Wednesday, December 31, 2014

RS Software - Review from 23 Apr 2014

The RS software review from April 23, 2014. The stock has run up quite a bit since then. May be still decent to buy but the margin of safety is ZERO which makes me fearful so I am ambivalent.


RS Software

A payments processing IT services company.

1. How good is the moat?

B+ Grade
  • Brand: Brand might not be much but in India this is one of the few companies doing the IT infrastructure for payment processing systems. Typically tenure is important in the payment processing space as the protocols and ability to take risk is lower. Which is why I believe that competition will be touch. Large companies like TCS, Infosys, etc have practices in this area as well but probably are not as focused.
  • Product replication: Replication for a new entrant is harder because of the risk involved in a new player and the requirement for six sigma beating reliability.
  • Sales and distribution - not big advantage here over the big guys.
  • Vendors - not great moat here.
  • Employees - there is a lot of focus on employees. In fact the average compensation per employee is far higher than TCS or Infosys at 20L/year. There is a RS Software employees welfare trust (RSSEWT) that owns stock in the company. The idea behind the trust is noble although the company is rapidly giving loans to the trust and I don't understand why.
  • Performance during recessions - this seems to be fairly recession proof as payment transactions have to be done for the economy to run and rapid improvements are required in the space. There might be some dips but not huge ones.

Tuesday, July 8, 2014

IGValue portfolio: Jun 2014 lessons & review

No real trades in Jun 2014 as the markets seem to be very high. I am working on finding more moat companies.

Lessons this month

  • It is very hard to keep sitting around doing no trades while the markets rally and you under perform
  • It is very easy to keep kicking yourself for not putting on more size on the trade
  • Sizing is a confidence thing. Of the 3 stocks I have picked so far at the end of Jun one is up over 50%, the second over 40% and the third over 5%. I need to have more confidence in my own analysis and do better on sizing. That said if the markets had fallen off a cliff maybe I would have been saying another thing.
It is sad that I have only 12 moat list companies so far. 

I am continuing to look for value in common stocks and hope you enjoy reading the blog. 

IGValue portfolio: May 2014 lessons & review

This update is long overdue. Markets are rallying to dizzying heights and I find it harder day by day to find new opportunities. I am happy to sit on a large allocation of cash.

Lessons this month

  • Prices of stocks don't move just on earnings - they move on earnings expectations. So, all else being equal, if the market expects earnings to be down 10% and they are only down 5% the stock will probably rally
  • When the price of a security falls for reasons you don't understand - and even if the move is in stark contrast with the market - don't doubt your analysis. Make sure the analysis is solid and you keep up with the news. If the price falls its time to buy.
  • Position sizing is the key. Of the 3 stocks in the Apr portfolio one is up 30%+, another up 14%+ and another flat. If the positions I had taken were bigger the returns would have been much better.
  • High conviction value investments are hard to find. Several reports have to be read before you get some right. Deploying even 50% of the capital takes time.

Inception to end of May 2014

Of all the companies I have reviewed so far and have found only 12 with the right kind of moat of which only 3 were trading at the right price. At the end of May 2014 the portfolio comprises of cash and these 3 stocks.

Thursday, May 15, 2014

How does moat grading work?

Several readers have asked me how I set a grade for the moat? I will try to describe this process and please pardon me if its a bit subjective as that's the nature of the exercise.

A moat grading system is required, much like a checklist is required, to keep the analyst or investor unbiased and rational. Without a system like this the analyst might have a tendency to apply his or her own biases to the moat grade - for example if I like to eat a particular kind of food product from a company I might ignore some of the factors such as employee relationships in the moat grading system.

Overall the moat grading system currently has 8 factors. Each of these factors is graded at -1, 0 or 1 basically suggesting non-existent or negative moat, weak moat and strong moat in the particular factor. Then the total score is divided by 8 to get a percentage. I have percentage ranges mapped for grades.

Sunday, May 11, 2014

Real estate vs equity markets: Value strategy

Often I find myself in discussions with family, friends and professionals on whether value investing is possible in the real estate markets. Several who are having this discussion believe that the equity markets have lots of cases of fraud and high risk whereas real estate is a monotonically increasing function. While this is not exactly true one can understand why people think so.


Real estate prices are very specific to the unit you own. Despite the advent of online websites like and accurate prices are not available daily. Bid ask spreads can be as high as 10% and even if there is volatility in the market it is very difficult to experience it as an investor. Equity prices on the other hand are experienced daily on TV, on websites, in the newspapers and all around by investors and thereby lots of volatility is experienced by the investor.

Volatility as you know is the value investor's friend and enables you to buy cheap businesses in several situations and is the reason why value investors typically stick to equities.

Monday, May 5, 2014

IGValue portfolio: Apr 2014 lessons & review

One of the goals of the IGValue blog is for me to keep it real by quantitatively measuring my performance and learning from my mistakes. So every month I try to review progress and make a list of things I have learnt. 

Lessons this month

  • The volume of companies to be reviewed needs to be very large to find even a few good ones
  • Stock screens like low P/E and high returns on capital have lots and lots of errors and need to be carefully used
  • Discipline is the key in keeping away from Companies on the edge - where the moat maybe just short or the price may be just a bit high (margin of safety is there but not enough)
  • Discount to market QIP (Qualified Institutional placement) puts retail & small investors at a disadvantage and necessarily does not drive prices down
  • Moat grading needs to be more mathematical as personal bias is likely to creep in without it

Saturday, May 3, 2014

Macro factors: Total Market cap to GDP ratio & index P/E

In general several people use several metrics to judge whether the market in general is irrationally exuberant. The ones I personally like are:
  • Sensex/NIFTY overall price to earnings ratio
  • Total market cap of listed stock to GDP ratio
Much like most macro factors both of these are gross approximations and should be used with caution. They do not under any circumstance form the basis of a trading strategy but just as a cross check to see if you are doing the right thing by holding on to a large invested position or cash position.

Friday, May 2, 2014

Heritage Foods - decent moat that shows promise but not yet in the greats

I love the dairy business and am always trying to find dairy companies to buy. It is one that takes an enormous doing to gain the customers' trust, inventories have to be held low as the goods are perishable and once you are established you can charge the earth for that trust. Nestle in India charges its customer huge premiums for consistent quality of milk and its products across the length and breadth of the country. Unfortunately Nestle trades at wild premiums at all times and it is unlikely that I will ever get to own Nestle. I analysed Kwality dairy for you and that didn't turn out to have a great moat so lets now look at Hertitage foods!

Heritage foods was established by N Chandrababu Naidu (who is know to have convinced Microsoft to setup a huge center in Hyderabad) in 1992. The dairy business is hugely profitable and all the other businesses seem to be losing money. As a dairy I think it might be one of the better run businesses and is a supplier to Nestle as well.

Tuesday, April 29, 2014

IL&FS Investment managers - No sales pipeline for a while

IL&FS is a infrastructure financing company setup by public sector banks. IL&FS Investment managers (IIML) is its private equity arm. I found out about it because Parag Parikh's fund (PPFAS) owns this stock and therefore it should be taken very seriously. Fundamentally the investment management business is great for value investing as it needs a brand and little capital to expand. Its downside is too much dependence on individual personalities if the company is not very large in terms of headcount - IIML has a headcount of just 58 people. Lack of fundraising has lead to reducing income and this trend is currently continuing. I am still not clear about what the carry is but online 3rd party articles say that only 30% of the carry goes to the shareholders and 70% goes to the management. This type of structure scares me as the business may be skewed too much in favor of the management.

Monday, April 28, 2014

Opto Circuits India Ltd - High debt, debtors & inventory

Opto Circuits was established in 1991 and went public in 2000. It manufactures cardiac and vital signs monitors and other cardiac equipment and was a darling of the markets back in 2011. Since the Jun 2012 the sales have been falling and in Dec 2013 the quarterly sales number is less than half of what it was in Jun 2012. I don't understand what has led to the decline in sales but the debt numbers are very scary. I think currently the company is probably at a Debt/EBITDA of over 4 times (or 6 times of Last Qx4). The company has announced a board meeting on May 6th for raising more equity capital which is consistent with the high debt analysis. The promoter shareholding is already low at around 28% and this capital raise is only going to make it worse.

Friday, April 25, 2014

GAIL - Great business but then again the under recoveries

GAIL was founded in 1984 and currently owns a good part of the gas pipeline network in India. It also has subsidiaries doing CNG in cities. With no further ado, the company is marred by the under recovery mechanism where if the profits rise the government uses the mechanism to drive up oil marketing company recoveries. This at the offset makes it a difficult one to invest in. Overall it is an excellent business to be in - because once you have the pipeline the customers have no choice but to go with you. The cost of setting up another pipeline for a competitor is a huge regulatory, execution, license and investment hassle. GAIL is considered by many as a safety stock and in flights to capital this might do well. Even buffet likes utilities like this one but mid-america energy and their ilk don't have to deal with subsidies. Lets analyse if despite the subsidies this company will be able to deliver good returns.

Thursday, April 24, 2014

Carefully crafted concentrated portfolios better than diversified?

Carefully crafted concentrated portfolios typically are preferred by value investors. This sounds very counter-intuitive to someone who has studied the efficient market hypothesis and mainstream finance as people will tell you to diversify as much as possible.

Diversification is a method of reducing risk by buying several companies which may or may not be good quality or at the right price and about which you have little to no knowledge about. Value investors will tell you that finding 10 opportunities in any market is difficult. Finding 100 opportunities is probably impossible. And if you do find a 100 opportunities you can probably analyze and rank them and the top 10 or 20 are likely to be far better than the bottom 10. The higher the diversification the higher the probability of being closer to the market returns - the only way you beat the market is by running a concentrated portfolio.

Monday, April 21, 2014

The importance of Inventory in Value Investing

Inventory plays a very important role in investing and typically is the driving force behind differences between cash flow from operations and net income. Too much inventory is almost always a bad thing - the question is what is the definition of too much inventory. Advanced manufacturing companies today are using just in time (JIT) techniques where their inventory stocking is calculated in hours. Lower inventory means:

Thursday, April 17, 2014

Is value only found in small caps? (And why markets are inefficient)

A company analysis is due from me and I will get to doing those next week. This week I don't have access to my research data as I am travelling. Hope you enjoy the articles on value investing concepts.


Many readers write to me saying why do you even bother covering large cap stocks? Look outside the top 300 companies for value as the large cap stocks have too many eyes on them. I agree that from first principles value is likely to be found outside the top 300 companies, but the concept of Mr. Market needs to be understood in great detail before we declare the market for the top 300 companies to be fully efficient.

Value investing as taught by Ben Graham and practiced by Buffet is an activity where we first figure out what the intrinsic value of a company is and the compare that number to what the market is offering to buy or sell it at. Another Buffet addition is that if the company has a moat that enables it to consistently grow earnings then you may never need to sell the company. First up if the top 300 companies are always efficiently priced then Buffet would never have succeeded in beating the market by buying large cap stocks.

Sunday, April 13, 2014

Value traps and how to avoid them

It seems that articles about value investing concepts are far more popular on IGValue than company analysis pieces so I am going to try to pickup the pace on the concept articles. Value traps are the number #1 reason for amateur value investors losing money. I have been a victim of several value traps and will attempt to categorize them into a checklist here so that we can all avoid them in the future.

A value trap is a stock that seems cheap relative to value but is fairly priced as the underlying business is doing worse than meets the eye. A simplistic example would be a company that drives up earnings in a year by selling some age old property and then claims that they will repeat it year on year.

In the company analysis articles I try to cover these points in the Soft factors sections.

Friday, April 11, 2014

Sun Pharma Ranbaxy Part #2: Ranbaxy and the merger

Ranbaxy is an Indian pharma company founded in 1961. In the 90s it was widely respected and revered. Exports to 125 countries, has operations in 43 and plants in 8. In 2008 it was sold by the founding family to Japanese firm Daiichi Sankyo. 2 employees since 2005 had complained to the FDA about irregularities and quality concerns with the medicines produced by the company. The company since has had terrible financial performance and I cannot understand why it still trades at a market cap of 19K Crores!

I know I said I will cover this in 3 parts but I think the merger can be covered right here in Part #2.

Wednesday, April 9, 2014

Sun Pharma Part #1: The ever acquiring darling of the markets

The Sun pharma and Ranbaxy deal will be covered in 3 parts - Sun Pharma, Ranbaxy and then the merger analysis.

Sun Pharma can be described better as a pharmaceutical company hedge fund than an pharmaceutical company - over 76% of the revenue comes from acquired companies. It has to be said that the acquisition capability of this company is stellar give the string of successful acquisitions. Overall the company has plants in the US, India and a few all over the place(Europe, Israel, South America). 

The global pharmaceutical market in 2011 was 956 Bil USD and as per the company should 1.2 Tri USD by 2016. Patent expires in 2012 were worth 35 Bil USD in revenue. 

Monday, April 7, 2014

Why hold on to a overvalued high quality company (and when to sell it)?

Some of my readers have noticed that I keep saying hold on to it at this price but don't buy it here. Shouldn't an overvalued security be sold period? There is good rationale behind that - I promise you its not my gut!

One of Buffet's reasons for not selling an overvalued good company is based on long term capital gains tax and trading costs. If you keep trading in and out of the same good business you keep paying taxes and brokerage on the trades. Whereas if you simply held it through you would avoid doing so and while at it save lots of time watching the ticker tape. Much like you cannot time the market,  you cannot time a single stock either.

Saturday, April 5, 2014

Infosys - a bit of a fallen yet expensive Star

Infosys is one of the biggest success stories of India's IT services export industry. Its founders are widely respected and have positively influenced many aspects of India - from the aadhar card system to corporate governance to fighting corruption. Its the second largest employer of H1-B professionals in the US. Infosys top management love to market the egalitarian approach and there are stores of the promoters cars being checked at the gate like everyone else. The question really is that after 33 years of existence does it belong to the value category.

There have been some negative reports about corporate governance standards at Infosys falling. There as been some talk earlier about the return of co-founder Narayana Murthy being about getting his son into the upper echelons of the company's management. The company also has lost some senior tenured talent which in the consulting & software business is not good at all.

Thursday, April 3, 2014

Oil & Natural Gas Corporation - very stable, massive margins but a subsidy engine

ONGC is the largest Indian upstream oil and gas producer with over 60% market share of the Indian fields. In the oil and gas exploration business ONGC has a massive head start and can garner a share in almost every PSC (Production sharing contract). The large issue is that the majority shareholder the government of India continues to direct these companies to share the burden of oil subsidy to the consumers as 36% on the upstream producers such as ONGC. To put it into perspective ONGC contributed 49,400 Crores to the under recoveries system which is more than 80% of its consolidated EBITDA!

Wednesday, April 2, 2014

TATA Steel - Too much debt and relatively low efficiency

Over a 100 years old. Incredibly important to India's history. Flagship and value driver for the TATA group. Tremendous social contribution. Had the famous "hum ispat bhi banate hain" - "we also make steel" advertisement on TV. They are extremely ethical, systematic, and care for all stakeholders - suppliers, customers, employees and society. I can go on and on about this for hours. But lets see if after the 107 years of functioning this company deserves to be in the IGValue portfolio.

After the acquisition the company has been marred by debt. Efficiency overall is fairly low - they produce around 294 tons per employee per year whereas the global industry leader Nucor does 980 tons per employee per year and the industry average is 420 or so. And to top it all this is a number the annual report does not talk about - one has to derive it!

Tuesday, April 1, 2014

Kwality Dairy - household brand growing too aggressively (read "too much debt")

Its easy to confuse this company with Kwality ice cream brand. Now it has nothing to do with ice cream! The company has grown rapidly but is on a highly levered speed race with no signs of abatement. The company claims that the Indian dairy industry currently stands at north of 70 Bil USD and other reports claim that it will be 140 Bil USD by 2020. So the industry is promising and the business is such that once trust is established with the customer base the pricing can be driven up rapidly. The company plans to invest another 300 Crores to expand sourcing operations and launch value added products - this is going to drive up debt even further. 

Cloning as an investment strategy

The idea of cloning other good value investors is a great one - and I learn't of this word from reading articles about Mohnish Pabrai. Mohnish Pabrai, for those new to value investing, is a very good source of learning and I highly recommend reading his book - “The Dhandho Investor: The Low – Risk Value Method to High Returns”.

Cloning as Pabrai describes it is getting good ideas from other people you respect, trust, or think have the right ideas. The point is not to just blindly copy but to understand why those people are invested in these securities. Once you have analyzed it yourself you can then go ahead and take your call on it. Typically you can read about big value investors from the annual reports, SAST disclosures on BSE and through the media.

Sunday, March 30, 2014

Tata Elxsi - high tech history but lots of uncertainty

TATA Elxsi was formed in 1989 and has Subramaniam Ramadorai in common with TCS. It was setup as the Indian arm to manufacture multi-processor based computers. Wikipedia claims that the TATA group was a venture investor in Elxsi in the US as well.

The company does 2 things - software development & services and systems integration. Over 90% of the revenue comes from the software development & services division. I fail to understand how this company does not have a conflict of interest with TCS. Even though the company claims it is the embedded product design arm of the TATA group (77% or so of the revenue of the company is in this basket) - TCS does the claim to do something similar in the TCS Embedded Systems group.

Saturday, March 29, 2014

State bank of India (SBI) - massive branch network but the operations could be better

BSE: 500112|NSE: SBIN|ISIN: INE062A01012

The socioeconomic impact of State Bank of India (SBI) has been staggering and cannot be overstated. It is the backbone of the Indian economy and the equivalent of the "too big to fail" banks in the US sub-prime crisis. As always that comes with lower efficiency but the Indian economy and banking system would be far worse off had it not been for SBI.

Thursday, March 27, 2014

Housing Development Finance Corporation - High quality home loans, insurance, banking, asset management at a high price

BSE: 500010 | NSE: HDFC | ISIN: INE001A01036

For those interested in learning how to analyze complex companies this is a good example. It is primarily a home lender than owns asset management businesses, a bank, insurance companies, a BPO company and publishing companies!

There are several ways of doing this. The most common being taking the public shareholding and subtracting that from the market cap. Then valuing the rest as a running business. In this approach the issue is that you first need to have a opinion on the underlying stocks. Fortunately we have already reviewed the largest underlying which is HDFC Bank. The unlisted insurance companies and GRUH (listed) are yet to be covered but do not form a large part of the earnings.

Wednesday, March 26, 2014

Alstom T&D - bogged down by low capex and very expensive

BSE: 522275 | NSE: ALSTOMT&D | ISIN: INE200A01026

Alstom global provides capital equipment for thermal power, renewable power, transmission and transport. This particular subsidiary designs and manufactures a range of electrical equipment for the high voltage and ultra-high voltage electricity transmission industry, provides substation automation solutions, network management services, and services & maintains capital assets sold earlier. Given the massive shortfall of electricity in India - at first glance this is an infrastructure play and should be hitting it out of the ballpark - and it was for many years but off late has lost the financial edge.

A capital equipment business is very scary from an operating leverage perspective. You have your team and assets lying waiting for the next order. If the order book dries up or execution is slow or the customers start delaying payments life becomes very challenging.

Domestic T&D market is around 80K Crores. 43% of it in 2012 was serviced by imports despite overcapacity in the Indian producers. Exports from India stand at around 18K Crores for T&D and have been growing slowly at 9.7%.

1. How good is the moat?

Grade B moat
  • Brand: Alstom is a massive global player and so the technology front is taken care of. That comes at the price of being exposed to foreign exchange risk. It has about 19% of the market and is the market leader in India. They also export over 10% of the revenue.
  • Sales & Distribution - All customer are industrial customers and seems like lots of government customers. Replication for a large corporation should not be such a big deal.
  • Pricing power - very low. Most of the products being won on pricing will be proprietary technology else might be hard to price. Company claims they lost lots of orders due to low prices.
  • Performance during recessions - very poor. Overcapacity in the sector in 2012 capacity utilization in the sector was 70% and capacity was expected to increase by more than 50% up to 2014-2015. Since then the economy has taken a nose dive and capital investments are slow.
  • Employees - 3597 employees. Seem to be stable. No competitive advantage seems to be here. Same with Vendors - not much covered here.

2. Risks

  • Technology license fee is rising - it has become 30.9 Crores in FY 2013 from 18.7 Crores in FY 2012. This may be a source of related party transactions where the pricing may not be in the interest of all shareholders
  • FX risk: Exports have become higher than imports in FY 2013 but still due to services and fees expenditure the company is still a net importer.
  • Debt - Debt to EBITD is at 1.48 times - which is a bit high. Not too much risk but I am worried about this due to the operating leverage situation described above.
  • Transparency risk - I don't understand why listed overseas companies want to maintain listed subsidiaries in India. The royalties, trademark fees, and buying prices of imports from parent companies or their vendors/affiliates is something which is a bit of a black box.
  • Customer creditworthiness - should be good as typically large state owned companies. Sometimes might have issues with large levered private companies.

3. Financials

  • CFO is actually leading net income which is great.
  • Stock options - Company claims parent company is providing stock options in the parent and not charging the subsidiary. Again this sounds slightly weird. Why would the subsidiary not be charged?
  • Exceptional items are small - profits on sale of land
  • Inventories in FY2013 have ballooned to 20% of sales from 10.7% a few years earlier. This again points to the slowdown in the customer pipeline.
  • ROE < 10% - has been going down since December 2008
  • Debtors % of sales stands at 50%+ - which is a very bad situation. Means average payment terms are 6 months. This drives up capital intensity and massively brings down ROE/ROCE.
  • Needless to say working capital consumption is much higher than where I would be comfortable
  • Dividend % of earnings is erratic - currently is 59% - the company is trying to keep up the dividend while the profits are falling.
  • No goodwill to talk about.

4. Soft factors

  • Shareholding - promoter shareholding is how 80% which needs to be 75% or below by SEBI guidelines and the promoters are wanting to keep the company listed.
  • Director shareholding - is not disclosed. Which is not a good sign
  • Growth - so far the company size has been contracting. Its multiple is probably high because the market expects that electricity transmission and distribution equipment market will pickup

5. Pricing

  • I really don't understand why project companies like Alstom are trading at such high multiples. Maybe the market is expecting them to hit it out of the ballpark once a new government is in place.
  • Overall the stability of earnings of this company is a big concern along with ballooning pending payments from customers. Pricing is also very expensive at 5000 Crores+ of market cap for just 107 Crores of TTM earnings. No value here.


Monday, March 24, 2014

Axis Bank - High quality, conservative (with blemishes) but there's value here

BSE: 532215|NSE: AXISBANK|ISIN: INE 238A01026

Used to be UTI bank - and probably one of the safest in terms of their gross NPAs. Tier 1 capital ratio is better than even HDFC bank at 12.23% at the end of the last financial year.
I compare all banks to HDFC Bank as in my opinion that is the bank to emulate. Interestingly Axis beats HDFC Bank on the employees front as well. Lets get straight into the details ...

1. How good is the Moat?

Grade B+ moat

  • Customer loyalty: Similar to HDFC. Customers are unlikely to switch to unknown names due to trust issues but among the big 5 or 10 banks competition is fierce.
  • Product: Nothing special. All banks offer similar products.
  • Sales and distribution: This is the core of any retail bank. Axis has 2321 branches and 12328 ATMs as of Dec 2013. Branch network on an annualized basis is expanding at around 25% per year. This network is the most valuable resource after the employees of the bank and is used to distribute third party products (MFs, Bancassurance, etc.) for a fee - I love that kind of income as its fairly risk free.
  • Vendors: For a bank vendors are depositors. Deposit % of total borrowings stands at 85.1% which is excellent but a bit behind HDFC at 88% or so
  • Employees - Profit per employee is 0.15Crores better than HDFC Bank at 0.10Crores or so. Business per employee is 12.15Crores - far better than HDFC Bank at 7.5Crores. This shows in the employee cost being 7.9% of sales versus HDFC Bank at 9.8% of sales. This also shows that the average compensation of a Axis employee is 7.7Lakhs/year verus 6.1 Lakhs/year for HDFC Bank. Axis wins hands down on this one.
  • Performance during recessions - as covered in the article on HDFC Bank the domestic credit to GDP ratio is very low at 51% as per the world bank. So I would not worry too much about the sales growth part. The issue is asset quality where this bank is slightly weaker than HDFC Bank.
  • #1 concern is the proprietary trading profits of 700+Crores - Even though this is positive in FY2013 it could very well be negative. Unless the bank is purely engaging in true arbitrage positions this is a VERY Bad sign. Retail banks should not be allowed to have proprietary trading operations. What slowly happens is that in the bull run years these desks generate money by being levered and being exposed to market beta. Management continues to allow them more and more risk until the big crash takes everything with it. It has been seen time and again on wall Street. This why I am a support in part for bringing back the Glass–Steagall act.
  • Overall B+ moat as asset quality concerns are slightly higher than HDFC Bank and the proprietary trading cowboys!

2. Risks

  • Proprietary trading - This is the #1 source of risk and can take an institution down.
  • Cost cutting to get business - even though the bank is more efficient on the employee front - they are giving out cheaper loans with higher NPAs showing that they are taking higher risk with lower returns. They are also taking money from the market at higher interest rates. Need to improve the NIM.
  • Customer concentration risk - 27% or so of the lending is retail loans which is mostly housing loans. Corporate credit is about 50% of the advances - unfortunately not much detail is given about these loans and their concentration and this worries me a bit.
  • Asset quality risk - gross NPAs for HDFC are at 1% whereas Axis has them at 1.42%.

3. Financials

  • Foreign exchange risk at a sophisticated bank like this seems to be hedged but I am still uneasy because of the prop desks. I have not been able to find how much risk the prop desks are allowed to take.
  • Employee Stock options: I am a supported of ESOPs in small degrees. In large degrees they make the management team take large risks not commensurate with the returns. Annually the bank issues about 0.6% of options. There are options pending for exercise in the money for about 2.4% of the total stock. They use the intrinsic value method with reasonable assumptions on the black scholes model.
  • Margins are hovering between 13% and 15% which is healthy for this bank
  • Dividend % of earnings is healthy as well around 18%
  • Net interest margin is at 3.53% which is much weaker than HDFC Bank at 4.5%
  • Cost of deposits is 5.9% versus HDFC Bank at 5.5%
  • Average interest on advances is 9.7% versus HDFC Bank at 10.8% - this is where Axis is loosing out. Their loans are cheaper than HDFC Bank with a higher NPA %. I am guessing they are using more people to address
  • Advances per branch are around 101 Crores which is marginally higher than HDFC at 97 Crores
  • Well capitalized as per Basel norms. Typically have maintained this and should not be a problem unless of course NPAs go out of control or prop desks go bonkers.

4. Soft factors

  • Promoters are SUUTI, LIC and General insurance company along with 4 others. They have recently offloaded their stake
  • Over 40% was owned by foreign institutional investors at 31st Mar 2013 - now I think it should be over 50% after the stake sale. This should hopefully ensure good corporate governance. Will also cause volatility on the stock.
  • I have been unable to find the director shareholding in the bank.
  • Index % - Axis bank is 1.8% of the SENSEX and 1.5% of the NIFTY. It is also part of several other indices.

5. Pricing

  • Bank is trading at around 11.5 times trailing 12 months (TTM) earnings. If it were to grow earnings at 15% for 6 years and then 10% for 6 years and 5% a year thereafter this price would be a good one to get in. So far this has happened and if the bank is able to capitalize on this position it could be a good long term value investment at 1390 per share or 65,100 crores of market cap.
  • Price to book - Around 2 times book. This should probably be looked at in terms of earnings as the returns on equity fairly robust.
  • On a relative basis the bank is far cheaper than HDFC trading at 21+ times earnings. I agree it should trade at a discount to HDFC due to gross NPAs and prop trading but this difference is a bit too high.

Saturday, March 22, 2014

Interpreting reports #1: Revenue & the importance of accuracy

Revenue is the lifeline of any business in the world. Unfortunately many companies end up making it look better by "managing" the financials. In this blog I would like to cover some of these technical aspects of sound investing. Detection & correct economic interpretation is the biggest strength of the astute investor and the easiest determinant of inflated revenue numbers is comparing cash flow from operations (CFO) to net income. Of course creative accounting can doctor CFO itself and we need to protect against that as well. In an ideal simple company cash flow from operations should be net income + depreciation assuming that the customer and vendor transactions are done on time, the customer and vendor payment terms are the same and inventory is being managed well.

Overstatement of revenue can be done in many ways some of which are:
  • Creating the invoice without having the customer's consent
    • Cases where this can happen: 
      • invoicing before shipment
      • Shipping goods/services without the customer wanting them
      • Backdated contracts or early revenue recognition on a contract
    • Losses: Leads to tax losses if the customer does not accept it in the future as invoices cannot be cancelled at will. There are several laws at play.
    • Detection: CFO vs net income.
  • Recognizing revenue before shipment/customer quality approval
    • Detection: Large increases in un-billed receivables.
  • Invoicing/recognizing 100% of value when <100% of the costs have been incurred
    • Detection: CFO vs net income. Secondly revenue recognition should be done after all the costs have been recognized. Read the revenue recognition policy in detail. Also look for previous quarter costs shown as 
  • Rejected goods lying with customers pending for rejection
    • Detection: This is very hard to detect and needs to be determined by looking into the history of customer claims, warranty claims, old rejections, etc. from the statements. 
  • Wild customer payment terms:
    • Increasing payment terms from 2 weeks to 6 months might increase sales drastically for customers but leads to interest loss, high recovery risk etc.
    • Detection: Debtors % of sales should be around 8% ideally - this shows a 30 day healthy payment cycle
  • Creditworthiness of customers
    • Detection: Very hard to determine but generally I try to avoid companies with higher than 15% debtors % of sales. Try to also avoid large credit exposures of the company to single customers - anything over 15% with a single customer is a company to stay away from. In addition to credit risk this will cause too much negotiation power with a single customer. For capital goods and long term service providing contracts customer financing situation needs to be studied. Again data on this might be scarce but needs to be dug out.
  • Sales to affiliates and group companies
    • Typically group company revenue is subtracted out but for example sales to the overseas or local parent might be done on varying payment terms and costing.
    • Detection: Unfortunately no annual report is going to say I sold for cheap and with a 6 months payment term to my majority shareholder's private firm. So the best tools we have are debtors% of sales and CFO vs Net income
  • Barter or stock transactions with customers:
    • For a detailed account on this please read the Financial Shenanigans book listed in the references but sometimes barter transaction values maybe inflated and revenue recognized.
    • Detection: Read the financials, annual reports, news and media releases carefully for this action.
  • Revenue recognition policy - needs to be deeply and carefully read by the investors to see if something does not sound right to you.
  • Revenue can be "managed" by with-holding revenue recognition for future quarters
    • Detection: Recognition of revenue from old work done, large margin changes across quarters or years without fundamental reasons. Large CFO vs Net income changes across quarters or years.
  • Marking up inventory at "maximum retail price" as it is in the finished goods yard or a fictitious completed service bucket
    • This may not be the sales price. Typically this reduces the cost side but in some creative cases it can be used to affect revenue as well. 
    • Detection: Read the inventory valuation sections carefully. Large negative adjustments to CFO due to increased inventories when payable's are not rising.
  • Cash flow from operations can itself be changed by wrongly recognizing investing cash flow as operational cash flow. Sometimes such transactions can be recognized as revenue as well so that the CFO and Net income are not too off from each other
    • Detection: Careful reading of the statements
So as we know there is no replacing careful reading of the information being given out by the company - annual reports, quarterlies, news releases, information given to the exchange, etc.

Keep a lookout for this space for more on how to be careful while reading financials & reports.


Financial Shenanigans by Howard Schilit

Friday, March 21, 2014

Reliance Industries Limited - Massive, diverse and as big a conundrum

BSE: 500325 | NSE: RELIANCE | ISIN: INE002A01018

Needless to say this company has been the poster child for rapid growth and shareholder returns. Today its a huge conglomerate which still generates most of its revenue from refining. Given the size it might be hard for the company to grow like it did the in the past. This also makes it a challenge for me to do justice to this massive company in one little piece. The company claims they want to be a top 10 player in the hydrocarbons space and I think they will achieve that given the history of business execution excellence. Given that buffet is holding Exxon Mobil stock the refiners are likely to be a good long term bet as long the execution is excellent.

1. How good is the moat?

Grade B moat.
  • Scale is the biggest factor in the moat. The company is the largest private sector refiner in India. India is likely to require massive refining capacity and the plastics consumption in India is likely to go up rapidly.
  • Exports are a large part of the moat - largest exporter in India. 64% of the revenue comes from exports. Going to 116 countries. 89% are petroleum products and balance 11% are petrochemicals. 
  • Refining margins are driven by the crack spread which is driven by refining capacity globally. This is the part where the moat looks weak as most refining companies cannot control their margins because of the product being a commodity.
  • Performance during recessions - The demand for its petrochemicals and petroleum products is fairly inelastic but in the global market the spreads might be thinner. 

2. Risks

  • Overcapacity in the refining space may put pressure on the margins
  • Given the fall in the rupee I would have expected Dec 2013 margins to be significantly higher as the import side is hedged by increases in prices to the Indian market and the export margins should be higher. Financials show only a small increase.
  • Increased capital expenditure leading to no growth in earnings - in FY 2010 revenue was almost half and the profits were higher! My concern is that the higher capital investments and revenue are not leading to higher profits.
  • Lots of cash on the balance sheet is invested in various instruments. These may or not not be good investments. This entire cash and investments portfolio is funded by debt.
  • Retail and telecom businesses are being invested in - businesses that the company has little experience in.
  • Upstream assets are limited for crude and downstream sales stations are missing due to subsidized gas sales by government companies.

3. Financials

  • FX exposure - despite the massive export of refined products from imported crude the company is a net importer. These import costs I suppose are passed on to the customers.
  • Returns are worse off than BP or Exxon - and both those companies trade significantly cheaper than Reliance. Also reliance financials are stated in a currency that has 8% inflation - after this adjustment the returns are dangerously low at the moment.
  • Margins also concern me - as the net margin of BP and Exxon are significantly more than Reliance.
  • Cash flow from operations is actually higher than net income, which is a first.
  • Company claims to be net debt free after offsetting cash and current investments against debt. This is probably being done to remain liquid in order to execute rapid investments once the opportunity arises.
  • Focus on returns on capital is not very high - the company talks about shareholder returns more than returns on capital employed.
  • There are 35K Crores of assets in the "Other" Category where the return on capital is around 1% before tax. This is 19% of the net worth of the company invested in low output assets.
  • Inventory % of sales is around 13% which is high but has been the case for years and should not be a case for too much worry. 
  • Of the 4 segments - Petrochemicals, Refining, Oil and Gas and Others - Petrochemicals as the best pretax return on capital employed - which is 14% or so.

4. Soft factors

  • Shareholding: 45% or so owned by the promoter group - rarely does the promoter group in India own less than 50% - but given the size of this company this is not much of a concern. All directors hold a good amount of shares in the company
  • Large share buyback program done by the company shows that the promoters and management believe in their investments.

5. Pricing

  • You can buy this company today for the same price as you could in July of 2007. Normally for a company with such a great track record it would be a screaming value investment. In this case however in July of 2007 the company's returns on equity with north of 15% and the margins were north of 9%. Today the margins are around 5% to 6% and the return on equity is around 11%.
  • The right price to buy this is hard to judge. The conundrum is between the stellar track record of this company and the off late not so great financial performance. Given the complexity and the risk this might not really be a value investment.
  • That said this could become the largest retailer in the country and a top 10 hydrocarbon company. Growth is imminent but the risk surrounding the company is high. Once the retail and telecom businesses stabilize this can be looked at again.
  • Bottom line: I don't understand the risk well.


Wednesday, March 19, 2014

Siemens Ltd. – high technology capital goods marred by slow Indian economy

BSE: 500550|NSE: SIEMENS|ISIN: INE003A01024

The parent company has been around since 1847 - a 100 years more than the independent republic of India's history.

This particular listed subsidiary is involved in the energy, industry, healthcare and infrastructure sectors. The entire sales cycle depends on the capital investment in the economy. Returns on equity used to be high From FY2005 till FY2011 after which the ROE has taken a sharp dip - since economic growth in India slowed down.

1. How good is the moat?

Grade B moat.
  • Brand - The brand is rock solid and has been around for years. Globally is well respected and known.
  • Product competitiveness - Few companies are competing in some of the areas and many in others. Overall needs to compete with several large companies for the market from all over the globe - Europe, US, & Asia. Siemens holds a lot of technology which might be of use in some areas - but in the Indian market buyers might step down to slightly older technology that is off patent for lower prices.
  • Sales and distribution - Relative to the competition no real competitive advantage in this area.
  • Employees - cordial relations with unions. HR processes are robust and well developed.
  • Net imports stand at 3000 Crores+ or over 26% of revenues - fall in INR values will hit profitability severely. Some of its competition in the Infrastructure space have setup local plants
  • Performance during recessions - This may be a big issue. A great management team & a great company when up against a bad business market is always going to end up losing the battle to the bad business market.

2. Risks
  • Largest risk is low capital expenditure in the economy will have adverse impacts of the cash flow
  • FX risk has already hit margins. Indian rupee is likely to decline against the dollar by the inflation rate difference between India and the US every year (FX interest rate parity)
3. Financials
  • CFO has lagged net profit by over 50%. Reasons a manifold - provisions reductions, etc.
  • Inventories - Have more or less fluctuated between 8% and 15% of sales
  • ROCE - Has gone down from over 30% to 4%
  • Dividend % of earnings - over 100% in the latest year. The company has tried to keep up the dividends through declining profits
4. Soft factors
  • Shareholding
    • Promoter group owns 75%. Has gone up from 55% or so in Sep 2010. This is the driver for the stock holding its value within 5% of the Sep 2010 prices. It is weird why this is happening given the decline in earnings.
  • Director shareholding - Negligible. Not a great sign.
  • Indices - BSE 200 Index, BSE Capital Goods Sector Index, BSE National Index, BSE Power Index, CNX 200 Index, CNX Infrastructure Index, CNX MNC Index, NSE CNX 100 and S&P CNX Nifty Index
5. Pricing
  • Market cap is around 24300 Crores with earnings of only 194 Crores. Dec 2013 is nothing very different. The company therefore is trading at 125 times or so earnings. Probably a bit too high at this point - not a value investment.
  • Price to book is around 6 times. For a company in this engineering sector this metric might not be very relevant
  • Only point going for the pricing maybe that the parent increased its stack back in 2010-2011.

Tuesday, March 18, 2014

ITC Limited - Smörgåsbord of quality, ethics and pricing?

BSE: 500875|NSE: ITC|ISIN: INE154A01025

Contrary to popular belief ITC is still largely a tobacco company with over 75% of the profits coming from the tobacco business. I still dont know who really owns the company. Financial performance is brilliant. The national public health foundation is running cigarrette ads which dont seem to be hurting ITCs financials. Also there is the ethical angle on this company - which is complex due to their cigarette activities being balanced by their hugely successful CSR activities.

1. How good is the moat?

Grade A+ moat.

  • Cigarette business is rock solid. They have over 80% market share and no new entrants into the industry are allowed. FDI is also banned. Nothing better than this moat. Question is can they export the cigarettes?
  • The company has over the years smartly built many businesses around the original tobacco business and brought tobacco revenues to 42% in FY 2013 from 79.4% in FY 2003 or but profit % from tobacco are still is 75% in FY 2013 down from 90% in FY 20013. The quest really remains whether this company can transform itself to become a proper FMCG player outside of tobacco. The company has made a huge effort in this regard.
  • Brand - in the Cigarettes space it has an over 70% market share where the moat is great but in the rest of the areas there might be an issue.
  • Sales & distribution: 100K markets directly serviced & over 20 Lakh retail outlets. Probably one of the biggest FMCG retail networks
  • Vendors - Innovations like e-Choupal enable ITC to procure agri products at very low prices while benefiting the farmers
  • ROE - The Return on equity on the cigarettes business is over 90%, Agri is 26% and the rest are pretty much not so great use of capital
Segment ROE % of revenue % of Capital
Cigaretts 94% 41.6% 27.6%
Other FMCG 0% 21.2% 16.7%
Hotels 1% 3.0% 18.9%
Agri 26% 21.0% 9.5%
Paper&board 9% 13.2% 27.4%

2. Risks

  • The cigarettes business still is growing but is likely to abate at some point due to the health organizations chasing the business. By the time that happens maybe the other businesses would not have picked up.
  • Rapid regulatory changes could hurt the cigarettes business giving ITC not enough time to recoup.
  • I think the hotels, agri, FMCG and other businesses might be a good way to advertise the cigarettes which again brings to fore the ethical question.

3. Financials

  • FX exposure - the business overall is a net exporter of about 5% of revenues. It does repatriate about 1000 Crores of dividends to overseas shareholders making it only a 2% to 2.5% net FX earner - of course the dividend sent overseas does not impact the company performance.
  • CFO and Net income are within 3% of each other.
  • Stock options dilution - This is a bit of an issue with the stock. They do recognize the black Scholes value of the options but whether they market to market the option dilution later is yet to be seen. Volume of options granted in FY2013 will cause dilution to the tune of around 1.1%. Which is high but not a game changer.
  • ROCE is consistently high
  • Debt is zero
  • Working capital is marginally negative - but this contains a provision for dividends which if taken out working capital would be less than 3% of sales. Very efficient!
  • Dividend % of earnings is very high - over 50% in all years - even 100% in some years. Basically the company needs to find good avenues for utilizing the capital. Hotels seems to be not a great way of utilizing the capital - unless they are a real estate play.
  • Not much goodwill on the balance sheet to be worried about.

4. Soft factors

  • Shareholding
    • I have no clue who the promoter is. The largest shareholder is listed on the annual report as Tobacco Manufacturers (India) Limited. This company cannot be found on the MCA website.
    • British american tobacco holds 30% of the company and currently claims to not want to increase its stake as per the news story linked here
  • Some reports suggest that the global tobacco industry is growing at 4.5%.
  • Ethics - is investing in a tobacco company irresponsible? Given the huge activism against the industry its probably seems irresponsible but the question really is that if we stop investing in these companies does that stop people from smoking? I will leave that thought for you to answer and the experts to ponder.
  • Growth - the agri business can grow. Cigarettes growth will have to come through exports. 

5. Pricing

  • Very hard to price as the growth of the cigarettes business is what is going to grow the bottom line and the overhang on that is hard to predict - per capital consumption in India is low but the public health administration in India is trying their best to get people to quit. Even if we assume that the company is able to grow bottom lines by 20% for 10 years (which is a very aggressive assumption) and then 10% after that the valuation would enable us to buy the stock at a 20 times multiple or so. For this to be a value investment I would say it would need to trade at 15 times or so.
  • Price to book is fairly irrelevant with such a high dividend % of earnings, no debt and ROE.

Sunday, March 16, 2014

HDFC Bank - Excellent Bank but too rich for now

BSE: 500180|NSE: HDFCBANK|ISIN: INE040A01026

Highest quality bank in the country. Has growth net income by 30%+ year on year for over 4 years. Lowest gross NPAs in the country among the big banks at 0.97%. Dec 2013 quarter NPAs are slightly higher at 1.1% which still keeps it among the top banks. Very few things would keep me up at night about this as a company.

1. How good is the moat?

Grade A moat
  • Customer stickyness: The brand is strong but customers are unlikely to shy away from shifting to another big name bank.
  • Sales pipeline: Very strong but nothing special relative to the competition. In fact I would say HDFC is less aggressive than for example Kotak.
  • Scale: This is one of the big banks with a good brand along with SBI, ICICI, Kotak and others. The Bank has over 3000 branches in over 1800 cities with more than 28.7 mil customers which is over 2% of the Indian population. Is in the top 3 by net income, top 4 by revenues, top 2 by net profit margins.
  • Lending safety: This is where HDFC Bank scores its grade A moat. Their discipline in getting what they want as security and loan safety is the highest. I have never heard of anyone saying HDFC dropped some loan requirement to close a deal - whereas people will always say that about some bank or the other.
  • Growth: India's domestic credit to private sector as a % of GDP in 2012 is abysmal at 51% as per world bank data. Most of the developed world is over 100%. Which means that the credit market has lots of growth left. The question for banks is how to tap on this growth without loosing your shirt. I think HDFC Bank is poised to take the maximum advantage of this situation.

2. Risks

  • Macro-economic risk: Runaway inflation could hurt the entire banking industry.
  • Banking to small transaction size consumers could raise costs
  • 57K Crores of unsecured advances - around 1/4th of the advances are listed in this section. Not many details are provided and this worries me.

3. Financials

  • Capital adequacy ratio is over 16% & Tier 1 capital is over 11%.
  • Net interest margin of 4.5%
  • Commission and brokerage as a % of revenues has fallen by 1% or so over the last 5 years
  • Deposit % of total borrowings is 88%+ which is very high - and very healthy.
  • 2 Subsidiaries - both seem to be profitable. Size is very small and probably dont play a major role currently for this business
  • No insurance exposure

4. Soft factors

  • The growth of the company has been stellar. EPS has grown faster than the ROE itself - showing that there was excess capacity that was used to deliver the EPS. Further room for growth is massive as credit is still scarce in India.
  • Shareholding: 
    • Company was originally floated by HDFC which in turn was floated by ICICI.
    • In this case the promoter so as to say is not a family or a set of individuals but an organization
    • Overall ADS depository JP Morgan owns 16 % which I presume is equity swap holdings overseas. Further FII holdings are 34% - over 50% holding is FII. Capital flows to india will be driving this stock.
  • Employee relations - are good. The HDFC jobs are coveted but not as much as the foreign banks yet.
  • Index % is 4.8% or so.

5. Pricing

  • This is highly tricky as its the first company I have seen that has been able to consistently grow earnings faster than the ROE %.
    • Is there room to grow? A resounding YES!
    • Can it keep the efficiency up at these levels? Probably.
    • Growth has slowed down in FY2014
  • We can safely expect this bank to grow earnings 20% for the next 5 years and maybe 10% per year for a few years after that.
  • The current price of 21.3 times Dec 2013 numbers is a bit too rich - might be a value investment anywhere around 14 to 15 times earnings. At current prices the investors still might make good returns as this is the darling of the markets but is not a value investment at this price.

Friday, March 14, 2014

Tata Consultancy Services - Excellent performance & A Grade moat but slightly rich

BSE: 532540|NSE: TCS|ISIN: INE467B01029

This is the poster boy for the TATA group and the entire country of India - in terms of the scale, growth and return on capital. I have always been curious to know what makes this engine such a superstar company.

1. How big is the moat?

A Grade moat

  • Traditional thinking will tell you that an IT client will move from one provider to another overnight but it seems that TCS is beyond that. They have consistently grown the client base and the revenue. Their revenue from repeat business is 98%+ which is excellent.
  • Scale obviously gives TCS a huge moat in India & globally. By revenue its around the 10 Bil mark making it about the 2nd largest company in the IT services space after IBM and parallel to accenture - not including the Microsoft consulting division.
  • Between the largest players shifting is probably possible and the space is likely to become more competitive.
  • Margins for TCS are larger than Accenture, EMC and IBM which are other IT services companies in its league globally - probably because of its being headquartered in low cost India.
  • Brand: Global footprint has been established and now the company is reporting good numbers on diversity and global presence. They will have to shed the low cost brand to being a global high quality player brand rapidly.
  • Performance during recessions - during recessions the company has been able to grow its revenue on the back to outsourcing from clients to reduce costs. So far the strategy has worked out.
  • Moat is A grade because the company does not have a proprietary product and can be replaced with IBM or Accenture or Infosys or Wipro or others by customers.

2. Risks

  • Size has become large and finding large growth opportunities will be difficult
  • Talent turnover is a huge issue but the safeguards in place are good too
  • Protectionism in the US
  • High exposure to banking and financial services - is a double edged sword - slowdown risk but increased regulation means more business for TCS
  • High cash on balance sheet might be used to make high value acquisitions - the TATA group has fallen for this before - where it worked out for TATA motors but didn't so much for TATA steel
  • Another double edged sword is the exports angle - FX exposure

3. Financials

We are basically trying to see if the financials are presenting an accurate picture of reality and if that reality shows that this is a great business.
  • Very consistently high ROE - at 36% or so
  • No debt
  • Cash Flow from Operations is lagging net income as debtors rise when there is revenue growth. High debtors is a concern here as they stand at 22% of annual revenues which indicates a 2.5 months payment cycle which is not a very comfortable position to be in. Also debtors are 36% of equity and 44% of invested capital. 
  • Un-billed revenue - there is revenue that has been recognized but not billed capitalized on the balance sheet to the tune of 3000 Crores+. This could be a source of risk if customers end up not paying for it.
  • No inventory to really talk about
  • Over a billion dollars of cash on balance sheet
  • Loans and advances to related parties are not large but don't sound befitting to the reputation of the TATA group.
  • 35% to 50% of the earnings have been paid out as dividends
  • Overall other than a few small issues financials look great.

4. Soft Factors

  • Promoter shareholding has been around 73% for a while
  • FIIs hold 16% of the stock so volatility is to be expected
  • Sources of growth - given the size of this company growth has to slow down at some point. So far they have been able to defy gravity. 
  • The stock is the largest component of the Sensex and will probably be highly correlated with the Index. 

5. Pricing

This is a tricky one. The moat is A (not A+) but the management performance is stellar. Currently trading at 19.5 times Dec 2013 quarter annualized and 24.1 times TTM. Price to book for such a high ROE business is not relevant. The question here is that if we assume that after the growth abates this stock will trade at around 10 times earnings it will have growth at 30% per year for 8 years to give you a net 20% return with a final revenue almost 2 times that of IBM. If the final P/E is 15 it would give you a 20% CAGR with 3 years of 30% growth and a revenue number about half that of IBM. The margin of safety is low so I would hold at this price and be buying around 17 times earnings.