most of you are aware of RSS. RSS allows you get my posts directly in a feed reader such as google or you can subscribe via email too (don’t worry, I will not spam you). You can subscribe to this blog via ‘subscribe’ option on the sidebar. In addition, I typically update twitter with what I am reading or planning to post. You can follow me via this link.
Friday, October 03, 2008
Time to get busy
Almost everyone is of the opinion that we are in for some nasty times especially in the US and other developed countries. India may not get impacted that badly, but could still face some impact.
I don’t agree that the bailout package in the US will fix the underlying issues. The underlying issue is that Banks have made bad investments via Derivatives and mortages. They have lost money on those investments. The only fix is to absorb the losses and build the capital again. In doing so, there will be a reduction in credit and liquidity.
The bailout package will at best allow the banks to sell these assets to someone (in this case the government). However I don’t think the US government will be stupid to buy it at book value. So the bailout package will help in creating liquidity for the toxic assets and get the system moving. However it is not going to reduce the losses and the subsequent pain.
I keep reading expectations of this mess getting resolved by early to mid 2009. I don’t know and I am not holding my breath on it. I personally don’t think the clean up will happen so soon. For history, look at the japanese experience in early 90’s.
Some guesses
So how does it play out for us ?
- Real estate in india could be in for some tough times. I still feel real estate in india was driven by liquidity and speculation in the last 3-4 years. A 30% or higher annual appreciation in real estate is not sustainable.
- Companies with debt, especially foreign borrowings could get hit big time. With the rupee depreciating and credit getting costly I would stay away from such companies (I personally have always avoided companies with high debt). The flip side is that companies with high cash holdings can deploy this cash profitably now (investments, cheap accquisitions or buybacks)
- Companies with a lot of promise, but not backed by results have already got hit and could get hit further. During bear markets, PE (what investors are ready to pay for the future) invariably contracts.
- IT, BPO and other industries could be in for a decent amount of pain. Mid to small cap companies could be at risk if they are dependent on a few clients in the banking sector.
- Double digit salary hikes may not happen for sometime now.
- Value investing will be back in fashion ( why not :) ? ). I am half serious ! A lot of investors who made good money in the last few years and consider the stock market as a short cut to riches, may be in for a rude shock. A slow grinding bear market is eventually more painful than a quick drop.
- This blog will see a 1000% increase in visitors …just joking !! couldn’t resist it.
Whats next ?
As I have said before, no one can predict that. There were predictions on the sensex touching 25K by the end of the year. Now all the analysts and so called TV gurus have turned bearish.
I am starting to see some amazing bargains now, some new and some in my exisiting holdings. It is starting to feel like 2003 again J ..almost there, but not yet. So its time to get busy in finding great bargains and building the portfolio.
I don’t agree that the bailout package in the US will fix the underlying issues. The underlying issue is that Banks have made bad investments via Derivatives and mortages. They have lost money on those investments. The only fix is to absorb the losses and build the capital again. In doing so, there will be a reduction in credit and liquidity.
The bailout package will at best allow the banks to sell these assets to someone (in this case the government). However I don’t think the US government will be stupid to buy it at book value. So the bailout package will help in creating liquidity for the toxic assets and get the system moving. However it is not going to reduce the losses and the subsequent pain.
I keep reading expectations of this mess getting resolved by early to mid 2009. I don’t know and I am not holding my breath on it. I personally don’t think the clean up will happen so soon. For history, look at the japanese experience in early 90’s.
Some guesses
So how does it play out for us ?
- Real estate in india could be in for some tough times. I still feel real estate in india was driven by liquidity and speculation in the last 3-4 years. A 30% or higher annual appreciation in real estate is not sustainable.
- Companies with debt, especially foreign borrowings could get hit big time. With the rupee depreciating and credit getting costly I would stay away from such companies (I personally have always avoided companies with high debt). The flip side is that companies with high cash holdings can deploy this cash profitably now (investments, cheap accquisitions or buybacks)
- Companies with a lot of promise, but not backed by results have already got hit and could get hit further. During bear markets, PE (what investors are ready to pay for the future) invariably contracts.
- IT, BPO and other industries could be in for a decent amount of pain. Mid to small cap companies could be at risk if they are dependent on a few clients in the banking sector.
- Double digit salary hikes may not happen for sometime now.
- Value investing will be back in fashion ( why not :) ? ). I am half serious ! A lot of investors who made good money in the last few years and consider the stock market as a short cut to riches, may be in for a rude shock. A slow grinding bear market is eventually more painful than a quick drop.
- This blog will see a 1000% increase in visitors …just joking !! couldn’t resist it.
Whats next ?
As I have said before, no one can predict that. There were predictions on the sensex touching 25K by the end of the year. Now all the analysts and so called TV gurus have turned bearish.
I am starting to see some amazing bargains now, some new and some in my exisiting holdings. It is starting to feel like 2003 again J ..almost there, but not yet. So its time to get busy in finding great bargains and building the portfolio.
Time to get busy
Almost everyone is of the opinion that we are in for some nasty times especially in the US and other developed countries. India may not get impacted that badly, but could still face some impact.
I don’t agree that the bailout package in the US will fix the underlying issues. The underlying issue is that Banks have made bad investments via Derivatives and mortages. They have lost money on those investments. The only fix is to absorb the losses and build the capital again. In doing so, there will be a reduction in credit and liquidity.
The bailout package will at best allow the banks to sell these assets to someone (in this case the government). However I don’t think the US government will be stupid to buy it at book value. So the bailout package will help in creating liquidity for the toxic assets and get the system moving. However it is not going to reduce the losses and the subsequent pain.
I keep reading expectations of this mess getting resolved by early to mid 2009. I don’t know and I am not holding my breath on it. I personally don’t think the clean up will happen so soon. For history, look at the japanese experience in early 90’s.
Some guesses
So how does it play out for us ?
- Real estate in india could be in for some tough times. I still feel real estate in india was driven by liquidity and speculation in the last 3-4 years. A 30% or higher annual appreciation in real estate is not sustainable.
- Companies with debt, especially foreign borrowings could get hit big time. With the rupee depreciating and credit getting costly I would stay away from such companies (I personally have always avoided companies with high debt). The flip side is that companies with high cash holdings can deploy this cash profitably now (investments, cheap accquisitions or buybacks)
- Companies with a lot of promise, but not backed by results have already got hit and could get hit further. During bear markets, PE (what investors are ready to pay for the future) invariably contracts.
- IT, BPO and other industries could be in for a decent amount of pain. Mid to small cap companies could be at risk if they are dependent on a few clients in the banking sector.
- Double digit salary hikes may not happen for sometime now.
- Value investing will be back in fashion ( why not :) ? ). I am half serious ! A lot of investors who made good money in the last few years and consider the stock market as a short cut to riches, may be in for a rude shock. A slow grinding bear market is eventually more painful than a quick drop.
- This blog will see a 1000% increase in visitors …just joking !! couldn’t resist it.
Whats next ?
As I have said before, no one can predict that. There were predictions on the sensex touching 25K by the end of the year. Now all the analysts and so called TV gurus have turned bearish.
I am starting to see some amazing bargains now, some new and some in my exisiting holdings. It is starting to feel like 2003 again J ..almost there, but not yet. So its time to get busy in finding great bargains and building the portfolio.
I don’t agree that the bailout package in the US will fix the underlying issues. The underlying issue is that Banks have made bad investments via Derivatives and mortages. They have lost money on those investments. The only fix is to absorb the losses and build the capital again. In doing so, there will be a reduction in credit and liquidity.
The bailout package will at best allow the banks to sell these assets to someone (in this case the government). However I don’t think the US government will be stupid to buy it at book value. So the bailout package will help in creating liquidity for the toxic assets and get the system moving. However it is not going to reduce the losses and the subsequent pain.
I keep reading expectations of this mess getting resolved by early to mid 2009. I don’t know and I am not holding my breath on it. I personally don’t think the clean up will happen so soon. For history, look at the japanese experience in early 90’s.
Some guesses
So how does it play out for us ?
- Real estate in india could be in for some tough times. I still feel real estate in india was driven by liquidity and speculation in the last 3-4 years. A 30% or higher annual appreciation in real estate is not sustainable.
- Companies with debt, especially foreign borrowings could get hit big time. With the rupee depreciating and credit getting costly I would stay away from such companies (I personally have always avoided companies with high debt). The flip side is that companies with high cash holdings can deploy this cash profitably now (investments, cheap accquisitions or buybacks)
- Companies with a lot of promise, but not backed by results have already got hit and could get hit further. During bear markets, PE (what investors are ready to pay for the future) invariably contracts.
- IT, BPO and other industries could be in for a decent amount of pain. Mid to small cap companies could be at risk if they are dependent on a few clients in the banking sector.
- Double digit salary hikes may not happen for sometime now.
- Value investing will be back in fashion ( why not :) ? ). I am half serious ! A lot of investors who made good money in the last few years and consider the stock market as a short cut to riches, may be in for a rude shock. A slow grinding bear market is eventually more painful than a quick drop.
- This blog will see a 1000% increase in visitors …just joking !! couldn’t resist it.
Whats next ?
As I have said before, no one can predict that. There were predictions on the sensex touching 25K by the end of the year. Now all the analysts and so called TV gurus have turned bearish.
I am starting to see some amazing bargains now, some new and some in my exisiting holdings. It is starting to feel like 2003 again J ..almost there, but not yet. So its time to get busy in finding great bargains and building the portfolio.
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