Update on Finolex Cables

The Economic Times reports that the IT ministry is looking to connect 50,000 gram panchayats through non optical fiber network this year followed by 2L gram panchayats in next 2 years. 

Finolex Cables, which operates and is the leader in this space and which I have written about in my earlier posts (read them here and here) continues to do well. 

With an IT savvy PM, I expect the broadband rollout plan to be aggressively followed through. The power cable business is also likely to pickup once the industrial cycle picks up.

I continue to be bullish and hold my previous opinion of the price target of between 240-360 and a FY15 EPS target of 16-18.

CMP - 199.

End of the "hope rally". Focus back on fundamentals.

Last month, India may have witnessed a watershed moment in its history. The reason I say may, is because, only time will tell if it really was such a moment, or it was another great opportunity lost. Expectedly the markets rallied as the results poured in. All the common reasons were offered - Modi has a single majority so he can fix all the problems of the economy, India will push forward with its reform agenda, industrialization and fix governance.

So, the "easy" money based on the hope of "acche din" played out. During the hope rally, everything that a "India development" story went up - mining, power, infra, cement - almost everything. A lot of the PE re-rating for mid caps took place. It removed the glaring cheapness of most of the "good" midcaps. 

With the obvious cheap stocks now becoming well priced, we are back to the grind of making money on the fundamental basis. So, it is critical to focus back on individual companies and how they can perform and grow in the next few years. 

It is obvious that there are no easy answers (from Modi or anyone) of India's challenges. Inflation is stubbornly high and so are subsidies. Any reduction in subsidies (oil, LPG, fertilizers, rail fare etc) without a commensurate increase in efficiency is likely to increase inflation even higher. There is no magic wand that the PM has to fix the Indian economy. Once people start realizing that, markets are likely to correct or stagnate at the very least. And provide an opportunity for patient investors to buy into. The trick is to be prepared with a buy list and cash when (& if) that happens.

Finolex Cables - Quick Update

About a year back, I had posted on Finolex Cables (refer to the post here). The company has performed well. The company has delivered an EPS of 13.6 versus 11-12 that I had expected. 

The company had very good margin expansion (the OPM expanded by
2.31% yoy to 11.6%). 

The company has also commenced a solar power plant for which it has got a tax benefit. This has aided in Net Profit growth (79% yoy) for Q4. 

Operating cash flow was above Rs 200 crore (about 85% of the operating profit). It repaid 54 cr worth of debt.
I am expecting an FY15 EPS range between 16-18. At a PE range of 15-20, the possible price ranges are 240-360. There is a lot of potential that still remains in the stock, even after its sharp run-up. The stock continues to remain attractive for investors for the medium term.

CMP - 153.

Note: I am invested in the company and have a vested interest in the stock. Please do your own due diligence before investing.

2013 Portfolio Roundup

With the calendar year coming to an end, it is time to take stock and look back at the year and the developments in the portfolio.

For the majority part of the year, I was bearish on the Indian economy. Even today, I am not convinced that the country is in very good financial health. The recent rally is more based on hope than substance. This rally has been fuelled by the hope of a stable pro-reform BJP government at the centre in 2014. Purely on fundamentals, there is no improvement on the ground. Inflation continues to be high, specially food inflation. It is unlikely to come down any time in the near future as long as the supply side structural issues are not addressed. The Current Account Deficit, thankfully has come down with the prices and consumption of gold falling during the year. Rupee scared everyone (atleast the importers and of course cheered the exporters) by shying away from the Rs 68 mark and settling for some time around 60, up from the 45-50 range established for a fair number of years.

I made some changes to my portfolio. I booked profits on some of the stocks where I had made good profits and where the business climate was looking sluggish for the next few years like Balaji Amines, Titan, GRP, Shriram Transport Finance, Cravatex and JK Lakshmi Cement. I booked losses in CEBBCO (lost 70% of my investment on this), Sintex and Thangamayil Jewellery.

During the year, I added some stocks, which are either more export focused and thus likely to gain by the strength in the dollar or simply who businesses are faring well in this recessionary environment. Shilpa Medicare, Poly Medicure, Alembic Pharma, Ajanta Pharma and Finolex Cables. I have added to my initial positions in PI industries and Kaveri Seeds over the year in small quantities. I have reduced my positions in Cera as I think the price has run much ahead of fundamentals. I have added Page Ind to my portfolio as a dipstick investment more from a tracking perspective. I am still not decided on the valuation comfort in the stock. I have not made any changes to my top 3 holdings.

Over the year, my portfolio has returned 25.14% versus 8.27% of the Sensex and 3.3% of the HDFC Equity fund. I have chosen the HDFC Equity fund as it is one of the largest and best-managed equity fund over a 15 year period. The point is, if I am not beating a decent mutual fund, then I would rather put my money there and go sit on a beach ;-)

Name of Company	% of Portfolio (Dec'12)	% of Portfolio (Dec'13)	Comments
Mayur Uniquoters	19.08%	19.79%	Hold / Buy on dips
Supreme Ind	16.37%	16.42%	Hold / Reduce
Astral Poly	8.02%	14.75%	Hold
Kaveri Seeds	2.02%	6.78%	Hold / Buy on dips
Amara Raja	5.06%	4.98%	Hold
Cera Sanitaryware	7.88%	4.72%	Hold / Reduce
Finolex Cables	0.00%	4.44%	Hold / Buy on dips
Yes Bank	6.03%	3.89%	Buy
Auto Auto	2.88%	3.85%	Hold
PI Industries	0.50%	3.77%	Accumulate
Balkrishna Industries	2.44%	2%	Hold / Reduce
Shilpa Medicare	0.00%	1.99%	Accumulate
Alembic Pharma	0.00%	1.97%	Hold
Ajanta Pharma	0.00%	1.88%	Hold
Poly Medicure	0.00%	1.75%	Accumulate
Page Industries	0.00%	0.66%
Cash	0.31%	6.35%
Balaji Amines	3.51%	0%
CEBBCO	2.20%	0%	Analyze mistake
Cravatex	0.84%	0%
Gujarat Reclaim	2.56%	0%	Wait for turnaround
JK Lakshmi Cement	3.51%	0%	Keep watch; Buying time may be soon
Shriram Transport Finance	8.22%	0%	Keep watch; Buying time may be soon
Sintex India	3.00%	0%	Keep watch; Buying time may be soon
Thangamayil Jewellery	1.22%	0%	Analyze mistake
Titan Industries	4.32%	0%	Keep watch

Why Doesn't Sachin Tendulkar & Roger Federer Retire?

With another new Test series coming up, one of the favourite questions for Indian sports journalists have started raising all over again is the question of Sachin Tendulkar's retirement. Roger Federer, another sporting legend, had an early exit from the currently ongoing US Open. So, instead of asking the usual question of is it time for them to retire, I was thinking about why it is so difficult for them (or similar others) to let go.

I have tried to answer my question from the Charlie Munger's theories of human misjudgement.
Here are the psychological tendencies/biases at work for these people that prevents them from being rational:

• Psychological Denial - It is difficult for a great performer to admit that his performance has declined. That he does not make the cut purely on merit but more on the crutches of past performance.

• Incentive caused bias - Huge endorsement contracts and money is at stake. Roughly, Federer earns over $65 million annually (from Forbes). Tendulkar has earned $18 million through his endorsements (from Forbes). Great incentive for not quitting, I would think!

• Social Proof - Everyone around them say they are the greatest ever. Everyone says, form is temporary but class is permanent. Sachin can think that if Gavaskar could have played till 39-40 years, why can't I? Federer sees people like Hewitt, also a former world no 1 and same age as him, still playing, so why can't he?

• Commitment & Consistency bias - They have both said multiple times, that they will get back their previous form. Also, that they will play till they "enjoy" playing. It is difficult to go back to that one fine morning and say, I am not enjoying playing anymore.

•  Overoptimism tendency - Over reliance on their own individual abilities.They think with a little bit more practice they can get back their previous form.

• Deprival super-reaction syndrome - There may be a conscious or sub-conscious fear in their minds that the adulation and fan-following that they get will wane once they are out of the spotlight.

So, now you ask, all this is fine, but what has all this got to do with investing?

Well, if people like Federer and Tendulkar are being fooled by psychology, just think what your brain is doing to you and your investments? How many stocks have you bought because someone else has it (social proof)? How many stocks are there in your portfolio for years but you are not able to sell because you think you will get back your price (anchoring) or the company will turn around (denial)? How many times have you chased a stock when it hit upper circuits because you just had to have it (deprival super-reaction syndrome?

The list goes on....

Be mindful of what your mind is doing to your portfolio!!

Enjoy investing!

Supreme Industries: Notes from Annual Report

* The Company during the year processed 2,81,452 tons of Polymers vs 2,45,700 tons of Polymers in the previous year, a growth of 14.55% in Polymer consumption.
* The Company exported goods worth US $ 14.32 mn vs US $ 13.49 million (excluding discontinued business of PP Mats) last year, a growth of 6.15%.
* The 23rd plant to manufacture LPG Gas Cylinders and Composite Pipes is ready. It may go into production in the 3rd quarter of FY14 after getting regulatory approvals. The Company has plans to put up another manufacturing unit in Kharagpur during the current year, subject to getting all clearances from State Governments on the land owned by the Company. Investment of Rs 250 cr is planned for this.
* The Company has committed an investment of Rs 415 cr in the year 2012-13.

Fig 1 - Revenue Mix across Segments

Segment Review : Plastics Piping Systems
* The Company has added 169 new products in the range during 2012-2013 taking total product portfolio to 5682 nos.
* CPVC piping has grown by 37% by volume in FY13.
* The company is exploring the possibility of entering into Industrial applications as well as Fire Sprinkler segment of CPVC business. The company has entered into an understanding for technical tie-up with leading world brands in that segment.
* The overall percentage of sale of Value Added Products to total sale increased to 26.47% vs 24.24% of last year. The company expects to further increase the share in years to come.

Segment Review : Consumer Products

* Revenues have grown by 5% and 3% by volume. 

* The company has decided to get out of the traded furniture business altogether.

* The Company’s business in Premium Products sales has increased from a level of 38% in 2011-12 to 40% of overall sales in the year 2012-13.

* The Company has more than 303 Exclusive Franchise Show Rooms on All-India basis displaying entire range of Supreme Furniture.

* The company has also initiated steps to start exporting furniture items

Segment Review : Industrial Products

* Although there was heavy demand recession in general, company managed growth of 21% in Automotive sector and 12% in Consumer Durables, against its planned target of 30% and 18% respectively.

* The company started supplies to two major Japanese companies in Consumer Durable sector and a few other customers in the same and Auto sector.

* The initial trial run for the Cockpit Assembly for one of the prestigious projects of our customer has been completed at the Plant. Company expects supplies to start towards later part of this year. Supplies stabilized for the parts of ‘Vespa’ being made by Piaggio.

* It supported two prestigious product launches of Maruti that is a LUV and a small Car during last year. The plant has successfully started supplies to Honda Car for its first order in recently launched Sedan which has become a market hit. Development is in progress for the next model of Car which is scheduled to be launched during early 2014. The company has bagged order for one more model of Car in mid-size range scheduled to be on road by mid-2014. Company expects good long term prospects with Honda Motors.

Segment Review : Construction - Supreme Chambers

* Out of the total saleable area available of about 2,79,529 sq. ft., the company has till now realized net Rs 143.05 cr against sale of 92,632 sq. ft. Remaining area to be sold would be about 1,61,241 sq. ft. The going rate is around Rs 14000 / sqft.

Segment Review : Composite LPG Cylinder

* The company expects to start production in Jan / March 2014. Company is equipped to make six different sizes of Cylinders ranging from 5 to 14 kg. of LPG.

Expected EPS for June 2014 : 24-25
PE range : 12-15
Expected price range (June 2014): 288-375

CMP: 334

My View:  

HOLD. 

The upside potential at this price seems to be already priced in, so no real point in buying aggressively. On the other hand, the stock is also very unlikely to take a major beating, so may be a good overall portfolio choice as a store of value.

Disclosure: I have a nearly 20% of my portfolio in Supreme Industries, so I am highly biased. This is not a recommendation to buy or sell in the stock.

Market Update - Where are we headed?

In the last 13-14 years, that I have been observing and participating in the markets, I cannot recollect a time where market sentiment was so negative. It was not this bad (atleast in India) in 2000, nor in 2008. Before, there was always a ray of hope, of optimism, that India was doing fine and the market problems were "imported". Once the external problems sorted itself out, Indian markets would go back up. This time I don't see any hope, no optimism at all amongst market participants. Because the problems are within. The problems are self-created and cannot be wished away.

When I speak to my friends who run their own businesses, they say thing s are terrible on the ground. There are just no orders. Inquiries have come down drastically. At the macro level also, the problems are all well documented - very high current account deficit, a central government hell bent on killing the economy by rocketing the fiscal deficit by harebrained welfare schemes like the food security bill. Rupee getting killed vis-a-vis the dollar with the RBI not having enough resources (either through reserves or policy initiatives) to be able to defend the currency, systemic policy inaction and flip-flops so that no one in their sane minds would want to invest in India.

Look at the way the RBI and Finance Ministry is behaving. It is very evident that they are a scared lot and have no clue as to what to do. Chidambaram is giving statements everyday to try to soothe the ruffled nerves of investors. But, it is not working. Simply because investors have lost trust on the effectiveness of the government to deliver on results. What is needed is decisive action, which sadly is missing. What we are getting instead is minor tinkering with FDI policy here and there. None of it is going to make any substantial difference anyway.

Jim Rogers in a recent interview said very candidly that there is nothing good in India (other than being a terrific tourist destination). The fact that he is short on an India ETF proves that atleast he puts his money where his mouth is.

I am beginning to get worried. A lot. I am worried that the era of 7-8% GDP growth was an aberration for India and is now gone forever. We are back to the 3-4% growth rates of the post-colonial license raj era. How long is it before the Indian economy stabilizes or will it ever go back up to 8% GDP growth levels? I don't know. What I fear is that we may be getting into a negative spiral of mediocrity and low-to-no-growth era for the many many years to come.

So,what does all this mean for investments? Specially in equities? I think, its time to take a long, hard look at the stocks in our portfolios. Keep those that can survive in a very difficult environment; which have low or no debt on their balance sheet; preferably have a large component of earnings coming from outside India. And most importantly, moderate expectations. Don't expect more that 10-12% growth. If you do get better, great. But don't count on it. Wait this period out. Maybe in hind sight, you would have missed a great buying opportunity, but it is better to be prudent and give off the first 10-20% of the up move (if it comes) to the really brave. Keep you ears to the ground and see if actual business sentiment is improving. Only then take a plunge.

Disclosure: I am an interested market participant. All views are personal. I reserve the right to be wrong!! I also reserve the right to change my mind anytime!! So, please do your due diligence before investing.