Equity Advisory

Are you looking for an honest, transparent and independent equity research and advisory? www.intelsense.in is run by Abhishek Basumallick for retail investors. Subscribe for long term wealth creation.

Monday 19 December 2011

Margin of Safety - The most notable quotes from Seth Klarman's investment classic - part I

I just finished re-reading Seth Klarman's "Margin of Safety". This time I made notes of all the important lessons from the book. I will be putting these up in the next few posts. Read them at your leisure. In it is some of the best wisdom on the stock markets from a person who is a "Investment-Hall-of-Fame" life-member.

Part II
Part III

On investing

To investors stocks represent fractional ownership of underlying businesses and bonds are loans to those businesses. Investors make buy and sell decisions on the basis of the current prices of securities compared with the perceived values of those securities. They transact when they think they know something that others don't know, don't care about, or prefer to ignore. They buy securities to appear to offer attractive return for the risk incurred and sell when the return no longer justifies the risk.

Investments, even long term investments like newly planted timber properties, will eventually throw off cash flow. A machine makes widgets that are marketed, a building is occupied by tenants who pay rent, and trees on a timber property ultimately are harvested and sold. By contrast, collectibles throw off no cash flow; the only cash they can generate is from their eventual sale.

There is nothing esoteric about value investing. It is simply the process of determining the value underlying a security and then buying it at a considerable discount from that value. It is really that simple. The greatest challenge is maintaining the requisite patience and discipline to buy only when prices are attractive and to sell when they are not, avoiding the short-term performance frenzy that engulfs most market conditions.

On Margin of Safety
A margin of safety is necessary because valuation is an imprecise art, the future is unpredictable, and investors are human and do make mistakes. It is adherence to the concept of a margin of safety that best distinguishes value investors from all others.

There are only a few things investors can do to counteract risk: diversify adequately, hedge when appropriate, and invest with a margin of safety. It is precisely because we do not and cannot know all the risks of an investment that we strive to invest at a discount. The bargain element helps to provide a cushion for when things go wrong.

The trick of successful investors is to sell when they want to, not when they have to. Investors who may need to sell should not own marketable securities other than US treasury bills.

Thursday 15 December 2011

Taxes in India: Wake Up Call

Looking at the tax scenario in India is very depressing. Only about 3% of Indians (35 million out of 1.2 billion) pay taxes.

Tax Receipts /GDP
Total debt /GDP

A recent report by Global Financial Integrity estimated that between 2000 and 2008 $104 billion was illegally transferred out of India to avoid taxation. That amounts to around one-third of the country's external debt.

But India does not seem to be very interested in trying to curb black money or arm-twist the banking safe-havens into telling the country who the depositors are. Does the government have something to hide themselves or are they actively shielding their near and dear ones?

The tax to GDP ratio is really scary. We need to quickly increase the tax base by taxing all types of income. The source of income should not be made a determinant of whether it should be taxed or not. So, all income whether agricultural or not needs to be taxed. I see no reason to not take taxes from the rich and super rich farmers. Also, this loop hole makes cheats out of otherwise honest men. (Remember, Amitabh Bachchan suddenly realized he was a farmer and bought farm land in UP!!)

Implementation of GST is also important to create a standard policy environment across the states. It has been delayed but the FM had promised that it would be implemented in 2012. I am hoping he will keep his word.

If we can take the tax/GDP ratio to nearly 30%, it would mean a lot more money in developmental and social schemes. I hope the government sees some sense.

Thursday 17 November 2011

Sintex Industries - Fallen Angel

Sintex Industries has corrected significantly over the last few quarters.

The main reason it has corrected is the currency overhang on their FCCB borrowing of $225 million. The market is assuming that since Sintex took on the loan at a rate of Rs 40.53 and the rupee has depreciated to Rs 50-51, there is a large impending forex loss.

Here is where I think the market is wrong. If you look at this year's annual report and read through the details of the FCCB, here are some of the facts you will get.

1. In respect of US$ 225 million zero coupons foreign currency convertible bonds (FCCBs) raised by the Company on March 12, 2008 during 2010-11, no FCCBs were converted into equity shares. The bondholders are entitled to apply for equity shares at a reseted price of `246.50 per share with a fixed rate of exchange on conversion of `40.53 to US$ 1. On full conversion of FCCBs paid up capital of the Company will increase by 36994928 equity shares of `1 each amounting to `3.70 crore.

2. Premium payable on redemption of FCCB conversion is 263.17 cr is already put in as Provisions in this years Balance Sheet.
3. Total Rs 986.11 cr Fixed Deposits. Rs. 507.11 cr are lying as unutilized amount of FCCB as part of the FD.
The 3rd point is the most critical one here. Out of $225 mn, nearly $100mn is lying unused in the bank as an FD. The company has a total of about $190 mn in Fixed Deposits on Mar 31, 2011. So, it should have no problems at all in paying back the FCCB. I am assuming they would not be converted as the price of Rs 246.50 will be tough to get to by Mar 31, 2013 when the FCCBs come up for redemption.

Sintex is also a company which has paid a dividend consistently for the last 78 years!!

The Consolidated EPS for FY11 was 16.97. The management has guided a 20% revenue growth this year. Even if we take a conservative view and take a flat growth, at a consolidated Rs. 17 EPS, the stock is currently available at a PE of 5.1. This is less than half of the last 5 year's average PE of 11.

If someone can hold on for 2 years from now, the expected 2014 EPS is likely to be upwards of Rs 25. At a PE of 8-10, the possible price range is Rs 200-250. That is more than a 100% appreciation in 2 years.

Note: I am invested in Sintex and may be biased. For all investment decisions, please consult your financial planner.

Monday 14 November 2011

Guru Speak: Warren Buffet's Partnership letters from 1957-1970

Warren Buffet's early days as an investment manager is documented in these letters. This was before the Berkshire Hathaway days when he managed money of friends, relatives and other known people.

For his Berkshire partnership letters, you can go to the Berkshire Hathaway website. You can also read "The Essays of Warren Buffet" by Lawrence Cunningham for a topic-by-topic coverage of the annual letter contents. Incidentally, this is one book that Warren Buffet himself recommends reading.

Buffett Partnership Letters 1957-1970

Sunday 13 November 2011

Guru Speak:Michael Mauboussin

Michael Mauboussin Long Term Investing in a Short Term World
Mauboussin is a extremely successful value manager and thought leader. He has three written excellent books:
Think Twice: Harnessing The Power Of Counterintuition
More Than You Know
Expectations Investing: Reading Stock Prices For Better Returns

Sunday 6 November 2011

Supreme Industries - Notes from Annual Report'2011

 Here are my notes on the 2010-11 annual report for Supreme Industries:-

* The Company is currently putting plants at two new locations. i.e in Halol (Gujarat) for composite cylinders and Hosur for Protective Packaging Products. Both these plants to be ready in Dec 2011 – Mar 2012 period.

* The Company invested a sum of RS 258 crores to augment capacities and to start a new
unit at Sriperumbudur in Tamilnadu. The company expects to invest Rs 200 crores in 2012.

* Growth was highly impacted due to high cost of raw material.
* Aqua Gold grew more than 40%.
* Lifeline CPVC grew more than 100%
* Fittings grew by over 40%
* After 3 years of degrowth, the exports grew this year by 14%

* Overall segment grew by 25% by value and 13% by volume. This implies higher sale of high-margin products.
* The company is closing down the mats business. It has a annual revenue of only Rs 15 crores.

* Strong growth of 30% overall
* Automotive products grew by 39% and appliances by 69%. Consumer electronics segment was weak.
* Company had bagged order for development of interior parts for new version of trucks from Tata Motors, which included completely assembled Instrument Panel, i.e. Cockpit.
* The Company has also bagged order for development of plastic parts for prestigious ‘Two Wheeler’, to be launched by Piaggio, sometime during early 2012.
* Expecting sustained growth of 25% to 30% year on year for next 3 to 5 years

* Overall segment grew by 27% by value and 20% by volume. This implies higher sale of high-margin products.

* Packaging Films sales were stagnant. Company is trying to move into new areas of applications and reduce its dependency on oil packaging.
* Protective Packaging products grew by 26% by value and 13% by volume. This implies higher sale of high-margin products.

* The average rate of Interest has gone up to 9.72% from 7.93%.
* The Company has chalked out Capex of Rs 1000 crores over a period of five years from 2010-11 to 2014-15 across all the products to tap the growth opportunities and to keep the pace of growth momentum so as to achieve desired CAGR of around 20% on y-o-y basis.
* Crisil has upgraded the rating outlook to "AA-/Stable" from "A+/Positive"
* The Company would try to bring the interest cost below 1% of Total Turnover by the end of next year.

Expected EPS for June 2012 : 15-16
PE range : 12-15
Expected price range : 180-240

Wednesday 2 November 2011

Guru Speak: Charlie Munger

A couple of old videos of Munger, but worth watching over and over.

University of Michingan-2010

Talk at Caltech-2008