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.