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.

If you like this content, then do check out my new blog on investing and stock markets for lots more information on the Indian equity markets

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.

If you like this content, then do check out my new blog on investing and stock markets for lots more information on the Indian equity markets

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!"

Allahabad Bank

Relatively Allahabad Bank is very cheap .. it's available at a PE of 4 and a dividend yield of 3.40%. Recently (May 2008), Emkay Research gave a buy call on Allahabad with a buy target of Rs. 170 per share. (here)

When I started to run the numbers on Allahabad Bank, the first thing I was interested in .. were the provisions numbers. Lately I went through a bank's quarterly report where the bank had drastically reduced the provisions for that quarter, and was hence able to show a higher net profit for the quarter. Given the increase in interest rates and rise in food prices of essential commodities, there is a higher probability of people defaulting on their loans than say, 12 months back. I'm glad to say that Allahabad Bank has infact, increased it's provisions for the quarter and year.

However this doesnt mean that all numbers deck up well. Some observations -
a) The net profit has declined sharply from last quarter. Q4 has delivered the lowest profits of all quarters, this year.
b) The Opex has risen sharply which will worry the bank. From just 281 crs (on a base of 1440 crs) - the expenses has risen to 508 crs (on a base of 1720 crs).
c) The administration of taxes seems a bit doubtful. The bank pays about 145 crs of taxes on a PBT of 1120 crs - which is about 12.9%. This seems a bit low .. but when I compare it with FY07 (7.6%), FY06 (4.7%) and FY05 (5.1%) .. this number seems pretty satisfactory.

The Emkay report rightly points out, "We like the continuance of the strategy of slower balance sheet growth as the advances have grown by 21% y-on-y compared to a 42% growth in FY07". I would still like to maintain a conservative picture around this because, in case of loans, the impact of intrepidness in lending is seen in about 12 months of the lending. (on a similar note, banks like Barclays and Reliance have gone crazy with lending activity. I received a call from Reliance Capital, about 3 months back where they were offering loans at 10%. The problem today faced by the banks & NBFCs is : while on a standalone your calculations will show that the loan applicant has sufficient income to take care of his expenses and pay off the loan ... the FIs just dont know the number of loans the person holds. If the applicant holds 2-3 loans, then no calculations will be useful as the chances of him/her defaulting is much higher than envisaged by our risk tools. I would blame the credit infrastructure in the country for this menace)

Since I am not good at evaluating banking stocks (the only stock I have ever bought or recommended in this space was Bank of Baroda), I compared Allahabad Bank's performance with Bank of Baroda (didnt include Kotak or ICICI Bank - they trade at very high PEs). Some notes -
a) The opex of BOB has historically been much higher than Allahabad Bank. But given Q4 results, both are pretty much equal.
b) The disappointing part of Allahabad's results were the NII which have been declining. This doesnt seem to be the case with BOB which still delivers rising NII.
c) Taxes paid by BOB are around the 35% mark (of PBT). Allahabad is still about 13% only, which is strange.

Note: the Dec quarter of BOB is nothing short of brilliant. The incomes have really risen but the lingering credit market fear has pushed the price of the stock down. You might want to look at Bank of Baroda aswell. Karvy had recommended a buy on BOB on 29th April 2008 (here)

It seems a number of banking stocks are undervalued. If we factor the 2009 RBI-opening-up-banking-regulations scenario, we can expect some M&A activity in banking which'll pick up the entire industry valuations too .. or I think it will.