The Big-Mac Index

The Big Mac index is based on the theory of purchasing power parity, according to which exchange rates should adjust to equalise the price of the basket of goods and services around the world. The basket in question is: the Big-Mac burger.

The notion of of the PPP is that a dollar should buy the same amount in all countries, and in the long run - the two countries shall move towards a rate that equalises the prices of an identical basket of goods and services. Now consider that all currencies will try to balance this delicate equation and tend towards a singly acceptable equation which would read something like :
aC1 = bC2 = cC3 = dC4 = ..... = nCn (really long term)

Lets take an example from the table below :
The price of Big-Mac in China (remember some news stories on the move to banish McDonald's from the forbidden city) is 11.0 Yuan which translates to 1.41 USD (7.77 Yuan = 1 USD). However the PPP calculation of the Chinese Big Mac (as compared to the US) would be 3.42 (i.e. 11.0 Yuan / 3.22 USD). This means, the Yuan in the long run will be valued at around 3.42 to the dollar .. while the current Yuan/USD fx rate is 7.77 ... indicating a possible 56% appreciation in the Yuan w.r.t. the dollar.


While the interplay between developed and developing/under-developed countries may not be too good for comfort, the difference in the Yen and USD is really appalling. The current exchange rate is 121.0 and the Big-Mac parity is at 87.0 (a big difference of 28%)

Nahar Export de-merger

In April 2006, Nahar Exports Ltds informed the BSE in an announcement that for every 100 shares a shareholder holds in Nahar Export (at a FV of Rs. 10) - he will receive :
1. 70 shares of NEL (at FV = Rs 5) and,
2. 55 shares of NSML (at FV = Rs 5) (Nahar Spinning Mills Limited)

This was discussed in my post on 26th April, 2006 (here)

The demerger came into effect today. The mechanics of the deal are enclosed :
OUT : 100 NEL shares @ Rs. 101 = Rs. 10,100
IN : (70 NEL shares @ Rs. 60.75) + (55 NSML shares @ Rs. 149.05)
= Rs. 4252.50 + Rs. 8197.75
= Rs. 12,450.25

Value unlocked = +23%

Interestingly, the buy recommendation was made when the price of NEL was Rs. 80 per share. The annualised return thus comes to 61% plus, dividend income.

At current levels of Rs. 60 per share, NEL is fairly valued and not a buy scrip.

High-rise

Prajay Engineers Syndicate Ltd. is a construction company based out of Hyderabad, India. The financials of the company are enclosed -
LY profit = 22.8 crs
Share capital = 16.78 crs
Loans on book = 74 crs
Net CA = 107.1 crs
FV = 10 rupees per share
Dividend = 2 rupees per share
CMP = 215 rupees per share (Mar-20)

Hence, initial analysis of stock >
Div yield = 0.93%
NCAV = 19.74 rupees per share
EPS = Rs 13.59 per share
P/E (on LY) = 15.82

The numbers didnt look that impressive until I check some other important parameters -
1. Expected profits of the company based on last 4 qtrs is 52 crs. This would propel the EPS to over 30 rupees and the P/E comes down to 6.94.
2. While profits are expected to grow by 160%, the sales too are growing by over 60%.
3. The debt recapitalisation ratio (as a %age of m-cap) is a huge 54% which is good margin of safety for the risk-averse value investor.

The recent budget has not shown any negative sides to the construction industry (although infrastructure project companies do get some stick) for companies like Prajay. However, the capping of cement prices will mean an increase in the raw material cost for Prajay as it will passed down to construction companies.

Prajay looks like a good bet to hold for the next 3-4 years, as India rides on the infrastructure and extended housing phase. At a low P/E & growing profit performance, Prajay is a good buy.

A sitting duck?

A stock with -
a) Cash per share of 38 rupees (which is more than 50% of the CMP)
b) Growing sales (15% increase in sales over LY expected)
c) Growing profits (35% increase in profits over LY expected)
d) Debt recap of 49% of current market capitatlisation
e) Estimated PE (trailing 4 qtrs) is 5.86

A software company ... surprised? Aftek Limited

The company has built up stakes/acquired a number of companies based in the US and Europe and is creating a niche for itself. I particularly like the strategy of partnering with other companies which gives them ready access to a field-force and local know-how (and they are doing it by acquiring control rather than an MoU).

At 68 rupees per share (Mar-14), Aftek Ltd. is undervalued. The stock offers deep discount and if matched with existing tier-2 software companies, has a price upside of 141% .. reaching 165 rupees per share in the next 12 months.

Strangely, the stock has been lying around (albeit, with enough volumes per day), with low upward movement. Any answers?

Mukand Ltd.

Note: Annual report not available. If available with you, pls email me at shankar.nath@gmail.com

LY profits = 61.5 crores
Share capital = 73.13 crs
Loan on books = 1,117 crs
Investments = 95.3 crs
Net CA = 962 crs
FV = 10 rupees/share
Dividend LY = Nil
CMP (Mar-16) = 78.30

Primary interests in Mukand Ltd. are on account of -
1. Core profits and sales growth at 30% and 18% resp. I estimate a profit closing of approx. 90 crores this year end. (at an EPS of 12.3 rupees/share).
2. The debt recapitalisation of Mukand is an amazing 44% of m-cap
3. Cash on books (on 31st Mar 2006) was 18 rupees per share (on account of the one-time income of 63 crs in 2005-06)
4. Trailing P/E for Mukand is 6.50 (the best in it's class)

The analyst presentation on it's website which gives a good take on it's future strategy. The company has a positive export strategy, heavy incidence on automobiles, introducing methods to dissolve the heavy debt on it's books, exploring new sectors and has strong relations with it's clients.

Do check the balance sheet of the company for three key points -
1. Nature of investments with the company (93 crores in Mar-2006)
2. Land available with the company (and value on books) (pls note: the Kurla land sold by the company for 221 crs may have been worth much much lower in the books of the company .. see gross block)
3. The management discussion & analysis of the company, w.r.t. debt-reduction, existing non-core businesses and capex. (a reduction in debt - using the cash on sale of land - will lower interest cost & boost profits; the company will however, not be in a hurry for this as they can save on taxes by this move)

At 78 rupees per share, the stock is undervalued. Mukand is a strong, solid stock and I expect it to fetch a price of around 125-140 rupees in the next 7-8 months.

The charting of the scrip is enclosed -

Why Value Value?

This was the title to Professor Sanjay Bakshi's first class in SABV at MDI Gurgaon, batch of 2000-02. The presentation had the case of EG Corporation and areas in which we could unlock value. (pls email me for the ppt)

Likewise, I had an interesting conversation with Saurabh yesterday on "value". We've, in the last many discussion on blogs, have explored value primarily from an EPS (visible) or investments (hidden) perspective. However in today's complex investing field some new areas of value have come forth. Database is one of them.

In other words, your customer records can be one of the primary value creators for companies. A number of Indian companies are exploiting their large business presence by selling a multitude of products e.g. ICICI Bank, Tata (with Trent, Tata Teleservices), Reliance (Retail, Telecom). Infact Reliance Energy's acquisition of BSES if looked just from a database viewpoint adds 25 million customers in Mumbai, Delhi, Goa and Orissa. 25 million customers - who can now be cross-sold mobile phones, credit cards, insurance, mutual funds, home loans, auto loans etc. etc.

Two thoughts came across -
a) What is the probability of a company utilising this database?
b) What is the monetary value that can be attached to this database?

a) As more companies join alliances (read: co-exist), the need for leveraging each others resources will increase. Database will be an obvious choice. And hence, cross-sell. For service companies, this "probability" will be much higher as compared to single product-institutional buyer companies. Professional managers will soon exploit this opportunity.

b) Adding a monetary value may be a bit difficult. Lets try a different tact here. The number of financial products a customer has in India averages 9 (this includes your LIC, savings a/c, credit card, car finance, home loan, NSC certificates, mutual fund, demat, PF, PPF, EPF etc.). Total middle class household in India is estimated at 180m. At an average annual income of 4000 USD (or Rs. 2 lacs) and a savings rate of 26% and an investible %age of savings at 35%, we can conculde that 1 HH in India spends just Rs. 18,200 per month on investments. While commission rate can be from 0% to 30% .. we would assume a middleman rate of 4% for ease. So, 1 Indian HH can earn Rs. 728 per month for a middleman. So the entire opportunity set for BSES (25m customers) is 11.55 billion rupees or rupees 1155 crores of income (not sales). Simple telemarketing gives a response rate of 2.5%, and assuming a 500 seater setup - the annual profits from this simple cross-sell activity should give an additional income of Rs. 32 crores for the year.

Sounds rather complicated, but an additional 32 crores based on an inexact science (with enough upside) is food for thought.

Other "value" areas will be patents, brand name and now, CEOs (imagine the distortions in stock price of a Virgin Atlantic with a Richard Branson and one without him)

Birla Corporation

Over the last one month, majority of all cement stocks have dropped .. and so have a number of diversified companies that are with the cement, steel, rubber or allied businesses. Consequently, a number of them have moved into the realm of a plausible value buy. Birla Corporation is a likely candidate.

Birla Corporation is a diversified company with interests in cement, steel, auto trims and jute. It has a particularly strong balance sheet and sales of over Rs. 1500 crs. Some specs from the company reports are enclosed :

Share capital = 77.01 crs
LY profits = 125 crs
Loan on books = 231 crs
Investments = 175 crs
Dividend = 2.25 rupees per share
FV = Rs. 10
CMP = 207 rupees (09-Mar)

Hence, some prelim stats would be :
Dividend yield = 1.09%
NCAV = (19.40) rupees per share
EPS = 16.23
P/E = 12.75 (based on LY numbers)

The last 4 quarters have gone extremely well for the company. The CARE ratings are at AA which shows very low credit risks on it's papers. And with estimated profits for FY 2007 at 295 crs, the 4 qtr trailing P/E will amount to just 5.33.

Noticeably, there is value in the company on the investments front. Investments of 175 crs, can be neatly labeled as -
> current invt (in MFs primarily) : 121 crs
> long term MFs (closed ended) : 35 crs
> other investments : 19 crs

... other investments : represent shares in various companies with the top 3 holdings in -
1. Century Textiles - 1807660 shares @ 52.1 (actual CMP = 553.0)
2. Birla Ericsson Optical - 938515 shares @ 50.0 (actual CMP = 19.4)
3. Universal Cables - 468000 shares @ 22.8 (actual CMP = 95.5)

Net net, value worth Rs. 106.2 crs was stated as 15.1 crs --- a difference of 91.1 crs.

I am particularly impressed (or maybe not, discerning to the lack of management vigour in managing leverage), the debt recapitalisation of this company would come to a massive 854 crs ... which is 57% of current market capitalisation (which is quite monstrous for a company of this size).


The charting of the stock is enclosed. Birla Corporation is at it's lowest.

I expect a substantial rise in the stock's price (to around 370 rupees per share) over the next 12 months. A BUY candidate (i bought some shares yesterday)

Savita Chemicals

I purchased Savita Chemicals yesterday at 218 rupees.

I had last analysed this scrip in a post dated March 16th, 2006 (here). In almost an year, a lot has changed in the company.
1. The EPS is up from Rs. 33.71 per share to Rs. 42.79 per share. FY2006-07 estimated EPS is Rs. 45 per share
2. The shares have come down from a high of Rs. 525 on 15th Jan 2007 to Rs. 222 (9th Mar). After adjusting for the bonus shares issued in Jan '07 - the stock price have dropped by around 30% from peak.
3. Annual increase in sales avg. a strong 27% over the last 3 yrs. This yr, I expect Savita Chemicals to close at a sales figure of around 810 crs (+17% from LY)
4. Profits for FY07 will be around 60 crs (as compared to 37 crs for FY06)
5. The NCAV of the scrip is a healthy 74 rupees per share
6. The company gives a dividend yield of 5.6% which is one of the highest among all businesses

Enclosed is the charting of the scrip over the last 2 months (Jan 17th to Mar 13th 2007).


At a CMP of 222 rupees (9th Mar), Savita Chemical's P/E is 5.40 - way better than it's peers. The business is sound (active for over 45 years) and has a strong management. The scrip has tremendous value and is a BUY candidate.

And so it continues ...

I broke my 10 month sabbatical from investing with the purchase of 7 scrips today. Starting tomorrow, i'll post my analysis of company stocks based on principles of value investing, competitive advantage, rising & dawning industries and whatever relevant comes to mind. In the interim, you'll find my previous blog (small2big.blogspot.com) useful - to evaluate & critique my writings.

Hope you like the blog and please feel free to post your comments on them. I am available at shankarnath@gmail.com. I shall try to reply to your emails at the earliest.

Scrips bought today - Gujarat Alkalies, Hindalco, Bank of Baroda, Vardhman Textiles, Birla Corporation, Graphite India and Savita Chemicals. While 1 in 7 scrips declined today, Birla Corp (-2.23%) ... Savita Chemicals shot up by 6.58% today. I shall be having a post on each of these scrips soon.