Annual Result 2010

2010 comes to an end. Sensex started the year with 17,473 and closed the year 20509. It touched a high of 21,108 and a low of 15,651. On an annual basis the gain in Sensex was 21.38%.

My portfolio which started this year has returned a 43.40%. That is a little more than double that of Sensex. Hoping for a better 2011.

Balaji Amines: An Update

Balaji Amines has moved down from around Rs 56-58 the current levels of Rs 40-42. I am actually expecting it to do better than 7 EPS for Fy11. Pre-split my expectation was around Rs 35-38 for FY11 and Rs 44-46 for Fy12. ( I would not be very surprised if it does a little better than that). That means an EPS of 7-7.6 in FY11 and 8.8-9.2 in FY12.

Balaji's core business is doing well. Realizations have improved and the new product Morpholine is likely to enjoy better margins as it may attract anti-dumping duty in India.

This stock is a good candidate for attractive returns for the medium term (2-3 years) with a tentative price target of 70-80 by Mar-Apr 2011 and 95-100 by Mar-Apr 2012.

Goodbye to 2010. Getting Ready for 2011

Its that time of the year when you sit back and take stock. Of the year gone by and plan ahead for the one that is to come. 2010 was in a way a great year. The Indian stock market nearly scaled back to previous all-time highs before giving up some of its gains to catch its breath.

International financial news was dominated by the PIGS (no not the animal variety, but the countries of Portugal, Ireland, Greece and Spain). The domestic economies were on the verge of imploding for these countries. They are still not out of the woods, the problems are now known (atleast I hope so!!) and steps are being taken to bring their economies back on track.

Throughout the year we saw tension between US and China on the currency front. Going by past record, that is one problem that is not going to be sorted out any time soon.

The commodity cycle seems to have reversed in the last 12 months. A lot of commodities including rubber, copper, zinc, steel, gold and silver scaled new highs or are tantalizingly close to their old highs. This may continue and oil may also join the party. The consumption boom in India and China is not going away anytime soon, so commodity prices in my opinion will remain in an upswing in the future.

2010 was an interesting year overall. I am sure 2011 will bring in its own share of ups and downs. It promises to be an interesting year for me as I formally start my portfolio management initiative.

Wishing all a great year ahead :-)

Happy New Year.

Profit from Mr. Market

Recently, Mr. Market seems to be in a bad mood. He is coming and offering ridiculous prices for some good mid cap and small cap companies. The reason he is angry is that some brokers allegedly were trying to rig prices for some companies without or without the management's approval.

The initial reaction for most people when they see Mr. Market behaving like this is to take the price offered and run for cover with their hard-earned money. It is understandable as stock prices for some of the "named" companies have fallen by 40-50% in the last few days. Now, as retail investors we need to understand what is happening around us and why we have invested in the first place. If our time horizon is for the long term (I don't know why it should be otherwise for investing in equities), then these mood swings of Mr.Market is a fantastic opportunity to pick up good, solid businesses in the mid cap and small cap space. Question is can they go lower? Sure they can. But neither you nor I have the faintest idea what will happen tomorrow. So, instead of wasting precious time and effort in trying to predict tomorrow, it is better to be focused on the stock price. If you think you are seeing value in a business, then go ahead and start buying. And follow my golden rule. NEVER BUY OR SELL IN ONE GO. Always stagger your buying or selling.

Happy Investing.

Sintex - Good Long Term Pick

Sintex is a solid company and has been in business for nearly 80 years. They are primarily known for their rooftop water storage tanks. Today, the tanks business is a small part of the overall company. Sintex has moved to becoming a major player in the infrastructure and plastics segment.

Some points for Sintex:-
* Promoter Holding has increased in the last 2 quarters (from Mar 2010 to Sep 2010) from 30.20% to 33.77%
* Has been paying dividends uninterrupted for 77 years
* Dividend paid is 5.98% of Net profit
* By 2012, India is expected to emerge as the world’s third largest plastic consumer after the US and China, consuming 12.5 mn tonnes annually and attracting US$80 bn fresh investments

Strategic developments, 2009-10
* Invested 137.89 crores in its standalone operations to enhance production and operational efficiency
* Established a new plant in Nalagarh while Nagpur and Namakal plants are under construction
* Nief Plastics acquired two companies named SICMO and SIMOP, increasing the European customer base; these companies are specialised in making and testing metallic moulds for plastic injection and light metal alloys
* Incorporated a wholly-owned subsidiary, Sintex Infra Projects Ltd to capitalise on the growing domestic infrastructural developments
* Acquired Esveegee Steel (Gujarat) Pvt. Ltd (100% equity stake) and renamed it Sintex Oil and Gas Pvt.

Building Materials Division:-
* 65% of sales
* Monolithic Concrete Housing Solutions, Prefabricated Structures, Liquid Management Solutions and Waste Management Systems
* Pioneered the manufacture of a range of panels used as roofing and wall materials. Energy Conservation Building Code (ECBC) 2007 is expected to drive energy-efficiency discipline in future, increasing sandwich-panel demand.

Core custom moulded products:-
* During 2009-10, Sintex initiated a project with Rafael, an Israel-based Company, supplying carrier cases for missile components

Areas of Future Growth:-
* Monolith construction, prefab construction
* The Company anticipates huge opportunities in the feeder pillar box segment owing to the growing popularity of underground cabling.
* Increasing focus on FRP transformer fencing, which is expected to generate enormous returns and volumes (received approvals in Gujarat and is likely to enter Uttar Pradesh)

On a consolidated basis, EPS for FY11 is expected to be around Rs. 30 (Rs 15 on the new FV of Rs 1) with a target of Rs 250-300 in the next six months. I am expecting the company to grow at an average of 20% over the next 3-4 years. With its existing consolidated PE at around 16, I do not expect any major re-rating to happen, so the growth in the stock price will come from the earnings growth.

LIC Housing Finance-Scam and Life thereafter

By now, everybody is aware and discussing about how people who earn so much and have such respect in their industries can stoop to such low acts as taking bribes!!! I will not dwell on the moral low that our leaders (both in the corporate and political world) seemed to have sunk to. Our job is to look at LIC Housing Finance as a business and a stock.

So, what really has happened here? A couple of people have allegedly taken bribes and given out loans to companies. LICHF's share in this is approximately 300 crores. For a company with assets of 38,000 crores and a net profit of 662 crores (FY10), the amount is not back breaking. Also, let us not jump to the conclusion that all of the 300 crores would end up as NPA. The company is operationally sound and is unlikely to go out of business. After six months, people will forget about this scam (the sad truth is that in this country nobody gets punished for white collar crimes!!!) and LICHF will continue to do well.

The stock has come down from 1300 to around 930 in a span of 3 days. So, what should you (or I for that matter) do? Well, I would think that this might be a good long term opportunity to BUY!!

The situation reminds me of the American Express situation when Buffet bought into it. So, if you have the courage of conviction and your wallet supports you, it might not be a bad idea to be a contrarion and buy LICHF now.

Indian Markets - Crystal ball gazing: Update

On October 2, I had a post on my guess on the market direction. (To read it click here).

Here is what I had written back then:-

1. Sensex/Nifty will make a dash for the all-time high sometime soon (maybe as early as October end)
2. Either breach it or turn back just short of it.
3. A bout of profit booking follows. Indices go down 10%-15% (back to around 18K-18.5K)
   
4. Main indices remain sideways for the next couple of quarters.
5. Mid caps move up from now as the last few weeks the valuation gap has widened.
6. Sometime after 2-3 quarters, the next up move starts for the main indices. By that time, PE is down to about 22 (which is still high but certainly not hitting the roof).

I am happy that for one my sense was correct (till now that is). The markets have exactly followed the first three points. Now, it remains to be seen if the remaining points play out as I expect them to.

LEEL-Notes from AR 2010

• Acquired “Janka” - Czech based manufactures of Air Handling Units in 2009. Price paid was Euros 4.5 million (Rs 33.17 cr) for a 100% stake. This was paid from internal accruals.

• Margins have improved in 2010 and is expected to be around this level

• The 2008 acquisition (Lloyds Coil Europe) has turned around and reported profits of 1.04 cr as opposed to a loss of 16.4 cr in the previous year.

• A new manufacturing facility has been setup at Pantnagar, Uttarakhand with backward integration of major components like coils required in the manufacturing of ACs.

• Executive management salary is not exhorbitant. Mr. B.R. Punj gets 28.8 lakhs and Mr. A.K.Roy gets 41.4 lakhs as total compensation.

• Last equity dilution took place in 2005-06 due to conversion of preference shares and issuance of GDR.

• Rs 50 cr has been put as corporate guarantee given against loan taken by related parties.

• Promoters have bought 4.68% from the market in November.
  

Price Realization for manufactured Items

	2010			2009			Growth%
	Nos	Price(in lacs)	Price/unit	Nos	Price(in lacs)	Price/unit
Condenser Coils	703347	4824.03	685.87	509857	2466.77	483.82	41.76%
Evaporator Coil	438299	2329.61	531.51	283707	1457.65	513.79	3.45%
Air Conditioners	308863	22076.08	7147.53	271616	21500.66	7915.83	-9.71%
Sheet Metal	63406	34877.56	55006.72	74110	30382.59	40996.61	34.17%

Lloyd Electric & Engineering Ltd - A good value play

Lloyd Electric & Engineering Ltd (LEEL), BSE: 517518,NSE: LLOYDELENG

Market Cap = 238 cr

Book Value = 130, P/B = 0.6

LEEL is largest makers of air-conditioner heat exchanger coils in India. The company is OEM supplier to almost all AC manufacturers in India, and have overseas business of approximately 20% of sales.

Its main products are:

1. Heat Exchangers
2. Rail Coach ACs
3. Window/Split ACs

Manufacturing Facilities:

1. Bhiwadi, Rajasthan
2. Kala Amb, Himachal Pradesh

Main Customers:

1. Blue Star
2. Voltas
3. LG
4. Samsung
5. Carrier
6. Emerson
7. Hitachi
8. Electrolux
9. Whirlpool
10. Daikin
11. Indian Railways

The company has started manufacturing large ACs for MNC companies since late last year. They are mainly catering to the large (10-15 ton) category, specially in the transport sector. That is ACs for buses and railways. It has bagged orders for Metro Rail ACs. This might actually give the earnings a boost in the future are more and more metros become operational.

I got attracted by the promoter buying and by the fact that it is going at a 8 PE as opposed to 18-20 PE of Hitachi/Blue Star. Not that I am comparing Blue Star with Lloyd, they are not in the same league, but I think Lloyd can be a case of PE re-rating to atleast 10. Also, its BV is 130 and its trading at nearly 40% discount to book, which I am not sure is warranted.

The negatives in the company are:

1. Consistent negative cash flow for the last three years
2. Very poor return on capital ratios (RoCE=10%, RoE=8.7%)
3. OPM of 10% and NPM of 5%

With a expected year end EPS of 12-13 and a PE of 10, I am expecting a 6 month target of around 120-130. In fact, I would really expect it to catch up to its book value of 130 (for comparison, Blue Star has a P/B of nearly 8).

Also, interestingly, it has not really fallen below the 70 mark in the last few months. That added to promoter buying makes me pretty confident that the downside risk is fairly limited here.

"Breaking News" as a friend of the long term investor

The "breaking news" screamed "South Korea returns fire from North Korea". The world markets, or atleast those which were up and running at the time of day, tanked dutifully. The Sensex was down around 450 points at one time. For the rational long term holder of good companies, this was a manna from up above. Load up on your favourite picks, screamed the voice inside me. And so I did. Picked up a some of the stocks that were on my buy list. It is improbable that a full scale war breaks out in Korea. This probably, (and I reserve the right to be wrong), was more of a border skirmish and a bit of bravado shown by troops on either side, which resulted in a good opportunity.
The lesson from all this is:

1. Be ready with cash. You never know, when "breaking news" happens and you get a bargain on a platter.
   
2. Be ready with your buy list for such opportunities. You cannot start looking at which stocks to buy when the opportunity arises. By the time you make that decision, the chance may have already passed you by.

Hope there is peace in Korea :-)

Portfolio Update:9 Months of Performance

After 9 months of NAV based tracking, the portfolio performance has been reasonable. The fund is up 53.96% (versus 24.79% of the Sensex).

The portfolio composition at this point in time is as follows:-

Notes from Investor Presentation dated 12 Nov 2010

* Supreme Industries Ltd (SIL) owns 29.88% of Supreme Petrochem. PAT of SPL was Rs. 60.58 crores in 2009-10, thus SIL's share of the PAT is 18.10 crores.
* Supreme Petrochecm is one of the largest single site Polystrene ( PS )producer accounting for 2% of world capacity. It owns 60% of domestic installed capacity.
* Sales volume to grow at CAGR of 15.60 % and likely to reach 3,24,000 MT by 2014-15
* Debt-Equity ratio has reduced from 0.8 to 0.6
* Positive cash flows at its operating as well as net level every year
* Even during tough times of FY09 company has made investment towards future

Supreme Chambers (Andheri Commercial Complex)
* Total Saleable Area : around 2,75,000 sq. ft.
* Total Project Cost : about Rs. 155 crores .
* Already sold about 40000 Sq.ft. with revenues of Rs 60.20 Crores.
* Plan to sale entire complex excluding one floor.
* Estimated total revenues from Sale about Rs. 375 Crores.
* Entire sale likely to fructify by Dec.2011

2015-15 Plan
* Capacity Expansion: The existing capacity to be enhanced to 595,000 MT by 2014-15 with Rs. 1000 crores of capex. This is to be funded by sales proceeds of the commercial complex and internal accruals.
* Diversify Product Portfolio: Focus on technological innovations
* Increase Share of Value Added Products: Enhance the overall contribution of VA products from 25% to 30%
* Widen Distribution Network: Increase channel partners and widen as well as deepen the distribution network

* Aim to become a Rs. 4500 crore turnover company
* Maintain 15% operating margins
* Overall growth of 17% y-o-y

Plastic Industry
Current Per Capita Polymer Consumption
US - 71.46 Kgs
Brazil - 22.71 Kgs
China - 30.74 Kgs
India - 5.66 Kgs

Variant Perception or Dis-conforming Evidence

Variant Perception can be explained as the difference of opinion between you and the market. That is, when your perception of a situation is different from that of the general market.

To make serious money in the markets, it is important to be able to take a position that is opposed to the general market view. A "margin of safety" is only available if the majority of market participants believe that a particular stock is not worth buying or is actually worth selling. In those instances, where the majority view is in one direction, and you believe that exactly the opposite is true, that the stock is worth buying into, then you have a contrarion viewpoint or a variant perception.

In any transaction in the markets, there is a buyer and a seller. Both are transacting at the same price. So, it is very important to think form the opposite point of view. Why is the person on the other side of the transaction selling to you? If your logic for buying is better than what you can think of for that of the seller, then you have a good case.

This ties in with the concept of "dis-conforming" evidence as popularized by Charlie Munger. [Note: There is no such word as dis-conforming and I think Munger wanted to mean nonconforming.]

Looking for dis-conforming evidence requires that before taking a position you list down points that is opposing to your existing view point. For example, if you are about to buy a stock of a company, think of why you would not want to buy it, what can go wrong in the business, how the business can be ruined or can go bankrupt and other such points.

If you force yourself to think in these terms, it usually brings sanity and rationality to the overall-thought process and helps clarify the decision in your own mind.

Measuring Portfolio Performance - Do it like a mutual fund

There is an old Chinese saying which says "what cannot be measured cannot be improved". I have thought about how I invest in the markets. As I get a monthly salary, I tend to put money into the markets also in monthly tranches. After a while it is difficult to measure the returns that I have got from my portfolio as a whole and not from individual stocks. All the websites that are out there that I have used does not really give a true picture of portfolio performance because it tracks the current holding and provides the percent gain or loss. I looked at various softwares, websites and did not find anything that actually helps me in doing this. So, I built a rudimentary spreadsheet in Microsoft Excel which helps me track my portfolio as a mutual fund on a NAV basis.

If you want you can use a similar concept. The concept is fairly simple and straightforward. The initial amount you start off with, say, Rs 1000 is your initial capital. Take an arbitrary face value (I chose 10 more out of convention, you could take 1 or 100 or whatever number takes your fancy). The number of "portfolio units" you allocate yourself are calculated by the total portfolio value divided by the face value (in this case, 1000/10=100 units).

Once you have the basic framework in place, it becomes easier from here. Every time you put money in your stock account, just calculate the number of "portfolio units" you would get. For example, if your initial capital of Rs1000 has grown to Rs 1200, your NAV would be 1200/100=12 (portfolio value divided by units equal new NAV). So, if you add Rs 60 to your portfolio, you will get 60/12=5 more units. So, you will have 100+5 units. So, your portfolio would be now 105*12=1260.

Keep track of a benchmark index if you are interested to know if your stock picking skills are good enough for you to continue at it. Over a period of time (not less than 3 years) if you are not doing better than the index, it is probably better to get out of managing your funds and hand it over to a mutual fund or an exchange traded fund (ETF).

A New Blog

I started an all-new blog just to focus on the stock markets (typically Indian) and my thoughts and learning related to value investing and contrarion investing.

I expect this to be my single repository where I will put everything related investing that I consider important at that point in time.

I will also migrate the most important posts from my other blog holdyourthoughts.blogspot.com that are related to investing. I will continue to post non-investing articles to that blog.

I hope you enjoy this blog.