In the previous post, I described my investment journey till 2003. By mid of 2003, I had spent close to 6-7 years on reading and studying about the topic. I had read dozens of books on warren buffett and other value investors. In addition I had been analying companies for the past 5 years. So I understood the basics of investing, valuation and other aspects of investing.
What was missing was the experience and the softer aspects of investing. I had allowed myself to be swayed by the surrounding euphoria (partly though) in 2000. In addition by 2002-2003 when there were values all around (companies like L&T, blue star etc were available at a bargain), I was still not confident enough to go the whole hog.
If you have gone through this phase or are going through it, you will understand. If you have not seen a lot of success (mine was relative, I had done well compared to the market) and even if you feel that your are doing the right thing, it is not easy to jump in again completely. So during this phase, I increased my holdings, but I was very cautious (maybe overcautious) about it.
The market had gone nowhere for the last 10 years and so unlike today, no one was interested in stocks.
So what were the key learnings for me till 2003 ?
1. Do not over pay for a stock. I learnt this from SSI. Yes, sky is the limit for these hot companies. However for every Infosys or PRIL or L&T, there are 10 pretenders. In addition this kind of early stage investing requires a different mindset. I do not have that kind of mindset.
2. focus on companies with sustainable competitive advantage which have a profitable growing business and are available at a reasonable price. I have made the best returns from this group. Ignore the long shots ..companies which will be the next HDFC, next infosys, next L&T etc. Buy HDFC if it is available at a reasonable price otherwise find something else.
Valuation and price matters. Promise is all great, but if a company does not meet the promise then the stock price gets killed. I learnt it from SSI and a lot of other investors are learning that lesson now via other companies.
3. Be honest and brutual about your mistakes. Do blame others like analysts, media, friends etc. If you have made a mistake, accept it and move on. In short – don’t whine !!
2003 – 2006 (Beating the market and making some money)
By the end of 2003, the market was up 73% and I beat the market by a few points. As I had beaten the market during the bear phase too, I had gained in absolute terms by the end of the year.
The portfolio mix was roughly the same, with a new addition by end of the year of kothari products which was a small position (I started experimenting with a few graham type stocks)
By 2004 year end, my portfolio was doing fairly well. I had done better than the market with good gains in asian paints, concor, blue star etc. In addition I created a new position in BayerABS and Balmer lawrie by the end of the year.
I did no major additions or sale during 2005. Most of the stocks did well and the valuation gaps closed for several of my earlier picks as the market started recognizing these companies. I was able to do better than the market and was now fairly confident of my approach, which was now working well.
2006 was also a year with almost no activity in terms of buying or selling. To certain extent, I was still riding my earlier picks and to a certain extent I was finding it diffcult to find ideas which were as attractive as my exisiting one. I had done most of my picks during the bear market of 2001-2003 when good companies were available at throwaway prices. I was still searching for similar opportunities in 2006. That ofcourse was a foolish thing to do then. I was not going to get those kind of opportunities in a bull market.
By end of 2006, most of the companies I held, seemed to be fully valued. I liquidated almost 60-70% of my portfolio and ended the year with small holdings in asian paints, reliance (which I got through my RPL holdings), Bayer ABS and balmer lawrie. In addition I started building a small position in Merck and KOEL.
As an aside, in 2004, I discovered blogging and created my blog. This was my first post.
2007 (rethinking the approach)
I began 2007, with a fairly liquidated portfolio and few holdings.The really good companies seemed to be fairly valued and so I was not interested in them. As this time I started exploring graham kind of opportunities.
Till 2007, my approach was always to buy good companies and hold them for a long time. However I was always split between the idea of buying and holding even after the company was selling at or above my estimate of intrinsic value.
In 2007, I read a book by Mohnish pabrai (Dhando investor) and also a few other books and comments by warren buffett. I kind of realised that if one is interested in making higher returns then you have to look at buying undervalued companies and selling at intrsinsic value. The portfolio churn is more and you have work harder at finding new ideas, but the returns are higher. So I had a slight change in approach in 2007.
I built a position in KOEL (kirloskar oil) and sold when it hit intrinsic value. I created new positions in cheviot, India nippon, novartis, VST, manugraph, HPCL, grindwell norton etc. In addition I bought and sold IGL (after I felt I was wrong in my analysis), and did the same with MRO tek when it reached intrinsic value.
2007 was a crazy year. Anyone could have made money. I did well too (maybe too well). However I did not go whole hog as I was not comfortable with the valuation for most companies. I had not forgotten my earlier lessons. Frankly I don’t care how well others are doing or what they are recommending. Maybe some people can trade profitably by looking at the tides, but that’s not for me. Real estate companies, Capital goods companies looked like IT companies of 2000 and so I stayed away from them.
2008 (Doing more of the same)
Jan started with a major high in terms of the market and low activity from my end. I have been analysing companies since then and looking for new ideas constantly.
2008 has seen the market tumble from the all time highs. As I was not comfortable with the valuations by the end of 2007, I did not add much to my holdings. I try not time the market, but time the price (this is a quote by warren buffett). What that means is that my buy and sell decisions are based on the discount at which good companies are selling to their intrinsic value. If there is a big discount I will buy irrespective of the market level. Ofcourse, most of the times this approach takes you out of the market at highs and makes you more active when the market is tanking.
My activity levels in terms of buying or selling are higher this year. My portfolio was in a semi-coma state for a long period as there was not much to do. However with a slight change in approach and better values, there is more activity now.
Future ?
I don’t know how things will work out. What I know for sure is that I plan to keep reading and learning. I plan to add arbitrage to my portfolio and make it a higher percentage. However overall, I plan to develop my approach further and deepen my understanding of various areas such as accounting, options pricing, and economics etc . The focus is to learn topics which would improve me as an investor.
If you have been with me for these two posts, you can see why I have a strong preference for value investing. This approach has worked for me and allows me get a good night sleep. It fits my temprament of slow and delibrate thinking. I do not like fast paced action and thrills (in my portfolio, movies are a different matter).
Even among valueinvestors, there are varying styles and each one selects a different set of companies for his or her portfolio. I think it is driven a lot by one’s experiences. In my case, I have stayed away from high growth, hot sexy companies due to my bad experience with SSI and other IT companies. On the other hand the boring, dull but solidly profitable companies have given me great returns. Hence my preference for those kind of companies.
Monday, August 25, 2008
My personal investment journey - II
In the previous post, I described my investment journey till 2003. By mid of 2003, I had spent close to 6-7 years on reading and studying about the topic. I had read dozens of books on warren buffett and other value investors. In addition I had been analying companies for the past 5 years. So I understood the basics of investing, valuation and other aspects of investing.
What was missing was the experience and the softer aspects of investing. I had allowed myself to be swayed by the surrounding euphoria (partly though) in 2000. In addition by 2002-2003 when there were values all around (companies like L&T, blue star etc were available at a bargain), I was still not confident enough to go the whole hog.
If you have gone through this phase or are going through it, you will understand. If you have not seen a lot of success (mine was relative, I had done well compared to the market) and even if you feel that your are doing the right thing, it is not easy to jump in again completely. So during this phase, I increased my holdings, but I was very cautious (maybe overcautious) about it.
The market had gone nowhere for the last 10 years and so unlike today, no one was interested in stocks.
So what were the key learnings for me till 2003 ?
1. Do not over pay for a stock. I learnt this from SSI. Yes, sky is the limit for these hot companies. However for every Infosys or PRIL or L&T, there are 10 pretenders. In addition this kind of early stage investing requires a different mindset. I do not have that kind of mindset.
2. focus on companies with sustainable competitive advantage which have a profitable growing business and are available at a reasonable price. I have made the best returns from this group. Ignore the long shots ..companies which will be the next HDFC, next infosys, next L&T etc. Buy HDFC if it is available at a reasonable price otherwise find something else.
Valuation and price matters. Promise is all great, but if a company does not meet the promise then the stock price gets killed. I learnt it from SSI and a lot of other investors are learning that lesson now via other companies.
3. Be honest and brutual about your mistakes. Do blame others like analysts, media, friends etc. If you have made a mistake, accept it and move on. In short – don’t whine !!
2003 – 2006 (Beating the market and making some money)
By the end of 2003, the market was up 73% and I beat the market by a few points. As I had beaten the market during the bear phase too, I had gained in absolute terms by the end of the year.
The portfolio mix was roughly the same, with a new addition by end of the year of kothari products which was a small position (I started experimenting with a few graham type stocks)
By 2004 year end, my portfolio was doing fairly well. I had done better than the market with good gains in asian paints, concor, blue star etc. In addition I created a new position in BayerABS and Balmer lawrie by the end of the year.
I did no major additions or sale during 2005. Most of the stocks did well and the valuation gaps closed for several of my earlier picks as the market started recognizing these companies. I was able to do better than the market and was now fairly confident of my approach, which was now working well.
2006 was also a year with almost no activity in terms of buying or selling. To certain extent, I was still riding my earlier picks and to a certain extent I was finding it diffcult to find ideas which were as attractive as my exisiting one. I had done most of my picks during the bear market of 2001-2003 when good companies were available at throwaway prices. I was still searching for similar opportunities in 2006. That ofcourse was a foolish thing to do then. I was not going to get those kind of opportunities in a bull market.
By end of 2006, most of the companies I held, seemed to be fully valued. I liquidated almost 60-70% of my portfolio and ended the year with small holdings in asian paints, reliance (which I got through my RPL holdings), Bayer ABS and balmer lawrie. In addition I started building a small position in Merck and KOEL.
As an aside, in 2004, I discovered blogging and created my blog. This was my first post.
2007 (rethinking the approach)
I began 2007, with a fairly liquidated portfolio and few holdings.The really good companies seemed to be fairly valued and so I was not interested in them. As this time I started exploring graham kind of opportunities.
Till 2007, my approach was always to buy good companies and hold them for a long time. However I was always split between the idea of buying and holding even after the company was selling at or above my estimate of intrinsic value.
In 2007, I read a book by Mohnish pabrai (Dhando investor) and also a few other books and comments by warren buffett. I kind of realised that if one is interested in making higher returns then you have to look at buying undervalued companies and selling at intrsinsic value. The portfolio churn is more and you have work harder at finding new ideas, but the returns are higher. So I had a slight change in approach in 2007.
I built a position in KOEL (kirloskar oil) and sold when it hit intrinsic value. I created new positions in cheviot, India nippon, novartis, VST, manugraph, HPCL, grindwell norton etc. In addition I bought and sold IGL (after I felt I was wrong in my analysis), and did the same with MRO tek when it reached intrinsic value.
2007 was a crazy year. Anyone could have made money. I did well too (maybe too well). However I did not go whole hog as I was not comfortable with the valuation for most companies. I had not forgotten my earlier lessons. Frankly I don’t care how well others are doing or what they are recommending. Maybe some people can trade profitably by looking at the tides, but that’s not for me. Real estate companies, Capital goods companies looked like IT companies of 2000 and so I stayed away from them.
2008 (Doing more of the same)
Jan started with a major high in terms of the market and low activity from my end. I have been analysing companies since then and looking for new ideas constantly.
2008 has seen the market tumble from the all time highs. As I was not comfortable with the valuations by the end of 2007, I did not add much to my holdings. I try not time the market, but time the price (this is a quote by warren buffett). What that means is that my buy and sell decisions are based on the discount at which good companies are selling to their intrinsic value. If there is a big discount I will buy irrespective of the market level. Ofcourse, most of the times this approach takes you out of the market at highs and makes you more active when the market is tanking.
My activity levels in terms of buying or selling are higher this year. My portfolio was in a semi-coma state for a long period as there was not much to do. However with a slight change in approach and better values, there is more activity now.
Future ?
I don’t know how things will work out. What I know for sure is that I plan to keep reading and learning. I plan to add arbitrage to my portfolio and make it a higher percentage. However overall, I plan to develop my approach further and deepen my understanding of various areas such as accounting, options pricing, and economics etc . The focus is to learn topics which would improve me as an investor.
If you have been with me for these two posts, you can see why I have a strong preference for value investing. This approach has worked for me and allows me get a good night sleep. It fits my temprament of slow and delibrate thinking. I do not like fast paced action and thrills (in my portfolio, movies are a different matter).
Even among valueinvestors, there are varying styles and each one selects a different set of companies for his or her portfolio. I think it is driven a lot by one’s experiences. In my case, I have stayed away from high growth, hot sexy companies due to my bad experience with SSI and other IT companies. On the other hand the boring, dull but solidly profitable companies have given me great returns. Hence my preference for those kind of companies.
What was missing was the experience and the softer aspects of investing. I had allowed myself to be swayed by the surrounding euphoria (partly though) in 2000. In addition by 2002-2003 when there were values all around (companies like L&T, blue star etc were available at a bargain), I was still not confident enough to go the whole hog.
If you have gone through this phase or are going through it, you will understand. If you have not seen a lot of success (mine was relative, I had done well compared to the market) and even if you feel that your are doing the right thing, it is not easy to jump in again completely. So during this phase, I increased my holdings, but I was very cautious (maybe overcautious) about it.
The market had gone nowhere for the last 10 years and so unlike today, no one was interested in stocks.
So what were the key learnings for me till 2003 ?
1. Do not over pay for a stock. I learnt this from SSI. Yes, sky is the limit for these hot companies. However for every Infosys or PRIL or L&T, there are 10 pretenders. In addition this kind of early stage investing requires a different mindset. I do not have that kind of mindset.
2. focus on companies with sustainable competitive advantage which have a profitable growing business and are available at a reasonable price. I have made the best returns from this group. Ignore the long shots ..companies which will be the next HDFC, next infosys, next L&T etc. Buy HDFC if it is available at a reasonable price otherwise find something else.
Valuation and price matters. Promise is all great, but if a company does not meet the promise then the stock price gets killed. I learnt it from SSI and a lot of other investors are learning that lesson now via other companies.
3. Be honest and brutual about your mistakes. Do blame others like analysts, media, friends etc. If you have made a mistake, accept it and move on. In short – don’t whine !!
2003 – 2006 (Beating the market and making some money)
By the end of 2003, the market was up 73% and I beat the market by a few points. As I had beaten the market during the bear phase too, I had gained in absolute terms by the end of the year.
The portfolio mix was roughly the same, with a new addition by end of the year of kothari products which was a small position (I started experimenting with a few graham type stocks)
By 2004 year end, my portfolio was doing fairly well. I had done better than the market with good gains in asian paints, concor, blue star etc. In addition I created a new position in BayerABS and Balmer lawrie by the end of the year.
I did no major additions or sale during 2005. Most of the stocks did well and the valuation gaps closed for several of my earlier picks as the market started recognizing these companies. I was able to do better than the market and was now fairly confident of my approach, which was now working well.
2006 was also a year with almost no activity in terms of buying or selling. To certain extent, I was still riding my earlier picks and to a certain extent I was finding it diffcult to find ideas which were as attractive as my exisiting one. I had done most of my picks during the bear market of 2001-2003 when good companies were available at throwaway prices. I was still searching for similar opportunities in 2006. That ofcourse was a foolish thing to do then. I was not going to get those kind of opportunities in a bull market.
By end of 2006, most of the companies I held, seemed to be fully valued. I liquidated almost 60-70% of my portfolio and ended the year with small holdings in asian paints, reliance (which I got through my RPL holdings), Bayer ABS and balmer lawrie. In addition I started building a small position in Merck and KOEL.
As an aside, in 2004, I discovered blogging and created my blog. This was my first post.
2007 (rethinking the approach)
I began 2007, with a fairly liquidated portfolio and few holdings.The really good companies seemed to be fairly valued and so I was not interested in them. As this time I started exploring graham kind of opportunities.
Till 2007, my approach was always to buy good companies and hold them for a long time. However I was always split between the idea of buying and holding even after the company was selling at or above my estimate of intrinsic value.
In 2007, I read a book by Mohnish pabrai (Dhando investor) and also a few other books and comments by warren buffett. I kind of realised that if one is interested in making higher returns then you have to look at buying undervalued companies and selling at intrsinsic value. The portfolio churn is more and you have work harder at finding new ideas, but the returns are higher. So I had a slight change in approach in 2007.
I built a position in KOEL (kirloskar oil) and sold when it hit intrinsic value. I created new positions in cheviot, India nippon, novartis, VST, manugraph, HPCL, grindwell norton etc. In addition I bought and sold IGL (after I felt I was wrong in my analysis), and did the same with MRO tek when it reached intrinsic value.
2007 was a crazy year. Anyone could have made money. I did well too (maybe too well). However I did not go whole hog as I was not comfortable with the valuation for most companies. I had not forgotten my earlier lessons. Frankly I don’t care how well others are doing or what they are recommending. Maybe some people can trade profitably by looking at the tides, but that’s not for me. Real estate companies, Capital goods companies looked like IT companies of 2000 and so I stayed away from them.
2008 (Doing more of the same)
Jan started with a major high in terms of the market and low activity from my end. I have been analysing companies since then and looking for new ideas constantly.
2008 has seen the market tumble from the all time highs. As I was not comfortable with the valuations by the end of 2007, I did not add much to my holdings. I try not time the market, but time the price (this is a quote by warren buffett). What that means is that my buy and sell decisions are based on the discount at which good companies are selling to their intrinsic value. If there is a big discount I will buy irrespective of the market level. Ofcourse, most of the times this approach takes you out of the market at highs and makes you more active when the market is tanking.
My activity levels in terms of buying or selling are higher this year. My portfolio was in a semi-coma state for a long period as there was not much to do. However with a slight change in approach and better values, there is more activity now.
Future ?
I don’t know how things will work out. What I know for sure is that I plan to keep reading and learning. I plan to add arbitrage to my portfolio and make it a higher percentage. However overall, I plan to develop my approach further and deepen my understanding of various areas such as accounting, options pricing, and economics etc . The focus is to learn topics which would improve me as an investor.
If you have been with me for these two posts, you can see why I have a strong preference for value investing. This approach has worked for me and allows me get a good night sleep. It fits my temprament of slow and delibrate thinking. I do not like fast paced action and thrills (in my portfolio, movies are a different matter).
Even among valueinvestors, there are varying styles and each one selects a different set of companies for his or her portfolio. I think it is driven a lot by one’s experiences. In my case, I have stayed away from high growth, hot sexy companies due to my bad experience with SSI and other IT companies. On the other hand the boring, dull but solidly profitable companies have given me great returns. Hence my preference for those kind of companies.
Tuesday, August 19, 2008
My Personal investment journey - I
There is a certain level of curiosity in knowing what the other guy is making or getting in terms of investment returns. A lot of people and friends I know like to flaunt the returns they are getting from the market (The stock I bought last month doubled !!). Maybe it is an ego thing or maybe just a topic of discussion.
I personally prefer to discuss about specific ideas, both in person and on my blog. I find that more interesting and educational for me and others. As a result of this quirk, I have never discussed about the overall returns I have made from the stock market on my blog. I am not selling anything to anyone and just like to share my ideas with like minded people. I am happy if people read what I have to say and can learn something (maybe) with me.
I have been asked about my investing experience and the kind of returns I have made. I have made 32% returns (annualized and unleveraged) over the past 8-9 years following a value approach. These may not be the fantastic returns some of you expect or may have achieved. However they are far more than what I have targeted for myself. Investing is side thing for me and is not my profession. I primarily invest for myself and my family and prefer a buy and hold (not buy and forget) approach. My personal portfolio is low on risk and volatility as I prefer a good night’s sleep.
It may be possible to get higher returns through alternative approaches. However I have found that value investing suits my temprament and the returns I have made are more than satisfactory for me.
A word of caution : I tend to hold a number of stocks which I discuss on this blog. However the purchase price for the stock and portfolio weightage of the stock makes a lot of difference to the overall returns. So please do not buy the stocks I discuss without your own analysis.
In terms of personal disclosure, this maybe as far I would like to go. I am not intending to disclose my overall portfolio and returns on an ongoing basis. Investing rationally is diffcult enough. I do not want to do it publicly and make it more diffcult for me.
However more important than the returns is my investment journey till date. I will be discussing the details in this and the next post. It is likely to be a long post, and maybe boring (no excitement in the way I invest). However what I have gone through may echo what you have or are going through.
1997-1999 (The start)
I had completed my MBA and was working in sales and marketing. I was responsible for handling the finances of my entire family and for me capital preservation was more important. I knew the basics of finance, however that was not sufficient to invest intelligently. An MBA education teaches you about corporate finance, but does not teach you to be an investor.
So during this phase I started learning the basics such as what is an FD, what is a mutual fund etc. Internet was not common then and so my learning was based on economic times and a few books I could get. There were no live quotes then, so one had to look at the papers to get the daily quotes.
During this period I came across the book – The warren buffett way and was competely struck by it. I was completely bowled over by warren buffett. I started reading any books I could get on him. I think I must have read around 20-25 books on him till date. These books led me to other investors like Benjamin graham, Phil fisher etc. By the end of 1999 I had read quite a few books on these masters.
This was more of a reading/ learning phase. The two stocks I bought during this phase were Reliance petroleum and Arvind mills. I read an article in business world on RPL and hence bought that stock. Arvind mills had given a presentation in my college some time back and I liked what I had heard and so went and bought a small amount of the stock.
Well, RPL did well and Arvind mills tanked as the denim industry went into a downturn.
Prior to these two stocks, I bought the following stocks also
IFCI – because the dividend yield was high
Karur vyasa – It was cheap on P/B basis
Larsen toubro – It was a well known company then though not a hot stock.
So by the end of 1999 (before the IT boom), I had a hodgepodge of stocks in my portfolio with most of them doing badly. The good thing was that I was learning and constantly re-evaluating the stocks I had. I soon realised that I had goofed up in some of my picks like IFCI and arvind mills and sold them at a good loss. The rest I held on.
2000 ( The greed phase)
By start of 2000, I felt I had learnt a lot and was ready for the dive ( don’t laugh). So starting from Jan 2000, I started looking at stocks. However all the reading for the last 2-3 years had made me wary of the IT stocks due to the high valuations. I luckily avoided picking any specific stocks during the early part of the year.
However it is not easy to avoid greed, especially if you are new to the market. Thinking that mutual funds are safe, I setup an SIP for some IT and general funds. Well, by the end of the year the IT funds and other funds had tanked and I got an expensive lesson.
Toward the end of the year, I started analsying a few companies and picked up SSI and asian paints. My analysis for asian paints was correct and I have benfitted from it. However in case of SSI I ignored the high valuations. I built a DCF model and pretty much made assumptions to justify the price. I paid for it by losing 90% of my investment on it.
So by end of 2000, after 4 years of learning, all I had to show was a drop of 15% in personal investments and ofcourse a lot of learning in terms of what not to do.
The reason, I think I never gave up was because I was already in love with investing and reading and so was not very dissapointed by the losses. By the way, I had still done better than the market averages. Why is that important? I will come to it by the end of my investment journey
2001-2003 (rebuilding the portfolio)
By 2000, I had got an expensive lesson for being greedy and for ignoring valuations. However I never letup on my learning. I was actually enjoying the process and knew by then that I was fairly passionate about it (money or not). Access to information through the internet made the learning process easier too.
By mid 2001, I started re-analysing my portfolio and identifying my mistakes. Overall, I think I did not have too many. I sold off SSI and exited the IT funds. The rest of the portfolio remained the same. I started analysing stocks and picked up the following companies during the 2001-2003 phase
- Blue star
- Concor
- ICICI bank (had bought the IPO, just increased the holding)
- Marico
- Pidilite
- Gujarat gas
In addition I moved into a few good mutual funds and exited the poorly performing funds. By Mid 2003, my portfolio had done much better than the market, but was below cost in absolute terms as the market had been dropping for the last 2 years.
It is easy to look back and regret that mid 2003 was an all time low (index was around 2900) and one should have invested heavily into the market. But if like me, you were new to the market and had faced only a bear market, it was a very diffcult thing to do. It was difficult to see a bull market over the horizon.
In hindsight (which is always perfect), my portfolio was well positioned for bull run. It however did not feel that way at that time.
By the way, I was not done doing stupid things. I was sick of L&T’s performance (due to the cement division), their management and the stock price. So I sold it after 4 years at a 10% gain. What happened after that ? see here
To be continued …..
I personally prefer to discuss about specific ideas, both in person and on my blog. I find that more interesting and educational for me and others. As a result of this quirk, I have never discussed about the overall returns I have made from the stock market on my blog. I am not selling anything to anyone and just like to share my ideas with like minded people. I am happy if people read what I have to say and can learn something (maybe) with me.
I have been asked about my investing experience and the kind of returns I have made. I have made 32% returns (annualized and unleveraged) over the past 8-9 years following a value approach. These may not be the fantastic returns some of you expect or may have achieved. However they are far more than what I have targeted for myself. Investing is side thing for me and is not my profession. I primarily invest for myself and my family and prefer a buy and hold (not buy and forget) approach. My personal portfolio is low on risk and volatility as I prefer a good night’s sleep.
It may be possible to get higher returns through alternative approaches. However I have found that value investing suits my temprament and the returns I have made are more than satisfactory for me.
A word of caution : I tend to hold a number of stocks which I discuss on this blog. However the purchase price for the stock and portfolio weightage of the stock makes a lot of difference to the overall returns. So please do not buy the stocks I discuss without your own analysis.
In terms of personal disclosure, this maybe as far I would like to go. I am not intending to disclose my overall portfolio and returns on an ongoing basis. Investing rationally is diffcult enough. I do not want to do it publicly and make it more diffcult for me.
However more important than the returns is my investment journey till date. I will be discussing the details in this and the next post. It is likely to be a long post, and maybe boring (no excitement in the way I invest). However what I have gone through may echo what you have or are going through.
1997-1999 (The start)
I had completed my MBA and was working in sales and marketing. I was responsible for handling the finances of my entire family and for me capital preservation was more important. I knew the basics of finance, however that was not sufficient to invest intelligently. An MBA education teaches you about corporate finance, but does not teach you to be an investor.
So during this phase I started learning the basics such as what is an FD, what is a mutual fund etc. Internet was not common then and so my learning was based on economic times and a few books I could get. There were no live quotes then, so one had to look at the papers to get the daily quotes.
During this period I came across the book – The warren buffett way and was competely struck by it. I was completely bowled over by warren buffett. I started reading any books I could get on him. I think I must have read around 20-25 books on him till date. These books led me to other investors like Benjamin graham, Phil fisher etc. By the end of 1999 I had read quite a few books on these masters.
This was more of a reading/ learning phase. The two stocks I bought during this phase were Reliance petroleum and Arvind mills. I read an article in business world on RPL and hence bought that stock. Arvind mills had given a presentation in my college some time back and I liked what I had heard and so went and bought a small amount of the stock.
Well, RPL did well and Arvind mills tanked as the denim industry went into a downturn.
Prior to these two stocks, I bought the following stocks also
IFCI – because the dividend yield was high
Karur vyasa – It was cheap on P/B basis
Larsen toubro – It was a well known company then though not a hot stock.
So by the end of 1999 (before the IT boom), I had a hodgepodge of stocks in my portfolio with most of them doing badly. The good thing was that I was learning and constantly re-evaluating the stocks I had. I soon realised that I had goofed up in some of my picks like IFCI and arvind mills and sold them at a good loss. The rest I held on.
2000 ( The greed phase)
By start of 2000, I felt I had learnt a lot and was ready for the dive ( don’t laugh). So starting from Jan 2000, I started looking at stocks. However all the reading for the last 2-3 years had made me wary of the IT stocks due to the high valuations. I luckily avoided picking any specific stocks during the early part of the year.
However it is not easy to avoid greed, especially if you are new to the market. Thinking that mutual funds are safe, I setup an SIP for some IT and general funds. Well, by the end of the year the IT funds and other funds had tanked and I got an expensive lesson.
Toward the end of the year, I started analsying a few companies and picked up SSI and asian paints. My analysis for asian paints was correct and I have benfitted from it. However in case of SSI I ignored the high valuations. I built a DCF model and pretty much made assumptions to justify the price. I paid for it by losing 90% of my investment on it.
So by end of 2000, after 4 years of learning, all I had to show was a drop of 15% in personal investments and ofcourse a lot of learning in terms of what not to do.
The reason, I think I never gave up was because I was already in love with investing and reading and so was not very dissapointed by the losses. By the way, I had still done better than the market averages. Why is that important? I will come to it by the end of my investment journey
2001-2003 (rebuilding the portfolio)
By 2000, I had got an expensive lesson for being greedy and for ignoring valuations. However I never letup on my learning. I was actually enjoying the process and knew by then that I was fairly passionate about it (money or not). Access to information through the internet made the learning process easier too.
By mid 2001, I started re-analysing my portfolio and identifying my mistakes. Overall, I think I did not have too many. I sold off SSI and exited the IT funds. The rest of the portfolio remained the same. I started analysing stocks and picked up the following companies during the 2001-2003 phase
- Blue star
- Concor
- ICICI bank (had bought the IPO, just increased the holding)
- Marico
- Pidilite
- Gujarat gas
In addition I moved into a few good mutual funds and exited the poorly performing funds. By Mid 2003, my portfolio had done much better than the market, but was below cost in absolute terms as the market had been dropping for the last 2 years.
It is easy to look back and regret that mid 2003 was an all time low (index was around 2900) and one should have invested heavily into the market. But if like me, you were new to the market and had faced only a bear market, it was a very diffcult thing to do. It was difficult to see a bull market over the horizon.
In hindsight (which is always perfect), my portfolio was well positioned for bull run. It however did not feel that way at that time.
By the way, I was not done doing stupid things. I was sick of L&T’s performance (due to the cement division), their management and the stock price. So I sold it after 4 years at a 10% gain. What happened after that ? see here
To be continued …..
My Personal investment journey - I
There is a certain level of curiosity in knowing what the other guy is making or getting in terms of investment returns. A lot of people and friends I know like to flaunt the returns they are getting from the market (The stock I bought last month doubled !!). Maybe it is an ego thing or maybe just a topic of discussion.
I personally prefer to discuss about specific ideas, both in person and on my blog. I find that more interesting and educational for me and others. As a result of this quirk, I have never discussed about the overall returns I have made from the stock market on my blog. I am not selling anything to anyone and just like to share my ideas with like minded people. I am happy if people read what I have to say and can learn something (maybe) with me.
I have been asked about my investing experience and the kind of returns I have made. I have made 32% returns (annualized and unleveraged) over the past 8-9 years following a value approach. These may not be the fantastic returns some of you expect or may have achieved. However they are far more than what I have targeted for myself. Investing is side thing for me and is not my profession. I primarily invest for myself and my family and prefer a buy and hold (not buy and forget) approach. My personal portfolio is low on risk and volatility as I prefer a good night’s sleep.
It may be possible to get higher returns through alternative approaches. However I have found that value investing suits my temprament and the returns I have made are more than satisfactory for me.
A word of caution : I tend to hold a number of stocks which I discuss on this blog. However the purchase price for the stock and portfolio weightage of the stock makes a lot of difference to the overall returns. So please do not buy the stocks I discuss without your own analysis.
In terms of personal disclosure, this maybe as far I would like to go. I am not intending to disclose my overall portfolio and returns on an ongoing basis. Investing rationally is diffcult enough. I do not want to do it publicly and make it more diffcult for me.
However more important than the returns is my investment journey till date. I will be discussing the details in this and the next post. It is likely to be a long post, and maybe boring (no excitement in the way I invest). However what I have gone through may echo what you have or are going through.
1997-1999 (The start)
I had completed my MBA and was working in sales and marketing. I was responsible for handling the finances of my entire family and for me capital preservation was more important. I knew the basics of finance, however that was not sufficient to invest intelligently. An MBA education teaches you about corporate finance, but does not teach you to be an investor.
So during this phase I started learning the basics such as what is an FD, what is a mutual fund etc. Internet was not common then and so my learning was based on economic times and a few books I could get. There were no live quotes then, so one had to look at the papers to get the daily quotes.
During this period I came across the book – The warren buffett way and was competely struck by it. I was completely bowled over by warren buffett. I started reading any books I could get on him. I think I must have read around 20-25 books on him till date. These books led me to other investors like Benjamin graham, Phil fisher etc. By the end of 1999 I had read quite a few books on these masters.
This was more of a reading/ learning phase. The two stocks I bought during this phase were Reliance petroleum and Arvind mills. I read an article in business world on RPL and hence bought that stock. Arvind mills had given a presentation in my college some time back and I liked what I had heard and so went and bought a small amount of the stock.
Well, RPL did well and Arvind mills tanked as the denim industry went into a downturn.
Prior to these two stocks, I bought the following stocks also
IFCI – because the dividend yield was high
Karur vyasa – It was cheap on P/B basis
Larsen toubro – It was a well known company then though not a hot stock.
So by the end of 1999 (before the IT boom), I had a hodgepodge of stocks in my portfolio with most of them doing badly. The good thing was that I was learning and constantly re-evaluating the stocks I had. I soon realised that I had goofed up in some of my picks like IFCI and arvind mills and sold them at a good loss. The rest I held on.
2000 ( The greed phase)
By start of 2000, I felt I had learnt a lot and was ready for the dive ( don’t laugh). So starting from Jan 2000, I started looking at stocks. However all the reading for the last 2-3 years had made me wary of the IT stocks due to the high valuations. I luckily avoided picking any specific stocks during the early part of the year.
However it is not easy to avoid greed, especially if you are new to the market. Thinking that mutual funds are safe, I setup an SIP for some IT and general funds. Well, by the end of the year the IT funds and other funds had tanked and I got an expensive lesson.
Toward the end of the year, I started analsying a few companies and picked up SSI and asian paints. My analysis for asian paints was correct and I have benfitted from it. However in case of SSI I ignored the high valuations. I built a DCF model and pretty much made assumptions to justify the price. I paid for it by losing 90% of my investment on it.
So by end of 2000, after 4 years of learning, all I had to show was a drop of 15% in personal investments and ofcourse a lot of learning in terms of what not to do.
The reason, I think I never gave up was because I was already in love with investing and reading and so was not very dissapointed by the losses. By the way, I had still done better than the market averages. Why is that important? I will come to it by the end of my investment journey
2001-2003 (rebuilding the portfolio)
By 2000, I had got an expensive lesson for being greedy and for ignoring valuations. However I never letup on my learning. I was actually enjoying the process and knew by then that I was fairly passionate about it (money or not). Access to information through the internet made the learning process easier too.
By mid 2001, I started re-analysing my portfolio and identifying my mistakes. Overall, I think I did not have too many. I sold off SSI and exited the IT funds. The rest of the portfolio remained the same. I started analysing stocks and picked up the following companies during the 2001-2003 phase
- Blue star
- Concor
- ICICI bank (had bought the IPO, just increased the holding)
- Marico
- Pidilite
- Gujarat gas
In addition I moved into a few good mutual funds and exited the poorly performing funds. By Mid 2003, my portfolio had done much better than the market, but was below cost in absolute terms as the market had been dropping for the last 2 years.
It is easy to look back and regret that mid 2003 was an all time low (index was around 2900) and one should have invested heavily into the market. But if like me, you were new to the market and had faced only a bear market, it was a very diffcult thing to do. It was difficult to see a bull market over the horizon.
In hindsight (which is always perfect), my portfolio was well positioned for bull run. It however did not feel that way at that time.
By the way, I was not done doing stupid things. I was sick of L&T’s performance (due to the cement division), their management and the stock price. So I sold it after 4 years at a 10% gain. What happened after that ? see here
To be continued …..
I personally prefer to discuss about specific ideas, both in person and on my blog. I find that more interesting and educational for me and others. As a result of this quirk, I have never discussed about the overall returns I have made from the stock market on my blog. I am not selling anything to anyone and just like to share my ideas with like minded people. I am happy if people read what I have to say and can learn something (maybe) with me.
I have been asked about my investing experience and the kind of returns I have made. I have made 32% returns (annualized and unleveraged) over the past 8-9 years following a value approach. These may not be the fantastic returns some of you expect or may have achieved. However they are far more than what I have targeted for myself. Investing is side thing for me and is not my profession. I primarily invest for myself and my family and prefer a buy and hold (not buy and forget) approach. My personal portfolio is low on risk and volatility as I prefer a good night’s sleep.
It may be possible to get higher returns through alternative approaches. However I have found that value investing suits my temprament and the returns I have made are more than satisfactory for me.
A word of caution : I tend to hold a number of stocks which I discuss on this blog. However the purchase price for the stock and portfolio weightage of the stock makes a lot of difference to the overall returns. So please do not buy the stocks I discuss without your own analysis.
In terms of personal disclosure, this maybe as far I would like to go. I am not intending to disclose my overall portfolio and returns on an ongoing basis. Investing rationally is diffcult enough. I do not want to do it publicly and make it more diffcult for me.
However more important than the returns is my investment journey till date. I will be discussing the details in this and the next post. It is likely to be a long post, and maybe boring (no excitement in the way I invest). However what I have gone through may echo what you have or are going through.
1997-1999 (The start)
I had completed my MBA and was working in sales and marketing. I was responsible for handling the finances of my entire family and for me capital preservation was more important. I knew the basics of finance, however that was not sufficient to invest intelligently. An MBA education teaches you about corporate finance, but does not teach you to be an investor.
So during this phase I started learning the basics such as what is an FD, what is a mutual fund etc. Internet was not common then and so my learning was based on economic times and a few books I could get. There were no live quotes then, so one had to look at the papers to get the daily quotes.
During this period I came across the book – The warren buffett way and was competely struck by it. I was completely bowled over by warren buffett. I started reading any books I could get on him. I think I must have read around 20-25 books on him till date. These books led me to other investors like Benjamin graham, Phil fisher etc. By the end of 1999 I had read quite a few books on these masters.
This was more of a reading/ learning phase. The two stocks I bought during this phase were Reliance petroleum and Arvind mills. I read an article in business world on RPL and hence bought that stock. Arvind mills had given a presentation in my college some time back and I liked what I had heard and so went and bought a small amount of the stock.
Well, RPL did well and Arvind mills tanked as the denim industry went into a downturn.
Prior to these two stocks, I bought the following stocks also
IFCI – because the dividend yield was high
Karur vyasa – It was cheap on P/B basis
Larsen toubro – It was a well known company then though not a hot stock.
So by the end of 1999 (before the IT boom), I had a hodgepodge of stocks in my portfolio with most of them doing badly. The good thing was that I was learning and constantly re-evaluating the stocks I had. I soon realised that I had goofed up in some of my picks like IFCI and arvind mills and sold them at a good loss. The rest I held on.
2000 ( The greed phase)
By start of 2000, I felt I had learnt a lot and was ready for the dive ( don’t laugh). So starting from Jan 2000, I started looking at stocks. However all the reading for the last 2-3 years had made me wary of the IT stocks due to the high valuations. I luckily avoided picking any specific stocks during the early part of the year.
However it is not easy to avoid greed, especially if you are new to the market. Thinking that mutual funds are safe, I setup an SIP for some IT and general funds. Well, by the end of the year the IT funds and other funds had tanked and I got an expensive lesson.
Toward the end of the year, I started analsying a few companies and picked up SSI and asian paints. My analysis for asian paints was correct and I have benfitted from it. However in case of SSI I ignored the high valuations. I built a DCF model and pretty much made assumptions to justify the price. I paid for it by losing 90% of my investment on it.
So by end of 2000, after 4 years of learning, all I had to show was a drop of 15% in personal investments and ofcourse a lot of learning in terms of what not to do.
The reason, I think I never gave up was because I was already in love with investing and reading and so was not very dissapointed by the losses. By the way, I had still done better than the market averages. Why is that important? I will come to it by the end of my investment journey
2001-2003 (rebuilding the portfolio)
By 2000, I had got an expensive lesson for being greedy and for ignoring valuations. However I never letup on my learning. I was actually enjoying the process and knew by then that I was fairly passionate about it (money or not). Access to information through the internet made the learning process easier too.
By mid 2001, I started re-analysing my portfolio and identifying my mistakes. Overall, I think I did not have too many. I sold off SSI and exited the IT funds. The rest of the portfolio remained the same. I started analysing stocks and picked up the following companies during the 2001-2003 phase
- Blue star
- Concor
- ICICI bank (had bought the IPO, just increased the holding)
- Marico
- Pidilite
- Gujarat gas
In addition I moved into a few good mutual funds and exited the poorly performing funds. By Mid 2003, my portfolio had done much better than the market, but was below cost in absolute terms as the market had been dropping for the last 2 years.
It is easy to look back and regret that mid 2003 was an all time low (index was around 2900) and one should have invested heavily into the market. But if like me, you were new to the market and had faced only a bear market, it was a very diffcult thing to do. It was difficult to see a bull market over the horizon.
In hindsight (which is always perfect), my portfolio was well positioned for bull run. It however did not feel that way at that time.
By the way, I was not done doing stupid things. I was sick of L&T’s performance (due to the cement division), their management and the stock price. So I sold it after 4 years at a 10% gain. What happened after that ? see here
To be continued …..
Friday, August 15, 2008
How i analyse stocks
I have been asked via emails and comments on the process I follow in analysing stocks. I have written about my approach earlier, but may have never put it formally in a single post.
My approach essentially consists of the following steps
1. Idea generation – This is typically the first step in the process. It involves searching for undervalued ideas. I do not have a strict formula for the search process. I use icici direct website to run a few screens to generate some ideas. Some of the screens are as follows
PE less than 13
ROE greater than 13%,
debt / Equity less than 0.7
Once I get this list, I export it into excel and then add additional parameters to it such as Net profit performance for last 5 years, ROE for last 5 years etc . A few companies get eliminated at this stage if they had losses for the last few years and have only been profitable for a year or two. Once I have shorter list, I start looking at the Profit and loss statement, Balance sheet and ratios. A few companies get eliminated if I don’t like what I see at this point of time. For ex: If the free cash flow is poor for the company, I will remove the company from the list.
In some cases the elimination is not really scientific and is driven by my whims and fancy ( I am not as rational as I should be). So highly cyclical companies, which seem to have a very low PE due to sudden profit spurt are eliminated if their normalised PE is not attractive. After all this number crunching, I may be left with a 10-12 companies.
Another source of ideas are blogs of other value investors, articles or suggestions by some other investors I admire and follow. If I see them talking about a company, I add it to the list and start investigating it.
2. Annual report review – Once I have a list of interesting ideas, I start scanning the annual reports of these companies to look for any red flags or hidden value. Some companies get eliminated at this stage if I find something fishy. Once I like the numbers I see, I start reading the Annual report from the beginning, starting with the Director’s report, Management discussion etc.
3. Valuation template – Once I have a rough idea of the company and if the company still looks good, I start updating my valuation template. I start with the Quantitative numbers, follow it up with an industry analysis, competitive analysis etc. I keep referring back to the annual report to update the worksheets and answer some of the questions in the template. I also use this stage to generate more questions on the company.
4. Broad research – After updating the basic numbers and the qualitative worksheet, I may end up with some open questions. For ex: How is the industry expected to do over the next few years? . How will competition impact the company etc ?. At this point, I start doing some research on the net to find answers to these questions though I may or may not be successful at this stage in finding answers . I may even download the AR of the main competitors and review it to get a feel of the industry. This stage is fairly unstructured and I just trying to gather as much information about the company and industry as possible
5. Valuation – If I am still comfortable with the company, I start the DCF calculation and other valuation exercises. Over time I have realised the valuation exercise is fairly redundant. If the undervaluation is not perfectly obvious by now, then plugging some numbers and making a bunch of assumptions is not going to make the company an attractive buy. The numbers being plugged into the model are dependent on the qualitative analysis done during previous stages.
During this stage I go through a DCF valuation, comparative valuation and a probability based valuation exercise. If the numbers match with each other in all the approaches, then I am more confident of the Intrinsic value estimates
6. Portfolio inclusion – I typically try to keep 12-15 companies in my portfolio. So if a company has to get added, another has to go out. This prevents my portfolio from becoming a zoo of mediocre ideas. I compare the discount at which the new company is selling to my estimate of the intrinsic value. I then compare this discount with that of the other companies in my portfolio. If the new idea is better than an existing one, then it replaces it. Else I may make just a very small token investment to track the company and wait till it become more attractive or some other company goes out of the portfolio.
Although I have listed the steps in a very linear and logical fashion, in reality it is not so neat. Multiple steps are going on at the same time and I may sometimes skip a step too.
As you can see, the process is a bit elaborate and time consuming. I however do not find it cumbersome as I enjoy doing it.
Come to think of it, why should it be easy? is there any competitive profession in the world where you can make good money without any effort ? why should investing be any different ? Have you ever heard that someone has become a heart surgeon in a day?
My approach essentially consists of the following steps
1. Idea generation – This is typically the first step in the process. It involves searching for undervalued ideas. I do not have a strict formula for the search process. I use icici direct website to run a few screens to generate some ideas. Some of the screens are as follows
PE less than 13
ROE greater than 13%,
debt / Equity less than 0.7
Once I get this list, I export it into excel and then add additional parameters to it such as Net profit performance for last 5 years, ROE for last 5 years etc . A few companies get eliminated at this stage if they had losses for the last few years and have only been profitable for a year or two. Once I have shorter list, I start looking at the Profit and loss statement, Balance sheet and ratios. A few companies get eliminated if I don’t like what I see at this point of time. For ex: If the free cash flow is poor for the company, I will remove the company from the list.
In some cases the elimination is not really scientific and is driven by my whims and fancy ( I am not as rational as I should be). So highly cyclical companies, which seem to have a very low PE due to sudden profit spurt are eliminated if their normalised PE is not attractive. After all this number crunching, I may be left with a 10-12 companies.
Another source of ideas are blogs of other value investors, articles or suggestions by some other investors I admire and follow. If I see them talking about a company, I add it to the list and start investigating it.
2. Annual report review – Once I have a list of interesting ideas, I start scanning the annual reports of these companies to look for any red flags or hidden value. Some companies get eliminated at this stage if I find something fishy. Once I like the numbers I see, I start reading the Annual report from the beginning, starting with the Director’s report, Management discussion etc.
3. Valuation template – Once I have a rough idea of the company and if the company still looks good, I start updating my valuation template. I start with the Quantitative numbers, follow it up with an industry analysis, competitive analysis etc. I keep referring back to the annual report to update the worksheets and answer some of the questions in the template. I also use this stage to generate more questions on the company.
4. Broad research – After updating the basic numbers and the qualitative worksheet, I may end up with some open questions. For ex: How is the industry expected to do over the next few years? . How will competition impact the company etc ?. At this point, I start doing some research on the net to find answers to these questions though I may or may not be successful at this stage in finding answers . I may even download the AR of the main competitors and review it to get a feel of the industry. This stage is fairly unstructured and I just trying to gather as much information about the company and industry as possible
5. Valuation – If I am still comfortable with the company, I start the DCF calculation and other valuation exercises. Over time I have realised the valuation exercise is fairly redundant. If the undervaluation is not perfectly obvious by now, then plugging some numbers and making a bunch of assumptions is not going to make the company an attractive buy. The numbers being plugged into the model are dependent on the qualitative analysis done during previous stages.
During this stage I go through a DCF valuation, comparative valuation and a probability based valuation exercise. If the numbers match with each other in all the approaches, then I am more confident of the Intrinsic value estimates
6. Portfolio inclusion – I typically try to keep 12-15 companies in my portfolio. So if a company has to get added, another has to go out. This prevents my portfolio from becoming a zoo of mediocre ideas. I compare the discount at which the new company is selling to my estimate of the intrinsic value. I then compare this discount with that of the other companies in my portfolio. If the new idea is better than an existing one, then it replaces it. Else I may make just a very small token investment to track the company and wait till it become more attractive or some other company goes out of the portfolio.
Although I have listed the steps in a very linear and logical fashion, in reality it is not so neat. Multiple steps are going on at the same time and I may sometimes skip a step too.
As you can see, the process is a bit elaborate and time consuming. I however do not find it cumbersome as I enjoy doing it.
Come to think of it, why should it be easy? is there any competitive profession in the world where you can make good money without any effort ? why should investing be any different ? Have you ever heard that someone has become a heart surgeon in a day?
How i analyse stocks
I have been asked via emails and comments on the process I follow in analysing stocks. I have written about my approach earlier, but may have never put it formally in a single post.
My approach essentially consists of the following steps
1. Idea generation – This is typically the first step in the process. It involves searching for undervalued ideas. I do not have a strict formula for the search process. I use icici direct website to run a few screens to generate some ideas. Some of the screens are as follows
PE less than 13
ROE greater than 13%,
debt / Equity less than 0.7
Once I get this list, I export it into excel and then add additional parameters to it such as Net profit performance for last 5 years, ROE for last 5 years etc . A few companies get eliminated at this stage if they had losses for the last few years and have only been profitable for a year or two. Once I have shorter list, I start looking at the Profit and loss statement, Balance sheet and ratios. A few companies get eliminated if I don’t like what I see at this point of time. For ex: If the free cash flow is poor for the company, I will remove the company from the list.
In some cases the elimination is not really scientific and is driven by my whims and fancy ( I am not as rational as I should be). So highly cyclical companies, which seem to have a very low PE due to sudden profit spurt are eliminated if their normalised PE is not attractive. After all this number crunching, I may be left with a 10-12 companies.
Another source of ideas are blogs of other value investors, articles or suggestions by some other investors I admire and follow. If I see them talking about a company, I add it to the list and start investigating it.
2. Annual report review – Once I have a list of interesting ideas, I start scanning the annual reports of these companies to look for any red flags or hidden value. Some companies get eliminated at this stage if I find something fishy. Once I like the numbers I see, I start reading the Annual report from the beginning, starting with the Director’s report, Management discussion etc.
3. Valuation template – Once I have a rough idea of the company and if the company still looks good, I start updating my valuation template. I start with the Quantitative numbers, follow it up with an industry analysis, competitive analysis etc. I keep referring back to the annual report to update the worksheets and answer some of the questions in the template. I also use this stage to generate more questions on the company.
4. Broad research – After updating the basic numbers and the qualitative worksheet, I may end up with some open questions. For ex: How is the industry expected to do over the next few years? . How will competition impact the company etc ?. At this point, I start doing some research on the net to find answers to these questions though I may or may not be successful at this stage in finding answers . I may even download the AR of the main competitors and review it to get a feel of the industry. This stage is fairly unstructured and I just trying to gather as much information about the company and industry as possible
5. Valuation – If I am still comfortable with the company, I start the DCF calculation and other valuation exercises. Over time I have realised the valuation exercise is fairly redundant. If the undervaluation is not perfectly obvious by now, then plugging some numbers and making a bunch of assumptions is not going to make the company an attractive buy. The numbers being plugged into the model are dependent on the qualitative analysis done during previous stages.
During this stage I go through a DCF valuation, comparative valuation and a probability based valuation exercise. If the numbers match with each other in all the approaches, then I am more confident of the Intrinsic value estimates
6. Portfolio inclusion – I typically try to keep 12-15 companies in my portfolio. So if a company has to get added, another has to go out. This prevents my portfolio from becoming a zoo of mediocre ideas. I compare the discount at which the new company is selling to my estimate of the intrinsic value. I then compare this discount with that of the other companies in my portfolio. If the new idea is better than an existing one, then it replaces it. Else I may make just a very small token investment to track the company and wait till it become more attractive or some other company goes out of the portfolio.
Although I have listed the steps in a very linear and logical fashion, in reality it is not so neat. Multiple steps are going on at the same time and I may sometimes skip a step too.
As you can see, the process is a bit elaborate and time consuming. I however do not find it cumbersome as I enjoy doing it.
Come to think of it, why should it be easy? is there any competitive profession in the world where you can make good money without any effort ? why should investing be any different ? Have you ever heard that someone has become a heart surgeon in a day?
My approach essentially consists of the following steps
1. Idea generation – This is typically the first step in the process. It involves searching for undervalued ideas. I do not have a strict formula for the search process. I use icici direct website to run a few screens to generate some ideas. Some of the screens are as follows
PE less than 13
ROE greater than 13%,
debt / Equity less than 0.7
Once I get this list, I export it into excel and then add additional parameters to it such as Net profit performance for last 5 years, ROE for last 5 years etc . A few companies get eliminated at this stage if they had losses for the last few years and have only been profitable for a year or two. Once I have shorter list, I start looking at the Profit and loss statement, Balance sheet and ratios. A few companies get eliminated if I don’t like what I see at this point of time. For ex: If the free cash flow is poor for the company, I will remove the company from the list.
In some cases the elimination is not really scientific and is driven by my whims and fancy ( I am not as rational as I should be). So highly cyclical companies, which seem to have a very low PE due to sudden profit spurt are eliminated if their normalised PE is not attractive. After all this number crunching, I may be left with a 10-12 companies.
Another source of ideas are blogs of other value investors, articles or suggestions by some other investors I admire and follow. If I see them talking about a company, I add it to the list and start investigating it.
2. Annual report review – Once I have a list of interesting ideas, I start scanning the annual reports of these companies to look for any red flags or hidden value. Some companies get eliminated at this stage if I find something fishy. Once I like the numbers I see, I start reading the Annual report from the beginning, starting with the Director’s report, Management discussion etc.
3. Valuation template – Once I have a rough idea of the company and if the company still looks good, I start updating my valuation template. I start with the Quantitative numbers, follow it up with an industry analysis, competitive analysis etc. I keep referring back to the annual report to update the worksheets and answer some of the questions in the template. I also use this stage to generate more questions on the company.
4. Broad research – After updating the basic numbers and the qualitative worksheet, I may end up with some open questions. For ex: How is the industry expected to do over the next few years? . How will competition impact the company etc ?. At this point, I start doing some research on the net to find answers to these questions though I may or may not be successful at this stage in finding answers . I may even download the AR of the main competitors and review it to get a feel of the industry. This stage is fairly unstructured and I just trying to gather as much information about the company and industry as possible
5. Valuation – If I am still comfortable with the company, I start the DCF calculation and other valuation exercises. Over time I have realised the valuation exercise is fairly redundant. If the undervaluation is not perfectly obvious by now, then plugging some numbers and making a bunch of assumptions is not going to make the company an attractive buy. The numbers being plugged into the model are dependent on the qualitative analysis done during previous stages.
During this stage I go through a DCF valuation, comparative valuation and a probability based valuation exercise. If the numbers match with each other in all the approaches, then I am more confident of the Intrinsic value estimates
6. Portfolio inclusion – I typically try to keep 12-15 companies in my portfolio. So if a company has to get added, another has to go out. This prevents my portfolio from becoming a zoo of mediocre ideas. I compare the discount at which the new company is selling to my estimate of the intrinsic value. I then compare this discount with that of the other companies in my portfolio. If the new idea is better than an existing one, then it replaces it. Else I may make just a very small token investment to track the company and wait till it become more attractive or some other company goes out of the portfolio.
Although I have listed the steps in a very linear and logical fashion, in reality it is not so neat. Multiple steps are going on at the same time and I may sometimes skip a step too.
As you can see, the process is a bit elaborate and time consuming. I however do not find it cumbersome as I enjoy doing it.
Come to think of it, why should it be easy? is there any competitive profession in the world where you can make good money without any effort ? why should investing be any different ? Have you ever heard that someone has become a heart surgeon in a day?
Friday, August 08, 2008
Analysis – Ashok leyland, Suraj diamonds etc
I had suggested to the readers of this blog a few weeks back to send me a list of companies to analyse. I am posting on a few from the list
Ashok Leyland – I have written on Ashok leyland here and here. I have been analysing the annual results of the company for 2007-2008 and the key points are summarized below
Postitives :
The company has maintained its ROE and capital efficiency (Wcap ratio) inspite of tough market conditions. The sales growth was around 6%, which is decent in view of the slowdown in the Commercial vehicle markets. The netprofit growth and margin were also satisfactory. The company has also improved its market share in the current year.
In addition to the above, the company is investing in capacity and also in R&D (at 2%+ of sales). The company is also investing in several JVs for exports, electronic components for vehicles etc.
Negatives :
Competition in the industry is increasing with a lot of foreign players coming into the country. As a result the obsolence of models will speed up. There would also be a higher spend on R&D and Marketing to manage the competitive pressure.
The company is also expanding internationally which in itself carries a higher risk.
The company is a cyclical industry where the demand could be weak for some more time. This is strictly not a negative as the long term competitive advantages of the company are still intact.
I have uploaded a detailed analysis of Ashok leyland in google groups here (valuationtemplatev2ALLaug2008.xls)
A valid question would be – Why not invest in tata motors which is the clear industry leader. To that my response is – Tata motors as a company is too complex for me (maybe not for others) to analyse. The company has a lot of moving parts now. It a heavy vehicle, car manufacturer combined. In addition with foreign accqusitions of Jaguar and other brands there are additional unknowns too. In comparison AL is a much simpler company to understand and analyse. Hence my preference for Ashok leyland.
Suraj Diamonds
The company is in the diamond cutting and jewelry business. The revenue has grown by almost 300% in the last 5 years and so has the net profit. However the net margins are very low at around 2-3%. In the addition the ROE is less 10% even after improvements in the last few years. The company has low free cash flows. The net profits in aggregate are around 130 crs in the last 5 years. However around 50% have been used up for fixed asset and working capital. There has been a huge increase in the debtors position which is now around 1 years sales. The company looks cheap from a net profit perspective, however I am not too impressed by the ability of the business to generate free cash flow. There is fairly high increase in debtors which is quite risky in my opinion.
I would personally not proceed further with this stock untill I see the company is able to improve its free cash flow generation. The risk in such stocks is that the faster the company grows, the more capital either in form of debt or equity would required. This is fine in the short term, however if the business model generate poor free cash flows, then the stock only appears but is not really undervalued
A few additional companies have been emailed to me, which I have analysed in the past. I am providing the list and the links below
Maruti
HPCL – see here and here
Kothari products – It is still a net cash situation and an arbitrage opportunity too.
VST industries
Ashok Leyland – I have written on Ashok leyland here and here. I have been analysing the annual results of the company for 2007-2008 and the key points are summarized below
Postitives :
The company has maintained its ROE and capital efficiency (Wcap ratio) inspite of tough market conditions. The sales growth was around 6%, which is decent in view of the slowdown in the Commercial vehicle markets. The netprofit growth and margin were also satisfactory. The company has also improved its market share in the current year.
In addition to the above, the company is investing in capacity and also in R&D (at 2%+ of sales). The company is also investing in several JVs for exports, electronic components for vehicles etc.
Negatives :
Competition in the industry is increasing with a lot of foreign players coming into the country. As a result the obsolence of models will speed up. There would also be a higher spend on R&D and Marketing to manage the competitive pressure.
The company is also expanding internationally which in itself carries a higher risk.
The company is a cyclical industry where the demand could be weak for some more time. This is strictly not a negative as the long term competitive advantages of the company are still intact.
I have uploaded a detailed analysis of Ashok leyland in google groups here (valuationtemplatev2ALLaug2008.xls)
A valid question would be – Why not invest in tata motors which is the clear industry leader. To that my response is – Tata motors as a company is too complex for me (maybe not for others) to analyse. The company has a lot of moving parts now. It a heavy vehicle, car manufacturer combined. In addition with foreign accqusitions of Jaguar and other brands there are additional unknowns too. In comparison AL is a much simpler company to understand and analyse. Hence my preference for Ashok leyland.
Suraj Diamonds
The company is in the diamond cutting and jewelry business. The revenue has grown by almost 300% in the last 5 years and so has the net profit. However the net margins are very low at around 2-3%. In the addition the ROE is less 10% even after improvements in the last few years. The company has low free cash flows. The net profits in aggregate are around 130 crs in the last 5 years. However around 50% have been used up for fixed asset and working capital. There has been a huge increase in the debtors position which is now around 1 years sales. The company looks cheap from a net profit perspective, however I am not too impressed by the ability of the business to generate free cash flow. There is fairly high increase in debtors which is quite risky in my opinion.
I would personally not proceed further with this stock untill I see the company is able to improve its free cash flow generation. The risk in such stocks is that the faster the company grows, the more capital either in form of debt or equity would required. This is fine in the short term, however if the business model generate poor free cash flows, then the stock only appears but is not really undervalued
A few additional companies have been emailed to me, which I have analysed in the past. I am providing the list and the links below
Maruti
HPCL – see here and here
Kothari products – It is still a net cash situation and an arbitrage opportunity too.
VST industries
Analysis – Ashok leyland, Suraj diamonds etc
I had suggested to the readers of this blog a few weeks back to send me a list of companies to analyse. I am posting on a few from the list
Ashok Leyland – I have written on Ashok leyland here and here. I have been analysing the annual results of the company for 2007-2008 and the key points are summarized below
Postitives :
The company has maintained its ROE and capital efficiency (Wcap ratio) inspite of tough market conditions. The sales growth was around 6%, which is decent in view of the slowdown in the Commercial vehicle markets. The netprofit growth and margin were also satisfactory. The company has also improved its market share in the current year.
In addition to the above, the company is investing in capacity and also in R&D (at 2%+ of sales). The company is also investing in several JVs for exports, electronic components for vehicles etc.
Negatives :
Competition in the industry is increasing with a lot of foreign players coming into the country. As a result the obsolence of models will speed up. There would also be a higher spend on R&D and Marketing to manage the competitive pressure.
The company is also expanding internationally which in itself carries a higher risk.
The company is a cyclical industry where the demand could be weak for some more time. This is strictly not a negative as the long term competitive advantages of the company are still intact.
I have uploaded a detailed analysis of Ashok leyland in google groups here (valuationtemplatev2ALLaug2008.xls)
A valid question would be – Why not invest in tata motors which is the clear industry leader. To that my response is – Tata motors as a company is too complex for me (maybe not for others) to analyse. The company has a lot of moving parts now. It a heavy vehicle, car manufacturer combined. In addition with foreign accqusitions of Jaguar and other brands there are additional unknowns too. In comparison AL is a much simpler company to understand and analyse. Hence my preference for Ashok leyland.
Suraj Diamonds
The company is in the diamond cutting and jewelry business. The revenue has grown by almost 300% in the last 5 years and so has the net profit. However the net margins are very low at around 2-3%. In the addition the ROE is less 10% even after improvements in the last few years. The company has low free cash flows. The net profits in aggregate are around 130 crs in the last 5 years. However around 50% have been used up for fixed asset and working capital. There has been a huge increase in the debtors position which is now around 1 years sales. The company looks cheap from a net profit perspective, however I am not too impressed by the ability of the business to generate free cash flow. There is fairly high increase in debtors which is quite risky in my opinion.
I would personally not proceed further with this stock untill I see the company is able to improve its free cash flow generation. The risk in such stocks is that the faster the company grows, the more capital either in form of debt or equity would required. This is fine in the short term, however if the business model generate poor free cash flows, then the stock only appears but is not really undervalued
A few additional companies have been emailed to me, which I have analysed in the past. I am providing the list and the links below
Maruti
HPCL – see here and here
Kothari products – It is still a net cash situation and an arbitrage opportunity too.
VST industries
Ashok Leyland – I have written on Ashok leyland here and here. I have been analysing the annual results of the company for 2007-2008 and the key points are summarized below
Postitives :
The company has maintained its ROE and capital efficiency (Wcap ratio) inspite of tough market conditions. The sales growth was around 6%, which is decent in view of the slowdown in the Commercial vehicle markets. The netprofit growth and margin were also satisfactory. The company has also improved its market share in the current year.
In addition to the above, the company is investing in capacity and also in R&D (at 2%+ of sales). The company is also investing in several JVs for exports, electronic components for vehicles etc.
Negatives :
Competition in the industry is increasing with a lot of foreign players coming into the country. As a result the obsolence of models will speed up. There would also be a higher spend on R&D and Marketing to manage the competitive pressure.
The company is also expanding internationally which in itself carries a higher risk.
The company is a cyclical industry where the demand could be weak for some more time. This is strictly not a negative as the long term competitive advantages of the company are still intact.
I have uploaded a detailed analysis of Ashok leyland in google groups here (valuationtemplatev2ALLaug2008.xls)
A valid question would be – Why not invest in tata motors which is the clear industry leader. To that my response is – Tata motors as a company is too complex for me (maybe not for others) to analyse. The company has a lot of moving parts now. It a heavy vehicle, car manufacturer combined. In addition with foreign accqusitions of Jaguar and other brands there are additional unknowns too. In comparison AL is a much simpler company to understand and analyse. Hence my preference for Ashok leyland.
Suraj Diamonds
The company is in the diamond cutting and jewelry business. The revenue has grown by almost 300% in the last 5 years and so has the net profit. However the net margins are very low at around 2-3%. In the addition the ROE is less 10% even after improvements in the last few years. The company has low free cash flows. The net profits in aggregate are around 130 crs in the last 5 years. However around 50% have been used up for fixed asset and working capital. There has been a huge increase in the debtors position which is now around 1 years sales. The company looks cheap from a net profit perspective, however I am not too impressed by the ability of the business to generate free cash flow. There is fairly high increase in debtors which is quite risky in my opinion.
I would personally not proceed further with this stock untill I see the company is able to improve its free cash flow generation. The risk in such stocks is that the faster the company grows, the more capital either in form of debt or equity would required. This is fine in the short term, however if the business model generate poor free cash flows, then the stock only appears but is not really undervalued
A few additional companies have been emailed to me, which I have analysed in the past. I am providing the list and the links below
Maruti
HPCL – see here and here
Kothari products – It is still a net cash situation and an arbitrage opportunity too.
VST industries
Tuesday, August 05, 2008
Analyst speak
Analyst recommendations -
Neutral – We are as clueless as you are about the future of the company, but I have to give some rating as I am being paid to do that.
Hold – Same as neutral
Buy – Holy Cow !! The stock price has gone up recently. Now that the whole world knows that the company is doing well, we are recommending the stock. Doesn’t matter if the company is overpriced …that is your problem.
Sell – (The opposite of buy ..literally and figuratively) Oh @##!! , The whole world knows that the company has gone to the dogs. The stock price has dropped like a stone. Better cover my ****.
Underweight or overweight – (Play of words) Means we are confused, but as we have to give some rating and have to generate some commision for the brokerage, sell a little or buy a little (we don’t care which, both will generate commisions for us)
I have nothing against individuals, but the profession forces honest, intelligent people to indulge in smoke and mirrors and put out garbage.
Neutral – We are as clueless as you are about the future of the company, but I have to give some rating as I am being paid to do that.
Hold – Same as neutral
Buy – Holy Cow !! The stock price has gone up recently. Now that the whole world knows that the company is doing well, we are recommending the stock. Doesn’t matter if the company is overpriced …that is your problem.
Sell – (The opposite of buy ..literally and figuratively) Oh @##!! , The whole world knows that the company has gone to the dogs. The stock price has dropped like a stone. Better cover my ****.
Underweight or overweight – (Play of words) Means we are confused, but as we have to give some rating and have to generate some commision for the brokerage, sell a little or buy a little (we don’t care which, both will generate commisions for us)
I have nothing against individuals, but the profession forces honest, intelligent people to indulge in smoke and mirrors and put out garbage.
Analyst speak
Analyst recommendations -
Neutral – We are as clueless as you are about the future of the company, but I have to give some rating as I am being paid to do that.
Hold – Same as neutral
Buy – Holy Cow !! The stock price has gone up recently. Now that the whole world knows that the company is doing well, we are recommending the stock. Doesn’t matter if the company is overpriced …that is your problem.
Sell – (The opposite of buy ..literally and figuratively) Oh @##!! , The whole world knows that the company has gone to the dogs. The stock price has dropped like a stone. Better cover my ****.
Underweight or overweight – (Play of words) Means we are confused, but as we have to give some rating and have to generate some commision for the brokerage, sell a little or buy a little (we don’t care which, both will generate commisions for us)
I have nothing against individuals, but the profession forces honest, intelligent people to indulge in smoke and mirrors and put out garbage.
Neutral – We are as clueless as you are about the future of the company, but I have to give some rating as I am being paid to do that.
Hold – Same as neutral
Buy – Holy Cow !! The stock price has gone up recently. Now that the whole world knows that the company is doing well, we are recommending the stock. Doesn’t matter if the company is overpriced …that is your problem.
Sell – (The opposite of buy ..literally and figuratively) Oh @##!! , The whole world knows that the company has gone to the dogs. The stock price has dropped like a stone. Better cover my ****.
Underweight or overweight – (Play of words) Means we are confused, but as we have to give some rating and have to generate some commision for the brokerage, sell a little or buy a little (we don’t care which, both will generate commisions for us)
I have nothing against individuals, but the profession forces honest, intelligent people to indulge in smoke and mirrors and put out garbage.
Saturday, August 02, 2008
And now on Twitter
Twitter is supposed to be a microblogging tool. It is like be cross between an SMS and a blog. This tool allows you to post entries (tweets ?) of about 140 characters. So one can use this to post or inform others about what you are doing, thinking etc almost on a real time basis
I originally thought that this tool would be a waste of time for me. However I read a few posts on this tool and have seen some other bloggers use this tool to communicate and discuss topics which are of interest but too short for a post.
So I have decided to give twitter a shot. You can follow me on twitter here. So what am I planning to write about ?
My initial thought is to post on interesting books, articles or posts I have read. I also plan to write on various developments in the business world and my thoughts on the same.
In the past, I would have a quick opinion on something, but found a post too long for it and in addition I was not wanting to clog my archives. I tend to post on a topic which interests me and after I have done some analysis or thinking on it.
It is still an experiment and if I realise it is taking too much of time or there is not much value being added, I may discontinue it. What I will not be writing on twitter are real time updates of what I am doing …like drinking coffee, reading something etc etc. I have not desire of boring anyone to death :)
If you are new to this blog, you can subscribe to this blog via RSS (click on the link or you can see the link at the top of the side bar under subscribe). Alternatively you can subscribe via email (you can be assured that I will not be spamming you)
I originally thought that this tool would be a waste of time for me. However I read a few posts on this tool and have seen some other bloggers use this tool to communicate and discuss topics which are of interest but too short for a post.
So I have decided to give twitter a shot. You can follow me on twitter here. So what am I planning to write about ?
My initial thought is to post on interesting books, articles or posts I have read. I also plan to write on various developments in the business world and my thoughts on the same.
In the past, I would have a quick opinion on something, but found a post too long for it and in addition I was not wanting to clog my archives. I tend to post on a topic which interests me and after I have done some analysis or thinking on it.
It is still an experiment and if I realise it is taking too much of time or there is not much value being added, I may discontinue it. What I will not be writing on twitter are real time updates of what I am doing …like drinking coffee, reading something etc etc. I have not desire of boring anyone to death :)
If you are new to this blog, you can subscribe to this blog via RSS (click on the link or you can see the link at the top of the side bar under subscribe). Alternatively you can subscribe via email (you can be assured that I will not be spamming you)
And now on Twitter
Twitter is supposed to be a microblogging tool. It is like be cross between an SMS and a blog. This tool allows you to post entries (tweets ?) of about 140 characters. So one can use this to post or inform others about what you are doing, thinking etc almost on a real time basis
I originally thought that this tool would be a waste of time for me. However I read a few posts on this tool and have seen some other bloggers use this tool to communicate and discuss topics which are of interest but too short for a post.
So I have decided to give twitter a shot. You can follow me on twitter here. So what am I planning to write about ?
My initial thought is to post on interesting books, articles or posts I have read. I also plan to write on various developments in the business world and my thoughts on the same.
In the past, I would have a quick opinion on something, but found a post too long for it and in addition I was not wanting to clog my archives. I tend to post on a topic which interests me and after I have done some analysis or thinking on it.
It is still an experiment and if I realise it is taking too much of time or there is not much value being added, I may discontinue it. What I will not be writing on twitter are real time updates of what I am doing …like drinking coffee, reading something etc etc. I have not desire of boring anyone to death :)
If you are new to this blog, you can subscribe to this blog via RSS (click on the link or you can see the link at the top of the side bar under subscribe). Alternatively you can subscribe via email (you can be assured that I will not be spamming you)
I originally thought that this tool would be a waste of time for me. However I read a few posts on this tool and have seen some other bloggers use this tool to communicate and discuss topics which are of interest but too short for a post.
So I have decided to give twitter a shot. You can follow me on twitter here. So what am I planning to write about ?
My initial thought is to post on interesting books, articles or posts I have read. I also plan to write on various developments in the business world and my thoughts on the same.
In the past, I would have a quick opinion on something, but found a post too long for it and in addition I was not wanting to clog my archives. I tend to post on a topic which interests me and after I have done some analysis or thinking on it.
It is still an experiment and if I realise it is taking too much of time or there is not much value being added, I may discontinue it. What I will not be writing on twitter are real time updates of what I am doing …like drinking coffee, reading something etc etc. I have not desire of boring anyone to death :)
If you are new to this blog, you can subscribe to this blog via RSS (click on the link or you can see the link at the top of the side bar under subscribe). Alternatively you can subscribe via email (you can be assured that I will not be spamming you)
Thursday, July 31, 2008
Arbitrage Process - II
In the previous post, I detailed the arbitrage process. In this post, let me provide some other resources to understand the process better.
Joe Ponzio (Fwallstreet) is a value investor and writes extremely well on value investing with a lot of clarity. He has written several posts on arbitrage with examples of specific companies such as the tribune company. In this post, and this post he talks of the 7 broad steps in a merger or accquisition. These steps are mainly around the due diligence of the deal, signing a definitive agreement, getting shareholder approval and follwed by the regulatory approvals. Once all the approvals have been taken, the probability of the transaction happening is high
As Joe’s indicates,correctly in this post – ‘In arbitrage, the goal is to earn high rates of return on an annualized basis in low-risk, high-certainty situations’. So by investing in a transaction which is past the major approvals, an investor can be confident that the transaction will happen , which reduces the risk component of an arbitrage transaction.
I would recommend you to read his arbitrage related post to get a good understanding on the process.
What are the kind transactions which can be considered for arbitrage ? I have written on these transactions in the past and am listing them here again
Spin-offs
Mergers : These can be friendly in nature or hostile. Friendly mergers have lower risk and lower return. Hostile mergers have higher risk and correspondingly higher returns. Mergers can involve cash merger where the target shareholder is paid cash for their holding or stock for stock exchange or a combination of the two.
Bankruptcy or restructuring
Recapitalizations
Arbitrage helps in generating positive returns during a bear market. However the downside is that this investment category requires a lot of work for the small returns you get in return. As a result arbitrage may not be suitable for someone who is able to devote only a few hours a month on investing.
Joe Ponzio (Fwallstreet) is a value investor and writes extremely well on value investing with a lot of clarity. He has written several posts on arbitrage with examples of specific companies such as the tribune company. In this post, and this post he talks of the 7 broad steps in a merger or accquisition. These steps are mainly around the due diligence of the deal, signing a definitive agreement, getting shareholder approval and follwed by the regulatory approvals. Once all the approvals have been taken, the probability of the transaction happening is high
As Joe’s indicates,correctly in this post – ‘In arbitrage, the goal is to earn high rates of return on an annualized basis in low-risk, high-certainty situations’. So by investing in a transaction which is past the major approvals, an investor can be confident that the transaction will happen , which reduces the risk component of an arbitrage transaction.
I would recommend you to read his arbitrage related post to get a good understanding on the process.
What are the kind transactions which can be considered for arbitrage ? I have written on these transactions in the past and am listing them here again
Spin-offs
Mergers : These can be friendly in nature or hostile. Friendly mergers have lower risk and lower return. Hostile mergers have higher risk and correspondingly higher returns. Mergers can involve cash merger where the target shareholder is paid cash for their holding or stock for stock exchange or a combination of the two.
Bankruptcy or restructuring
Recapitalizations
Arbitrage helps in generating positive returns during a bear market. However the downside is that this investment category requires a lot of work for the small returns you get in return. As a result arbitrage may not be suitable for someone who is able to devote only a few hours a month on investing.
Arbitrage Process - II
In the previous post, I detailed the arbitrage process. In this post, let me provide some other resources to understand the process better.
Joe Ponzio (Fwallstreet) is a value investor and writes extremely well on value investing with a lot of clarity. He has written several posts on arbitrage with examples of specific companies such as the tribune company. In this post, and this post he talks of the 7 broad steps in a merger or accquisition. These steps are mainly around the due diligence of the deal, signing a definitive agreement, getting shareholder approval and follwed by the regulatory approvals. Once all the approvals have been taken, the probability of the transaction happening is high
As Joe’s indicates,correctly in this post – ‘In arbitrage, the goal is to earn high rates of return on an annualized basis in low-risk, high-certainty situations’. So by investing in a transaction which is past the major approvals, an investor can be confident that the transaction will happen , which reduces the risk component of an arbitrage transaction.
I would recommend you to read his arbitrage related post to get a good understanding on the process.
What are the kind transactions which can be considered for arbitrage ? I have written on these transactions in the past and am listing them here again
Spin-offs
Mergers : These can be friendly in nature or hostile. Friendly mergers have lower risk and lower return. Hostile mergers have higher risk and correspondingly higher returns. Mergers can involve cash merger where the target shareholder is paid cash for their holding or stock for stock exchange or a combination of the two.
Bankruptcy or restructuring
Recapitalizations
Arbitrage helps in generating positive returns during a bear market. However the downside is that this investment category requires a lot of work for the small returns you get in return. As a result arbitrage may not be suitable for someone who is able to devote only a few hours a month on investing.
Joe Ponzio (Fwallstreet) is a value investor and writes extremely well on value investing with a lot of clarity. He has written several posts on arbitrage with examples of specific companies such as the tribune company. In this post, and this post he talks of the 7 broad steps in a merger or accquisition. These steps are mainly around the due diligence of the deal, signing a definitive agreement, getting shareholder approval and follwed by the regulatory approvals. Once all the approvals have been taken, the probability of the transaction happening is high
As Joe’s indicates,correctly in this post – ‘In arbitrage, the goal is to earn high rates of return on an annualized basis in low-risk, high-certainty situations’. So by investing in a transaction which is past the major approvals, an investor can be confident that the transaction will happen , which reduces the risk component of an arbitrage transaction.
I would recommend you to read his arbitrage related post to get a good understanding on the process.
What are the kind transactions which can be considered for arbitrage ? I have written on these transactions in the past and am listing them here again
Spin-offs
Mergers : These can be friendly in nature or hostile. Friendly mergers have lower risk and lower return. Hostile mergers have higher risk and correspondingly higher returns. Mergers can involve cash merger where the target shareholder is paid cash for their holding or stock for stock exchange or a combination of the two.
Bankruptcy or restructuring
Recapitalizations
Arbitrage helps in generating positive returns during a bear market. However the downside is that this investment category requires a lot of work for the small returns you get in return. As a result arbitrage may not be suitable for someone who is able to devote only a few hours a month on investing.
Monday, July 28, 2008
Arbitrage process - I
I have been reading a book on risk arbitrage and came across the following steps in a typical deal (merger, spin-off, recap etc)
Deal announcement – This generally involves a press release or filing of an offer with BSE/ NSE with the requisite details. An investor has to be on a constant lookut for such announcements.
Gather and analyse information – After the investor comes to know about the deal, the next step involves gathering and analysing information.
The following are the various types of information which needs to be considered
Financial information: This involves reading all the filings with the stock exchange, Financial details of the companies involved such as the annual report, quarterly reports and analyst reports.
Legal information: gather and analyse any legal information which may impact the deal. For ex: check if there is an legal dispute in which the target or the acquiring company is involved, which may impact the success of the deal
Any tax and accounting implication should also be studied
Interpret and estimate – This stage involves the interpreting the information from step 2 and coming up with values for the following three variables
Returns estimate – The formulae used for the returns would as follows: Final target company price-Current price / Current price. In addition if the deal involves a stock for stock merger, then the investor should add the dividends to be received. If however the deal involves a mix of cash and stock, then the total return can be calculated as follows
(% of cash* amount of cash+% of stock * amount of stock)- Current price / Current price
If the transaction involves shorting the accquiring company stock and using borrowed money, then the return should be reduced by the dividends which needs to paid for the shorted stock and also by the interest cost of the borrowed capital.
Risk estimate – The risk in the transaction is the downside risk of the target company + Upside risk of the accquiring company
Downside risk = Current price – estimate of target company price if the deal fails
If the deal fails, and the investor has shorted the accquiring company stock to hedge, then he may incur an upsideside risk too
Upside risk = estimate of the accquiring company price if deal breaks – current price
The estimate of the prices for the target and accquiring company is done based on several factors such the pre-deal price, price of other companies in the industry etc.
Probability – This is the probaility of the deal coming through. The investor may assume there is an 80% probaility of the deal coming through. His estimate of returns my be 15% and estimate of risk may be 30%.
Based on these numbers the risk adjusted return is = .8*.15+.2*-.3 = 6%. This could be the absolute returns. If the investor expects the deal to complete in one month, then the annualized return is 72%.
It is important to consider the time it will take for the transaction or deal to happen and use that to estimate the annualized returns. The longer the time for the successful closure, the lower the annualized returns.
Estimation of probability is a very subjective exercise. An an investor one has to analyse the various subjective elements of a deal and estimate the likelyhood of the deal being successful.
The earlier one invests in a deal, the more the uncertainity and hence higher the spread. In the event that there are multiple scenarios possible for a deal such as possiblity of a white knight appearing, then the risk/return of each scenario needs to wieghted with the probability of that scenario to arrive at the estimated returns for a deal.
Next Post : Other resources to understand the arbitrage process
Deal announcement – This generally involves a press release or filing of an offer with BSE/ NSE with the requisite details. An investor has to be on a constant lookut for such announcements.
Gather and analyse information – After the investor comes to know about the deal, the next step involves gathering and analysing information.
The following are the various types of information which needs to be considered
Financial information: This involves reading all the filings with the stock exchange, Financial details of the companies involved such as the annual report, quarterly reports and analyst reports.
Legal information: gather and analyse any legal information which may impact the deal. For ex: check if there is an legal dispute in which the target or the acquiring company is involved, which may impact the success of the deal
Any tax and accounting implication should also be studied
Interpret and estimate – This stage involves the interpreting the information from step 2 and coming up with values for the following three variables
Returns estimate – The formulae used for the returns would as follows: Final target company price-Current price / Current price. In addition if the deal involves a stock for stock merger, then the investor should add the dividends to be received. If however the deal involves a mix of cash and stock, then the total return can be calculated as follows
(% of cash* amount of cash+% of stock * amount of stock)- Current price / Current price
If the transaction involves shorting the accquiring company stock and using borrowed money, then the return should be reduced by the dividends which needs to paid for the shorted stock and also by the interest cost of the borrowed capital.
Risk estimate – The risk in the transaction is the downside risk of the target company + Upside risk of the accquiring company
Downside risk = Current price – estimate of target company price if the deal fails
If the deal fails, and the investor has shorted the accquiring company stock to hedge, then he may incur an upsideside risk too
Upside risk = estimate of the accquiring company price if deal breaks – current price
The estimate of the prices for the target and accquiring company is done based on several factors such the pre-deal price, price of other companies in the industry etc.
Probability – This is the probaility of the deal coming through. The investor may assume there is an 80% probaility of the deal coming through. His estimate of returns my be 15% and estimate of risk may be 30%.
Based on these numbers the risk adjusted return is = .8*.15+.2*-.3 = 6%. This could be the absolute returns. If the investor expects the deal to complete in one month, then the annualized return is 72%.
It is important to consider the time it will take for the transaction or deal to happen and use that to estimate the annualized returns. The longer the time for the successful closure, the lower the annualized returns.
Estimation of probability is a very subjective exercise. An an investor one has to analyse the various subjective elements of a deal and estimate the likelyhood of the deal being successful.
The earlier one invests in a deal, the more the uncertainity and hence higher the spread. In the event that there are multiple scenarios possible for a deal such as possiblity of a white knight appearing, then the risk/return of each scenario needs to wieghted with the probability of that scenario to arrive at the estimated returns for a deal.
Next Post : Other resources to understand the arbitrage process
Arbitrage process - I
I have been reading a book on risk arbitrage and came across the following steps in a typical deal (merger, spin-off, recap etc)
Deal announcement – This generally involves a press release or filing of an offer with BSE/ NSE with the requisite details. An investor has to be on a constant lookut for such announcements.
Gather and analyse information – After the investor comes to know about the deal, the next step involves gathering and analysing information.
The following are the various types of information which needs to be considered
Financial information: This involves reading all the filings with the stock exchange, Financial details of the companies involved such as the annual report, quarterly reports and analyst reports.
Legal information: gather and analyse any legal information which may impact the deal. For ex: check if there is an legal dispute in which the target or the acquiring company is involved, which may impact the success of the deal
Any tax and accounting implication should also be studied
Interpret and estimate – This stage involves the interpreting the information from step 2 and coming up with values for the following three variables
Returns estimate – The formulae used for the returns would as follows: Final target company price-Current price / Current price. In addition if the deal involves a stock for stock merger, then the investor should add the dividends to be received. If however the deal involves a mix of cash and stock, then the total return can be calculated as follows
(% of cash* amount of cash+% of stock * amount of stock)- Current price / Current price
If the transaction involves shorting the accquiring company stock and using borrowed money, then the return should be reduced by the dividends which needs to paid for the shorted stock and also by the interest cost of the borrowed capital.
Risk estimate – The risk in the transaction is the downside risk of the target company + Upside risk of the accquiring company
Downside risk = Current price – estimate of target company price if the deal fails
If the deal fails, and the investor has shorted the accquiring company stock to hedge, then he may incur an upsideside risk too
Upside risk = estimate of the accquiring company price if deal breaks – current price
The estimate of the prices for the target and accquiring company is done based on several factors such the pre-deal price, price of other companies in the industry etc.
Probability – This is the probaility of the deal coming through. The investor may assume there is an 80% probaility of the deal coming through. His estimate of returns my be 15% and estimate of risk may be 30%.
Based on these numbers the risk adjusted return is = .8*.15+.2*-.3 = 6%. This could be the absolute returns. If the investor expects the deal to complete in one month, then the annualized return is 72%.
It is important to consider the time it will take for the transaction or deal to happen and use that to estimate the annualized returns. The longer the time for the successful closure, the lower the annualized returns.
Estimation of probability is a very subjective exercise. An an investor one has to analyse the various subjective elements of a deal and estimate the likelyhood of the deal being successful.
The earlier one invests in a deal, the more the uncertainity and hence higher the spread. In the event that there are multiple scenarios possible for a deal such as possiblity of a white knight appearing, then the risk/return of each scenario needs to wieghted with the probability of that scenario to arrive at the estimated returns for a deal.
Next Post : Other resources to understand the arbitrage process
Deal announcement – This generally involves a press release or filing of an offer with BSE/ NSE with the requisite details. An investor has to be on a constant lookut for such announcements.
Gather and analyse information – After the investor comes to know about the deal, the next step involves gathering and analysing information.
The following are the various types of information which needs to be considered
Financial information: This involves reading all the filings with the stock exchange, Financial details of the companies involved such as the annual report, quarterly reports and analyst reports.
Legal information: gather and analyse any legal information which may impact the deal. For ex: check if there is an legal dispute in which the target or the acquiring company is involved, which may impact the success of the deal
Any tax and accounting implication should also be studied
Interpret and estimate – This stage involves the interpreting the information from step 2 and coming up with values for the following three variables
Returns estimate – The formulae used for the returns would as follows: Final target company price-Current price / Current price. In addition if the deal involves a stock for stock merger, then the investor should add the dividends to be received. If however the deal involves a mix of cash and stock, then the total return can be calculated as follows
(% of cash* amount of cash+% of stock * amount of stock)- Current price / Current price
If the transaction involves shorting the accquiring company stock and using borrowed money, then the return should be reduced by the dividends which needs to paid for the shorted stock and also by the interest cost of the borrowed capital.
Risk estimate – The risk in the transaction is the downside risk of the target company + Upside risk of the accquiring company
Downside risk = Current price – estimate of target company price if the deal fails
If the deal fails, and the investor has shorted the accquiring company stock to hedge, then he may incur an upsideside risk too
Upside risk = estimate of the accquiring company price if deal breaks – current price
The estimate of the prices for the target and accquiring company is done based on several factors such the pre-deal price, price of other companies in the industry etc.
Probability – This is the probaility of the deal coming through. The investor may assume there is an 80% probaility of the deal coming through. His estimate of returns my be 15% and estimate of risk may be 30%.
Based on these numbers the risk adjusted return is = .8*.15+.2*-.3 = 6%. This could be the absolute returns. If the investor expects the deal to complete in one month, then the annualized return is 72%.
It is important to consider the time it will take for the transaction or deal to happen and use that to estimate the annualized returns. The longer the time for the successful closure, the lower the annualized returns.
Estimation of probability is a very subjective exercise. An an investor one has to analyse the various subjective elements of a deal and estimate the likelyhood of the deal being successful.
The earlier one invests in a deal, the more the uncertainity and hence higher the spread. In the event that there are multiple scenarios possible for a deal such as possiblity of a white knight appearing, then the risk/return of each scenario needs to wieghted with the probability of that scenario to arrive at the estimated returns for a deal.
Next Post : Other resources to understand the arbitrage process
Friday, July 25, 2008
Those were the times !!
2004-2007
Inflation – 3-5%
Sensex – 300% up
Interest rates – around 7-8%
Salary hikes – 20% minimum
Real estate – 200% or more up
A few more years of this, and I could have retired. Ahh ..life was good !!. All I had to do was to buy a house, anywhere or pick a stock which I heard from my panwala or barber.
how I long for those times again :)
I want a new bubble !!!!!
Inflation – 3-5%
Sensex – 300% up
Interest rates – around 7-8%
Salary hikes – 20% minimum
Real estate – 200% or more up
A few more years of this, and I could have retired. Ahh ..life was good !!. All I had to do was to buy a house, anywhere or pick a stock which I heard from my panwala or barber.
how I long for those times again :)
I want a new bubble !!!!!
Those were the times !!
2004-2007
Inflation – 3-5%
Sensex – 300% up
Interest rates – around 7-8%
Salary hikes – 20% minimum
Real estate – 200% or more up
A few more years of this, and I could have retired. Ahh ..life was good !!. All I had to do was to buy a house, anywhere or pick a stock which I heard from my panwala or barber.
how I long for those times again :)
I want a new bubble !!!!!
Inflation – 3-5%
Sensex – 300% up
Interest rates – around 7-8%
Salary hikes – 20% minimum
Real estate – 200% or more up
A few more years of this, and I could have retired. Ahh ..life was good !!. All I had to do was to buy a house, anywhere or pick a stock which I heard from my panwala or barber.
how I long for those times again :)
I want a new bubble !!!!!
Wednesday, July 23, 2008
Responding to comments - NIIT tech valuation
I have posted on NIIT tech earlier here. I had done a quick back of the envelope calculation and uploaded the same in the google groups – see the file valuationtemplatev3NIITtemp.xls. I have been asked on the logic of the valuation via comments and emails. So here goes,
Following are the assumptions in the valuation
- Topline will grow by around 10% per annum for the next 2-3 years
- PBT margins will drop from 17% to around 10% in 2-3 years
- New tax rate will increase from around 15% to 25%
- Net margins will drop from the current 14.5 % to 7% due to the above factors.
I personally think, the above assumptions are very conservative. It is possible that the company can do worse than this, but based on current facts, I think that is a low probability.
So based on the above assumptions the net profit for 2010 is around 90 Crs. I have taken a multiplier of 14 and added the cash on books to arrive at a rough valuation of around 1550 Crs (I have also added the pending options to the share count).
To see what a PE of 14 means, please look at the spreadsheet quantitative calculation – worksheet ROC and PE. Look for the DCF calculation with ROC of 25% (approximate ROE for NIIT tech). A growth of 8% for 3-4 years gives a PE of 14. So I am talking of a growth of 7-8% in profits after 2010.
The valuation is dependent on the assumptions above. Ofcourse these assumptions are not set in stone. If the US market goes into a deep recession or the management does something very negative, then the netprofit could be lower than what I have assumed. If you believe that the market is pricing NIIT tech correctly, then your underlying assumption is that the company is going to fall off the cliff in the next 2-3 years (basically shutdown in the next 3-4 years).
Based on the past performance and this quarter’s result, I don’t see any reason to believe that. However I can and will change my mind if the future invalidates my assumptions. So as I have said before, please do not consider my analysis as a recommendation for the stock.
As an aside, I have received the maximum number of emails and comments on this stock. Its not too surprising as a lot of readers of this blog are from the IT industry and tend to invest more in IT stocks.
Following are the assumptions in the valuation
- Topline will grow by around 10% per annum for the next 2-3 years
- PBT margins will drop from 17% to around 10% in 2-3 years
- New tax rate will increase from around 15% to 25%
- Net margins will drop from the current 14.5 % to 7% due to the above factors.
I personally think, the above assumptions are very conservative. It is possible that the company can do worse than this, but based on current facts, I think that is a low probability.
So based on the above assumptions the net profit for 2010 is around 90 Crs. I have taken a multiplier of 14 and added the cash on books to arrive at a rough valuation of around 1550 Crs (I have also added the pending options to the share count).
To see what a PE of 14 means, please look at the spreadsheet quantitative calculation – worksheet ROC and PE. Look for the DCF calculation with ROC of 25% (approximate ROE for NIIT tech). A growth of 8% for 3-4 years gives a PE of 14. So I am talking of a growth of 7-8% in profits after 2010.
The valuation is dependent on the assumptions above. Ofcourse these assumptions are not set in stone. If the US market goes into a deep recession or the management does something very negative, then the netprofit could be lower than what I have assumed. If you believe that the market is pricing NIIT tech correctly, then your underlying assumption is that the company is going to fall off the cliff in the next 2-3 years (basically shutdown in the next 3-4 years).
Based on the past performance and this quarter’s result, I don’t see any reason to believe that. However I can and will change my mind if the future invalidates my assumptions. So as I have said before, please do not consider my analysis as a recommendation for the stock.
As an aside, I have received the maximum number of emails and comments on this stock. Its not too surprising as a lot of readers of this blog are from the IT industry and tend to invest more in IT stocks.
Responding to comments - NIIT tech valuation
I have posted on NIIT tech earlier here. I had done a quick back of the envelope calculation and uploaded the same in the google groups – see the file valuationtemplatev3NIITtemp.xls. I have been asked on the logic of the valuation via comments and emails. So here goes,
Following are the assumptions in the valuation
- Topline will grow by around 10% per annum for the next 2-3 years
- PBT margins will drop from 17% to around 10% in 2-3 years
- New tax rate will increase from around 15% to 25%
- Net margins will drop from the current 14.5 % to 7% due to the above factors.
I personally think, the above assumptions are very conservative. It is possible that the company can do worse than this, but based on current facts, I think that is a low probability.
So based on the above assumptions the net profit for 2010 is around 90 Crs. I have taken a multiplier of 14 and added the cash on books to arrive at a rough valuation of around 1550 Crs (I have also added the pending options to the share count).
To see what a PE of 14 means, please look at the spreadsheet quantitative calculation – worksheet ROC and PE. Look for the DCF calculation with ROC of 25% (approximate ROE for NIIT tech). A growth of 8% for 3-4 years gives a PE of 14. So I am talking of a growth of 7-8% in profits after 2010.
The valuation is dependent on the assumptions above. Ofcourse these assumptions are not set in stone. If the US market goes into a deep recession or the management does something very negative, then the netprofit could be lower than what I have assumed. If you believe that the market is pricing NIIT tech correctly, then your underlying assumption is that the company is going to fall off the cliff in the next 2-3 years (basically shutdown in the next 3-4 years).
Based on the past performance and this quarter’s result, I don’t see any reason to believe that. However I can and will change my mind if the future invalidates my assumptions. So as I have said before, please do not consider my analysis as a recommendation for the stock.
As an aside, I have received the maximum number of emails and comments on this stock. Its not too surprising as a lot of readers of this blog are from the IT industry and tend to invest more in IT stocks.
Following are the assumptions in the valuation
- Topline will grow by around 10% per annum for the next 2-3 years
- PBT margins will drop from 17% to around 10% in 2-3 years
- New tax rate will increase from around 15% to 25%
- Net margins will drop from the current 14.5 % to 7% due to the above factors.
I personally think, the above assumptions are very conservative. It is possible that the company can do worse than this, but based on current facts, I think that is a low probability.
So based on the above assumptions the net profit for 2010 is around 90 Crs. I have taken a multiplier of 14 and added the cash on books to arrive at a rough valuation of around 1550 Crs (I have also added the pending options to the share count).
To see what a PE of 14 means, please look at the spreadsheet quantitative calculation – worksheet ROC and PE. Look for the DCF calculation with ROC of 25% (approximate ROE for NIIT tech). A growth of 8% for 3-4 years gives a PE of 14. So I am talking of a growth of 7-8% in profits after 2010.
The valuation is dependent on the assumptions above. Ofcourse these assumptions are not set in stone. If the US market goes into a deep recession or the management does something very negative, then the netprofit could be lower than what I have assumed. If you believe that the market is pricing NIIT tech correctly, then your underlying assumption is that the company is going to fall off the cliff in the next 2-3 years (basically shutdown in the next 3-4 years).
Based on the past performance and this quarter’s result, I don’t see any reason to believe that. However I can and will change my mind if the future invalidates my assumptions. So as I have said before, please do not consider my analysis as a recommendation for the stock.
As an aside, I have received the maximum number of emails and comments on this stock. Its not too surprising as a lot of readers of this blog are from the IT industry and tend to invest more in IT stocks.
Sunday, July 20, 2008
Cement Industry – Stock analysis
I received a list of companies to analyse based on my earlier post. In order to do a better analysis, I am trying to club all the stocks from the same industry. As there are several cement companies in the list, I decided to take a stab at the cement stocks first.
My earlier analysis of the cement industry is here and here. In addition I have analysed the industry and updated my analysis in the file business analysis in the google group. Please have a look under the column commodity – cement.
The cement industry is a cyclical commodity industry where the profit and return on capital is dependent on the demand cycle picture. From the mid 90’s to 2002-2003 period, there was an excess of supply and hence prices were depressed. Most companies had poor to non-existent profits and accordingly the stock prices suffered. Since 2003, the demand has increased rapidly and so have the prices. The profit margins are now in excess of 20% for some companies and ROE in excess of 40% for companies such as ambuja cements. I personally think these are fairly high returns for this industry and the best of the companies in the industry would earn around a max of 20% over a business cycle.
Valuation of cement companies should not be done on the basis of peak earnings alone. This holds true for most commodity companies. Case in point – sugar companies. In 2006-2007, these companies appeared cheap based on their peak earnings. However when the cycle turned downwards, the stock prices got wacked. The economics of the cement industry are not as bad (there is lesser government intervention), however the valuation approach should be similar to the sugar industry. One has to be careful in extrapolating the peak earnings and assuming that the stock is undervalued.
Due to the cyclicality and commodity nature of the industry, analysis and valuation of cement companies is more diffcult as one has to figure out where the industry stands in terms of the business cycle . High returns can be made if one can predict the key turnaround points in the business cycle.
Mysore cement –
This is an interesting company. The company was taken over by the heidelberg group and made a tender offer to buy shares from the public at 54 Rs/ share in 2006 . SEBI directed the group to set the price at 72.5 per share. This was recently overturned by SAT and the heidelberg group can now initiate a tender offer to buy the shares from the public at Rs54 per share.
In addition the company alloted 66.5 Million shares at Rs 54 per share in 2006 to the group. This capital was used to pay off the accumulated debts and wipe out the accumulated losses. The company has also become profitable from 2007 since the new management took over.
In addition a recent news, indicates that indorama cement would be merging with mysore cement taking the capacity to 2.8 Million tonnes. The company further plans to expand the capacity to 5.9 Million tonnes.
The financial look good, with the company solidly in the black, no debt and cash of almost 180 crs on the books. The impact of the new management can clearly be seen from the P&L account, balance sheet improvement and aggressive plans of the company to expand capacity through mergers and greenfield projects.
So if everything is so good, then one should go and buy the stock? I would hold on that before I can figure out the following
- Cement is a cyclical industry. Currently the industry is on an upswing and hence all cement companies are making good money. How will mysore cement fare when the cycle turns south (supply exceeds demand)
- What is the cost structure for mysore cement? Cost is critical in a commodity industry such as cement.
- Future plans of the management. Scale is important in the industry. Mysore cement is still at 2.8 Million tonnes and even after capacity expansion would still be one of the smaller companies
One interesting development is the tender offer. The stock is quoting at around 30 Rs and the tender offer should be around 54 Rs. The stock may be a good arbitrage opportunity, even if the long term prospects of the company needs a more thorough analysis.
Ambuja cements
Ambuja cements has been one of most profitable cement companies in india and has made money even during the downturns. They have the highest net profit margins in the industry at 30% and ROE of almost 40%. Net profit margins have grown from 10% to around 30% and the profit as a result has grown by 8 times in the last 5 years.
The company sells at around 560 Crs/ Million tons of capacity compared to say 170 Crs/ Million tons of capacity for Mysore cement. The difference is high and understandable as Ambuja cement is a well run company with huge capacity and a very efficient cost structure.
The company is currently selling at a PE of 7 based on last year’s net profit numbers. Based on normalised profit margins of around 12-15%, the company is selling at a PE of around 12-13. I would say the company is undervalued by 20-25% at best.
If you believe that the net margins are sustainable, consider the following fact : Net margins in 2003 and before were around 10% and have expanded to around 30% in the last 2 years.
Grasim, ACC, Ultratech etc
Grasim has a blend of cement, VSF and other businesses. The cement business seems to be doing well in line with industry. The other companies such as ACC and ultratech have also been performing well in the last 2-3 years. Most of the top cement companies now have margins in the range of 18-22%, ROE in excess of 30% and high profit growth rates in excess of 20-30%.
The valuations of these companies are fairly close. Most of these tier I companies are selling at 7-8 times profit in comparison to the smaller companies which are selling at 4-5 times or lesser.
I am reaching the following conclusions after looking at the complete sector
- The cement industry has enjoyed very high growth rates and great profits for the last few years. The profits margins are not sustainable. New capacity, cost pressure and competition are bound to drive the margins to long term averages of around 10-12% in the next few years
- Most of the companies appear undervalued in terms of the last 2 years profits. However on the basis of normalized profits they are selling at 12-13 times earnings. At best, these companies appear undervalued by 20-25%. There may be a bit of undervaluation, but not by a huge amount.
- Considering the level of undervaluation in some sectors such as pharma, IT etc and the better economics enjoyed by those industries compared to Cement, I am personally not too keen on investing in the cement sector. If I had to pick up one cement company to put my money in for the long term, I would prefer ambuja cement (if I had to that is !!)
My earlier analysis of the cement industry is here and here. In addition I have analysed the industry and updated my analysis in the file business analysis in the google group. Please have a look under the column commodity – cement.
The cement industry is a cyclical commodity industry where the profit and return on capital is dependent on the demand cycle picture. From the mid 90’s to 2002-2003 period, there was an excess of supply and hence prices were depressed. Most companies had poor to non-existent profits and accordingly the stock prices suffered. Since 2003, the demand has increased rapidly and so have the prices. The profit margins are now in excess of 20% for some companies and ROE in excess of 40% for companies such as ambuja cements. I personally think these are fairly high returns for this industry and the best of the companies in the industry would earn around a max of 20% over a business cycle.
Valuation of cement companies should not be done on the basis of peak earnings alone. This holds true for most commodity companies. Case in point – sugar companies. In 2006-2007, these companies appeared cheap based on their peak earnings. However when the cycle turned downwards, the stock prices got wacked. The economics of the cement industry are not as bad (there is lesser government intervention), however the valuation approach should be similar to the sugar industry. One has to be careful in extrapolating the peak earnings and assuming that the stock is undervalued.
Due to the cyclicality and commodity nature of the industry, analysis and valuation of cement companies is more diffcult as one has to figure out where the industry stands in terms of the business cycle . High returns can be made if one can predict the key turnaround points in the business cycle.
Mysore cement –
This is an interesting company. The company was taken over by the heidelberg group and made a tender offer to buy shares from the public at 54 Rs/ share in 2006 . SEBI directed the group to set the price at 72.5 per share. This was recently overturned by SAT and the heidelberg group can now initiate a tender offer to buy the shares from the public at Rs54 per share.
In addition the company alloted 66.5 Million shares at Rs 54 per share in 2006 to the group. This capital was used to pay off the accumulated debts and wipe out the accumulated losses. The company has also become profitable from 2007 since the new management took over.
In addition a recent news, indicates that indorama cement would be merging with mysore cement taking the capacity to 2.8 Million tonnes. The company further plans to expand the capacity to 5.9 Million tonnes.
The financial look good, with the company solidly in the black, no debt and cash of almost 180 crs on the books. The impact of the new management can clearly be seen from the P&L account, balance sheet improvement and aggressive plans of the company to expand capacity through mergers and greenfield projects.
So if everything is so good, then one should go and buy the stock? I would hold on that before I can figure out the following
- Cement is a cyclical industry. Currently the industry is on an upswing and hence all cement companies are making good money. How will mysore cement fare when the cycle turns south (supply exceeds demand)
- What is the cost structure for mysore cement? Cost is critical in a commodity industry such as cement.
- Future plans of the management. Scale is important in the industry. Mysore cement is still at 2.8 Million tonnes and even after capacity expansion would still be one of the smaller companies
One interesting development is the tender offer. The stock is quoting at around 30 Rs and the tender offer should be around 54 Rs. The stock may be a good arbitrage opportunity, even if the long term prospects of the company needs a more thorough analysis.
Ambuja cements
Ambuja cements has been one of most profitable cement companies in india and has made money even during the downturns. They have the highest net profit margins in the industry at 30% and ROE of almost 40%. Net profit margins have grown from 10% to around 30% and the profit as a result has grown by 8 times in the last 5 years.
The company sells at around 560 Crs/ Million tons of capacity compared to say 170 Crs/ Million tons of capacity for Mysore cement. The difference is high and understandable as Ambuja cement is a well run company with huge capacity and a very efficient cost structure.
The company is currently selling at a PE of 7 based on last year’s net profit numbers. Based on normalised profit margins of around 12-15%, the company is selling at a PE of around 12-13. I would say the company is undervalued by 20-25% at best.
If you believe that the net margins are sustainable, consider the following fact : Net margins in 2003 and before were around 10% and have expanded to around 30% in the last 2 years.
Grasim, ACC, Ultratech etc
Grasim has a blend of cement, VSF and other businesses. The cement business seems to be doing well in line with industry. The other companies such as ACC and ultratech have also been performing well in the last 2-3 years. Most of the top cement companies now have margins in the range of 18-22%, ROE in excess of 30% and high profit growth rates in excess of 20-30%.
The valuations of these companies are fairly close. Most of these tier I companies are selling at 7-8 times profit in comparison to the smaller companies which are selling at 4-5 times or lesser.
I am reaching the following conclusions after looking at the complete sector
- The cement industry has enjoyed very high growth rates and great profits for the last few years. The profits margins are not sustainable. New capacity, cost pressure and competition are bound to drive the margins to long term averages of around 10-12% in the next few years
- Most of the companies appear undervalued in terms of the last 2 years profits. However on the basis of normalized profits they are selling at 12-13 times earnings. At best, these companies appear undervalued by 20-25%. There may be a bit of undervaluation, but not by a huge amount.
- Considering the level of undervaluation in some sectors such as pharma, IT etc and the better economics enjoyed by those industries compared to Cement, I am personally not too keen on investing in the cement sector. If I had to pick up one cement company to put my money in for the long term, I would prefer ambuja cement (if I had to that is !!)
Cement Industry – Stock analysis
I received a list of companies to analyse based on my earlier post. In order to do a better analysis, I am trying to club all the stocks from the same industry. As there are several cement companies in the list, I decided to take a stab at the cement stocks first.
My earlier analysis of the cement industry is here and here. In addition I have analysed the industry and updated my analysis in the file business analysis in the google group. Please have a look under the column commodity – cement.
The cement industry is a cyclical commodity industry where the profit and return on capital is dependent on the demand cycle picture. From the mid 90’s to 2002-2003 period, there was an excess of supply and hence prices were depressed. Most companies had poor to non-existent profits and accordingly the stock prices suffered. Since 2003, the demand has increased rapidly and so have the prices. The profit margins are now in excess of 20% for some companies and ROE in excess of 40% for companies such as ambuja cements. I personally think these are fairly high returns for this industry and the best of the companies in the industry would earn around a max of 20% over a business cycle.
Valuation of cement companies should not be done on the basis of peak earnings alone. This holds true for most commodity companies. Case in point – sugar companies. In 2006-2007, these companies appeared cheap based on their peak earnings. However when the cycle turned downwards, the stock prices got wacked. The economics of the cement industry are not as bad (there is lesser government intervention), however the valuation approach should be similar to the sugar industry. One has to be careful in extrapolating the peak earnings and assuming that the stock is undervalued.
Due to the cyclicality and commodity nature of the industry, analysis and valuation of cement companies is more diffcult as one has to figure out where the industry stands in terms of the business cycle . High returns can be made if one can predict the key turnaround points in the business cycle.
Mysore cement –
This is an interesting company. The company was taken over by the heidelberg group and made a tender offer to buy shares from the public at 54 Rs/ share in 2006 . SEBI directed the group to set the price at 72.5 per share. This was recently overturned by SAT and the heidelberg group can now initiate a tender offer to buy the shares from the public at Rs54 per share.
In addition the company alloted 66.5 Million shares at Rs 54 per share in 2006 to the group. This capital was used to pay off the accumulated debts and wipe out the accumulated losses. The company has also become profitable from 2007 since the new management took over.
In addition a recent news, indicates that indorama cement would be merging with mysore cement taking the capacity to 2.8 Million tonnes. The company further plans to expand the capacity to 5.9 Million tonnes.
The financial look good, with the company solidly in the black, no debt and cash of almost 180 crs on the books. The impact of the new management can clearly be seen from the P&L account, balance sheet improvement and aggressive plans of the company to expand capacity through mergers and greenfield projects.
So if everything is so good, then one should go and buy the stock? I would hold on that before I can figure out the following
- Cement is a cyclical industry. Currently the industry is on an upswing and hence all cement companies are making good money. How will mysore cement fare when the cycle turns south (supply exceeds demand)
- What is the cost structure for mysore cement? Cost is critical in a commodity industry such as cement.
- Future plans of the management. Scale is important in the industry. Mysore cement is still at 2.8 Million tonnes and even after capacity expansion would still be one of the smaller companies
One interesting development is the tender offer. The stock is quoting at around 30 Rs and the tender offer should be around 54 Rs. The stock may be a good arbitrage opportunity, even if the long term prospects of the company needs a more thorough analysis.
Ambuja cements
Ambuja cements has been one of most profitable cement companies in india and has made money even during the downturns. They have the highest net profit margins in the industry at 30% and ROE of almost 40%. Net profit margins have grown from 10% to around 30% and the profit as a result has grown by 8 times in the last 5 years.
The company sells at around 560 Crs/ Million tons of capacity compared to say 170 Crs/ Million tons of capacity for Mysore cement. The difference is high and understandable as Ambuja cement is a well run company with huge capacity and a very efficient cost structure.
The company is currently selling at a PE of 7 based on last year’s net profit numbers. Based on normalised profit margins of around 12-15%, the company is selling at a PE of around 12-13. I would say the company is undervalued by 20-25% at best.
If you believe that the net margins are sustainable, consider the following fact : Net margins in 2003 and before were around 10% and have expanded to around 30% in the last 2 years.
Grasim, ACC, Ultratech etc
Grasim has a blend of cement, VSF and other businesses. The cement business seems to be doing well in line with industry. The other companies such as ACC and ultratech have also been performing well in the last 2-3 years. Most of the top cement companies now have margins in the range of 18-22%, ROE in excess of 30% and high profit growth rates in excess of 20-30%.
The valuations of these companies are fairly close. Most of these tier I companies are selling at 7-8 times profit in comparison to the smaller companies which are selling at 4-5 times or lesser.
I am reaching the following conclusions after looking at the complete sector
- The cement industry has enjoyed very high growth rates and great profits for the last few years. The profits margins are not sustainable. New capacity, cost pressure and competition are bound to drive the margins to long term averages of around 10-12% in the next few years
- Most of the companies appear undervalued in terms of the last 2 years profits. However on the basis of normalized profits they are selling at 12-13 times earnings. At best, these companies appear undervalued by 20-25%. There may be a bit of undervaluation, but not by a huge amount.
- Considering the level of undervaluation in some sectors such as pharma, IT etc and the better economics enjoyed by those industries compared to Cement, I am personally not too keen on investing in the cement sector. If I had to pick up one cement company to put my money in for the long term, I would prefer ambuja cement (if I had to that is !!)
My earlier analysis of the cement industry is here and here. In addition I have analysed the industry and updated my analysis in the file business analysis in the google group. Please have a look under the column commodity – cement.
The cement industry is a cyclical commodity industry where the profit and return on capital is dependent on the demand cycle picture. From the mid 90’s to 2002-2003 period, there was an excess of supply and hence prices were depressed. Most companies had poor to non-existent profits and accordingly the stock prices suffered. Since 2003, the demand has increased rapidly and so have the prices. The profit margins are now in excess of 20% for some companies and ROE in excess of 40% for companies such as ambuja cements. I personally think these are fairly high returns for this industry and the best of the companies in the industry would earn around a max of 20% over a business cycle.
Valuation of cement companies should not be done on the basis of peak earnings alone. This holds true for most commodity companies. Case in point – sugar companies. In 2006-2007, these companies appeared cheap based on their peak earnings. However when the cycle turned downwards, the stock prices got wacked. The economics of the cement industry are not as bad (there is lesser government intervention), however the valuation approach should be similar to the sugar industry. One has to be careful in extrapolating the peak earnings and assuming that the stock is undervalued.
Due to the cyclicality and commodity nature of the industry, analysis and valuation of cement companies is more diffcult as one has to figure out where the industry stands in terms of the business cycle . High returns can be made if one can predict the key turnaround points in the business cycle.
Mysore cement –
This is an interesting company. The company was taken over by the heidelberg group and made a tender offer to buy shares from the public at 54 Rs/ share in 2006 . SEBI directed the group to set the price at 72.5 per share. This was recently overturned by SAT and the heidelberg group can now initiate a tender offer to buy the shares from the public at Rs54 per share.
In addition the company alloted 66.5 Million shares at Rs 54 per share in 2006 to the group. This capital was used to pay off the accumulated debts and wipe out the accumulated losses. The company has also become profitable from 2007 since the new management took over.
In addition a recent news, indicates that indorama cement would be merging with mysore cement taking the capacity to 2.8 Million tonnes. The company further plans to expand the capacity to 5.9 Million tonnes.
The financial look good, with the company solidly in the black, no debt and cash of almost 180 crs on the books. The impact of the new management can clearly be seen from the P&L account, balance sheet improvement and aggressive plans of the company to expand capacity through mergers and greenfield projects.
So if everything is so good, then one should go and buy the stock? I would hold on that before I can figure out the following
- Cement is a cyclical industry. Currently the industry is on an upswing and hence all cement companies are making good money. How will mysore cement fare when the cycle turns south (supply exceeds demand)
- What is the cost structure for mysore cement? Cost is critical in a commodity industry such as cement.
- Future plans of the management. Scale is important in the industry. Mysore cement is still at 2.8 Million tonnes and even after capacity expansion would still be one of the smaller companies
One interesting development is the tender offer. The stock is quoting at around 30 Rs and the tender offer should be around 54 Rs. The stock may be a good arbitrage opportunity, even if the long term prospects of the company needs a more thorough analysis.
Ambuja cements
Ambuja cements has been one of most profitable cement companies in india and has made money even during the downturns. They have the highest net profit margins in the industry at 30% and ROE of almost 40%. Net profit margins have grown from 10% to around 30% and the profit as a result has grown by 8 times in the last 5 years.
The company sells at around 560 Crs/ Million tons of capacity compared to say 170 Crs/ Million tons of capacity for Mysore cement. The difference is high and understandable as Ambuja cement is a well run company with huge capacity and a very efficient cost structure.
The company is currently selling at a PE of 7 based on last year’s net profit numbers. Based on normalised profit margins of around 12-15%, the company is selling at a PE of around 12-13. I would say the company is undervalued by 20-25% at best.
If you believe that the net margins are sustainable, consider the following fact : Net margins in 2003 and before were around 10% and have expanded to around 30% in the last 2 years.
Grasim, ACC, Ultratech etc
Grasim has a blend of cement, VSF and other businesses. The cement business seems to be doing well in line with industry. The other companies such as ACC and ultratech have also been performing well in the last 2-3 years. Most of the top cement companies now have margins in the range of 18-22%, ROE in excess of 30% and high profit growth rates in excess of 20-30%.
The valuations of these companies are fairly close. Most of these tier I companies are selling at 7-8 times profit in comparison to the smaller companies which are selling at 4-5 times or lesser.
I am reaching the following conclusions after looking at the complete sector
- The cement industry has enjoyed very high growth rates and great profits for the last few years. The profits margins are not sustainable. New capacity, cost pressure and competition are bound to drive the margins to long term averages of around 10-12% in the next few years
- Most of the companies appear undervalued in terms of the last 2 years profits. However on the basis of normalized profits they are selling at 12-13 times earnings. At best, these companies appear undervalued by 20-25%. There may be a bit of undervaluation, but not by a huge amount.
- Considering the level of undervaluation in some sectors such as pharma, IT etc and the better economics enjoyed by those industries compared to Cement, I am personally not too keen on investing in the cement sector. If I had to pick up one cement company to put my money in for the long term, I would prefer ambuja cement (if I had to that is !!)
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