Gold - To Buy or Not to Buy!!

I was discussing investments with a very senior investor, someone who has been in the Indian markets for nearly over 50 years and has his finger in nearly all major asset classes - stocks, bonds, gold, real estate in addition to his own business, which these days is managed by his two sons.

While discussing investments, he told me, "Beta, sona kharidna thoda thoda har saal. India mein sona ka bhav girta nahi". I was sure he was wrong. I have seen long term charts of gold and have seen severe price corrections. The chart below is what I have seen multiple times. Which shows gold bugs have not made any money from around 1980 till around 2008 - a fairly long period.

Then when I looked at gold prices in Indian Rupees, the mystery was solved. Look at the chart below for the same period. The difference is the $-INR conversion rate. Dollar has appreciated over the years and compensated for the loss of price in gold, thus keeping the INR price of gold high. Looking at this chart, we can clearly see that there has been no long term bear market in gold in India for over 40 years. And the way the dollar is moving with respect to the rupee, I don't see the trend reversing anytime soon.

So, as Peter Cundill used to say, there is always something to do (and learn) in the markets :-)

Dislcosure: I do not own any investment gold (other than family jewellery).

Deepak Nitrite - Interesting play in the chemicals space

Here is a short write-up on Deepak Nitrite.

§         Established in 1970s by Mr. C.K. Mehta

§         Market leader in India for Sodium Nitrite / Nitrate & Nitro Toluenes.

§         DNL is a top 3 global supplier for products like Cumidines and Oximes

§         On par with global players in colour intermediates business

§         Exports are around 44% of sales (FY12) & 29% YTD (FY13)

§         Manufacturing of hazardous chemicals is shifting from developed economies to developing economies due to environmental hazards. India is benefiting from this trend.

§         Diversified  customer  base  consisting  of  some  of  the  largest chemical  companies  in  the  world,  including  Sygenta  Global,  Bayer  Crop  Science,  BASF, Kemira,  Lanxess,  Clariant,  Isochem,  Lonza,  IOC,  Reliance &  Essar.

§         Fuel additives & Solar Salts are expected to be significant growth drivers in the future.

§         Fuel additives grew by 56% in Fy12. It was 98 cr in FY12. In 9mFY13, it is already 130 cr with Q3 35cr. Company is expecting 150-160 cr from this segment this year.

Segments	Organic Intermediates	Inorganic Intermediates	Fine & Specialty Chemicals
Product Categories	Nitro Toluenes, Fuel Additives, Nitro Chloro Benzene, Xylidines, Cumidines	Sodium Nitrite, Sodium Nitrate	DASDA, Oximes, Fuel Additives,  Specialty chemicals
Applications	Agro-chemicals, Pigments, Dyestuffs, Fuel Pharmaceuticals	Pigments, Dyes,, Rubber Chemicals, Explosives, Food Colour, Electro Plating Glass	Paper,  Detergent,  Textiles, Agrochemicals,  Fuel Additives, Pharmaceuticals
% of revenue	57%	16%	27%

Financials

Market Cap: Rs. 273.42 Crores
Current Price: Rs. 260.40
Book Value: Rs. 267.78
Stock P/E: 7.20
Dividend Yield: 2.30%
Stock is Rs. 10.00 paid up
52 Week High/Low: Rs. 325.00 / Rs. 139.00
Dividend Payout Ratio: 16.54%
Debt to equity: 1.18 (high... key monitorable)
Price to book value: 0.97
EPS FY12 = 22.06

9M EPS FY13 = 27.14
Fy13 EPS (exp) = 31-32
FY14 EPS (exp) = 38-40

For the next 2 years, earnings can grow 30%. If there is a moderate PE re-rating (only possible if the mid/small cap market sentiment improves) to 9-10, the price in a year can be around 350-400.

Disclosure: I am invested in Deepak Nitrite and my views are likely to be biased.

A poem for value investors!!

For a change, I am posting a poem that was written by Rudyard Kipling in 1895. It is for all and not just value investors, but it reflects stoicism at its best. One of my favourite poems in the English language :-)

If you can keep your head when all about you
Are losing theirs and blaming it on you;
If you can trust yourself when all men doubt you,
But make allowance for their doubting too:
If you can wait and not be tired by waiting,
Or being lied about, don’t deal in lies,
Or being hated don’t give way to hating,
And yet don’t look too good, nor talk too wise;

If you can dream—and not make dreams your master;
If you can think—and not make thoughts your aim,
If you can meet with Triumph and Disaster
And treat those two impostors just the same:
If you can bear to hear the truth you’ve spoken
Twisted by knaves to make a trap for fools,
Or watch the things you gave your life to, broken,
And stoop and build ’em up with worn-out tools;

If you can make one heap of all your winnings
And risk it on one turn of pitch-and-toss,
And lose, and start again at your beginnings
And never breathe a word about your loss:
If you can force your heart and nerve and sinew
To serve your turn long after they are gone,
And so hold on when there is nothing in you
Except the Will which says to them: ‘Hold on!’

If you can talk with crowds and keep your virtue,
Or walk with Kings—nor lose the common touch,
If neither foes nor loving friends can hurt you,
If all men count with you, but none too much:
If you can fill the unforgiving minute
With sixty seconds’ worth of distance run,
Yours is the Earth and everything that’s in it,
And—which is more—you’ll be a man, my son! 

Merck - Stable Pharma Major

I have been looking at some Pharma names recently. Let me put a disclaimer upfront. I am not very good at analyzing pharma companies. I am not able to differentiate between most of the companies who sell non-patented generic drugs in India.

Having said that, the numbers for Merck looked good. Below is a glimpse.

Market Cap: Rs. 1050 Cr
Current Price: Rs. 630.00
Book Value: Rs. 291.36
Stock P/E: 13.34
Debt to equity: 0.00
Price to book value: 2.16
Promoter Holding: 51.8%

• Merck Limited was set up in India as Merck’s first Asian subsidiary in 1967. The Company operates both its pharmaceuticals & chemicals businesses in the country.

• Dec'13 (Q4) quarter net profits & EPS have gone up by 58%; Revenues are up 31.8%

• FY12 (year ending Dec) EPS is 47.2 vs 38.4 in Fy11 (Gain of 23%)

Problem Areas

• Large part of the company's revenues comes from areas under govt price control, ability to pass on input cost escalations is not there. This can severely impact margins.
• Company has a performance materials division which makes pigments and cosmetic actives, neither of which is core to the company's business.

Valuation
The company is likely to post a FY13 (Dec) EPS of close to 53-54. At 15 times, the stock can trade at around 800 levels, which is about 25% from current levels. So, not a screaming buy, but something worth looking into for stability and moderate returns over the short term.

Disclosure: I am not invested in Merck at this time. I am not yet decided whether to invest or not. Please do your own due diligence before investing.

Guru Speak: Charlie Munger

Sensex Rolling Retuns - Some observations

I was doing some data analysis on Sensex data from BSE. I have taken the Sensex value for March end (or very close to it) for every year since Sensex was constituted in 1979. It put my mind to rest on the need to keep focussed on the long term and ignore short term market gyrations.

Some interesting observations:-

1. The worst crash in Sensex came not in 2008 but in 1993 courtesy Harshad Mehta. Down 45% in 1993 vs 35% in 2009.
2. The highest return for a year has been 252% in 1992!!! Again, courtesy Harshad bhai. The man giveth and he taketh away!!!
3. So, between 1992 & 1993, investors actually did not lose a lot money if they had stayed invested. Sensex was down 10% over the 2 year period, not a catastrophe.
4. Negative returns for over rolling 5 years starts to become lower and lower and by 12 years, it becomes zero. i.e, there has been no case historically, where an investor has lost money by being invested for 12 years or more.
5. For a period of 3 years or more, the median return is relatively good - 14% or more.

Summary of Observations
		Returns (%)
Date	Sensex	1 Year	3 Years	5 Years	7 Years	10 Years	12 Years	15 Years
Apr-79	124
Apr-80	129	3.92
Apr-81	173	34.47
Apr-82	221	27.34	21.18
Apr-83	213	-3.76	18.12
Apr-84	247	16.06	12.46	14.73
Apr-85	353	43.05	16.91	22.30
Apr-86	582	64.91	39.90	27.40	24.70
Apr-87	524	-9.92	28.56	18.87	22.18
Mar-88	398	-24.03	4.11	13.38	12.61
Apr-89	724	81.71	7.53	24.01	18.48	19.28
Apr-90	783	8.16	14.30	17.27	20.47	19.76
Apr-91	1203	53.63	44.54	15.62	25.39	21.37	20.83
Apr-92	4238	252.34	80.24	51.88	42.63	34.37	33.78
Apr-93	2311	-45.46	43.45	42.14	21.77	26.95	24.08
Mar-94	3779	63.49	46.46	39.17	32.60	31.37	26.70	25.57
Apr-95	3317	-12.23	-7.85	33.47	35.36	25.11	25.73	24.17
Apr-96	3418	3.04	13.92	23.23	24.82	19.36	24.49	21.98
Apr-97	3558	4.10	-1.99	-3.44	24.14	21.10	21.23	20.35
Apr-98	4072	14.46	7.08	11.99	19.03	26.17	17.60	21.75
Apr-99	3686	-9.47	2.55	-0.50	-1.97	17.68	17.65	19.75
Apr-00	5053	37.07	12.41	8.79	11.82	20.50	23.58	19.41
Apr-01	3605	-28.66	-3.98	1.07	-0.67	11.60	14.32	12.92
Apr-02	3463	-3.94	-2.06	-0.54	0.62	-2.00	13.19	13.41
Apr-03	3151	-9.00	-14.56	-5.00	-1.15	3.15	8.36	14.78
Apr-04	5788	83.68	17.10	9.44	7.20	4.36	2.63	14.87
Apr-05	6605	14.11	24.02	5.50	7.15	7.13	9.14	15.28
Apr-06	11564	75.08	54.25	26.25	17.74	12.96	9.77	16.29
Apr-07	12625	9.17	29.69	29.52	13.98	13.50	11.78	7.55
Apr-08	15833	25.41	33.83	38.11	23.54	14.54	13.63	13.69
Apr-09	10349	-34.64	-3.63	12.32	16.93	10.87	9.31	6.95
Apr-10	17693	70.96	11.91	21.78	27.95	13.35	13.02	11.81
Apr-11	19420	9.77	7.05	10.92	18.88	18.34	14.85	12.28
Apr-12	17597	-9.39	19.36	6.87	15.03	17.65	10.96	11.25
Mar-13	19570	11.21	3.42	4.33	7.81	20.04	15.14	11.03
Yearly Rolling Returns		34	32	30	28	25	23	20
Negative Returns		11	6	4	3	1	0	0
Summary since 03 Apr 1979
	1 Year	3 Years	5 Years	7 Years	10 Years	12 Years	15 Years
Yearly Rolling Return Observations	34	32	30	28	25	23	20
Negative Return Observations	11	6	4	3	1	0	0
Loss Probability (%)	32	19	13	11	4	NIL	NIL
Median Return (%)	10	14	15	19	18	15	15
Average Return (%)	24	18	17	17	17	17	16
Max Return (%)	252	80	52	43	34	34	26
Minimum Return (%)	-45	-15	-5	-2	-2	3	7
Standard Deviation (%)	53	20	14	11	9	7	5