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A video sent by Vikas :

How to spot deep value stocks

This article (here) was published in The Economic Times on 4th May 2008. (nah! I didnt write it).

"Manish Sonthalia of Motilal Oswal Securities believes that PSU banks like Oriental Bank of Commerce, which is trading at a PE of 5.6 with book value of Rs 240 for FY09, is a perfect example of a deep value stock." (unfortunately this was the only stock discussed in the entire article)

Recently, OBC declared it's Q4 results and showed a net loss of Rs. 99 crs as against a profit of Rs. 54 crs last year. Additionally, on a full year basis, OBC closed the year on a profit of Rs. 353 crs as against Rs. 580 crs last year. The primary reason for the lowering of profits was the writing-off of the entire unabsorbed losses of Global Trust Bank (GTB) amounting to Rs. 487 crore, including the Rs 242 crore earlier slated for 2008-09, in the financial statements for 2007-08 itself. This means OBC starts of FY08-09 on a clean slate. 

To put some quick numbers around this - OBC will save on about Rs. 242 crores this year (apportioned as GTB write-off) this year. So reconstructing FY2007-08 numbers (without the OBC w/off) comes to -
Operating income : Rs. 5,800 crores
Other income : Rs. 615 crores
Operating expenses : Rs. 5,155 crores
Hence, profit before taxes : Rs. 1,260
Less: Taxes @ 35% : Rs. 441 crores
Net profit : Rs. 819 crores

At the current price of Rs.207 and a market cap of Rs 5,186 crores .. the stock is priced at a price-earning of 6.33. I am not assuming any increase in income here (or being a pessimist - am not apportioning additional provisions in the P&L for dubious asset quality). At 6.33, the stock is a bit undervalued. How deep the value is ... anyones guess !

Tough times are actually a good time for

Thomas Schoewe loves to say the phrase, "Tough times are actually a good time for Wal-Mart". This outlandish statement is infact coming. Consumers in the United States are riddled with rising food prices and huge cost of gas. This has made it difficult for most households to run their home and a number of them are living off credit. Consequently this year, Wal-Mart slashed grocery prices by as much as 30 percent to lure customers stung by high food costs. This brilliant strategy was promoted with enticing advertisements that read (and asked consumers) - "What will you do with your savings?"

In the last six months, Wal-Mart's stock price has risen $15 a share, or about 33 percent. During that time, Macy's shares dropped by 16 percent, Target's by 6 percent and JC Penney's by 5 percent. As their CFO says, "Wal-Mart customers value our price leadership more than ever, especially as they try to stretch their money even further".

Now, this is a brilliant "economic moat". A business that has the muscle to change potential problems into opportunities. Wal-Mart used it's efficiencies to actually display an advantage to it's customers .. this not only increases sales at stores but also builds loyalty. I am assuming that the stores donot make a loss on the sale of groceries, but are at a no profit-no loss situation. An average Wal-Mart customer doesnt earn his shopping dollars just on groceries. Groceries (i presume) are only 20% of all purchases (value) made by a customer at the stores. So, my 100 dollars at the shop will be split as 80 for other goods and 20 for groceries. I am further assuming that I would make a margin of 10% on groceries (on an average; since they are perishable, everyday commodities) and 15% on other goods. So spliting the spends on an 80:20 ratio, I find -
Case 1 : (80 * 15%) + (20 * 10%) = 14.0%
Case 2 : (80 * 15%) + (20 * 0%) = 12.0% (a small increase in sale is enough to off-set this reduction in profit margin which can be easily done by innovative pricing changes)

This also takes me back to my principles of micro-economics which reads - "In case of essential commodities like food, the demand curve is inelastic such that any increase in price will only induce just a small reduction in demand". This is true from an individual's point of view. However, from a firm's poin of view (Wal-Mart) ... this principle doesn't hold good. In this case, by virtue of lowering the price of food .. Wal-Mart has been able to post very high increase in traffic at their stores which has resulted in greater sales of other goods aswell. I'm wondering how soon will be see a similar campaign from an Indian retail firm (Subhiksha, Reliance, More, EasyDay, Food Bazaar) given the increasing food prices here.

On the subject of inelastic demand ...  I'll leave you with a thought : 


In March 2002, Ireland enacted a nationwide tax of nine pence (15 cents) on the use of plastic grocery bags, to be collected by retailers. Predictably, in just five months the tax cut plastic bag use by 90 percent.

What is the Price Elasticity of Demand for Plastic Grocery Bags? 


PS: If you have an interest in economic policies then read more about this tax (here). Don't miss the comments section.

212 degrees

I am in the middle of a CAP Coaches training program. CAP is an acronym for "Change Acceleration Program".

The 3-day program is designed to provide participants with the knowledge and skills that can be used to facilitate changes in teams with which one works. I think this is one of the best programs I've attended in the last 2 years. It provides for a number of facilitation tools which can be easily applied at work and can give instant results. I wont call it a soft-skills training .. instead this course helps you become a bit politically savvy to assist you in getting to decisions, quickly and effectively. The program is being conducted by Jenny Sarang.

Thought I'll share with you a very nice, inspirational video (3.35 mins) that was shown during training :



Bonus : While browsing YouTube, I spotted a scene from a movie I watched about 2 years back. The movie "Facing the Gaints" (website) is about a coach's struggle to inspire his team and win the championships. The movie is a must watch for young kids especially if they love sports. I personally loved it. You can watch the inspiring scene I was referring to here. (I call it the "Dont Quit" scene)

Cash is King !

The term "Cash is King" has a wikipedia entry. It reads, "Cash is king is an expression sometimes used in analyzing businesses; it refers to the importance of cash flow in the overall fiscal health of the business ... A company could have a large amount of accounts receivables on its balance sheet which would also increase equity, but the company could still be short on cash with which to make purchases, including paying wages to workers for labor. Unless it was able to convert its accounts receivable and other current assets to cash quickly, it could be technically bankrupt despite a positive net worth."

An interesting article appeared on the importance of cash on CNBC-TV18 (here), which claims that about 70% of companies reported a drop in net cash flows from operating activities. This is crucial because a strong operating cash flow pays for all capex requirements of the organisation and dividend to shareholders. If cash from operations declines for a company, then it might have to borrow from the market to finance it's growth plans. Given the current rate of interest, this is a double whammy - and needs to be factored into every stock evaluation.

Largest Build up in Cash Flows :



Biggest Drop in Cash Flows :



Note: I checked Pfizer (here). The net cash from operations is 17 crs and not 23 crs as stated in the article. There has been some extraordinary earnings for Pfizer which may change some variables in calculation of cash flow (i think, but not certain) .. so I'll not delve into it for now. To illustrate an example outside this list, Hero Honda's net cash from operations slipped from 936 crs in FY06 to 625 crs in FY07. In the same period, profits dropped mildly from 971 crs to 857 crs.

Net net, the importance of cash from operations cannot be ignored. This is the lifeline of most businesses and any decline in these numbers should be looked with the minutest precision before allocating your capital for these stocks.

Star-struck !

Look what I found !

Dharmesh Joshi from The Ganeshaspeaks Team had posted this on their blog (here). The title of the post read "Golden Period for Bank of Baroda from December 2008 to May 2009".

Here's what the post says -
"According to the Sun Horoscope of BOB's establishment date, Saturn and Ketu's presence in the wealth house might create some hindrances in its economic growth. However, as Mercury, Venus and Rahu are transiting through its Birth Chart, Jupiter will provide gains to the bank.

According to BOB,s nationalized date (19th July, 1969)'s Sun Horoscope, Saturn will transit through its Sun and Rahu will transit through its Birth Rahu taking a U turn between July 2006 and March 2007. However, after this period slow and steady growth is indicated for BOB.

The period starting from 10th December 2008 till 21st May 2009 can be considered as the golden period for BOB. It will create new history in the sector of banking.

May Lord Ganesha bless this bank with more and more depositors in the years to come!"