Parag Parikh's view on the US downgrade by S&P

We tend to make decisions based on the currently, readily available
information vividly displayed. Open any newspaper or flip through a business
channel, or go to a party, there is only one talk of the US being downgraded
by the S&P. Why? Because of the high fiscal deficit and the high amount of
debt. Is this really new? Did not the world know about it? So why the
reaction? Well it is because of the availability bias. Today the downgrading
is the centre of attraction. 

Go back a couple of months in the memory lane.
The 2G scam, the Anna Hazare fast, the CWC games scandal. When they were the
centre of attraction the newspapers, the TV channels concentrated only on
those news. Although none of the matters have still been sorted out, how
much reporting does one see? Over the next week the euphoria on the down
grade will die down.

As the fear dies down and the reality dawns, things will improve. When this will happen, no one knows. It can be tomorrow, a week or a month or a year from now. You make the choice.

One another bias investors are prone to is the Representative Bias. The 2009 crisis still haunts investors. The way the stocks lost values is still very vivid in the minds of investors. One should not consider the recent downgrade and the fall as a representative of the 2008/2009. This is very different. We are not in a situation like that.

Lastly coming back to the downgrade by S&P. If they were so good in their judgments what happened in 2008/2009? Were they able to assess the quality of derivative mortgage backed securities which led to the downfall of so many financial institutions and banks? 

We are living in a society where insanity and irrationality works. The best way to survive is to follow a process and be disciplined to keep to that. The process: Buy good sustainable businesses available at attractive valuations and run by good management. The discipline: Think long term and not be swayed away by market swings.

Read the full post here: https://www.ppfas.net/blog/2011/08/08/sp-downgrade-caution-or-an-opportunity/

2008 vs 2011 - Which is a greater crash?

Fundamentally, we are not even close to the problems that were there in 2008. Credit markets froze then. Now, nothing of the sort is happening. S&P is basically getting back at the political top brass in the US. These were the people who lambasted them for not providing enough warning before the housing crisis and S&P, Moody's and Fitch got the wrong end of the stick back then. Now is their time to hit back. Revenge, as Dan Ariely argues in his latest book, is a very powerful motivation.

Funds and Institutions will probably not stop buying US bonds because a "A" was replaced by a "+" in somebody's report!! More because there is no credible alternative. Euro is in worse state, and Japanese Yen is not even in the running anymore. In this turmoil, Gold & Silver might shoot up along with the clamour for a gold-backed currency.

If we keep our heads above water now and can invest, 12 months down the line, we'll be happier for it.

My only caveat is that there should be no more adverse developments. Then the time horizon may need to be stretch from a year to more.

The Lost Art of Selling Stocks - Excerpts from Sanjoy Bhattacharya's column in Forbes

I am a great admirer of Sanjoy Bhattacharya, Prtner in Fortuna Capital. I enjoy his talks and columns that he writes for Forbes. This month he has tackled a great topic that merits repeating and internalizing. Here are some of the important thoughts from his article.

"I had managed to acquire any investment wisdom considering my labour of love for the past 25 years. ... it struck me that selling smart is probably the single most important element of investment success over the long-haul. In fact, I would dare to go one step further and suggest that accepting losses promptly is the key to investment nirvana."

"more often than not, one is too early to the party and the wait can be fairly embarrassing. In addition, the problem with a truly long timeframe is that in a fair number of cases the dynamics of the business begin to shift gradually which counter-intuitively has a disproportionate impact on price"

Private equity investors looking to buy a business typically have a holding period between three and five years. While too short a horizon typically leads to over-trading and disastrous results, it is vital to establish a finite exit point in order to have a realistic understanding of ‘intrinsic value’ and judge what management can realistically achieve. So, buy-and-hold is a sensible approach provided the fundamentals remain in good shape and in line with what can be reasonably expected but ‘forever’ might stretch both intellect and judgment to the brink.

While remaining disciplined in terms of the process of stock-picking, the seasoned value investor waits patiently for Mr. Market to provide opportunity. Typically, there are just four reasons to sell:

• A clear deterioration in either earning power or ‘asset’ value.
• Market price exceeds ‘fair’ value by a meaningful margin.
• The primary assumptions, or expected catalysts, identified prior to making the investment are unlikely to materialise or are proven to be flawed.
• An opportunity likely to yield superior returns (with a high degree of certainty) as compared to the least attractive current holdings is on offer.

Two genuinely useful primers I would recommend are The Zurich Axioms by Max Gunther and It’s When you sell that Counts by Donald Cassidy.

“Dead money” does insidious damage to the sensible portfolio, not by falling precipitously and then getting stuck in a narrow range, but far more by preventing redeployment of the same capital in distinctly superior opportunities.

Two simple rules come to mind. First, what works for me personally, after years of coping with unremitting losses is to sell out completely whenever a new investment shrinks by more than 15 percent. Not only does this deal with my dumber prejudices and blind spots in a ruthlessly efficient manner, more importantly it frees capital. With ‘dead money’ it is probably best to sell one-third, maybe even half the holding rather than the entire position simply because such stocks occasionally experience incredibly short, sharp rebounds. That is probably the moment to get rid of the rest! One final comment: When you are carrying out a portfolio review, resist the temptation to sell the stocks with the best profits. Instead, relentlessly focus on selling the companies which meet the BBBB test — bent, broken or beyond belief!

The other really serious affliction is refusing to sell because of the taxes that need to be paid. In a sense, this amounts to putting the cart before the horse. The idea behind sensible investing is to earn profits, not avoid taxes.

 Read the full article here: http://business.in.com/column/column/the-art-of-selling-stocks/27282/1

Balaji Amines - Takeaways from their quarterly conference call

Balaji Amines had a conference call on July 28, 2011.

Here are the key takeaways from it:-

1. Methyl Amine capacity is getting increased from 24,000 to 54,000 tons
2. Production of dimethylformide is to start by end of 2013. Total capacity planned is 30,000 tons. Currently, only RCF manufactures this in India and has a capacity of 5,000 tons. India imports the rest of the demand of around 30,000 tons. After Balaji's capacity comes online, India may be in a position to meet all of its needs domestically with some export opportunities as well.
3. The expected revenue from both these initiatives from a 3-year timeframe (2014-15) is about 350 cr. 180 cr is expected from the methyl amine expansion and another 170 cr from  dimethylformide.
4. The company has filed for European DMF for PVP K30. It will take about 6-8 months to get approval. Once approved, the company will be able to export PVP K30 to Europe.
5. The interest costs have gone up dramatically from 9-10% to 13.5-14% currently. This has resulted in high interests costs this quarter and is likely to remain like this for the next few quarters.
6. Prices of key raw materials have also increased after accidents in BASF and Nan Ya Plastics, two large global suppliers.
7. The company has a capex plan of 70 cr out of which 50 cr is for the methyl amine expansion and 20 cr for setting up dimethyl formide production.
8. Company has a working capital loan of about 80-85 cr and total loan book of 157 cr.
9. The newly added capacities are working at 40-50% of capacity currently.
10. The company is targeting a topline of 420-450 cr in FY12
11. The company is targeting a PBT of 47-48 cr in FY12
12. The promoter holds 54% of the company's stock and another 20% is held by close relatives. 20% of promoter holding is pledged to banks to get beneficial terms for the term loans.

Results Update Q1 2011 - JK Lakshmi Cement

	Q1 2010	Q1 2011	% Growth
Sales	323.59	391.79	21.08%
Op Profit	34.62	54.47	57.34%
Net Profit	16.81	22.75	35.34%
EPS	1.37	1.86	35.77%
Cash EPS	3.05	4.76	56.07%
Op Margin	10.70%	13.90%
Net Margin%	5.19%	5.81%

• Margins have increased
• Good overall growth
• Interest expenses have doubled and may go up higher in the next few quarters

Results Update - Shriram Transport Finance

Good set of numbers from STFC. Profit growth has been better than my expectation. But continuous rise in interest rates is surely going to have a more serious impact in the coming quarters.

	Q1 2010	Q1 2011	% Growth
Sales	1233.51	1393.22	12.95%
Op Profit	948.29	1039.49	9.62%
Net Profit	288.94	347.3	20.20%
EPS	12.76	15.34	20.22%

Results Update - Supreme Industries, Balaji Amines

Supreme Industries (Consolidated):

	Q4 2010	Q4 2011	% Growth	FY 2010	FY 2011	% Growth
Sales	669.98	732.52	9.33%	2007.02	2436.2	21.38%
Op Profit	100.82	113.94	13.01%	298.68	357.39	19.66%
Net Profit	51.91	60.25	16.07%	155.98	195.84	25.55%
EPS	4.09	4.74	15.89%	12.28	15.42	25.57%
Cash EPS	5.28	6.01	13.83%	16.45	20.29	23.34%
Op Margin	15.05%	15.55%		14.88%	14.67%
Net Margin%	7.75%	8.23%		7.77%	8.04%
RoCE%	7.47%	8.70%		21.95%	26.35%
RoE%	9.48%	11.00%		28.48%	35.76%
Assets	1138.48
Net worth	547.71
Loaned Funds	511.24

• Dividend of Rs 3 per share has been declared.
• No news on the real estate sale. 
• Q4 growth has been muted, although annual results are reasonably good.
• Net margins have been consistently been increasing last few years. Stands at 8.04% vs 7.77% last year and has actually doubled in the last 5 years from 4% in 2006.

Balaji Amines

	Q1 2010	Q1 2011	% Growth
Sales	78.91	114.52	45.13%
Op Profit	12.03	15.04	25.02%
Net Profit	6.22	7.17	15.27%
EPS	1.92	2.21	15.10%

• Interest outgo has nearly than doubled - from 2.65 cr to 4.95 cr