Prof. Bakshi's 8 vantage points to look at a stock

As usual, great post from Prof.Bakshi. In this he goes through the eight ways of looking at a company and provides nuggets of wisdom while looking at the financial statements from the company.

Vantage Point: 8 Points of View For Evaluating a Stock

Yes Bank - Stellar Performance & Stupidity rolled into one!!

First the stellar performance:

Highlights for Full Year ended Mar 31, 2011 (FY11)

• Net Profit up 52.2% to 727.1 cr (477.7 cr in FY10)
• Net Interest Income up 58.2% to 1,246.9 cr (788.0 cr in FY10)
• Operating Profit up 37.9% to 1,190.4 cr (863.3 cr in FY10)
• Net Interest Margin at 2.9% 
• Return on Average Assets-RoA of 1.5%; RoA has been at or above 1.5% over the past 3 years
• Return on Equity-RoE of 21.1%; has been 20% or above over past 3 years
• Basic EPS of  21.1 and Diluted EPS of 20.2

Other Key Highlights as at Mar 31, 2011

• Advances up 54.8%
• Deposits up 71.4%
• Total Assets up 62.2%
• Basel II Capital Adequacy Ratio of 16.5% (Tier I – 9 .7%)
• Gross NPA at 0.23% of Gross Advances 
• Net NPA at 0.03% of Net Advances 
• Book value per share of 109.3 (91.0 as at Mar 31, 2010)

Now, the stupidity:

Yes Bank made 2 announcements - 1) dividend of 2.5/share (approximately 85 crores) and 2) it has plans to raise up to USD 500 million (about Rs 2,000 crore) during the current fiscal to fund business growth . 

These two announcements, to my mind, are contradictory in nature. Why does a company earning 20% RoE growing at over 40% need to pay a dividend? Specially, if it needs to raise equity capital in the near future. Beats me.

Bottomline: Great bank, keep buying on dips.

Book Review: Warren Buffet Portfolio by Robert Hagstrom

This book came very highly recommended to me. Hagstrom's more popular book The Warren Buffet Way was the first book related to investments that I had read. I was eager to read this to understand the approach for creating a portfolio. However, this book was a big let down. Hagstrom, to my mind, has tried to rehash some very popular and easily accessible material from Buffet's shareholders, Poor Charlie's Almanac and other such sources and put together a book. There is nothing is this that a reader can learn from that he won't get from reading the Buffet's letter to shareholders and books on Munger. 

The idea that is propagated throughout the book is to build a focused portfolio of not more than 10-15 stocks. Have a holding period of not less than 5 years. Increase your knowledge about every company you hold. Learn about them, their industry and competitors. 

In a nutshell, a book that has no new insights and repeats very well-known investment ideas and themes. Better to avoid.

Book Review: Investment Gurus by Peter Tanous

I just completed reading Peter Tanous' Investment Gurus. This book has been written on the lines of the Market Wizards series by Jack Schwager.That is, it is a collection of interviews with famous money managers. Added to those are a list of academicians. The list of interviewees are a very good collection of money managers. It includes people like Peter Lynch, Mario Gabelli, William Sharpe, Richard Driehaus and Eugene Fama.

The focus of the book is on finding out the method that each use to consistently beat the markets and to understand if the efficient market theory actually has any basis in reality.

This is a good book to read if you want to flip through the investment strategies of some very well-known and outperforming managers. If you want to have in-depth understanding of any theory, then this is not the book for you.

Elecon Engineering Limited - A good stock to own

Company Background

Elecon Engineering Limited (EEL) is one of India’s largest manufacturer of Material Handling Equipments (MHE) and Industrial Gears and Power Transmission products. MHE systems primarily comprise of various conveyor systems. EEL is one of the largest manufacturers of industrial gears and was the first company in India to introduce modular design concept, case hardened and ground gear technology. EEL is the gear supplier of choice to core sectors like Sugar, Cement, Steel, Fertilizer, Plastic Extrusion and Rubber. They are the only manufacturers of Vertical Roller Mill Gear for the power and cement industry.

Investment Thesis

Turn around in capex cycle has meant that the order inflow has stabilized. EEC has acquired the Benzler-Radicon business from the David Brown Gear Systems Group for a consideration of ~132cr. The company proposes to fund 80% of the acquisition through debt. That means an additional debt burden of 105 cr. This acquisition provides EEL with access to European markets.

The order book is robust. The outstanding order book position on Jan 31, 2011 is 1690 crores. This includes 420 cr added in Q3 FY11. Out of this, MHE orders are 1350 cr and gears are 340 cr. EEL has also submitted bids worth 5000 cr and expects a hit ratio of 20-25%. With the existing order book, there is good revenue visibility for FY12.

Financials

	FY10	FY09	FY08	FY07	FY06
Sales	1109.36	1030.84	927.85	816.6	507.75
Other Income	18.72	-7.89	0.88	0.89	-0.32
Op Profit	168.45	180.72	154.75	123.75	73.45
EBDIT	187.17	172.83	155.63	124.64	73.13
PBT	94.68	92.05	107.57	87.76	45.48
PAT	66.18	57.45	67.2	54.9	27.88
EPS	7.13	6.19	7.24	17.75	48.85
Depreciation	33.12	22.15	14.2	12.22	9.43
Interest	58.71	58.23	33.86	24.66	18.22
Effective Interest Rate(%)	11.26%	9.83%	8.27%	8.69%	8.86%
Tax	24.14	30.65	31.47	29.5	13.09
Effective Tax rate (%)	25.50%	33.30%	29.26%	33.61%	28.78%

Assets	847.68	867.5	646	471.57	308.41
Networth	326.1	275.4	236.72	187.9	102.67
Debt	521.58	592.1	409.28	283.67	205.74
Net Block	344.34	282.91	177.15	122.27	84.55
Cap WIP	17.88	28.11	15.92	4.47	10.66
Debt/Equit Ratio	1.60	2.15	1.73	1.51	2.00
Book Value	35.12	29.66	25.49	60.76	179.87

Debt-Equity Ratio is likely to go up after the acquisition. Increased debt of 105cr would mean an additional interest outgo of around 10-12 cr.

Net Cash (Operations)	170.11	71.25	-20.22	-62.13	-40.51
Net Cash (Investment)	-60.21	-135.33	-79.32	-40.82	-41.73
Capex	84.32	140.1	80.53	43.75	104.64
Free Cash Flow	85.79	-68.85	-100.75	-105.88	-145.15
FCF/Sales(%)	7.73%	-6.68%	-10.86%	-12.97%	-28.59%

Interestingly, EEL has turned net free cash flow positive in 2010 and has turned positive operational cash flow from 2009 onwards.

Dupont Analysis
OPM(%)	15.18%	17.53%	16.68%	15.15%	14.47%
NPM(%) -- (A)	5.97%	5.57%	7.24%	6.72%	5.49%
Asset turnover(avg) -- (B)	1.31	1.19	1.44	1.73	1.65
RoA(%)	7.81%	6.62%	10.40%	11.64%	9.04%
Financial Leverage -- ( C)	2.60	3.15	2.73	2.51	3.00
RoE(%) -- (=A*B*C)	20.29%	20.86%	28.39%	29.22%	27.15%

Quarterly Results

	Q1	Q2	Q3
Sales	247.17	280.91	302.39
Other Income	0.01	0.4	20.55
Op Profit	37.91	39.96	49.65
EBDIT	37.92	40.36	70.2
PBT	19.16	19.95	48.03
PAT	13.32	14.21	36.82
EPS	1.43	1.53	3.97
Depreciation	8.92	9.75	9.83
Interest	9.85	10.66	12.34
Tax	5.84	5.74	11.21
Effective Tax rate (%)	30.48%	28.77%	23.34%

Risks

Political instability may reduce the pace of infrastructure development and may harm the growth for the company.

Input cost of steel is important for margins and any sudden and large increase in prices may impact margins.

Valuation

Stock is currently at 68.95 (NSE closing price) and PE of 19.34 (based on FY2010 EPS) and 7 (based on TTM EPS of 9.85). So, it cannot be termed as expensive. Expected FY12 EPS is around 11-12, with an estimated PE range of 10-12, the expected price range is Rs 110 – Rs 144.

I would not be surprised if I see atleast a 50% price appreciation in one year. The downside risk seems to be limited to 10%-15%.