Entrepreneurs

http://www.hbs.edu/entrepreneurs/ is a link which no wannabe-entrepreneur should miss. Enclosed are the memoirs of over 25 HBS alumni who have taken up entrepreneurship. I read through most of them and particularly liked the capsule on Jim Sharpe of Extrusion Technology.

Happy reading !!

Graphite India

Graphite India financials are enclosed -
Share capital : Rs. 29.38 crs
Loans : Rs. 524.93 crs
NCA : Rs. 455.23 crs
FV : Rs. 2 per share
Dividend per share : Rs. 1.20 (adjusted for stock split)
Profit ('05-'06) : Rs. 62.95 crs
CMP : Rs. 55.9

Ben Graham would have been extremely uninterested in Graphite India. A negative NCAV of -4.9 rupees per share, dividend yield of just 2.14% .. virtually no margin of safety.

The annual report shows that Graphite India is a cash rich company (Rs. 143 crs or Rs. 10 per share in cash). This might however be used for capex requirements. Further, the company has put in 4 strong quarters of performance and profits will be over 100 crs for the year .. an EPS of Rs. 7.14. The new PE is just around 7.10.

Sales of the company are on the rise .. 513 crs ('04-05), 615 crs ('05-06) and 820 crs ('06-07). So are profits. The overall industry buoyancy is good over the long term and also the short term. My kind of company. I bought shares in the company at Rs. 49.

Music to my ears

Finally, McLaren beat the qualifying juggernaut of team Ferrari. With the times Alonso and Hamilton have put at Monaco today, tomorrow's race can well be an all-McL battle.

Anyways, enjoy some of the pics I clicked at the Malaysian GP in Sepang (2007).

The Circle and small cap investing

When a friend suggested we should start investing in small-cap companies (companies with an m-cap of below 300 crs), I was the most vocal protestor. My skills are rather poor at influencing (Read: non-Caldini), and hence I too participated (though unwillingly) skirmish with investing in small cap companies 6-7 months back. It's turned out mighty profitable with annualised returns of over 65%. But the real celebration has been around the fact that inspite the increased stock price, our PE's in the companies have halved in the same time and the balance sheets have turned much stronger.

Some notes -
1. We're looking at growth companies .. so a current PER of 50 doesnt bother us (I have always supported companies whose current PEs were below 10, so you can imagine my dissent when "The Circle" would suggest a scrip which was at a high PER)

2. The topline has to grow .. and so should the bottomline .. and so should the DEBT in the company. We get frustrated with companies who donot actively use their balance sheet strength to pick debt from the market to finance growth. So a cash-rich, zero debt company would be placed in the CashCow quadrant of our investing map but then a low-cash/adequate-debt/growing company would be placed in the Star quadrant

3. There has to be news value. The management should have it's PR cell and ensure maximum face time with the media. We are not interested in reticent, passive management. Aggression is the key.

4. We did not look at share volumes (or liquidity). Afterall, they are companies in the making. The lower the volumes, less is the movement in shares .. management can get on with their work without worrying about stock movements (donot confuse this with pt 3)

5. Dividend paying companies .. dont bother. If the rupee invested in the company can give 1.2 next year, then we are game to zero-dividends. (I cant find a fixed deposit which can give me 20% p.a.)

Why tell you this now?
a) I was circumspect on how well it will do .. with time my confidence has improved. A stock market crash will only fortify it further as I can invest even higher sums then
b) The market is still fresh with many such companies (we found 4 such companies while reading the morning papers, over breakfast) .. just read the financials.

PS: The Circle is what my friends (and I) call this investing club of ours :-)

Sical Logistics

With retail being the latest talk of the town, it's not difficult to explain why the logistics industry will be benefitted with new, big players entering the country. Sical Logistics is one company that seems to understand that, with it's recent forays in ramping trucking operations (May '06), raising USD 75m through FCCBs (Apr '06), building an iron-ore terminal (Jul '06), buying another logistics company (Sep '06) etc.

The financial details are enclosed :
Share capital - Rs. 30.19 crs
Loans - Rs. 313.4 crs
Investments - Rs. 41.0 crs
NCA - 338. 69 crs
PAT - Rs. 65.1 crs (FY 05-06)

Three key observations in FY 05-06 data :
1. There was no dividend given by the company for the last 4 yrs inspite of making profits as high as Rs. 65 crs in the last year
2. There was a drop of 15% in the operating income of the company as compared to 2004-05
3. Strangely, it's investment column speaks of a company named Southern Petrochemical Industries Corporation Ltd. where they had invested 3.01 million shares at a cost of 12.3 crs. The scrip had delisted from the stock exchange on Oct 2004. Am not sure it's listed anywhere .. this fact was not mentioned in the balance sheet.

This year, Sical will close at around 33 crs of net profit. That's an EPS of Rs. 10.91. At a CMP of Rs. 236, you're looking at an expensive share - with a P/E of 21.6. I am not tempted to look at the balance sheet strengths as the company has taken enough leverage this year. There was an interesting analyst concall which I went through www.indiaearnings.com. The summary is enclosed -
1. The company is divesting it's non-core businesses totalling Rs. 100-107 crs
2. Expected topline for the company is 500-600 crs (even lower than last year) but margins of 10-11%, a PAT fo 50-66 crs. At this number, the PER turns to between 10.7 and 14.2.

I could find two news items on moneycontrol.com which were bullish on Sical. BRICs went whole-hog on this company with a price target of Rs. 701 (here), while Edelweiss was more sedate in it's evaluation (here). Net net, Sical is a company to keep a watch for. If you find any reports on Sical, kindly email them to me.

Macmillan India

Macmillan India has it's results coming up in the next 2 weeks. For now, I am looking at a company 33 crs in profits (FY '06-07) and has an EPS of 19.64. At a CMP of Rs. 299 per share, this translates to a trailing PE of 15.22 .. maybe, not that impressive. But here's a company with a solid balance sheet -
a) The company has zero debt in it 's books
b) It has cash of 47 crores (FY '05-06) which corresponds to Rs. 28 per share worth cash
c) The liquid investments (mutual funds and other money market instruments) in the company are around Rs. 32 crs.
d) NCAV (excl invt) = Rs. 56.5 per share and NCAV (incl invt) = Rs. 75.5

Macmillan India is at it's lowest stock price in the last two years. It would be interesting to take a call on the company post it's AGM on June 4th. Keep this stock on your watchlist.

The Law of Small Errors

An extract from an article by Keith Devlin

How many people you need to have at a party so that there is a better-than-even chance that two of them will share the same birthday?

Most people think the answer is 183, the smallest whole number larger than 365/2. In fact, you need just 23.

Surprisingly, the number of people you need to have present for there to be a better-than-evens chance of someone sharing your birthday is not 183, but the much larger 254. (Yes, really, 254, including yourself.)

Here are the answers ...

1. First, the coincidence of two birthdays. It turns out to be easier to compute the probability that no two people at the party have the same birthday, and then subtract the answer from 1 to obtain the probability that two people will share a birthday. For simplicity, let's ignore leap years. Thus, there are 365 possible birthdays to consider.

Imagine the people entering the room one-by-one. When the second person enters the room, there are 364 possible days for her to have a birthday that differs from the first person. So the probability that she will have a different birthday from the first person is 364/365. When the third person enters, there are 363 possibilities of him having a birthday different from both of the first two, so the probability that all three will have different birthdays is 364/365 x 363/365. When the fourth person enters, the probability of all four having different birthdays is 364/365 x 363/365 x 362/365. Continuing in this way, when 23 people are in the room, the probability of all of them having different birthdays is :

364/365 x 363/365 x 362/365 x . . . x 343/365.

This works out to be 0.492. (It is when you have 23 people that the above product first drops below 0.5.) Thus, the probability that at least two of the 23 have the same birthday is 1 - 0.492 = 0.508, better than even.

2. Now for the problem of the birthdays different from yours. Pick any person at the party. The probability of that person having a birthday different from you is 364/365. (Again, I'm ignoring leap years, for simplicity.) Thus, if there are n people at the party besides yourself, the probability that they all have a different birthday from you is (364/365)n. (Since we don't have to worry whether their birthdays coincide or not, we don't have to count down 364, 363, 362, etc. as we did last time.) The first value of n for which the number (364/365) n falls below 0.5 is n = 253.

And that's all there is to it.

Electrosteel Castings

The key financials of Electrosteel Castings are enclosed -
Share capital - Rs. 20.7 crores
Loans - Rs. 385.6 crores
Net Current Assets - Rs. 560.0 crores
FV - Rs. 10 per share
Dividend - 12.5 rupees per share
CMP - 387.00 rupees per share (May-22)
LY Profits - Rs. 76 crores

This corresponds to -
NCAV - 84.5 rupees per share
Div Yield - 3.22%

Investments in the company are Rs. 232.2 crs. Of this, 147 crs are in mutual funds. This (147 crs) corresponds to an additional margin of safety of Rs. 71 rupees per share. Hence the NCAV (w/ invt) equals 155 rupees per share. CMP : NCAV ratio is just 2.48 (good comfort)

I expect current sales at Rs. 110 crores for the company i.e. a trailing EPS of 53 rupees per share or, a P/E of 7.3. This is brilliant as compared to it's peers aka Bharat Forge, Ahmednagar Forging, IID Forging etc. (Bharat Forge is at a PER of 32)

The sales of the company have been on the rise - 677 crs (2004), 897 crs (2005), 971 crs (2006), 1140 crs (FY2007). Profits have remained uniform over the last 4 years. FY2007 has however been different with a 35% net gain over last year profits. As long as profits remain at the same levels, I am up for investing.

Electrosteel Castings is a Rs. 600+ share (in 12-18 months), as long as they are no strange downsides in margins. (satirically, the margins have been coming down but increased sales activity is ensuring constant generation of profits). It is however a mystery why the stock has been between the 380 and 395 mark for the last 3 months, when so much activity is happening around the sensex. I did double-check for possible downturns ... looked at reports of Ahmednagar Forging and Bharat Forge - there weren't any industry risks in sight. A good buy !

It Happened In India

Kishore Biyani's beautiful book, where he traverses through his experiences in growing Pantaloons, Big Bazaar, Central etc. from his life as a trader to an industry 'maverick'. I particularly enjoyed the simplicity (or Indian--ness) of his writings .. a symbol of his own self.

I am taking one small part of this book (Pg 100-101) for all to read -

".. we were fortunate to have a group of long-term individual investors who stared believing in us. All of them had visited our stores and were prepared to focus more on the number of customers coming in, rather than the financial numbers on the balance sheet ...

One of the first was a Bengali gentleman from Kolkata who happened to visit the Pantaloons outlet in Gariahat. He saw the crowds and the merchandise we were offering and started to put in his stakes. He did not get good returns in the beginning, but his trust in us was so strong that he kept acquiring our stock as well as recommending it to his friends in the investment community ..."

Rakesh Jhunjhunwala :

The market's anxiety emerged from a lack of appreciation of retailing as a business and of Kishore as a person. He was considered over-ambitious, but they all missed the big picture as well as the bus.

Kishore was aggressive in a field that was supposed to see a lot of growth in India. The stock market was concerned about the high debt-equity ratio. But I found that it wasn't the debt that was high, it was just the equity base which was low. So we helped him raise funds through private placements.

The backed Kishore because he was very different from most entrepreneurs. First of all, he was very aggressive and secondly, he wasn't money-minded. For him achievement meant doing what he thought innovative. He understood customers well and there was a lot of clarity in his thinking. Also, he went beyond the numbers. I found this quality to be a key differentiator. ...

Provisions & Prakash Industries

On the face of it, Prakash Industries seemed a good bet. The company has embarked on a number of cost saving initiatives and has improved profitability in multiple areas. The P/E of the scrip is around 4. The company has diversified into various businesses like power, wind energy etc. There is also a lingering news of a de-merger which could unlock more value for stockholders (which is primarily promoters).

However, the announcements page of BSE had one section which caught my attention. It seems the company has a penchant for "ignoring possible risks". Here's some important items the auditors pointed out -
1. No provision has been made in respect of doubtful / disputed debts, loans and advances aggregating to Rs 109 lacs
2. No provision has been made in respect of lease rental liabilities due to pending cases and settlement of disputes with the lessors, the amount whereof is not ascertainable.
3. No provisions for gratuity and leave encashment has been made, the amount whereof has not been ascertained. (Refer Note 7)
4. There is a lower charge of interest of Rs 563 lacs for the quarter (Rs 1668 lacs for the nine months period) ended December 31, 2006 for which the settlements with the concerned lenders are yet to be concluded.
5. No adjustment has been made in the accounts for the amount waived under settlements entered into during the year with financial institutions.
6. Adjustment has been made in the books of account towards Minimum Alternate Tax which may be set off against future tax liability of the Company. However, the auditors are unable to express any opinion on the Company’s ability in future for this set off. (Refer Note 13)
7. Provision for Deferred Tax Liability has not been made. Consequently, the profit for the quarter & the period ending December 31, 2006 has been shown higher by Rs 1387 lacs and Rs 3702 lacs respectively. (Refer Note 14)
8. No amount has been amortised towards Deferred revenue expenditure incurred during the year by the Company. (Refer Note 15)

These provisions can have a huge impact on the profitability of any company. Let's take two examples here -

1. Consider an insurance company. The perfect recipe for insolvency is the combination of aggressive (under) pricing and low reserving. The two underlying motives for this are - 1. expansion & increasing market share and, 2. inflating the profits. These short-term moves can really hurt the company when a serious claim hits them - and they find themselves out of money to settle the claim (Read the article on Insurance Company Failures for more info on this)

2. Frequent flyer miles given out by Airline companies. Currently, around 14 trillion miles have been unclaimed - this is a risk faced by all airline companies where they, as a group, have to quantify these 14 trillion miles and accommodate this liability in their accounting statements as a provision (reserves). American Airlines carries a USD 1.6 billion liability in it's books, in unclaimed miles. Interestingly, 7.5% of all customer who flew in the US, were on free trips. That's 7.5% less income for all airlines.

Im not comfortable with ivesting in Prakash Industries given these provisions. This is quite typical of a promoter-led organisation (promoters in the company have over 2/3rd ownership and public holding is just 15%).

Indian videos on YouTube

1. A brilliant musical composition around our national anthem, Jana Gana mana .. by A R Rehman with other great Indian maestros' . A must watch !
http://www.youtube.com/watch?v=6gdwKovcDBE

2. Vande Mataram - sung by Lata Mangeshkar .. good, but I would have preferred the simple Vande Mataram which I learnt at school (without the fusion music)
http://www.youtube.com/watch?v=s1UgUpKz3Lc

3. School chale hum - excellent video to promote children literacy & reduce school dropouts in India
http://www.youtube.com/watch?v=Sni0ryF619w

4. India poised -
a) Gulzar (Hindi) - http://www.youtube.com/watch?v=h1tuLZMgzq8
b) Amitabh Bachchan (English) - http://www.youtube.com/watch?v=xN7oX1O6xTY

5. Maa tujhe salaam - A R Rehman's first composition .. brilliant video and beautifully sung
http://www.youtube.com/watch?v=vDRBREpR0mc

Hamara Bajaj

Numerous organisations have tried, but couldnt achieve the emotional connect of these two Bajaj ads. Watch and enjoy !!!

[1] Hamara Bajaj (1989) : http://www.youtube.com/watch?v=dcoSeg2y6tk

Yeh zameen yeh asman .. hamara kal hamara aaj (2)
Buland bharat ki buland tasveer .. hamara bajaj (2)
Buland bharat ki buland tasveer .. hamara bajaj (2)

[2] Hamara Bajaj (2001) : http://www.youtube.com/watch?v=-h8hrlbdEz4

Badal rahein hum yahan .. hai yeh zaamen yeh aasman
Naya hai kal .. hai kal .. hai kal ..... Hamara kal
Naya hai aaj ..... humara aaj
Naye bharat ki ..... bulund bharat ki
Nayee tasveer .. tasveer .. tasveer ..... Bulund tasveer
Hamara Bajaj .. Hamara bajaj .. Hamara Bajaj

Bhagyanagar India Limited - a buy back candidate

The last time I purchased this scrip, it was a 4-bagger. (last reco was in Jan '06). Though it would be wonderful to have similar results, there is enough merit in the stock to purport a second buy. Here's why -

1. There is a strong margin of safety in the stock. The NCAV of the scrip is Rs 22.40 per share. At a CMP of Rs. 43, this is a pretty good number

2. Interestingly the company's chief promoter, the Surana Group has been busy in March '07 buying shares in the company. Maybe they too feel, the company is undervalued at the current levels. Also Bearn Stern has a 5% stake in the company.

3. The last quarter results were fantastic. The company made a PAT of Rs. 48 crores .. a quarter EPS of 6.57 rupees per share. A good reason for these numbers, is the company's diversification into wind energy, estate and infrastructure. Copper products and jelly filled cables are still the primary revenue line for the company

4. Rising sales and now, rising profits.

5. The company has investments of 12.16 crores. Most of this money is in mutual funds, which adds further margin of safety to the investment. (around 2.8 rupees per share)

6. Although some of the current numbers are not comparitive because of changes in business .. i suspect the P/E of the company is around the 5-7 mark (which is quite comfortable)

Karvy has also placed a buy on Bhagyanagar India at a target price of Rs. 65. I agree to the buy decision but feel there more than sixty-five to this stock. A well diversified business, growing businesses, more sales & profits, under-valued, excellent NCAV .. a definite buy.

Zero percent schemes

Yesterday, I had gone shopping with my mom - to purchase a microwave. The price of the microwave quoted by the shop was Rs. 15,000. Interestingly, there was a 12 month finance option available on it .. at Zero Percent Interest. The shop had done a brillaint job of putting up posters and pops all around the place to promote this grand scheme. As a customer you should be extremely hapy about this, right?

The math is quite different in this case. First, the finance option for the item is not 12 months, it often 8 months. Secondly, finance companies would charge 4 installments upfront (so you lose out on the interest that those 4 additional installments (of Rs. 1250 each) would have made over a 4 month period .. this amount comes to Rs. 62.50. Thirdly, you will be charged a processing fee (in my case, it was Rs. 800).

So there you go, in t(zero) you would recieve Rs. 15,000 but cough up Rs. 5,000 (1250*4) plus another 800 rupees in processing fees .. all totalling 9200 rupees of value recd. From t1 to t8, you will give Rs. 1250 every month to close the loan. Put these numbers in an excel sheet and use the IRR function, you find that the finance company has taken an interest of 22.7% in this so-called zero interest scheme.

I didnt settle for this finance 'scheme'. Instead used my credit card to pay for the microwave. The credit card gives me more flexibility to pay my bills and gives me reward points. Interestingly, credit card companies in India have started promotions of convertng these puchase into 6 month installment so that I can regulate my interest payout. I plan to do this, in a couple of days.

Rational market?

Page 26, The Times of India, May 18th 2007 (Friday)
The short snippet in the top left of the page reads : Max India reports a loss of Rs. 3.82 crores.
The middle strip in the page which shows NSE TOP Gainers reads : Max (I) : 257.65 (an intra-day gain of 7.1%)

Further, in the last one week - the price of the share has increased from 204 to 260 rupees per share. Also, some major shareholders have increased their holdings in the company - Medicare and Maxopp Investments. Interestingly, Max India has given an announcement from the Board Meeting that they will not recommend any dividend for the year (obviously, due to the negative profits). The share price rose inspite of no-dividends.

On a business front, Max has primary interests in two fields - Insurance and Medical facilities. While the latter requires heavy capex, the former reaches break-even only in 5-6 years. Also the competition in insurance has been increasing and Max NewYork has to totally rely on agents (ICICI Prudential, SBI Life have a strong bancassurance base aswell). At annual sales of around 170 crs and net profits of 10 crs, the company is too small to vouch an interest in conservative investors like me.

But i'll sure like to know what the fuss is all about - why would people put extensive money on company which has just declared a loss for the quarter. Am I missing something?

Merck

There's been lots of action around Merck. First, the Indian arm sold off it's Life Sciences & Analytics business in 2006. As a result, the company's sales fell by 31% and PAT by 14% for the last quarter. Secondly, the news of May 13th says that Mylan has acquired Merck KGaA for USD 6.7 billion.

Two other pieces caught my attention however -
1. a single line in the Merck website page on investor relations page which reads "the company has investments in bank deposits and liquid funds of Rs. 3054 million". Or rupees 305 crs. At 1.68 cr outstanding shares, the cash in the company comes to Rs. 181. The current price of the share is 405 rupees. Cash constitutes 44% of the CMP of the company !! (cash-rich company)

2. A news item on the internet which reads how Merck is sending top executives to India to size up the situation here. They plan to introduce new drugs soon. (I dont really read much into these news articles, but it did "catch" my attention)

On a more financial front, the current quarter yielded 15.9 crs on sales of 77.2 crs. This is not bad .. a NPM of 20%. Extrapolating these numbers and adding a downside risk of 18%, the annual profits for Merck should be around 50 crores. Or an EPS of 29.76 rupees per share, hence a P/E of 13.6 (which is on track for a pharma company)



Interestingly, Merck is at it's all-time low for the year. There is some muddle around the company, but I think the numbers add up. I'll invest some in the company.

Sitting duck - Jindal South West Holding Co.

This piece has been borrowed from an Emkay report. The report says -
1. While the total m-cap of JSWHC is only Rs. 334 crores, the estimated value of it's investments is Rs. 1535 crores at today's value. This represents a discount of m-cap to value of investments, of 78%.
2. The current stock price of the company is Rs. 301. The report calculates that this price has a 130% upside and Rs. 681 per share should be the ideal price.

Occurences like this (the sitting duck syndrome) should not happen often in an 'efficient' growing market but the study of equities over the years has infact solidified this belief in huge market anomalies. Only last February, we analysed Jai Corp on my previous blog. The recommended price of 104 rupees then, is today a 1857 rupees scrip.

I would signal a buy on this stock and to be kept for long. Would appreciate if someone can investigate this company further.

Getting greedy

A common thread amongst all people reading this blog is the greed for earning more - to make every rupee count for more & beyond. Corporations are no different. To squeeze out every dollar of profits from the scarce capital base is a prime priority for small and big firms alike. A recent news article described how Walmart exploited a tax loophole to save taxes .... Article

The modus operandi was simple -
1. Walmart transfers the asset to an REIT which is largely controlled by a subsidiary of Walmart (REIT means a Real estate Investment Trust). The Walmart store then pays a rent to the REIT, which is tax deductible (Taxes saved - 1)
2. The REIT in turn pays dividend of the Walmart subsidiary which is 99% of the rental received. The rule says, if an REIT transfers most of it's earnings to it's shareholders as dividend then no tax is deducted on the amount (Taxes saved - 2)
3. The subsidiary in turn, transfers the monies received to the parent. The transfer of income from the subsidiary to the parent involves no taxes. (Taxes saved - 3)

The taxes saved in question is an incredible USD 2.3 billion !!!