Lets go over what the typical investor was thinking over the last 18 months, from the peak to the current recovery phase.
Jan 2008 – Whopee, I am getting rich. Just need to keep buying and selling and trading and I can retire! I am a genius!!!
March 2008 – I knew the market was overvalued, but then I am long term investor. So I am going hold onto my stocks during the this drop, maybe even buy more
Aug 2008 – The market is climbing again!! the bear market is over.
Nov 2008 – What happened ?!! oh boy, why did not sell in august. I have lost too much money. No point in selling
Feb 2008 – This is getting bad. Let me salvage whatever I can and move to fixed deposits. Even the CNBC guys are saying that
April 2008 – The market has risen a bit, but I am not worried. The market will drop once the election results are announced
May 2008 – The results were a surprise and missed the rally. I should have bought in Feb when the market was cheap. Let me wait
Jun 2008 – let me wait for the market to drop
July 2008 – Let me wait for the market to drop
….and the mental circus continues
I know I am exaggerating, but I know there are a lot of investors who went through the above mental roller coaster and will learn all the wrong things like
- The market is a casino and one has to be able to predict the market in advance to make money
- I should take more risk and should trade more frantically to make money
- One needs to be glued to the TV to make money
- All the losses are not my fault, though the gains were due to my brilliance
I have myself gone through some of the above emotions in the past. There is nothing wrong in experiencing all kinds of conflicting emotions during such volatile times. It will however not do an investor any good, if he or she does not learn the right lessons. Let me state a few things I learnt from bear markets in the past
- There is only one person to blame for your losses – you
- There is never a good or a bad time to buy stocks. If you can find a good company, which is undervalued, buying is a smarter decision than guessing what the market will do.
- Prepare in advance – I have been guilty of being timid in the previous bear market. During 2001-2003 bear market, I lacked the self confidence of investing a meaningful amount of money even though I realized that the market and stocks were cheap. The reaction is understandable if you are new to the market and have suffered losses. After the bear market ended, I realized my mistake and make a mental plan of how much capital I would commit when the inevitable downturn came. During the current downturn, I was prepared psychologically to go ‘all in’ when the valuations became cheap.
- Stop listening to markets forecast and silly predictions. They will cost you money in the long run
- Learn continuously. You may make money by luck in the stock market, but will not keep it.
- Stop looking backwards – I should have or would have done this, is not relevant. The question is – knowing what I know now, what do I plan to do?
Wednesday, July 29, 2009
What did the bear market teach you ?
Lets go over what the typical investor was thinking over the last 18 months, from the peak to the current recovery phase.
Jan 2008 – Whopee, I am getting rich. Just need to keep buying and selling and trading and I can retire! I am a genius!!!
March 2008 – I knew the market was overvalued, but then I am long term investor. So I am going hold onto my stocks during the this drop, maybe even buy more
Aug 2008 – The market is climbing again!! the bear market is over.
Nov 2008 – What happened ?!! oh boy, why did not sell in august. I have lost too much money. No point in selling
Feb 2008 – This is getting bad. Let me salvage whatever I can and move to fixed deposits. Even the CNBC guys are saying that
April 2008 – The market has risen a bit, but I am not worried. The market will drop once the election results are announced
May 2008 – The results were a surprise and missed the rally. I should have bought in Feb when the market was cheap. Let me wait
Jun 2008 – let me wait for the market to drop
July 2008 – Let me wait for the market to drop
….and the mental circus continues
I know I am exaggerating, but I know there are a lot of investors who went through the above mental roller coaster and will learn all the wrong things like
- The market is a casino and one has to be able to predict the market in advance to make money
- I should take more risk and should trade more frantically to make money
- One needs to be glued to the TV to make money
- All the losses are not my fault, though the gains were due to my brilliance
I have myself gone through some of the above emotions in the past. There is nothing wrong in experiencing all kinds of conflicting emotions during such volatile times. It will however not do an investor any good, if he or she does not learn the right lessons. Let me state a few things I learnt from bear markets in the past
- There is only one person to blame for your losses – you
- There is never a good or a bad time to buy stocks. If you can find a good company, which is undervalued, buying is a smarter decision than guessing what the market will do.
- Prepare in advance – I have been guilty of being timid in the previous bear market. During 2001-2003 bear market, I lacked the self confidence of investing a meaningful amount of money even though I realized that the market and stocks were cheap. The reaction is understandable if you are new to the market and have suffered losses. After the bear market ended, I realized my mistake and make a mental plan of how much capital I would commit when the inevitable downturn came. During the current downturn, I was prepared psychologically to go ‘all in’ when the valuations became cheap.
- Stop listening to markets forecast and silly predictions. They will cost you money in the long run
- Learn continuously. You may make money by luck in the stock market, but will not keep it.
- Stop looking backwards – I should have or would have done this, is not relevant. The question is – knowing what I know now, what do I plan to do?
Jan 2008 – Whopee, I am getting rich. Just need to keep buying and selling and trading and I can retire! I am a genius!!!
March 2008 – I knew the market was overvalued, but then I am long term investor. So I am going hold onto my stocks during the this drop, maybe even buy more
Aug 2008 – The market is climbing again!! the bear market is over.
Nov 2008 – What happened ?!! oh boy, why did not sell in august. I have lost too much money. No point in selling
Feb 2008 – This is getting bad. Let me salvage whatever I can and move to fixed deposits. Even the CNBC guys are saying that
April 2008 – The market has risen a bit, but I am not worried. The market will drop once the election results are announced
May 2008 – The results were a surprise and missed the rally. I should have bought in Feb when the market was cheap. Let me wait
Jun 2008 – let me wait for the market to drop
July 2008 – Let me wait for the market to drop
….and the mental circus continues
I know I am exaggerating, but I know there are a lot of investors who went through the above mental roller coaster and will learn all the wrong things like
- The market is a casino and one has to be able to predict the market in advance to make money
- I should take more risk and should trade more frantically to make money
- One needs to be glued to the TV to make money
- All the losses are not my fault, though the gains were due to my brilliance
I have myself gone through some of the above emotions in the past. There is nothing wrong in experiencing all kinds of conflicting emotions during such volatile times. It will however not do an investor any good, if he or she does not learn the right lessons. Let me state a few things I learnt from bear markets in the past
- There is only one person to blame for your losses – you
- There is never a good or a bad time to buy stocks. If you can find a good company, which is undervalued, buying is a smarter decision than guessing what the market will do.
- Prepare in advance – I have been guilty of being timid in the previous bear market. During 2001-2003 bear market, I lacked the self confidence of investing a meaningful amount of money even though I realized that the market and stocks were cheap. The reaction is understandable if you are new to the market and have suffered losses. After the bear market ended, I realized my mistake and make a mental plan of how much capital I would commit when the inevitable downturn came. During the current downturn, I was prepared psychologically to go ‘all in’ when the valuations became cheap.
- Stop listening to markets forecast and silly predictions. They will cost you money in the long run
- Learn continuously. You may make money by luck in the stock market, but will not keep it.
- Stop looking backwards – I should have or would have done this, is not relevant. The question is – knowing what I know now, what do I plan to do?
Friday, July 24, 2009
Maruti suzuki
I have written about maruti suzuki earlier here and here. Maruti recently announced great results, atleast on the face of it.
The results are good, though not spectacular. The company has shown an 18% year on year growth in volume and 25% growth in profit. The QoQ growth is -4% , mainly due to the seasonality of the sales. The company has been able to manage the costs well on yoy basis and reduce them from the previous quarter. The main reduction has been on material costs and elimination of the exchange variation losses.
So I should be doing handsprings and cartwheels ..right ? not exactly. I have written earlier on anchoring and my failure to build a full position in maruti suzuki. So a 200%+ price increase is a simultenaous reason for me to smile and beat myself :)
Bharat electronics
I have writen about BEL earlier here . BEL recently announced Q1 results and reported 180%+ growth in net profits and a 10 fold increase in profits.
I am happy about the results, but not for the reasons you would expect. Let me explain – My key concern with BEL has been that the company has been booking majority of its sales in Q4 and a result was making almost 60-70% of its profit in the same quarter.
Now the company operates in a project kind of business and hence could be booking revenue based on percentage of completion method during Q4. As a result of the skew, the company had built up high recievables and hence higher working capital.
The company seems to be moving away from the above (need to confirm from the annual report) skew which is good as it would help in improving the cash flow and reduce work capital requirements. So the results are good, not due to the growth, but due to the reduction in the skew in the quarter by quarter revenue.
On an overall basis, the core business of the company is fairly immune from the recession and the company should continue to do well.
CRISIL
I have written about CRISIL earlier here. CRISIL reported its quartely results and reported a 17% increase in topline and 12% increase in the bottom line. The offshore research business continued to show growth inspite of the chaos in the international markets.
I am pretty happy with the results in view of the macro conditions in which these results were achieved. In addition the company reported a dividend of 25Rs/ share which amounts to a 50% payout. The company management is not hoarding the capital, which is a good thing.
CRISIL is one of the few companies with enormous competitive advantages. I have always wanted to buy this company, but was put off by the steep valuations. During the downturn, I was reading an article on buffett and was struck by a comment – buffett tends to read about companies even if he has no plans to buy the stock. If he likes the company, he mentally files it and waits for the right time when the price is right.
The above comment got me thinking and on going through my notes found my analysis of maruti and CRISIL. After a quick analysis, I decided to pull the trigger.
Moral of the story :) (for me) – be prepared in advance. You never know when opportunity strikes !
I have written about maruti suzuki earlier here and here. Maruti recently announced great results, atleast on the face of it.
The results are good, though not spectacular. The company has shown an 18% year on year growth in volume and 25% growth in profit. The QoQ growth is -4% , mainly due to the seasonality of the sales. The company has been able to manage the costs well on yoy basis and reduce them from the previous quarter. The main reduction has been on material costs and elimination of the exchange variation losses.
So I should be doing handsprings and cartwheels ..right ? not exactly. I have written earlier on anchoring and my failure to build a full position in maruti suzuki. So a 200%+ price increase is a simultenaous reason for me to smile and beat myself :)
Bharat electronics
I have writen about BEL earlier here . BEL recently announced Q1 results and reported 180%+ growth in net profits and a 10 fold increase in profits.
I am happy about the results, but not for the reasons you would expect. Let me explain – My key concern with BEL has been that the company has been booking majority of its sales in Q4 and a result was making almost 60-70% of its profit in the same quarter.
Now the company operates in a project kind of business and hence could be booking revenue based on percentage of completion method during Q4. As a result of the skew, the company had built up high recievables and hence higher working capital.
The company seems to be moving away from the above (need to confirm from the annual report) skew which is good as it would help in improving the cash flow and reduce work capital requirements. So the results are good, not due to the growth, but due to the reduction in the skew in the quarter by quarter revenue.
On an overall basis, the core business of the company is fairly immune from the recession and the company should continue to do well.
CRISIL
I have written about CRISIL earlier here. CRISIL reported its quartely results and reported a 17% increase in topline and 12% increase in the bottom line. The offshore research business continued to show growth inspite of the chaos in the international markets.
I am pretty happy with the results in view of the macro conditions in which these results were achieved. In addition the company reported a dividend of 25Rs/ share which amounts to a 50% payout. The company management is not hoarding the capital, which is a good thing.
CRISIL is one of the few companies with enormous competitive advantages. I have always wanted to buy this company, but was put off by the steep valuations. During the downturn, I was reading an article on buffett and was struck by a comment – buffett tends to read about companies even if he has no plans to buy the stock. If he likes the company, he mentally files it and waits for the right time when the price is right.
The above comment got me thinking and on going through my notes found my analysis of maruti and CRISIL. After a quick analysis, I decided to pull the trigger.
Moral of the story :) (for me) – be prepared in advance. You never know when opportunity strikes !
Maruti suzuki
I have written about maruti suzuki earlier here and here. Maruti recently announced great results, atleast on the face of it.
The results are good, though not spectacular. The company has shown an 18% year on year growth in volume and 25% growth in profit. The QoQ growth is -4% , mainly due to the seasonality of the sales. The company has been able to manage the costs well on yoy basis and reduce them from the previous quarter. The main reduction has been on material costs and elimination of the exchange variation losses.
So I should be doing handsprings and cartwheels ..right ? not exactly. I have written earlier on anchoring and my failure to build a full position in maruti suzuki. So a 200%+ price increase is a simultenaous reason for me to smile and beat myself :)
Bharat electronics
I have writen about BEL earlier here . BEL recently announced Q1 results and reported 180%+ growth in net profits and a 10 fold increase in profits.
I am happy about the results, but not for the reasons you would expect. Let me explain – My key concern with BEL has been that the company has been booking majority of its sales in Q4 and a result was making almost 60-70% of its profit in the same quarter.
Now the company operates in a project kind of business and hence could be booking revenue based on percentage of completion method during Q4. As a result of the skew, the company had built up high recievables and hence higher working capital.
The company seems to be moving away from the above (need to confirm from the annual report) skew which is good as it would help in improving the cash flow and reduce work capital requirements. So the results are good, not due to the growth, but due to the reduction in the skew in the quarter by quarter revenue.
On an overall basis, the core business of the company is fairly immune from the recession and the company should continue to do well.
CRISIL
I have written about CRISIL earlier here. CRISIL reported its quartely results and reported a 17% increase in topline and 12% increase in the bottom line. The offshore research business continued to show growth inspite of the chaos in the international markets.
I am pretty happy with the results in view of the macro conditions in which these results were achieved. In addition the company reported a dividend of 25Rs/ share which amounts to a 50% payout. The company management is not hoarding the capital, which is a good thing.
CRISIL is one of the few companies with enormous competitive advantages. I have always wanted to buy this company, but was put off by the steep valuations. During the downturn, I was reading an article on buffett and was struck by a comment – buffett tends to read about companies even if he has no plans to buy the stock. If he likes the company, he mentally files it and waits for the right time when the price is right.
The above comment got me thinking and on going through my notes found my analysis of maruti and CRISIL. After a quick analysis, I decided to pull the trigger.
Moral of the story :) (for me) – be prepared in advance. You never know when opportunity strikes !
I have written about maruti suzuki earlier here and here. Maruti recently announced great results, atleast on the face of it.
The results are good, though not spectacular. The company has shown an 18% year on year growth in volume and 25% growth in profit. The QoQ growth is -4% , mainly due to the seasonality of the sales. The company has been able to manage the costs well on yoy basis and reduce them from the previous quarter. The main reduction has been on material costs and elimination of the exchange variation losses.
So I should be doing handsprings and cartwheels ..right ? not exactly. I have written earlier on anchoring and my failure to build a full position in maruti suzuki. So a 200%+ price increase is a simultenaous reason for me to smile and beat myself :)
Bharat electronics
I have writen about BEL earlier here . BEL recently announced Q1 results and reported 180%+ growth in net profits and a 10 fold increase in profits.
I am happy about the results, but not for the reasons you would expect. Let me explain – My key concern with BEL has been that the company has been booking majority of its sales in Q4 and a result was making almost 60-70% of its profit in the same quarter.
Now the company operates in a project kind of business and hence could be booking revenue based on percentage of completion method during Q4. As a result of the skew, the company had built up high recievables and hence higher working capital.
The company seems to be moving away from the above (need to confirm from the annual report) skew which is good as it would help in improving the cash flow and reduce work capital requirements. So the results are good, not due to the growth, but due to the reduction in the skew in the quarter by quarter revenue.
On an overall basis, the core business of the company is fairly immune from the recession and the company should continue to do well.
CRISIL
I have written about CRISIL earlier here. CRISIL reported its quartely results and reported a 17% increase in topline and 12% increase in the bottom line. The offshore research business continued to show growth inspite of the chaos in the international markets.
I am pretty happy with the results in view of the macro conditions in which these results were achieved. In addition the company reported a dividend of 25Rs/ share which amounts to a 50% payout. The company management is not hoarding the capital, which is a good thing.
CRISIL is one of the few companies with enormous competitive advantages. I have always wanted to buy this company, but was put off by the steep valuations. During the downturn, I was reading an article on buffett and was struck by a comment – buffett tends to read about companies even if he has no plans to buy the stock. If he likes the company, he mentally files it and waits for the right time when the price is right.
The above comment got me thinking and on going through my notes found my analysis of maruti and CRISIL. After a quick analysis, I decided to pull the trigger.
Moral of the story :) (for me) – be prepared in advance. You never know when opportunity strikes !
Sunday, July 19, 2009
Quarterly results review – VST india, Novartis, Concor
VST
I wrote about VST a month back and got it perfectly wrong. The company has come out with a 60%+ topline growth and doubling of bottom line. I have not been find more details on the results, but need to figure out how the company has been able to increase topline so rapidly in a business with such a low growth.
Container corporation
The company reported a 10% topline growth and a flat bottom line. The bottom line is flat due to the 20% rise in the rail expenses. Although I don’t have the exact details, the rail charge hikes cannot be passed on the customers immediately and there is a lag in getting the price increase.
The overall results are good in view of the slowdown in the exim markets. Concor has been a long term holding for me and is a very profitable logistics company with a cash rich balance sheet, attractive margins and substantial competitive advantage.
Novartis
I wrote on Novartis earlier here. I have not completely exited the stock as I felt the buyback price was too low. The company has been able to increase the holding to 76.4% now. The company increased the topline by 7% and bottom line by around the same amount.
The performance is nothing out of the ordinary. The stock continues to be undervalued and will most likely remain so. The only upside is a possible buyback and delisting by the parent. However as there is no fixed timetable, it may not make sense to hold the stock for the long term. In my case, I will exit my position when I can find a better idea.
So how is your portfolio doing ?
I often get this question by email. The short answer is – as expected (around 10% in excess of the index returns). I started buying last year from march and went all in by Q4 of 2008. I have not been very active since the beginning of the year due to various reasons ranging from shortage of cash to lack of time.
I have been lucky that my wins generally end up more than compensating for my goof-ups. It is however difficult to know beforehand which idea would be a winner or a clunker. In the final analysis, though it is the portfolio performance rather than individual stock performance, which matters more.
I wrote about VST a month back and got it perfectly wrong. The company has come out with a 60%+ topline growth and doubling of bottom line. I have not been find more details on the results, but need to figure out how the company has been able to increase topline so rapidly in a business with such a low growth.
Container corporation
The company reported a 10% topline growth and a flat bottom line. The bottom line is flat due to the 20% rise in the rail expenses. Although I don’t have the exact details, the rail charge hikes cannot be passed on the customers immediately and there is a lag in getting the price increase.
The overall results are good in view of the slowdown in the exim markets. Concor has been a long term holding for me and is a very profitable logistics company with a cash rich balance sheet, attractive margins and substantial competitive advantage.
Novartis
I wrote on Novartis earlier here. I have not completely exited the stock as I felt the buyback price was too low. The company has been able to increase the holding to 76.4% now. The company increased the topline by 7% and bottom line by around the same amount.
The performance is nothing out of the ordinary. The stock continues to be undervalued and will most likely remain so. The only upside is a possible buyback and delisting by the parent. However as there is no fixed timetable, it may not make sense to hold the stock for the long term. In my case, I will exit my position when I can find a better idea.
So how is your portfolio doing ?
I often get this question by email. The short answer is – as expected (around 10% in excess of the index returns). I started buying last year from march and went all in by Q4 of 2008. I have not been very active since the beginning of the year due to various reasons ranging from shortage of cash to lack of time.
I have been lucky that my wins generally end up more than compensating for my goof-ups. It is however difficult to know beforehand which idea would be a winner or a clunker. In the final analysis, though it is the portfolio performance rather than individual stock performance, which matters more.
Quarterly results review – VST india, Novartis, Concor
VST
I wrote about VST a month back and got it perfectly wrong. The company has come out with a 60%+ topline growth and doubling of bottom line. I have not been find more details on the results, but need to figure out how the company has been able to increase topline so rapidly in a business with such a low growth.
Container corporation
The company reported a 10% topline growth and a flat bottom line. The bottom line is flat due to the 20% rise in the rail expenses. Although I don’t have the exact details, the rail charge hikes cannot be passed on the customers immediately and there is a lag in getting the price increase.
The overall results are good in view of the slowdown in the exim markets. Concor has been a long term holding for me and is a very profitable logistics company with a cash rich balance sheet, attractive margins and substantial competitive advantage.
Novartis
I wrote on Novartis earlier here. I have not completely exited the stock as I felt the buyback price was too low. The company has been able to increase the holding to 76.4% now. The company increased the topline by 7% and bottom line by around the same amount.
The performance is nothing out of the ordinary. The stock continues to be undervalued and will most likely remain so. The only upside is a possible buyback and delisting by the parent. However as there is no fixed timetable, it may not make sense to hold the stock for the long term. In my case, I will exit my position when I can find a better idea.
So how is your portfolio doing ?
I often get this question by email. The short answer is – as expected (around 10% in excess of the index returns). I started buying last year from march and went all in by Q4 of 2008. I have not been very active since the beginning of the year due to various reasons ranging from shortage of cash to lack of time.
I have been lucky that my wins generally end up more than compensating for my goof-ups. It is however difficult to know beforehand which idea would be a winner or a clunker. In the final analysis, though it is the portfolio performance rather than individual stock performance, which matters more.
I wrote about VST a month back and got it perfectly wrong. The company has come out with a 60%+ topline growth and doubling of bottom line. I have not been find more details on the results, but need to figure out how the company has been able to increase topline so rapidly in a business with such a low growth.
Container corporation
The company reported a 10% topline growth and a flat bottom line. The bottom line is flat due to the 20% rise in the rail expenses. Although I don’t have the exact details, the rail charge hikes cannot be passed on the customers immediately and there is a lag in getting the price increase.
The overall results are good in view of the slowdown in the exim markets. Concor has been a long term holding for me and is a very profitable logistics company with a cash rich balance sheet, attractive margins and substantial competitive advantage.
Novartis
I wrote on Novartis earlier here. I have not completely exited the stock as I felt the buyback price was too low. The company has been able to increase the holding to 76.4% now. The company increased the topline by 7% and bottom line by around the same amount.
The performance is nothing out of the ordinary. The stock continues to be undervalued and will most likely remain so. The only upside is a possible buyback and delisting by the parent. However as there is no fixed timetable, it may not make sense to hold the stock for the long term. In my case, I will exit my position when I can find a better idea.
So how is your portfolio doing ?
I often get this question by email. The short answer is – as expected (around 10% in excess of the index returns). I started buying last year from march and went all in by Q4 of 2008. I have not been very active since the beginning of the year due to various reasons ranging from shortage of cash to lack of time.
I have been lucky that my wins generally end up more than compensating for my goof-ups. It is however difficult to know beforehand which idea would be a winner or a clunker. In the final analysis, though it is the portfolio performance rather than individual stock performance, which matters more.
Monday, July 13, 2009
Patience
In an ideal world, If I expect my portfolio to return 24% per annum, I would prefer to get 2% returns per month. That way at the end of each month, I would have a nice gain and would be feeling quite good about it.
Now all of us know that it does not work that way. In the last few years, however a lot of investors have come to expect that they ‘deserve’ to make 40% per annum and that too in equal increments with minimal drops along the way. If you think I am exaggerating, look at the mutual fund inflows and outflows to confirm my statement.
Impatience and mutual funds
If a mutual does well for a few months, they have a surge of new funds. If however, heaven forbid they drop for a few months, the money starts flowing out. In such a sceanrio a fund manager cannot be faulted for having a short term view. Mutual funds and fund managers have their faults too and I am not defending those faults. However impatient investors cause a lot of fund managers to take a short term view which affects the fund performance in the long run.
The above phenomenon is not limited to the indian markets alone. You can find it prevalent in almost all the foreign markets too. There is a lot of evidence that the average holding period for investors has come down progressively. This shows up as higher volumes and more trading in the markets.
Patience and investing
Value investing requires a lot of patience, maybe more than what most investors or individuals have. I recently analysed my performance for the last 8-9 years and noticed that quite a few of my picks (maybe 80%) have taken 1-2 years to approach intrinsic value. What does that imply?
If I buy a stock for 100 and think it is worth 200, I may end up holding it for 1-2 years without any action on the stock. Then suddenly, the gap closes. I have seen the gap close in a matter of a few weeks. So my net returns after, say 1.5 years could be 5-10% at best and then in a matter of weeks the stock doubles.
Now if you think you can predict when the gap will close, then congratulations !!!. You are on your way to becoming very very rich. However I do not have such a sixth or seventh sense. So I end up analysing the stock, accumulate it slowly and then waiting patiently for the gap to close.
I think one of the key advantage, we can have over others is to have more patience. I have repeatedly seen it work, though the interimn period is painful and full of doubt. The other reality is also that patience is the rarest commodity on the stock market.
So when does patience become stubborn refusual to accept that the situation has changed and the stock price will never improve ..well that’s a post for another day
Now all of us know that it does not work that way. In the last few years, however a lot of investors have come to expect that they ‘deserve’ to make 40% per annum and that too in equal increments with minimal drops along the way. If you think I am exaggerating, look at the mutual fund inflows and outflows to confirm my statement.
Impatience and mutual funds
If a mutual does well for a few months, they have a surge of new funds. If however, heaven forbid they drop for a few months, the money starts flowing out. In such a sceanrio a fund manager cannot be faulted for having a short term view. Mutual funds and fund managers have their faults too and I am not defending those faults. However impatient investors cause a lot of fund managers to take a short term view which affects the fund performance in the long run.
The above phenomenon is not limited to the indian markets alone. You can find it prevalent in almost all the foreign markets too. There is a lot of evidence that the average holding period for investors has come down progressively. This shows up as higher volumes and more trading in the markets.
Patience and investing
Value investing requires a lot of patience, maybe more than what most investors or individuals have. I recently analysed my performance for the last 8-9 years and noticed that quite a few of my picks (maybe 80%) have taken 1-2 years to approach intrinsic value. What does that imply?
If I buy a stock for 100 and think it is worth 200, I may end up holding it for 1-2 years without any action on the stock. Then suddenly, the gap closes. I have seen the gap close in a matter of a few weeks. So my net returns after, say 1.5 years could be 5-10% at best and then in a matter of weeks the stock doubles.
Now if you think you can predict when the gap will close, then congratulations !!!. You are on your way to becoming very very rich. However I do not have such a sixth or seventh sense. So I end up analysing the stock, accumulate it slowly and then waiting patiently for the gap to close.
I think one of the key advantage, we can have over others is to have more patience. I have repeatedly seen it work, though the interimn period is painful and full of doubt. The other reality is also that patience is the rarest commodity on the stock market.
So when does patience become stubborn refusual to accept that the situation has changed and the stock price will never improve ..well that’s a post for another day
Patience
In an ideal world, If I expect my portfolio to return 24% per annum, I would prefer to get 2% returns per month. That way at the end of each month, I would have a nice gain and would be feeling quite good about it.
Now all of us know that it does not work that way. In the last few years, however a lot of investors have come to expect that they ‘deserve’ to make 40% per annum and that too in equal increments with minimal drops along the way. If you think I am exaggerating, look at the mutual fund inflows and outflows to confirm my statement.
Impatience and mutual funds
If a mutual does well for a few months, they have a surge of new funds. If however, heaven forbid they drop for a few months, the money starts flowing out. In such a sceanrio a fund manager cannot be faulted for having a short term view. Mutual funds and fund managers have their faults too and I am not defending those faults. However impatient investors cause a lot of fund managers to take a short term view which affects the fund performance in the long run.
The above phenomenon is not limited to the indian markets alone. You can find it prevalent in almost all the foreign markets too. There is a lot of evidence that the average holding period for investors has come down progressively. This shows up as higher volumes and more trading in the markets.
Patience and investing
Value investing requires a lot of patience, maybe more than what most investors or individuals have. I recently analysed my performance for the last 8-9 years and noticed that quite a few of my picks (maybe 80%) have taken 1-2 years to approach intrinsic value. What does that imply?
If I buy a stock for 100 and think it is worth 200, I may end up holding it for 1-2 years without any action on the stock. Then suddenly, the gap closes. I have seen the gap close in a matter of a few weeks. So my net returns after, say 1.5 years could be 5-10% at best and then in a matter of weeks the stock doubles.
Now if you think you can predict when the gap will close, then congratulations !!!. You are on your way to becoming very very rich. However I do not have such a sixth or seventh sense. So I end up analysing the stock, accumulate it slowly and then waiting patiently for the gap to close.
I think one of the key advantage, we can have over others is to have more patience. I have repeatedly seen it work, though the interimn period is painful and full of doubt. The other reality is also that patience is the rarest commodity on the stock market.
So when does patience become stubborn refusual to accept that the situation has changed and the stock price will never improve ..well that’s a post for another day
Now all of us know that it does not work that way. In the last few years, however a lot of investors have come to expect that they ‘deserve’ to make 40% per annum and that too in equal increments with minimal drops along the way. If you think I am exaggerating, look at the mutual fund inflows and outflows to confirm my statement.
Impatience and mutual funds
If a mutual does well for a few months, they have a surge of new funds. If however, heaven forbid they drop for a few months, the money starts flowing out. In such a sceanrio a fund manager cannot be faulted for having a short term view. Mutual funds and fund managers have their faults too and I am not defending those faults. However impatient investors cause a lot of fund managers to take a short term view which affects the fund performance in the long run.
The above phenomenon is not limited to the indian markets alone. You can find it prevalent in almost all the foreign markets too. There is a lot of evidence that the average holding period for investors has come down progressively. This shows up as higher volumes and more trading in the markets.
Patience and investing
Value investing requires a lot of patience, maybe more than what most investors or individuals have. I recently analysed my performance for the last 8-9 years and noticed that quite a few of my picks (maybe 80%) have taken 1-2 years to approach intrinsic value. What does that imply?
If I buy a stock for 100 and think it is worth 200, I may end up holding it for 1-2 years without any action on the stock. Then suddenly, the gap closes. I have seen the gap close in a matter of a few weeks. So my net returns after, say 1.5 years could be 5-10% at best and then in a matter of weeks the stock doubles.
Now if you think you can predict when the gap will close, then congratulations !!!. You are on your way to becoming very very rich. However I do not have such a sixth or seventh sense. So I end up analysing the stock, accumulate it slowly and then waiting patiently for the gap to close.
I think one of the key advantage, we can have over others is to have more patience. I have repeatedly seen it work, though the interimn period is painful and full of doubt. The other reality is also that patience is the rarest commodity on the stock market.
So when does patience become stubborn refusual to accept that the situation has changed and the stock price will never improve ..well that’s a post for another day
Saturday, July 04, 2009
Things I don’t understand
Why does one have to focus on daily stock volumes. If I am small investor and confident that the I am buying a good company at a discount, how does the daily volumes matter?
How do elections matter ? have they mattered in the past ? how does the long term economics of a company such as Colgate palmolive change if congress comes to power ? Will I use more toothpaste if they came to power ?
Why do people base their decision on CNBC or other financial channels ? do any of the anchors talk anything useful ? All that I can see is minute by minute commentary of what is happening in the market. Even the cricket commentators provide a more in depth analysis than these talking heads
Why do people base their investment decision based on brokerage report ? The best you can get from a brokerage report are some facts and data. The worst is to depend on their price targets. The same analysts cannot be a 100% sure of what will happen to him after 6 months, but can pin point a precise price target for a stock
Why people blame others and the stock market for the losses, but themselves for the gain ?
Why people constantly want to stock tips and think that the stock market is an easy way to make quick money, but know of no other activity in life that gives something for nothing?
Why every new investor in the bull market after investing for six months thinks he is the next Rakesh jhunjhunwala or warren buffett?
Why some investors after investing for a few months think they are smarter than a buffett or a jhunjhunwala if they make a mistake on a stock?
How do elections matter ? have they mattered in the past ? how does the long term economics of a company such as Colgate palmolive change if congress comes to power ? Will I use more toothpaste if they came to power ?
Why do people base their decision on CNBC or other financial channels ? do any of the anchors talk anything useful ? All that I can see is minute by minute commentary of what is happening in the market. Even the cricket commentators provide a more in depth analysis than these talking heads
Why do people base their investment decision based on brokerage report ? The best you can get from a brokerage report are some facts and data. The worst is to depend on their price targets. The same analysts cannot be a 100% sure of what will happen to him after 6 months, but can pin point a precise price target for a stock
Why people blame others and the stock market for the losses, but themselves for the gain ?
Why people constantly want to stock tips and think that the stock market is an easy way to make quick money, but know of no other activity in life that gives something for nothing?
Why every new investor in the bull market after investing for six months thinks he is the next Rakesh jhunjhunwala or warren buffett?
Why some investors after investing for a few months think they are smarter than a buffett or a jhunjhunwala if they make a mistake on a stock?
Things I don’t understand
Why does one have to focus on daily stock volumes. If I am small investor and confident that the I am buying a good company at a discount, how does the daily volumes matter?
How do elections matter ? have they mattered in the past ? how does the long term economics of a company such as Colgate palmolive change if congress comes to power ? Will I use more toothpaste if they came to power ?
Why do people base their decision on CNBC or other financial channels ? do any of the anchors talk anything useful ? All that I can see is minute by minute commentary of what is happening in the market. Even the cricket commentators provide a more in depth analysis than these talking heads
Why do people base their investment decision based on brokerage report ? The best you can get from a brokerage report are some facts and data. The worst is to depend on their price targets. The same analysts cannot be a 100% sure of what will happen to him after 6 months, but can pin point a precise price target for a stock
Why people blame others and the stock market for the losses, but themselves for the gain ?
Why people constantly want to stock tips and think that the stock market is an easy way to make quick money, but know of no other activity in life that gives something for nothing?
Why every new investor in the bull market after investing for six months thinks he is the next Rakesh jhunjhunwala or warren buffett?
Why some investors after investing for a few months think they are smarter than a buffett or a jhunjhunwala if they make a mistake on a stock?
How do elections matter ? have they mattered in the past ? how does the long term economics of a company such as Colgate palmolive change if congress comes to power ? Will I use more toothpaste if they came to power ?
Why do people base their decision on CNBC or other financial channels ? do any of the anchors talk anything useful ? All that I can see is minute by minute commentary of what is happening in the market. Even the cricket commentators provide a more in depth analysis than these talking heads
Why do people base their investment decision based on brokerage report ? The best you can get from a brokerage report are some facts and data. The worst is to depend on their price targets. The same analysts cannot be a 100% sure of what will happen to him after 6 months, but can pin point a precise price target for a stock
Why people blame others and the stock market for the losses, but themselves for the gain ?
Why people constantly want to stock tips and think that the stock market is an easy way to make quick money, but know of no other activity in life that gives something for nothing?
Why every new investor in the bull market after investing for six months thinks he is the next Rakesh jhunjhunwala or warren buffett?
Why some investors after investing for a few months think they are smarter than a buffett or a jhunjhunwala if they make a mistake on a stock?
Tuesday, June 30, 2009
Result review – NIIT tech and Cheviot company
NIIT tech
I have written on NIIT earlier (see here).
NIIT recently announced the Q4 09 results and published the transcript of their investor call. Some thoughts on the call
- Topline grew by 10% (excluding hedging losses), and operating margins increased to 22.3% from 19% (excluding hedging losses) for the quarter.
- The topline growth was around 5% for the year and the operating margins held steady. However the bottom line dropped by more than 10% due to the hedging losses.
- Hedging losses were around 22 Crs. This is the most ridicolous hedge I have ever seen. They had created a hedge for almost 2+ years of revenue at the rate of almost 41.6 Rs. I cannot understand why the management would have taken such a long hedge last year and assume that the currency would only strengthen.
- The company now has a hedge of around 1 year at the same rate and has mark to market loss of 199 Crs. The underlying earning power of the company is not impacted by this hedge, but some finance guys probably the CFO should be taken to task for such a hedge. The above losses have been booked against the reserves as per the new guidelines.
- The other key indicators such as new client additions (18 for the year), order intake (312 Mn usd), utilization etc have been healthy.
Overall, the results have been as expected and not really spectacular. However the current valuations continue to assume much worse and hence the stock continues to be undervalued. I have updated the valuation spreadsheet and uploaded it again(valuationtemplateNIIT2009).
I personally feel, that my net margin assumption of 7.5% may be too conservative and the company may be able to maintain net margins in the region of 10%. If that turns out to be the case, there could be a higher upside to the stock price.
Cheviot company
I have analysed cheviot company earlier. The main thesis behind this idea can be summarized as follows – the company net of cash and equivalents is selling at 1 or less times annual earnings.The company has an average earnings power of 14-15 Crs per year and can valued at around 200 crs (versus 80 Crs market cap).
I recently reviewed the annual report and did not like what I saw, mainly on how the company is using the excess cash. A few key points from my annual report analysis are
- The company recorded a topline growth of around 5% (inspite of a drop in volumes) and a bottom line which was flat or up a few percentage point (one needs to exclude the impact of other income which is mainly from equity investments and mutual funds). The same is visible in the cash flow from operations too.
- The operating and net margins from core operations has remained steady inspite of the turmoil in the export markets and other issues such as labor.
- The investments on books have dropped by 20 crs and there seems to be an unexplained loan/ advance of the same amount on the balance sheet. The company had invested the surplus cash in the equity markets and has seen a drop in the value of the holdings. The company also took some losses through the profit and loss statement due to the sale of some holdings.
- The outlook for the next year looks bad due to the high jute prices and recession in the global market. The bottom line and hence the stock price could remain depressed.
So why am I annoyed with the results
- For starters, the company has taken the surplus cash and invested in the equity markets. That does not seem to be their core skills. In addition, I don’t think they have done a great job of it anyway. The market value has dropped by 50%, which seems to be roughly in line with the market level. So the treasury department is barely keeping up with the market or earning a few points above it.
- The dividend payout has been reduced this year due to the drop in profits (from other income). I am fairly irritated by this reduction as the company is drowing in cash, does not have too much use for it in the core business and is investing it in the stock market (not too well )
- There is an unexplained 20 Cr advance to someone. There are no other details provided on this transaction. This is not a related party transaction, but at the same time I would prefer more disclosure.
- A donation of 3 Crs (LY 2.5 Crs) !!
I am annoyed mainly by the capital allocation skills being displayed by the management. They are holding excess cash and are neither able to deploy in the core business and at the same time not ready to return it to the shareholders.
I have been slow in learning this fact, but catching onto it – Managements which show poor capital allocation skills and hoard cash, destroy value and the market may never assigns a decent multiple to such a businesses.
I do not have plans to sell the stock, but plan to monitor it closely. If I don’t see an improvement or change in the capital allocation policy of the management, I may decide to exit the stock.
I have written on NIIT earlier (see here).
NIIT recently announced the Q4 09 results and published the transcript of their investor call. Some thoughts on the call
- Topline grew by 10% (excluding hedging losses), and operating margins increased to 22.3% from 19% (excluding hedging losses) for the quarter.
- The topline growth was around 5% for the year and the operating margins held steady. However the bottom line dropped by more than 10% due to the hedging losses.
- Hedging losses were around 22 Crs. This is the most ridicolous hedge I have ever seen. They had created a hedge for almost 2+ years of revenue at the rate of almost 41.6 Rs. I cannot understand why the management would have taken such a long hedge last year and assume that the currency would only strengthen.
- The company now has a hedge of around 1 year at the same rate and has mark to market loss of 199 Crs. The underlying earning power of the company is not impacted by this hedge, but some finance guys probably the CFO should be taken to task for such a hedge. The above losses have been booked against the reserves as per the new guidelines.
- The other key indicators such as new client additions (18 for the year), order intake (312 Mn usd), utilization etc have been healthy.
Overall, the results have been as expected and not really spectacular. However the current valuations continue to assume much worse and hence the stock continues to be undervalued. I have updated the valuation spreadsheet and uploaded it again(valuationtemplateNIIT2009).
I personally feel, that my net margin assumption of 7.5% may be too conservative and the company may be able to maintain net margins in the region of 10%. If that turns out to be the case, there could be a higher upside to the stock price.
Cheviot company
I have analysed cheviot company earlier. The main thesis behind this idea can be summarized as follows – the company net of cash and equivalents is selling at 1 or less times annual earnings.The company has an average earnings power of 14-15 Crs per year and can valued at around 200 crs (versus 80 Crs market cap).
I recently reviewed the annual report and did not like what I saw, mainly on how the company is using the excess cash. A few key points from my annual report analysis are
- The company recorded a topline growth of around 5% (inspite of a drop in volumes) and a bottom line which was flat or up a few percentage point (one needs to exclude the impact of other income which is mainly from equity investments and mutual funds). The same is visible in the cash flow from operations too.
- The operating and net margins from core operations has remained steady inspite of the turmoil in the export markets and other issues such as labor.
- The investments on books have dropped by 20 crs and there seems to be an unexplained loan/ advance of the same amount on the balance sheet. The company had invested the surplus cash in the equity markets and has seen a drop in the value of the holdings. The company also took some losses through the profit and loss statement due to the sale of some holdings.
- The outlook for the next year looks bad due to the high jute prices and recession in the global market. The bottom line and hence the stock price could remain depressed.
So why am I annoyed with the results
- For starters, the company has taken the surplus cash and invested in the equity markets. That does not seem to be their core skills. In addition, I don’t think they have done a great job of it anyway. The market value has dropped by 50%, which seems to be roughly in line with the market level. So the treasury department is barely keeping up with the market or earning a few points above it.
- The dividend payout has been reduced this year due to the drop in profits (from other income). I am fairly irritated by this reduction as the company is drowing in cash, does not have too much use for it in the core business and is investing it in the stock market (not too well )
- There is an unexplained 20 Cr advance to someone. There are no other details provided on this transaction. This is not a related party transaction, but at the same time I would prefer more disclosure.
- A donation of 3 Crs (LY 2.5 Crs) !!
I am annoyed mainly by the capital allocation skills being displayed by the management. They are holding excess cash and are neither able to deploy in the core business and at the same time not ready to return it to the shareholders.
I have been slow in learning this fact, but catching onto it – Managements which show poor capital allocation skills and hoard cash, destroy value and the market may never assigns a decent multiple to such a businesses.
I do not have plans to sell the stock, but plan to monitor it closely. If I don’t see an improvement or change in the capital allocation policy of the management, I may decide to exit the stock.
Result review – NIIT tech and Cheviot company
NIIT tech
I have written on NIIT earlier (see here).
NIIT recently announced the Q4 09 results and published the transcript of their investor call. Some thoughts on the call
- Topline grew by 10% (excluding hedging losses), and operating margins increased to 22.3% from 19% (excluding hedging losses) for the quarter.
- The topline growth was around 5% for the year and the operating margins held steady. However the bottom line dropped by more than 10% due to the hedging losses.
- Hedging losses were around 22 Crs. This is the most ridicolous hedge I have ever seen. They had created a hedge for almost 2+ years of revenue at the rate of almost 41.6 Rs. I cannot understand why the management would have taken such a long hedge last year and assume that the currency would only strengthen.
- The company now has a hedge of around 1 year at the same rate and has mark to market loss of 199 Crs. The underlying earning power of the company is not impacted by this hedge, but some finance guys probably the CFO should be taken to task for such a hedge. The above losses have been booked against the reserves as per the new guidelines.
- The other key indicators such as new client additions (18 for the year), order intake (312 Mn usd), utilization etc have been healthy.
Overall, the results have been as expected and not really spectacular. However the current valuations continue to assume much worse and hence the stock continues to be undervalued. I have updated the valuation spreadsheet and uploaded it again(valuationtemplateNIIT2009).
I personally feel, that my net margin assumption of 7.5% may be too conservative and the company may be able to maintain net margins in the region of 10%. If that turns out to be the case, there could be a higher upside to the stock price.
Cheviot company
I have analysed cheviot company earlier. The main thesis behind this idea can be summarized as follows – the company net of cash and equivalents is selling at 1 or less times annual earnings.The company has an average earnings power of 14-15 Crs per year and can valued at around 200 crs (versus 80 Crs market cap).
I recently reviewed the annual report and did not like what I saw, mainly on how the company is using the excess cash. A few key points from my annual report analysis are
- The company recorded a topline growth of around 5% (inspite of a drop in volumes) and a bottom line which was flat or up a few percentage point (one needs to exclude the impact of other income which is mainly from equity investments and mutual funds). The same is visible in the cash flow from operations too.
- The operating and net margins from core operations has remained steady inspite of the turmoil in the export markets and other issues such as labor.
- The investments on books have dropped by 20 crs and there seems to be an unexplained loan/ advance of the same amount on the balance sheet. The company had invested the surplus cash in the equity markets and has seen a drop in the value of the holdings. The company also took some losses through the profit and loss statement due to the sale of some holdings.
- The outlook for the next year looks bad due to the high jute prices and recession in the global market. The bottom line and hence the stock price could remain depressed.
So why am I annoyed with the results
- For starters, the company has taken the surplus cash and invested in the equity markets. That does not seem to be their core skills. In addition, I don’t think they have done a great job of it anyway. The market value has dropped by 50%, which seems to be roughly in line with the market level. So the treasury department is barely keeping up with the market or earning a few points above it.
- The dividend payout has been reduced this year due to the drop in profits (from other income). I am fairly irritated by this reduction as the company is drowing in cash, does not have too much use for it in the core business and is investing it in the stock market (not too well )
- There is an unexplained 20 Cr advance to someone. There are no other details provided on this transaction. This is not a related party transaction, but at the same time I would prefer more disclosure.
- A donation of 3 Crs (LY 2.5 Crs) !!
I am annoyed mainly by the capital allocation skills being displayed by the management. They are holding excess cash and are neither able to deploy in the core business and at the same time not ready to return it to the shareholders.
I have been slow in learning this fact, but catching onto it – Managements which show poor capital allocation skills and hoard cash, destroy value and the market may never assigns a decent multiple to such a businesses.
I do not have plans to sell the stock, but plan to monitor it closely. If I don’t see an improvement or change in the capital allocation policy of the management, I may decide to exit the stock.
I have written on NIIT earlier (see here).
NIIT recently announced the Q4 09 results and published the transcript of their investor call. Some thoughts on the call
- Topline grew by 10% (excluding hedging losses), and operating margins increased to 22.3% from 19% (excluding hedging losses) for the quarter.
- The topline growth was around 5% for the year and the operating margins held steady. However the bottom line dropped by more than 10% due to the hedging losses.
- Hedging losses were around 22 Crs. This is the most ridicolous hedge I have ever seen. They had created a hedge for almost 2+ years of revenue at the rate of almost 41.6 Rs. I cannot understand why the management would have taken such a long hedge last year and assume that the currency would only strengthen.
- The company now has a hedge of around 1 year at the same rate and has mark to market loss of 199 Crs. The underlying earning power of the company is not impacted by this hedge, but some finance guys probably the CFO should be taken to task for such a hedge. The above losses have been booked against the reserves as per the new guidelines.
- The other key indicators such as new client additions (18 for the year), order intake (312 Mn usd), utilization etc have been healthy.
Overall, the results have been as expected and not really spectacular. However the current valuations continue to assume much worse and hence the stock continues to be undervalued. I have updated the valuation spreadsheet and uploaded it again(valuationtemplateNIIT2009).
I personally feel, that my net margin assumption of 7.5% may be too conservative and the company may be able to maintain net margins in the region of 10%. If that turns out to be the case, there could be a higher upside to the stock price.
Cheviot company
I have analysed cheviot company earlier. The main thesis behind this idea can be summarized as follows – the company net of cash and equivalents is selling at 1 or less times annual earnings.The company has an average earnings power of 14-15 Crs per year and can valued at around 200 crs (versus 80 Crs market cap).
I recently reviewed the annual report and did not like what I saw, mainly on how the company is using the excess cash. A few key points from my annual report analysis are
- The company recorded a topline growth of around 5% (inspite of a drop in volumes) and a bottom line which was flat or up a few percentage point (one needs to exclude the impact of other income which is mainly from equity investments and mutual funds). The same is visible in the cash flow from operations too.
- The operating and net margins from core operations has remained steady inspite of the turmoil in the export markets and other issues such as labor.
- The investments on books have dropped by 20 crs and there seems to be an unexplained loan/ advance of the same amount on the balance sheet. The company had invested the surplus cash in the equity markets and has seen a drop in the value of the holdings. The company also took some losses through the profit and loss statement due to the sale of some holdings.
- The outlook for the next year looks bad due to the high jute prices and recession in the global market. The bottom line and hence the stock price could remain depressed.
So why am I annoyed with the results
- For starters, the company has taken the surplus cash and invested in the equity markets. That does not seem to be their core skills. In addition, I don’t think they have done a great job of it anyway. The market value has dropped by 50%, which seems to be roughly in line with the market level. So the treasury department is barely keeping up with the market or earning a few points above it.
- The dividend payout has been reduced this year due to the drop in profits (from other income). I am fairly irritated by this reduction as the company is drowing in cash, does not have too much use for it in the core business and is investing it in the stock market (not too well )
- There is an unexplained 20 Cr advance to someone. There are no other details provided on this transaction. This is not a related party transaction, but at the same time I would prefer more disclosure.
- A donation of 3 Crs (LY 2.5 Crs) !!
I am annoyed mainly by the capital allocation skills being displayed by the management. They are holding excess cash and are neither able to deploy in the core business and at the same time not ready to return it to the shareholders.
I have been slow in learning this fact, but catching onto it – Managements which show poor capital allocation skills and hoard cash, destroy value and the market may never assigns a decent multiple to such a businesses.
I do not have plans to sell the stock, but plan to monitor it closely. If I don’t see an improvement or change in the capital allocation policy of the management, I may decide to exit the stock.
Wednesday, June 24, 2009
Some interesting questions
I received an email from Thirunarayanan with some interesting questions and have decided to publish my answers to his email.
1. You said that your goal is to beat the stock market by 5-8%. How did you arrive at this lower and higher end ? And why is that important ?
The market on an average has given 13-14% per annum over the long term, maybe even more. In case of most of the value investors - ones with public record- i have seen an outperformance of around 2-3%. The greatest of them all - warren buffett beat the market by around 13%. So i have taken a goal which is not as ambititous as buffett, but more ambititous than the average. Also as i do this part time, i dont think it would be easy for me to exceed 8% above market - which translates to around 20-23% per annum over the long run (5+ years).
The above goal is important, for the reason that the time and effort should justify the rewards. i can easily match the index or maybe beat it by 1-2% via index or mutual funds. So i should cross the high water mark of 1-2% to justify this effort, else i am better off investing in index and mutual funds - which i do now too. I have been lucky to have exceeded my goal till date.
2. You also mentioned that you wanted to beat the stock market on 3 year rolling cycle. How did you arrive at that number ? And what is the significance of this number ?
The reason of having a 3 yr rolling period is that a yearly or lesser number is too short to confirm if i am beating the market or not. Over 1 year or less, luck plays an important role and one cannot be sure if the performance is due to skill. However as the time period increases, the element of luck reduces and skill plays a bigger role in the returns. The reason for keeping it 3 years is that it long enough to eliminate substantial a component of luck, but not so long that i dont get feedback for a long time on whether i am truly beating the market or not.
There are ofcourse no hard and fast rules on the above parameters and i have set them to my own specific case.
3. I am assuming that you are publishing your whole portfolio and your thought process in your blog. What are the chances of someone coat-tailing? What are your chances of seeing some competition and see a rise in the share price because of your publication ? Either you will share forever or there may be a time when you will have to stop revealing a lot (because of competition or lack of time to blog)
I have no issues people coat tailing me, although i dont think that is a problem yet. i am not yet so famous or considered a super investor that people will blindly follow me. in addition, my picks usually have a bad short term outlook.
So it is unlikely someone will just buy what i discuss and see immediate benefit.My approach on the blog is to share my learnings and analysis, but i dont give tips. So an individual is left to make his decision, which is not easy if you are just following someone blindly. Also considering i am small investor and followed by others like me, it is very unlikely that any stock i discuss will have a price run up after i discuss about it. if that starts happening ..then i have arrived in life :).
On continuing to share my ideas i dont know how long this will continue. i dont see it stopping in the next couple of years ..however i do have plans to start private investment partnerships. When i do so, i will have look at the constraints such an arrangement will have. However that is still a few years away.
1. You said that your goal is to beat the stock market by 5-8%. How did you arrive at this lower and higher end ? And why is that important ?
The market on an average has given 13-14% per annum over the long term, maybe even more. In case of most of the value investors - ones with public record- i have seen an outperformance of around 2-3%. The greatest of them all - warren buffett beat the market by around 13%. So i have taken a goal which is not as ambititous as buffett, but more ambititous than the average. Also as i do this part time, i dont think it would be easy for me to exceed 8% above market - which translates to around 20-23% per annum over the long run (5+ years).
The above goal is important, for the reason that the time and effort should justify the rewards. i can easily match the index or maybe beat it by 1-2% via index or mutual funds. So i should cross the high water mark of 1-2% to justify this effort, else i am better off investing in index and mutual funds - which i do now too. I have been lucky to have exceeded my goal till date.
2. You also mentioned that you wanted to beat the stock market on 3 year rolling cycle. How did you arrive at that number ? And what is the significance of this number ?
The reason of having a 3 yr rolling period is that a yearly or lesser number is too short to confirm if i am beating the market or not. Over 1 year or less, luck plays an important role and one cannot be sure if the performance is due to skill. However as the time period increases, the element of luck reduces and skill plays a bigger role in the returns. The reason for keeping it 3 years is that it long enough to eliminate substantial a component of luck, but not so long that i dont get feedback for a long time on whether i am truly beating the market or not.
There are ofcourse no hard and fast rules on the above parameters and i have set them to my own specific case.
3. I am assuming that you are publishing your whole portfolio and your thought process in your blog. What are the chances of someone coat-tailing? What are your chances of seeing some competition and see a rise in the share price because of your publication ? Either you will share forever or there may be a time when you will have to stop revealing a lot (because of competition or lack of time to blog)
I have no issues people coat tailing me, although i dont think that is a problem yet. i am not yet so famous or considered a super investor that people will blindly follow me. in addition, my picks usually have a bad short term outlook.
So it is unlikely someone will just buy what i discuss and see immediate benefit.My approach on the blog is to share my learnings and analysis, but i dont give tips. So an individual is left to make his decision, which is not easy if you are just following someone blindly. Also considering i am small investor and followed by others like me, it is very unlikely that any stock i discuss will have a price run up after i discuss about it. if that starts happening ..then i have arrived in life :).
On continuing to share my ideas i dont know how long this will continue. i dont see it stopping in the next couple of years ..however i do have plans to start private investment partnerships. When i do so, i will have look at the constraints such an arrangement will have. However that is still a few years away.
Some interesting questions
I received an email from Thirunarayanan with some interesting questions and have decided to publish my answers to his email.
1. You said that your goal is to beat the stock market by 5-8%. How did you arrive at this lower and higher end ? And why is that important ?
The market on an average has given 13-14% per annum over the long term, maybe even more. In case of most of the value investors - ones with public record- i have seen an outperformance of around 2-3%. The greatest of them all - warren buffett beat the market by around 13%. So i have taken a goal which is not as ambititous as buffett, but more ambititous than the average. Also as i do this part time, i dont think it would be easy for me to exceed 8% above market - which translates to around 20-23% per annum over the long run (5+ years).
The above goal is important, for the reason that the time and effort should justify the rewards. i can easily match the index or maybe beat it by 1-2% via index or mutual funds. So i should cross the high water mark of 1-2% to justify this effort, else i am better off investing in index and mutual funds - which i do now too. I have been lucky to have exceeded my goal till date.
2. You also mentioned that you wanted to beat the stock market on 3 year rolling cycle. How did you arrive at that number ? And what is the significance of this number ?
The reason of having a 3 yr rolling period is that a yearly or lesser number is too short to confirm if i am beating the market or not. Over 1 year or less, luck plays an important role and one cannot be sure if the performance is due to skill. However as the time period increases, the element of luck reduces and skill plays a bigger role in the returns. The reason for keeping it 3 years is that it long enough to eliminate substantial a component of luck, but not so long that i dont get feedback for a long time on whether i am truly beating the market or not.
There are ofcourse no hard and fast rules on the above parameters and i have set them to my own specific case.
3. I am assuming that you are publishing your whole portfolio and your thought process in your blog. What are the chances of someone coat-tailing? What are your chances of seeing some competition and see a rise in the share price because of your publication ? Either you will share forever or there may be a time when you will have to stop revealing a lot (because of competition or lack of time to blog)
I have no issues people coat tailing me, although i dont think that is a problem yet. i am not yet so famous or considered a super investor that people will blindly follow me. in addition, my picks usually have a bad short term outlook.
So it is unlikely someone will just buy what i discuss and see immediate benefit.My approach on the blog is to share my learnings and analysis, but i dont give tips. So an individual is left to make his decision, which is not easy if you are just following someone blindly. Also considering i am small investor and followed by others like me, it is very unlikely that any stock i discuss will have a price run up after i discuss about it. if that starts happening ..then i have arrived in life :).
On continuing to share my ideas i dont know how long this will continue. i dont see it stopping in the next couple of years ..however i do have plans to start private investment partnerships. When i do so, i will have look at the constraints such an arrangement will have. However that is still a few years away.
1. You said that your goal is to beat the stock market by 5-8%. How did you arrive at this lower and higher end ? And why is that important ?
The market on an average has given 13-14% per annum over the long term, maybe even more. In case of most of the value investors - ones with public record- i have seen an outperformance of around 2-3%. The greatest of them all - warren buffett beat the market by around 13%. So i have taken a goal which is not as ambititous as buffett, but more ambititous than the average. Also as i do this part time, i dont think it would be easy for me to exceed 8% above market - which translates to around 20-23% per annum over the long run (5+ years).
The above goal is important, for the reason that the time and effort should justify the rewards. i can easily match the index or maybe beat it by 1-2% via index or mutual funds. So i should cross the high water mark of 1-2% to justify this effort, else i am better off investing in index and mutual funds - which i do now too. I have been lucky to have exceeded my goal till date.
2. You also mentioned that you wanted to beat the stock market on 3 year rolling cycle. How did you arrive at that number ? And what is the significance of this number ?
The reason of having a 3 yr rolling period is that a yearly or lesser number is too short to confirm if i am beating the market or not. Over 1 year or less, luck plays an important role and one cannot be sure if the performance is due to skill. However as the time period increases, the element of luck reduces and skill plays a bigger role in the returns. The reason for keeping it 3 years is that it long enough to eliminate substantial a component of luck, but not so long that i dont get feedback for a long time on whether i am truly beating the market or not.
There are ofcourse no hard and fast rules on the above parameters and i have set them to my own specific case.
3. I am assuming that you are publishing your whole portfolio and your thought process in your blog. What are the chances of someone coat-tailing? What are your chances of seeing some competition and see a rise in the share price because of your publication ? Either you will share forever or there may be a time when you will have to stop revealing a lot (because of competition or lack of time to blog)
I have no issues people coat tailing me, although i dont think that is a problem yet. i am not yet so famous or considered a super investor that people will blindly follow me. in addition, my picks usually have a bad short term outlook.
So it is unlikely someone will just buy what i discuss and see immediate benefit.My approach on the blog is to share my learnings and analysis, but i dont give tips. So an individual is left to make his decision, which is not easy if you are just following someone blindly. Also considering i am small investor and followed by others like me, it is very unlikely that any stock i discuss will have a price run up after i discuss about it. if that starts happening ..then i have arrived in life :).
On continuing to share my ideas i dont know how long this will continue. i dont see it stopping in the next couple of years ..however i do have plans to start private investment partnerships. When i do so, i will have look at the constraints such an arrangement will have. However that is still a few years away.
Sunday, June 21, 2009
Analysis - Patni computers - II
I initiated the analysis of Patni computers in my last post. The rest of the analysis follows
Competitive analysis
The IT services industry is a very competitive industry driven by scale, customer relationships and management quality.
I think there is a low level of differentiation in the industry (contrary to what each company claims in its annual report) and most of the companies provide a similar product.
There is a decent amount of lockin at the customer level. Most companies including patni have a high % of repeat business and are able to leverage these relationships and customer lockin to sell additional services. However there is a substantial amount of competition now and it is no longer a given that a company will always maintain the same level of engagement at a client.
Patni has had a high concentration of revenue from its top customers. This has however been reducing in the last few years which is a good thing.
Finally management quality is an important factor in the IT industry, which I evaluate in the next section
Management quality checklist
- Management compensation: The founders and executive directors are entitled to a pension equal to 50% of last pay after 62 yrs of age. I cannot fathom the logic of this compensation. The current value of this obligation is almost 35 Crs and increasing. This is around 1% of the company’s market cap. Although not a large amount by itself, I cannot see any precedent for this kind of compensation in any other company in the industry. The compensation for the top management including the founders is almost 8% of net profit. This level of compensation is quite high and above the industry average. In addition this represents a 50% increase in 2008, when the performance does not justify such an increase.
- Capital allocation record: average record. The ROE has been high and the management has not blown too much cash on accquisitions, but as other IT companies, the company is holding too much cash. In addition the dividend payouts are not commensurate with the profit levels.
- Shareholder communication – good and in line with other IT services companies
- Accounting practise – The disclosure levels are good, in line with other IT company. However the company has around 185 Crs of hedge related liability on the balancesheet. I have not been able to find the details, but I can also see a 144 crs hedge reserve. This looks like a writeoff of the hedging losses without passing it through P&L. This is aggressive accounting. On the other hand the company has also adopted AS30 (forex related accounting) in advance which is a positive. In addition the company has a translation adjustment of almost 110 Mn usd (500 Crs) in the GAAP statement. I have to evaluate how much of this loss will reverse due to forex changes and how much will have a pass through into the P&L statement depending on the nature of the derivative contracts.
- Conflict of interest and related party transactions – Nothing stands out in terms of related party transactions. As stated earlier, the compensation is quite high and the same is confirmed in this section too.
- Performance track record – average. The management has shown average performance in terms of the topline and bottom line growth. On absolute basis the performance is good, but average in comparison to the industry.
Valuation
The key to valuing an IT services company is to estimate its underlying earnings power. The net profit numbers for most companies has been fluctuating a lot due to forex changes. In addition, the current tax levels are too low due to imminent expiration of the tax holidays.
Patni had a forex gain of almost 103 Crs in 2007 and a loss of 83 Crs in the current year. The tax as a % of PBT has dropped from 16% of PBT in 2007 to around 5% in 2008. Clearly a 5% tax rate is not sustainable.
As a final adjustment to the valuation, one must also adjust the impact of the stock options (or RSU now). I have made the following assumptions in arriving at my final numbers (these can ofcourse be debated)
Tax as % of PBT = 25%
Future earning power = 7.5% of sales (7.5 % net margin) excluding the impact of forex. Current net margins are around 12-14%.
Cost of outstanding options = 152 Crs
Dilution due to options = 1.17 cr additional shares
If we consider the above assumptions, a PE of 14 (which is not aggressive for a company with 8-10% growth and ROE of 15%+) and cash on books of around 1300 Crs, the intrinsic value is 6000-6300 Crs.
Scenario analysis
The above valuation assumes a very modest topline growth (around 10% per annum) and a negative growth for net profits (due to falling net margins and higher taxation).
The company could get a better valuation if it is able to hold its net margins and reduce the forex losses. I think the performance risk for the company are low as the current market enviorment is as bad as it can get – drop in demand, forex losses etc.
conclusion
Patni is a decent undervalued idea. However due to the various management issues outlined earlier and average performance in the past, I will not look at the company as a long term holding. It would be good idea to hold the company as long as the undervaluation exists and then exit once the gap closes.
Disclaimer – I have a holding in the stock.
Competitive analysis
The IT services industry is a very competitive industry driven by scale, customer relationships and management quality.
I think there is a low level of differentiation in the industry (contrary to what each company claims in its annual report) and most of the companies provide a similar product.
There is a decent amount of lockin at the customer level. Most companies including patni have a high % of repeat business and are able to leverage these relationships and customer lockin to sell additional services. However there is a substantial amount of competition now and it is no longer a given that a company will always maintain the same level of engagement at a client.
Patni has had a high concentration of revenue from its top customers. This has however been reducing in the last few years which is a good thing.
Finally management quality is an important factor in the IT industry, which I evaluate in the next section
Management quality checklist
- Management compensation: The founders and executive directors are entitled to a pension equal to 50% of last pay after 62 yrs of age. I cannot fathom the logic of this compensation. The current value of this obligation is almost 35 Crs and increasing. This is around 1% of the company’s market cap. Although not a large amount by itself, I cannot see any precedent for this kind of compensation in any other company in the industry. The compensation for the top management including the founders is almost 8% of net profit. This level of compensation is quite high and above the industry average. In addition this represents a 50% increase in 2008, when the performance does not justify such an increase.
- Capital allocation record: average record. The ROE has been high and the management has not blown too much cash on accquisitions, but as other IT companies, the company is holding too much cash. In addition the dividend payouts are not commensurate with the profit levels.
- Shareholder communication – good and in line with other IT services companies
- Accounting practise – The disclosure levels are good, in line with other IT company. However the company has around 185 Crs of hedge related liability on the balancesheet. I have not been able to find the details, but I can also see a 144 crs hedge reserve. This looks like a writeoff of the hedging losses without passing it through P&L. This is aggressive accounting. On the other hand the company has also adopted AS30 (forex related accounting) in advance which is a positive. In addition the company has a translation adjustment of almost 110 Mn usd (500 Crs) in the GAAP statement. I have to evaluate how much of this loss will reverse due to forex changes and how much will have a pass through into the P&L statement depending on the nature of the derivative contracts.
- Conflict of interest and related party transactions – Nothing stands out in terms of related party transactions. As stated earlier, the compensation is quite high and the same is confirmed in this section too.
- Performance track record – average. The management has shown average performance in terms of the topline and bottom line growth. On absolute basis the performance is good, but average in comparison to the industry.
Valuation
The key to valuing an IT services company is to estimate its underlying earnings power. The net profit numbers for most companies has been fluctuating a lot due to forex changes. In addition, the current tax levels are too low due to imminent expiration of the tax holidays.
Patni had a forex gain of almost 103 Crs in 2007 and a loss of 83 Crs in the current year. The tax as a % of PBT has dropped from 16% of PBT in 2007 to around 5% in 2008. Clearly a 5% tax rate is not sustainable.
As a final adjustment to the valuation, one must also adjust the impact of the stock options (or RSU now). I have made the following assumptions in arriving at my final numbers (these can ofcourse be debated)
Tax as % of PBT = 25%
Future earning power = 7.5% of sales (7.5 % net margin) excluding the impact of forex. Current net margins are around 12-14%.
Cost of outstanding options = 152 Crs
Dilution due to options = 1.17 cr additional shares
If we consider the above assumptions, a PE of 14 (which is not aggressive for a company with 8-10% growth and ROE of 15%+) and cash on books of around 1300 Crs, the intrinsic value is 6000-6300 Crs.
Scenario analysis
The above valuation assumes a very modest topline growth (around 10% per annum) and a negative growth for net profits (due to falling net margins and higher taxation).
The company could get a better valuation if it is able to hold its net margins and reduce the forex losses. I think the performance risk for the company are low as the current market enviorment is as bad as it can get – drop in demand, forex losses etc.
conclusion
Patni is a decent undervalued idea. However due to the various management issues outlined earlier and average performance in the past, I will not look at the company as a long term holding. It would be good idea to hold the company as long as the undervaluation exists and then exit once the gap closes.
Disclaimer – I have a holding in the stock.
Analysis - Patni computers - II
I initiated the analysis of Patni computers in my last post. The rest of the analysis follows
Competitive analysis
The IT services industry is a very competitive industry driven by scale, customer relationships and management quality.
I think there is a low level of differentiation in the industry (contrary to what each company claims in its annual report) and most of the companies provide a similar product.
There is a decent amount of lockin at the customer level. Most companies including patni have a high % of repeat business and are able to leverage these relationships and customer lockin to sell additional services. However there is a substantial amount of competition now and it is no longer a given that a company will always maintain the same level of engagement at a client.
Patni has had a high concentration of revenue from its top customers. This has however been reducing in the last few years which is a good thing.
Finally management quality is an important factor in the IT industry, which I evaluate in the next section
Management quality checklist
- Management compensation: The founders and executive directors are entitled to a pension equal to 50% of last pay after 62 yrs of age. I cannot fathom the logic of this compensation. The current value of this obligation is almost 35 Crs and increasing. This is around 1% of the company’s market cap. Although not a large amount by itself, I cannot see any precedent for this kind of compensation in any other company in the industry. The compensation for the top management including the founders is almost 8% of net profit. This level of compensation is quite high and above the industry average. In addition this represents a 50% increase in 2008, when the performance does not justify such an increase.
- Capital allocation record: average record. The ROE has been high and the management has not blown too much cash on accquisitions, but as other IT companies, the company is holding too much cash. In addition the dividend payouts are not commensurate with the profit levels.
- Shareholder communication – good and in line with other IT services companies
- Accounting practise – The disclosure levels are good, in line with other IT company. However the company has around 185 Crs of hedge related liability on the balancesheet. I have not been able to find the details, but I can also see a 144 crs hedge reserve. This looks like a writeoff of the hedging losses without passing it through P&L. This is aggressive accounting. On the other hand the company has also adopted AS30 (forex related accounting) in advance which is a positive. In addition the company has a translation adjustment of almost 110 Mn usd (500 Crs) in the GAAP statement. I have to evaluate how much of this loss will reverse due to forex changes and how much will have a pass through into the P&L statement depending on the nature of the derivative contracts.
- Conflict of interest and related party transactions – Nothing stands out in terms of related party transactions. As stated earlier, the compensation is quite high and the same is confirmed in this section too.
- Performance track record – average. The management has shown average performance in terms of the topline and bottom line growth. On absolute basis the performance is good, but average in comparison to the industry.
Valuation
The key to valuing an IT services company is to estimate its underlying earnings power. The net profit numbers for most companies has been fluctuating a lot due to forex changes. In addition, the current tax levels are too low due to imminent expiration of the tax holidays.
Patni had a forex gain of almost 103 Crs in 2007 and a loss of 83 Crs in the current year. The tax as a % of PBT has dropped from 16% of PBT in 2007 to around 5% in 2008. Clearly a 5% tax rate is not sustainable.
As a final adjustment to the valuation, one must also adjust the impact of the stock options (or RSU now). I have made the following assumptions in arriving at my final numbers (these can ofcourse be debated)
Tax as % of PBT = 25%
Future earning power = 7.5% of sales (7.5 % net margin) excluding the impact of forex. Current net margins are around 12-14%.
Cost of outstanding options = 152 Crs
Dilution due to options = 1.17 cr additional shares
If we consider the above assumptions, a PE of 14 (which is not aggressive for a company with 8-10% growth and ROE of 15%+) and cash on books of around 1300 Crs, the intrinsic value is 6000-6300 Crs.
Scenario analysis
The above valuation assumes a very modest topline growth (around 10% per annum) and a negative growth for net profits (due to falling net margins and higher taxation).
The company could get a better valuation if it is able to hold its net margins and reduce the forex losses. I think the performance risk for the company are low as the current market enviorment is as bad as it can get – drop in demand, forex losses etc.
conclusion
Patni is a decent undervalued idea. However due to the various management issues outlined earlier and average performance in the past, I will not look at the company as a long term holding. It would be good idea to hold the company as long as the undervaluation exists and then exit once the gap closes.
Disclaimer – I have a holding in the stock.
Competitive analysis
The IT services industry is a very competitive industry driven by scale, customer relationships and management quality.
I think there is a low level of differentiation in the industry (contrary to what each company claims in its annual report) and most of the companies provide a similar product.
There is a decent amount of lockin at the customer level. Most companies including patni have a high % of repeat business and are able to leverage these relationships and customer lockin to sell additional services. However there is a substantial amount of competition now and it is no longer a given that a company will always maintain the same level of engagement at a client.
Patni has had a high concentration of revenue from its top customers. This has however been reducing in the last few years which is a good thing.
Finally management quality is an important factor in the IT industry, which I evaluate in the next section
Management quality checklist
- Management compensation: The founders and executive directors are entitled to a pension equal to 50% of last pay after 62 yrs of age. I cannot fathom the logic of this compensation. The current value of this obligation is almost 35 Crs and increasing. This is around 1% of the company’s market cap. Although not a large amount by itself, I cannot see any precedent for this kind of compensation in any other company in the industry. The compensation for the top management including the founders is almost 8% of net profit. This level of compensation is quite high and above the industry average. In addition this represents a 50% increase in 2008, when the performance does not justify such an increase.
- Capital allocation record: average record. The ROE has been high and the management has not blown too much cash on accquisitions, but as other IT companies, the company is holding too much cash. In addition the dividend payouts are not commensurate with the profit levels.
- Shareholder communication – good and in line with other IT services companies
- Accounting practise – The disclosure levels are good, in line with other IT company. However the company has around 185 Crs of hedge related liability on the balancesheet. I have not been able to find the details, but I can also see a 144 crs hedge reserve. This looks like a writeoff of the hedging losses without passing it through P&L. This is aggressive accounting. On the other hand the company has also adopted AS30 (forex related accounting) in advance which is a positive. In addition the company has a translation adjustment of almost 110 Mn usd (500 Crs) in the GAAP statement. I have to evaluate how much of this loss will reverse due to forex changes and how much will have a pass through into the P&L statement depending on the nature of the derivative contracts.
- Conflict of interest and related party transactions – Nothing stands out in terms of related party transactions. As stated earlier, the compensation is quite high and the same is confirmed in this section too.
- Performance track record – average. The management has shown average performance in terms of the topline and bottom line growth. On absolute basis the performance is good, but average in comparison to the industry.
Valuation
The key to valuing an IT services company is to estimate its underlying earnings power. The net profit numbers for most companies has been fluctuating a lot due to forex changes. In addition, the current tax levels are too low due to imminent expiration of the tax holidays.
Patni had a forex gain of almost 103 Crs in 2007 and a loss of 83 Crs in the current year. The tax as a % of PBT has dropped from 16% of PBT in 2007 to around 5% in 2008. Clearly a 5% tax rate is not sustainable.
As a final adjustment to the valuation, one must also adjust the impact of the stock options (or RSU now). I have made the following assumptions in arriving at my final numbers (these can ofcourse be debated)
Tax as % of PBT = 25%
Future earning power = 7.5% of sales (7.5 % net margin) excluding the impact of forex. Current net margins are around 12-14%.
Cost of outstanding options = 152 Crs
Dilution due to options = 1.17 cr additional shares
If we consider the above assumptions, a PE of 14 (which is not aggressive for a company with 8-10% growth and ROE of 15%+) and cash on books of around 1300 Crs, the intrinsic value is 6000-6300 Crs.
Scenario analysis
The above valuation assumes a very modest topline growth (around 10% per annum) and a negative growth for net profits (due to falling net margins and higher taxation).
The company could get a better valuation if it is able to hold its net margins and reduce the forex losses. I think the performance risk for the company are low as the current market enviorment is as bad as it can get – drop in demand, forex losses etc.
conclusion
Patni is a decent undervalued idea. However due to the various management issues outlined earlier and average performance in the past, I will not look at the company as a long term holding. It would be good idea to hold the company as long as the undervaluation exists and then exit once the gap closes.
Disclaimer – I have a holding in the stock.
Monday, June 15, 2009
Analysis – Patni
I will be publishing the analysis in multiple parts.
About
Patni is an IT services company similar to Infosys, WIPRO and other companies in the same industry. The company derieves a major portion of its revenue from the US. The main industry segments in which the company operates are Financial services, insurance, manufacturing and media.
The key feature of the business model is offshoring. Indian IT services company provide a cost advantage to the customer by executing the work in low cost locations such as India.
Financials
The company has been doing fairly well financially for the last couple of years. It has been able to maintain its ROE in excess of 15% over the past 5 years. The calculated ROE is depressed due to high cash on books (running almost 1400 Crs now). The company had a good topline growth till 2005, which slowed down in 2007 and 2008. However it has still been able to pull off a double digit growth for 2008.
The net margins has dropped from around 20% to around 13% levels due to forex losses. The net margins are not as high as the Tier I companies such as infosys, but still at healthy levels.
The net profit growth has been fairly erratic in the last few years due to the forex changes. However the profit has doubled in the last 5 years inspite of the major changes in the market such as recession, flucutations in the Rupee-dollar rates and increases in the salary etc.
Positives
The company has a fairly healthy cash flow and the same is visible via the strong level of cash on the balance sheet. The company has had a moderate growth in the topline and bottomline numbers.
The company is also growing faster in the non US markets and thus reducing the dependence and contribution of the US markets.
The company recently completed a buyback of almost 10% of its equity at around 210 Rs per share. Thus the company has been able to buyback its shares at a fairly discounted price and thus add value to the exisiting shareholders. This buyback is however partly offset by almost 1 Cr ESOP outstanding for employees which would increase the dilution.
Negatives
The are several negatives with the company. The company performance has been average and has not been of the level of the tier I vendors. As a result the company will not get the valuations of its more successful competitors. The company has had a decent performance, but on a comparitive basis it is poorer than the tier I vendors.
The other negatives is the stock options plan of the company. The earlier stock option plan was almost 5% of the equity. However in 2008, the plan was converted to a RSO (restricted stock options) plan with a strike price of almost Rs 2 / share. The irritating part is that the proposal was approved without the management specifying if the ESOP numbers will roll into the RSO plan. If that happen,I am looking at a reduction of almost 150 Crs (6-7 Rs/ share) in the value of the stock. This may not be huge, but it is irritating to see the company change the plan at the expense of the shareholders.
Risks
The company shares the usual risks faced by the other IT companies such as recession, protectionism in developed markets, cost escalation and competitive pressures from other IT vendors – both indian and foreign.
Next post : competitive analysis, Management quality, valuation and conclusion
Side note: I have a mirror self hosted copy of this blog. I recently changed the blog design and feel it is an improvement over the earlier design. Would appreciate your feedback on it. If this blog were to go down for some reason, then that would be place to go !! guys give that website some love too :)
About
Patni is an IT services company similar to Infosys, WIPRO and other companies in the same industry. The company derieves a major portion of its revenue from the US. The main industry segments in which the company operates are Financial services, insurance, manufacturing and media.
The key feature of the business model is offshoring. Indian IT services company provide a cost advantage to the customer by executing the work in low cost locations such as India.
Financials
The company has been doing fairly well financially for the last couple of years. It has been able to maintain its ROE in excess of 15% over the past 5 years. The calculated ROE is depressed due to high cash on books (running almost 1400 Crs now). The company had a good topline growth till 2005, which slowed down in 2007 and 2008. However it has still been able to pull off a double digit growth for 2008.
The net margins has dropped from around 20% to around 13% levels due to forex losses. The net margins are not as high as the Tier I companies such as infosys, but still at healthy levels.
The net profit growth has been fairly erratic in the last few years due to the forex changes. However the profit has doubled in the last 5 years inspite of the major changes in the market such as recession, flucutations in the Rupee-dollar rates and increases in the salary etc.
Positives
The company has a fairly healthy cash flow and the same is visible via the strong level of cash on the balance sheet. The company has had a moderate growth in the topline and bottomline numbers.
The company is also growing faster in the non US markets and thus reducing the dependence and contribution of the US markets.
The company recently completed a buyback of almost 10% of its equity at around 210 Rs per share. Thus the company has been able to buyback its shares at a fairly discounted price and thus add value to the exisiting shareholders. This buyback is however partly offset by almost 1 Cr ESOP outstanding for employees which would increase the dilution.
Negatives
The are several negatives with the company. The company performance has been average and has not been of the level of the tier I vendors. As a result the company will not get the valuations of its more successful competitors. The company has had a decent performance, but on a comparitive basis it is poorer than the tier I vendors.
The other negatives is the stock options plan of the company. The earlier stock option plan was almost 5% of the equity. However in 2008, the plan was converted to a RSO (restricted stock options) plan with a strike price of almost Rs 2 / share. The irritating part is that the proposal was approved without the management specifying if the ESOP numbers will roll into the RSO plan. If that happen,I am looking at a reduction of almost 150 Crs (6-7 Rs/ share) in the value of the stock. This may not be huge, but it is irritating to see the company change the plan at the expense of the shareholders.
Risks
The company shares the usual risks faced by the other IT companies such as recession, protectionism in developed markets, cost escalation and competitive pressures from other IT vendors – both indian and foreign.
Next post : competitive analysis, Management quality, valuation and conclusion
Side note: I have a mirror self hosted copy of this blog. I recently changed the blog design and feel it is an improvement over the earlier design. Would appreciate your feedback on it. If this blog were to go down for some reason, then that would be place to go !! guys give that website some love too :)
Analysis – Patni
I will be publishing the analysis in multiple parts.
About
Patni is an IT services company similar to Infosys, WIPRO and other companies in the same industry. The company derieves a major portion of its revenue from the US. The main industry segments in which the company operates are Financial services, insurance, manufacturing and media.
The key feature of the business model is offshoring. Indian IT services company provide a cost advantage to the customer by executing the work in low cost locations such as India.
Financials
The company has been doing fairly well financially for the last couple of years. It has been able to maintain its ROE in excess of 15% over the past 5 years. The calculated ROE is depressed due to high cash on books (running almost 1400 Crs now). The company had a good topline growth till 2005, which slowed down in 2007 and 2008. However it has still been able to pull off a double digit growth for 2008.
The net margins has dropped from around 20% to around 13% levels due to forex losses. The net margins are not as high as the Tier I companies such as infosys, but still at healthy levels.
The net profit growth has been fairly erratic in the last few years due to the forex changes. However the profit has doubled in the last 5 years inspite of the major changes in the market such as recession, flucutations in the Rupee-dollar rates and increases in the salary etc.
Positives
The company has a fairly healthy cash flow and the same is visible via the strong level of cash on the balance sheet. The company has had a moderate growth in the topline and bottomline numbers.
The company is also growing faster in the non US markets and thus reducing the dependence and contribution of the US markets.
The company recently completed a buyback of almost 10% of its equity at around 210 Rs per share. Thus the company has been able to buyback its shares at a fairly discounted price and thus add value to the exisiting shareholders. This buyback is however partly offset by almost 1 Cr ESOP outstanding for employees which would increase the dilution.
Negatives
The are several negatives with the company. The company performance has been average and has not been of the level of the tier I vendors. As a result the company will not get the valuations of its more successful competitors. The company has had a decent performance, but on a comparitive basis it is poorer than the tier I vendors.
The other negatives is the stock options plan of the company. The earlier stock option plan was almost 5% of the equity. However in 2008, the plan was converted to a RSO (restricted stock options) plan with a strike price of almost Rs 2 / share. The irritating part is that the proposal was approved without the management specifying if the ESOP numbers will roll into the RSO plan. If that happen,I am looking at a reduction of almost 150 Crs (6-7 Rs/ share) in the value of the stock. This may not be huge, but it is irritating to see the company change the plan at the expense of the shareholders.
Risks
The company shares the usual risks faced by the other IT companies such as recession, protectionism in developed markets, cost escalation and competitive pressures from other IT vendors – both indian and foreign.
Next post : competitive analysis, Management quality, valuation and conclusion
Side note: I have a mirror self hosted copy of this blog. I recently changed the blog design and feel it is an improvement over the earlier design. Would appreciate your feedback on it. If this blog were to go down for some reason, then that would be place to go !! guys give that website some love too :)
About
Patni is an IT services company similar to Infosys, WIPRO and other companies in the same industry. The company derieves a major portion of its revenue from the US. The main industry segments in which the company operates are Financial services, insurance, manufacturing and media.
The key feature of the business model is offshoring. Indian IT services company provide a cost advantage to the customer by executing the work in low cost locations such as India.
Financials
The company has been doing fairly well financially for the last couple of years. It has been able to maintain its ROE in excess of 15% over the past 5 years. The calculated ROE is depressed due to high cash on books (running almost 1400 Crs now). The company had a good topline growth till 2005, which slowed down in 2007 and 2008. However it has still been able to pull off a double digit growth for 2008.
The net margins has dropped from around 20% to around 13% levels due to forex losses. The net margins are not as high as the Tier I companies such as infosys, but still at healthy levels.
The net profit growth has been fairly erratic in the last few years due to the forex changes. However the profit has doubled in the last 5 years inspite of the major changes in the market such as recession, flucutations in the Rupee-dollar rates and increases in the salary etc.
Positives
The company has a fairly healthy cash flow and the same is visible via the strong level of cash on the balance sheet. The company has had a moderate growth in the topline and bottomline numbers.
The company is also growing faster in the non US markets and thus reducing the dependence and contribution of the US markets.
The company recently completed a buyback of almost 10% of its equity at around 210 Rs per share. Thus the company has been able to buyback its shares at a fairly discounted price and thus add value to the exisiting shareholders. This buyback is however partly offset by almost 1 Cr ESOP outstanding for employees which would increase the dilution.
Negatives
The are several negatives with the company. The company performance has been average and has not been of the level of the tier I vendors. As a result the company will not get the valuations of its more successful competitors. The company has had a decent performance, but on a comparitive basis it is poorer than the tier I vendors.
The other negatives is the stock options plan of the company. The earlier stock option plan was almost 5% of the equity. However in 2008, the plan was converted to a RSO (restricted stock options) plan with a strike price of almost Rs 2 / share. The irritating part is that the proposal was approved without the management specifying if the ESOP numbers will roll into the RSO plan. If that happen,I am looking at a reduction of almost 150 Crs (6-7 Rs/ share) in the value of the stock. This may not be huge, but it is irritating to see the company change the plan at the expense of the shareholders.
Risks
The company shares the usual risks faced by the other IT companies such as recession, protectionism in developed markets, cost escalation and competitive pressures from other IT vendors – both indian and foreign.
Next post : competitive analysis, Management quality, valuation and conclusion
Side note: I have a mirror self hosted copy of this blog. I recently changed the blog design and feel it is an improvement over the earlier design. Would appreciate your feedback on it. If this blog were to go down for some reason, then that would be place to go !! guys give that website some love too :)
Tuesday, June 09, 2009
Should I sell ?
I have been receiving this question and its variants via comments and emails for the last few days.
Let me try to answer this question from my point of view. My response may not be typical of what is usually recommended and may not suit your specific case.
I am wary of a simplistic approach of selling stocks at an X % profit or at predefined index or price level. A decision to sell, like buying is more nuanced and requires more thought than that.
Two criterias for selling
In my case, the selling criteria is part and parcel of the analysis done before buying the stock. I typically will have an exit criteria in mind based on fundamentals and valuation at the time of buying the stock. If the business fundamentals deteriorate more than expected (see my post on India nippon), then I will sell the stock if I think that the drop is not temporary and the intrinsic value will stagnate or drop in the future.
The second case where i sell the stock is when the current price exceeds the intrinsic value by 10-15% and the future increases in the intrinsic value is less than the returns I can get via other opportunities. So if the stock is selling at intrinsic value and I can find another idea at a 40% or higher discount, then I will sell the stock and re-invest the proceeds in the new idea.
You will notice a lack of reference to any pre-determined index levels or fixed increase in stock price in my sell criteria. For starters, index levels do not have a direct bearing on individual stock. My pick can stagnate when the index is rising and vice versa. So selling a stock just because the index has gone up would be foolish
Mental accounting
I will also not sell stock just because it has gone up by X% to ‘book’ some profit and leave my profits behind. This would be a clear case of mental accounting (put cost and profit in different mental accounts) and an attempt to avoid regret. If one breaks the investment into different mental accounts, there is tendency to recover the cost and let the profit run. I see no reason to treat profits any different from the cost. The entire money is just one single account (available capital) and it is important to take decision on the entire holding as such.
Avoiding regret
A common reason for selling is also to avoid regret. If the market drops, I will regret losing the profit. However I would say that in the short term, it is impossible to avoid regret. If the market rises, then you will end up regretting selling the stock and losing on the upside.
If I cannot predict the markets and avoid regret, the best option is to have an approach based on intrinsic value and accept the fact that I could face regret in the short term irrespective of my decision. The same scenario occurred for anyone who waited for the election results to commence buying. In order to avoid the regret of buying at a higher price and then see the price drop after the elections, they ended up watching the price shoot up and are now regretting missing the rise.
Final bias – hindsight bias
The silliest reason by far is to evaluate a decision based on how the market moves in the short term. If the market rises after I decide to hold the stock, does it make me smart or stupid if the market drops? absolutely not !!
All investing decisions have to be taken based on current information and in absence of knowing which way the market will move, my decision can appear to be very smart or stupid in the short run. However if you follow a rational approach of buying and selling stocks based on some measure of value, then short term market movements should not trouble you too much (which ofcourse is easier said than done)
Let me try to answer this question from my point of view. My response may not be typical of what is usually recommended and may not suit your specific case.
I am wary of a simplistic approach of selling stocks at an X % profit or at predefined index or price level. A decision to sell, like buying is more nuanced and requires more thought than that.
Two criterias for selling
In my case, the selling criteria is part and parcel of the analysis done before buying the stock. I typically will have an exit criteria in mind based on fundamentals and valuation at the time of buying the stock. If the business fundamentals deteriorate more than expected (see my post on India nippon), then I will sell the stock if I think that the drop is not temporary and the intrinsic value will stagnate or drop in the future.
The second case where i sell the stock is when the current price exceeds the intrinsic value by 10-15% and the future increases in the intrinsic value is less than the returns I can get via other opportunities. So if the stock is selling at intrinsic value and I can find another idea at a 40% or higher discount, then I will sell the stock and re-invest the proceeds in the new idea.
You will notice a lack of reference to any pre-determined index levels or fixed increase in stock price in my sell criteria. For starters, index levels do not have a direct bearing on individual stock. My pick can stagnate when the index is rising and vice versa. So selling a stock just because the index has gone up would be foolish
Mental accounting
I will also not sell stock just because it has gone up by X% to ‘book’ some profit and leave my profits behind. This would be a clear case of mental accounting (put cost and profit in different mental accounts) and an attempt to avoid regret. If one breaks the investment into different mental accounts, there is tendency to recover the cost and let the profit run. I see no reason to treat profits any different from the cost. The entire money is just one single account (available capital) and it is important to take decision on the entire holding as such.
Avoiding regret
A common reason for selling is also to avoid regret. If the market drops, I will regret losing the profit. However I would say that in the short term, it is impossible to avoid regret. If the market rises, then you will end up regretting selling the stock and losing on the upside.
If I cannot predict the markets and avoid regret, the best option is to have an approach based on intrinsic value and accept the fact that I could face regret in the short term irrespective of my decision. The same scenario occurred for anyone who waited for the election results to commence buying. In order to avoid the regret of buying at a higher price and then see the price drop after the elections, they ended up watching the price shoot up and are now regretting missing the rise.
Final bias – hindsight bias
The silliest reason by far is to evaluate a decision based on how the market moves in the short term. If the market rises after I decide to hold the stock, does it make me smart or stupid if the market drops? absolutely not !!
All investing decisions have to be taken based on current information and in absence of knowing which way the market will move, my decision can appear to be very smart or stupid in the short run. However if you follow a rational approach of buying and selling stocks based on some measure of value, then short term market movements should not trouble you too much (which ofcourse is easier said than done)
Should I sell ?
I have been receiving this question and its variants via comments and emails for the last few days.
Let me try to answer this question from my point of view. My response may not be typical of what is usually recommended and may not suit your specific case.
I am wary of a simplistic approach of selling stocks at an X % profit or at predefined index or price level. A decision to sell, like buying is more nuanced and requires more thought than that.
Two criterias for selling
In my case, the selling criteria is part and parcel of the analysis done before buying the stock. I typically will have an exit criteria in mind based on fundamentals and valuation at the time of buying the stock. If the business fundamentals deteriorate more than expected (see my post on India nippon), then I will sell the stock if I think that the drop is not temporary and the intrinsic value will stagnate or drop in the future.
The second case where i sell the stock is when the current price exceeds the intrinsic value by 10-15% and the future increases in the intrinsic value is less than the returns I can get via other opportunities. So if the stock is selling at intrinsic value and I can find another idea at a 40% or higher discount, then I will sell the stock and re-invest the proceeds in the new idea.
You will notice a lack of reference to any pre-determined index levels or fixed increase in stock price in my sell criteria. For starters, index levels do not have a direct bearing on individual stock. My pick can stagnate when the index is rising and vice versa. So selling a stock just because the index has gone up would be foolish
Mental accounting
I will also not sell stock just because it has gone up by X% to ‘book’ some profit and leave my profits behind. This would be a clear case of mental accounting (put cost and profit in different mental accounts) and an attempt to avoid regret. If one breaks the investment into different mental accounts, there is tendency to recover the cost and let the profit run. I see no reason to treat profits any different from the cost. The entire money is just one single account (available capital) and it is important to take decision on the entire holding as such.
Avoiding regret
A common reason for selling is also to avoid regret. If the market drops, I will regret losing the profit. However I would say that in the short term, it is impossible to avoid regret. If the market rises, then you will end up regretting selling the stock and losing on the upside.
If I cannot predict the markets and avoid regret, the best option is to have an approach based on intrinsic value and accept the fact that I could face regret in the short term irrespective of my decision. The same scenario occurred for anyone who waited for the election results to commence buying. In order to avoid the regret of buying at a higher price and then see the price drop after the elections, they ended up watching the price shoot up and are now regretting missing the rise.
Final bias – hindsight bias
The silliest reason by far is to evaluate a decision based on how the market moves in the short term. If the market rises after I decide to hold the stock, does it make me smart or stupid if the market drops? absolutely not !!
All investing decisions have to be taken based on current information and in absence of knowing which way the market will move, my decision can appear to be very smart or stupid in the short run. However if you follow a rational approach of buying and selling stocks based on some measure of value, then short term market movements should not trouble you too much (which ofcourse is easier said than done)
Let me try to answer this question from my point of view. My response may not be typical of what is usually recommended and may not suit your specific case.
I am wary of a simplistic approach of selling stocks at an X % profit or at predefined index or price level. A decision to sell, like buying is more nuanced and requires more thought than that.
Two criterias for selling
In my case, the selling criteria is part and parcel of the analysis done before buying the stock. I typically will have an exit criteria in mind based on fundamentals and valuation at the time of buying the stock. If the business fundamentals deteriorate more than expected (see my post on India nippon), then I will sell the stock if I think that the drop is not temporary and the intrinsic value will stagnate or drop in the future.
The second case where i sell the stock is when the current price exceeds the intrinsic value by 10-15% and the future increases in the intrinsic value is less than the returns I can get via other opportunities. So if the stock is selling at intrinsic value and I can find another idea at a 40% or higher discount, then I will sell the stock and re-invest the proceeds in the new idea.
You will notice a lack of reference to any pre-determined index levels or fixed increase in stock price in my sell criteria. For starters, index levels do not have a direct bearing on individual stock. My pick can stagnate when the index is rising and vice versa. So selling a stock just because the index has gone up would be foolish
Mental accounting
I will also not sell stock just because it has gone up by X% to ‘book’ some profit and leave my profits behind. This would be a clear case of mental accounting (put cost and profit in different mental accounts) and an attempt to avoid regret. If one breaks the investment into different mental accounts, there is tendency to recover the cost and let the profit run. I see no reason to treat profits any different from the cost. The entire money is just one single account (available capital) and it is important to take decision on the entire holding as such.
Avoiding regret
A common reason for selling is also to avoid regret. If the market drops, I will regret losing the profit. However I would say that in the short term, it is impossible to avoid regret. If the market rises, then you will end up regretting selling the stock and losing on the upside.
If I cannot predict the markets and avoid regret, the best option is to have an approach based on intrinsic value and accept the fact that I could face regret in the short term irrespective of my decision. The same scenario occurred for anyone who waited for the election results to commence buying. In order to avoid the regret of buying at a higher price and then see the price drop after the elections, they ended up watching the price shoot up and are now regretting missing the rise.
Final bias – hindsight bias
The silliest reason by far is to evaluate a decision based on how the market moves in the short term. If the market rises after I decide to hold the stock, does it make me smart or stupid if the market drops? absolutely not !!
All investing decisions have to be taken based on current information and in absence of knowing which way the market will move, my decision can appear to be very smart or stupid in the short run. However if you follow a rational approach of buying and selling stocks based on some measure of value, then short term market movements should not trouble you too much (which ofcourse is easier said than done)
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