Using derivatives to manage portfolio volatility

This post in response to a query by Kiran on one of my previous posts. I sometimes use put options in my portfolio. Since, this is more a call on absolute levels of the market and its likely future direction, I use it sparingly.


Even when I do buy a put option, I buy a far out-of-the-money one so that I pay a low premium. Since, my portfolio is long-only, I don't need to buy call options for hedging. Also, I don't employ complicated option strategies like straddles, strangles or other such esoteric ones. My thoughts are simple, I buy puts with little premium so that if the market suddenly collapses, then I will make up for some of the loss in the stock values. And I am ready to write-off that premium if the market does not fall off the cliff.


And for this reason I use options only when we are close to a important event which has a large risk or a long term market top. So, for example, I might but a put option close to the 2014 elections or when Nifty goes to 6000.


Personally, I do not think small investors should try their hand at options. The certainty of losing money is much much higher than the possibility of making it over a period of time. It is much better to buy, hold (and pray!!) than to speculate on the future direction of the market.

Dr. Michael Burry speaks at UCLA

Dr. Michael Burry - Famous as the person who shorted his way to billions during the collapse of 2008.

BHEL - Worth Looking At?

It is a surprise, even to myself, that the last two stocks that I looked at are either PSU or state owned. (Previous one - Tide Water Oil). This week I was looking at BHEL - Bharat Heavy Electricals Ltd. I don't want to dwell on the merits and demerits of the company, it is perhaps all too well known.


It is a jewel-in-the-crown company, which basically means, it is there for the government to milk it dry before it either goes belly up or is sold to a private player!!! The company has an order book of around 1.3 lakh crores at the end of Mar 2012. It has also recently received orders from the NTPC for a super thermal power plant in Madhya Pradesh. BHEL has had trouble due to competition from China. Some of the Indian power companies have gone ahead and bought cheaper equipment from Chinese vendors, who also bundle in cheap financing. There is an expectation that the government might increase import duty or add an anti-dumping duty on power equipment, which would go a long way in boosting the company's position. Also, the government might just wake up from its slumber and order some big ticket reforms in the power area (unlikely, but possible).


On the valuation front, the stock is available at a dividend yield of over 2.8%, PE of 7.5 and a P/B of 2.0. The price of 220 is close to its 5 year low of 196 reached in 2008. The problem is with the the promoters (the government of India) - the worst promoter you can think off, so take some valuation points off for them. But still worth a look at this price. But only for a time horizon of 5 years or more. 

Fear is the Key

Murphy's Law states "If anything can go wrong it will". O'Brien's Law says " Murphy is an optimist"! But when you are beyond Murphy and O'Brien and things are so bad that you are really really scared, that is the time to buy.


I use a "gut-feeling" indicator to adding net money to my portfolio. When my gut says that I should sell everything and put the cash in fixed deposits, I brace myself and buy stocks! Usually, it is when the markets are in very bad condition and over the last 12 years that I have been investing, it has given me decent returns. As J. Paul Getty once famously said, No one can possibly achieve any real and lasting success or get rich in business by being a conformist. 


Another aspect which is healthy to inculcate is skepticism. When everyone thinks alike, everyone is likely to be wrong. These days investors seek the comfort of the herd from online forums and mailing lists. These forums tend to have some darling stocks against which it is sacrilegious to voice a negative opinion. Every one is comfortable that a vast majority of "similar" investors are doing what they are doing. The problem with such herd thinking is people tend to suspend their natural skepticism and stop questioning the basics. Most of the time, if basic common sense is applied, you can stay away from problematic stocks. 


So, the advice I give myself, is 1) never to take someone else's stock tips and 2) buy stock when I want to invest only in Fixed Deposits and vice versa.

Mayur Uniquoter - Board to consider Bonus Shares

Mayur Uniquoters has informed the exchanges that a meeting of the Board of Directors of the Company will be held on June 22, 2012, inter alia, to transact the following business:-

1. To consider and recommend the issue of bonus shares, if any.
2. To fix the date, time and place for holding the Annual General Meeting for the financial year 2011-12
3. To consider and approve the Notice and other matter related to the Annual Report.


Mayur continues on its journey of creating shareholder value.

Indian sanitaryware market - Cera &HSIL

According to a recent survey conducted by UNICEF, there are about 638 Million people in India who do not have proper sanitation facilities. Nearly 50% population use open toilets. Another Indian report mentioned that India has more mobile phones than proper toilets!

According to another recently published report, " the market for sanitary ware products is expected to grow enormously in the coming years. It is forecasted that global sanitary ware market will record a whooping turnover of US$ 89.5 Billion by 2017 where maximum growth is anticipated from emerging economies such as China and India. The mature market such as United States and Europe will encounter a sluggish growth for the next five year period."

The sanitary ware market for high end products in India is dominated by the organized segment but the unorganized segment has captured major share in low-end products segment. The market was dominated by the domestic players but now the international players are performing extremely well out of which some have registered growth of even more than 30% y-o-y. HSIL, Cera, Parryware and Somany are the major players present in the sanitary ware market in India.

Improving literacy rates, liberalized FDI policy in the real estate sector, favorable demographics, increasing purchasing power, customer friendly banks, and favorable reforms initiated by the Government to attract global investors is driving the growth for sanitary ware market in India which is forecasted to reach US$ 1.8 Billion within next five years.

Note: I am invested in both Cera & HSIL, so have a vested interest in both. Please due your own due diligence and consult your financial advisor before investing.

Tide Water Oil Ltd

I was recently looking at an interesting company - Tide Water Oil Ltd (TWOL). 


The major product brands of TWOL are “Veedol” and “Nippon Mitsubishi”.The product range includes automotive lubricants (engine oils, gear oils, transmission oils), industrial lubricants (hydraulic oils, superclean hydraulic oils, gear oils, specialty lubricants) and automotive and industrial greases.

It has also invested in wind power (which a lot of companies have done primarily for tax benefits) but the revenues (2 cr) is negligible in the overall scheme of things. 


What is interesting is that this year the company aquired Veedol International Ltd from BP plc and has gained access to the Veedol brand in over 120 countries of the world. The company has established a subsidiary in Dubai, Veedol International DMCC, to cater to Middle East and North Africa.


Now some numbers:-

P&L Statement	FY12	FY11	FY10	FY9	FY8	FY7
Sales	1004.47	861.42	751.58	610.48	504.83	420.58
Other Income	1.98	4.72	3.51	0.05	4.35	2.39
Op Profit	75.65	99.06	91.66	47.7	35.97	15.8
EBDIT	75.65	103.78	95.17	47.75	40.32	18.19
Interest	1.1	1.89	1.93	3.1	2.59	3.52
Depreciation	9.26	9.71	6.18	3.39	2.5	1.76
PBT	86.13	92.18	87.06	41.26	35.23	12.91
Tax	27.11	30.3	31.54	18.23	12.14	3.98
PAT	57.92	64.16	57.79	27.55	23.18	8.97
EPS	664.86	736.46	663.34	316.23	266.04	102.96

Num of shares	871,200	871,200	871,200	871,200	871,200	871,200
Dividend per share	120	60	50	30	20	15
Dividend Yield	1.78%	0.89%	0.74%	0.45%	0.30%	0.22%

Dupont Analysis
OPM(%)	7.53%	11.50%	12.20%	7.81%	7.13%	3.76%
NPM(%) -- (A)	5.77%	7.45%	7.69%	4.51%	4.59%	2.13%
Asset turnover(avg) -- (B)	2.16	3.29	3.69	3.96	3.81	3.51
RoA(%)	12.45%	24.53%	28.38%	17.88%	17.48%	7.48%
Financial Leverage -- ( C)	1.51	1.00	1.00	1.02	1.05	1.13
RoE(%) -- (=A*B*C)	18.85%	24.53%	28.38%	18.24%	18.30%	8.49%

Key Risks:

• A lot depends on crude prices. 
• The company is owned by Andrew Yule (a PSU),  United India Insurance Company Limited and Life Insurance Corporation of India, so there is possibly some amount of government control or "inefficiency" built in.

Valuation:-

It trades at a PE of roughly 10 times earnings and 1.9 times Price/Book. It has been a regular dividend payer and is likely to continue to do so. Also, the company is available at a much cheaper valuation as compared to its peer - Castrol, although it is much smaller in size.

Catalyst for Valuation Trigger

The Dept of Divestment, Ministry of Finance, is planning to sell Andrew Yule's, United Insurance's and LIC's stake in TWOL to a strategic investor. 

Please refer to http://www.divest.nic.in/PIM_TWOL(19April).asp for further details. 

If the sale goes through, and we don't see any push back from political front (read Mamata Banerjee, as this is a Calcutta headquartered company), then this can act as a trigger for the stock price.

Disclosure:-

Please  consult your financial advisor for your investments. This post is not an investment advice and I do not take any responsibility for your gains or losses!