Apar Industries - Poised for growth

Apar Industries is involved mainly in the power ancillary business - Conductors, Specialty Oils (mainly transformer oils) and Cables.

Conductor Segment
• CO generates 45% of revenues from conductors
• Apar has a market share of 23% in the domestic market
• One of the top five manufacturers of conductors in the world. Largest exporter of conductors from India.
• Estimated conductor market size in India is 7500 cr growing at 13%
• First turnkey project for High Temperature Low Sag (HTLS) conductors was successfully executed. It is a higher margin product compared to conventional conductors.
• Co is expecting a growth from 2% of revenues to 7.5% of revenues in FY16 in HTLS
• Co is expanding capacity by 30,000MT. Commercial production is to start by September 2016

Specialty Oils
• Domestic market share of 45% in transformer oils
• Fourth largest transformer oil manufacturer in the world and exports to 100 countries
• This segment is dependent on crude prices. Fall in prices depresses topline revenue.
• Shift in demand to 765KV & 1200KV transformers driving demand for higher voltage transformer oils
• Co has 2 manufacturing units - Rabale (222,000 KL) & Silvassa (220,000 KL)
• Co has setup a R&D center in Rabale
• Commissioning a new plant at Sharjah which will start production by Q3 FY17
• Tie-up with ENI of Italy from 2007 to produce auto lubricants

Cables
• Co has 2 manufacturing sites in Umbergaon & Khatalwada - Gujarat
• Domestic market sales is 78% and exports comprises of 22%
• Co moving away consciously from HT LT cables due to low margins and moving into Elastomeric & E-beam cables
• National Optical Fibre Network (NOFN) will create a network connecting all gram panchayats
• 3G & 4G rollout will also add to the requirements

Financials
Market Cap.: 1,767.58 Cr.
Current Price: 459.15
Book Value: 196.60
Stock P/E: 20.52
Dividend Yield: 0.76%
Face Value: 10.00
52 Week High/Low: 541.95 / 321.00
Dividend Payout Ratio: 28.14%
Debt to equity: 0.78
Price to book value: 2.34
Sales growth 5Years: 20.19%
Profit growth 5Years: -7.16%
OPM: 6.19%
NPM last year: 0.96%
Return on assets: 7.97%
Return on equity: 7.66%
Return on capital employed: 18.72%

Risks

• A delay in power distribution sector turnaround may impact the profitability of the company.
• Exports may get impacted due to volatility in currencies
• Speciality Oils are derivatives of crude hence any sharp price movement in crude can impact the company

Opportunity
With a turnaround in the power distribution business and possible benefits from the UDAY scheme, all the segments are likely to benefit. Apar has a good potential to benefit from this trend.

Company website for Annual reports and Concall transcripts - www.apar.com/financials.php
Screener Financials - https://www.screener.in/company/APARINDS/


Disclosure:- I am not a SEBI registered research analyst. This is a chronicle of my personal investment thoughts and NOT a buy/sell recommendation. Please do you own due diligence before investing.

Investing During a Crash

These are some questions that friends and investors kept coming up with during discussions in the last few weeks. And my attempts at answering them.

• Have we reached the bottom? Will the market fall further?
• There is no way I (or anyone) can predict the level at which the price correction in the market will stop.  Technical chartists can provide levels, but they are not sacrosanct. They are based on previous levels in the market. If the situation has changed, the levels also may change.

• Can we start buying at these levels?
• Again a difficult call to take. It really depends on your ability to handle volatility in prices after you buy. There is no guarantee that a stock which has corrected 50% cannot go down another 30% from there. There are two approaches to buying during tough times - i) keep nibbling in small lots once the stock reaches your desired buy levels and ii) wait for the overall market to stabilize and then start buying. In the second case, you will probably end of buying at higher levels, but that is okay. If the choice of stock is right, and you are buying with atleast a three year horizon, a few percentage points should not materially change your overall result.

• Could I have sold before the crash and sat on cash?
• Wouldn't we all love to do it!!! Unfortunately, there is no predictable, repeatable and foolproof way to predict a crash. So, if you could not predict the crash, you could not sell beforehand and have the cash ready to be deployed at depressed levels. On the other hand, if you had sold early, you could have been too early and maybe you would have sold out at prices lower than where it is today even post correction. These decisions are easy only when viewed through the rear-view mirror. Some indicators that can help identify serious market corrections are:
• Overall market (indices) heats up and trades at high PE multiples
• Sectors within the market gets into bubble territory (Dot com, Banking crash etc)
• Large number of IPOs with craze valuations
• Major currency change (appreciation / depreciation)
• Major political event

             

• I don't have any cash now. How to benefit from the low prices now?
• You can't. Cash is the raw material of investing. If you don't have the raw material, you cannot produce the finished goods!! The best you can do is to rejig your portfolio and move cash from one holding to another (either new or existing) based on the relative valuation. But then again, that option is always available, irrespective of market crashes.

There is no easy or simple answer to investing. Remember what the old man said, "Investing is simple, but not easy!!"

Stay Solvent, Stay Invested

It is again that time of the year when there is a slight nip in the air, we pull out the sweaters and jackets from the wardrobes and become nostalgic about the year gone by and excited about a fresh new year coming up. I am exactly in the same mood myself so here is a little bit of what went on in 2015 and some worthless crystal ball gazing for 2016.

The year started with the benchmark BSE Sensex at about 27,500 and ended the year at close to 26,000 losing about 5.5%. During the year, the index went up beyond 30,000 and fell to a low of 24,800, fluctuating 2500 points on either side of the starting mark of the year. Macro economical events held sway on a lot of the market gyrations. Starting from the US Fed rate cut, Greek referendum to remain in the Eurozone, Chinese decline and continued pressure on oil prices and other commodities made their presence felt on the Indian markets. Another very important event which took place was the decision by the government to allow investment of its corpus into the Indian equity markets. This year saw EPFO deciding to invest 5% of its incremental corpus being invested. This is a long-term game changer for India as we would become less dependent on FII flows.

Indian corporate earnings failed to accelerate during the year and the initial euphoria of having a majority government seems to have died down now as people have begun realizing that bringing the Indian economy back on the growth path is not a short term fix. It will take time and the final outcome is also uncertain as the world is going through a deflationary / recessionary phase. India has had a huge benefit from the multi-year collapse of crude oil. That has given some breathing space to the government to get their house in order. At the cost of hazarding a guess, I would think that we will continue to have benign oil prices for atleast a couple of years more, so we have to make these years count.

Mr. Raghuram Rajan has been a bright spot in our economic landscape. I sure hope the government is prudent enough to extend his tenure. Mr Rajan has over this year take steps to bring in more competition into the banking space by giving out licenses for new full service banks and payment banks. He has also resisted the call to reduce rates for most of the year and only did it when the specter of inflation receded. The overall NPA situation in the banking sector continues to be precarious. Mid-sized PSU banks are the most at risk as the new banks will hit their customer base. (For some more information, read "Payment Banks - Airtel Bank in the making?")

Another aspect which is beginning to get scary is the fresh breed of investors / traders who have not seen multiple cycles or major drawdowns on the portfolios talk flippantly about sustainable growth of net profits of 25% or PEs of 30. When this type of cacophony increases, it is time to be careful. Safir Anand has written a great post which I suggest all to read (link here). For a prudent investor, what is critical is to make sure you don't lose your capital permanently. Some of the midcap and smallcaps I see people chasing these days are apt to do just that. Everyone wants a "multibagger" these days. No one is happy with a 20% compounder!!!

In 2016, I think there are a lot of macro headwinds. Chinese slowdown, Eurozone issues are likely to crop up anytime, US interest rates going up, Indian state elections, Crude price volatility all will play out at one point or the other. Like every year my outlook is to protect capital and look for reasonable returns. In fact, I am trying to moderate my expectations so that high expectations don't force me into risky trades.

A step-up in public investment as the government fights to avert an economic slowdown might start paying some dividends in the latter half of the year. Plays on infra or infra-ancillaries can be a good long term bet. Consumption stocks could also get a boost from the pay commission award.

Lastly, stay solvent, stay invested, and have a great year.

Payment Banks - Airtel Bank in the making?

I have always been bullish on the Indian financial sector. My logic is simple. Any industry where there is a very large disconnect between demand and supply is bound to do well. India is a cash / credit starved nation and any business which provides credit to people and businesses will do well over a very very long time. 

The history of Indian banking is very interesting. Refer to Banking in India on wikipedia for a good overview. By now, most people are used to the ubiquitous ATM machines and do not consider private banks as fly-by-night operators who will take their money and run away. We are at the cusp of the third major wave in Indian banking (nationalisation in the 70s and privatisation in the 90s being the first two). With the 11 new licenses given out by RBI for new payment banks, the playing field has been (once again) forever changed. Ten years down the line, banking will not be the same as today. Brace yourself for a huge disruption in the coming years.

So what are payment banks? For simplicity's sake, it is a "technology driven bank", mainly mobile based which will cover most of the services provided by a regular bank except giving loans. They can take deposits of upto Rs 1 Lakh and pay interest on it, provide debit cards, transfer money from one account to another. 

The 11 players who have got the licenses include some very very prominent names - Airtel, Vodafone, Aditya Birla Nuvo, Reliance, Mahindra, India Post, Dilip Sanghvi (promoter of Sun Pharma), Paytm, Cholamandalam and NSDL. All of them are big players in their own fields. Three of them stand out distinctly - India Post, Airtel and Vodafone. Their reach and penetration is really unmatched. Just as an example, Vodafone m-pesa accounts for more than 50% of the GDP of Kenya on its platform. 

Already, we are seeing a beginning of "Uber"isation of services. Players like Vodafone & Airtel who are already there with you. It is so much more convenient if you can just use the mobile to pay for your kirana purchases or on public transport or at petrol pumps. 

Where does that leave the existing banks? The existing large players will push strongly on their apps (HDFC, ICICI, SBI etc). The brunt of the disruption in my opinion will be borne by the mid sized PSU banks and the smaller private banks. We already saw a DCB Bank being routed on the bourses because they accepted the increased competition from these new players. There will be more to come. The age of easy-CASA money may be behind us. The mid sized banks would now have to tie-up with some of these payment banks or invest heavily in their own app infrastructure. 

Let us keep an eye out for the trio - Airtel, Vodafone and India Post for the next leg of banking disruption.

Indian Plywood Industry - Value Migration On The Way

The Indian Plywood industries is at the cusp of a new era. Over the last few years, the organised players (Century Ply, Green Ply, Kitply etc) have been growing at double the rate of the overall industry. This signifies that there is value migration happening from the unorganised unbranded products to the organised branded ones. The overall organised sector is growing 20-25% CAGR. Organised sector is 30% of the overall plywood sector.

The overall plywood industry size is Rs. 180 billion (source: Greenply AR 2015). The MDF industry size is Rs. 13 billion growing at 15-20% over the last 5 years. MDF is engineered wood made from wood (fibres), glued together using heat, resin and pressure. It is also a superior substitute for cheap unorganised plywood. It faces competition from imports. Demand in this sector is driven by ready-made modular furniture, modular kitchen, ready-to-move into offices/retail outlets, a need to substitute low quality plywood, affordability, increasing awareness of customers of better alternatives and shortage of time.

The Indian govt has imposed a ban on new licenses for manufacturing due to the environmental impact. This will help the existing majors.
Growth Levers
GST & its impact
    • Remove inter-state tax anomalies
    • Remove differential with unorganized sector hence a value migration from unorganized to organized players
   
Other growth levers
    • Home renovation cycle is declining
    • India's per capita income rising along with disposable income
    • Rising urbanisation and aspiration levels amongst people
    • Govt focus on "Housing for All" -- Rs 22,407 crores allocated by FinMin for 2015 to create 6 cr (2 cr urban + 4 cr rural) complete houses by 2022
    • Government Announcement regarding construction of 100  smart cities    
    • Focus by HFCs on Tier-2, Tier-3 locations

Over the short term (< 1 year), the industry may have moderate growth owing to the subdued demand in real estate sector. However, the growth levers are likely to kick in over the medium term (2-3 years). The industry looks to have bright prospects over the long term (10 years). It would be interesting to keep a watch on Century, Green and any new player in this space.

Filter Out The Noise

I have stopped blogging over the last few months to be on the right side of SEBI's guidelines. Now, that there is some amount of clarity, atleast in my mind, I have decided to continue chronicling my thoughts once more. The only change is I will restrict myself from discussing specific stocks or valuations related to stocks. 

The last few months saw a tremendous amount of volatility. We have seen both 29000 and 25000 on the Sensex since April 2015. We have seen the Green drama, the unending US Fed rate hike soap opera keeps playing in the background every few months. We are also witnessing a human tragedy of great proportions in the Syrian refugee crisis. The run-up to the US elections has started and is likely to pick up momentum in the months to come.

Closer home, the Bihar polls are heating up. Lalu-Nitish-Modi are battling it out - or so the media would want us to believe. Hardik Patel wants reservations for the Patels in Gujarat. Monsoon session in Parliament did not achieve much, again as expected. Raghuram Rajan did not decrease rates.

So, where am I going with all this? I just want to highlight that all of this is noise. I sometimes go back and read old newspapers. I am yet to see an issue where there is no news printed. There is always something going on. As an investor it is critical to filter out the noise from the signal.

The signals which are important to me as an investor are the following:

1. Passing the GST bill - this has long term implications as it is a fundamental shift on the taxation front. This bill has been making for over a decade and we may be in the last lap of the marathon. 
2. Land Bill - After the Singur agitation, land acquisition all over India has become a non-starter. India needs a stable land acquisition policy so that industries can realistically acquire land for projects. The government does not seem to be making much headway on this.
3. Improvement in Corporate Results - Quarterly results in general have been quite dismal. Management of nearly all the companies' for which I have attended conference calls stated quite candidly that on the ground there is very little traction in the core sectors.

I am skeptical of a major impact of rate reduction that everyone is so keen on. I cannot think that a company will decide to invest in capacity expansion because interest rates are 0.5% down. We need some major projects in the infrastructure space either by the government or incentivized by the government through tax cuts to kick start the real economy.

In the meantime, filter out the noise and remember that in India, news channels are for entertainment ;-)

Stock Update: Sintex

Sintex has come out with a decent set of results for FY2015. 

FY2015 Results (Consolidated)

Sales : 7006.6 cr (up 20%)

PAT : 528.8 cr (up 45%)

EPS (Diluted) : 13.5

Building materials grew 16% yoy (from 2734 cr to 3176 cr)
Custom moulding grew 21% yoy (from 2566 cr to 3107 cr)
Textile grew 33% yoy (from 546 cr to 724 cr)

The company also announced that it had won a large government order for rural RO water shelter enclosure and healthcare centre from couple of states.

The company will add about 1 lakh spindles by Sep 2015 and 2.2 lakhs by Mar'16 bringing the total spindle capacity to 3.2 lakh spindles. Overall the company plans to increase total spindle capacity to around 10 lakhs but that depends on capacity utilization of the initial setup. Company expects operating margins from the textile division to improve by 0.5%  with economies of scale coming in with new capacities getting on-stream.

In building product segment, new products in segments of environment & clean fuels, cold chains and warehouses are driving growth along with education and healthcare sectors. The company has received fresh orders in Prefab segment from new territories and for new product ranges. The company is the only company in India to get government approval for prefabricated biogas plants.

Custom moulding did very well both in India and Europe and is likely to continue with good performance with a pickup in industrial activity.

Of the total US $ 120 M FCCB conversion, only US $ 17 M is yet remaining to be converted, which will happen in Q1 FY'16.

High debt and low promoter holding (and promoter pledging of shares) remains a risk and creates an overhang on the stock.

Overall, it is an interesting stock to keep a watch on.

Book Review: The Education of a Value Investor by Guy Spier

I just finished reading Guy Spier's The Education of a Value Investor. Guy is a well-known value investor who runs the Aquamarine Funds and is based out of Zurich. He has been educated at some of the most renowned educational institutions like Oxford and Harvard Business School. In his book he goes over his career as an investor and money manager and shares his wisdom. 

This is not a how-to book. It has very little in terms of the author's investment process. He does not even talk much about his stock picks and the rationale behind investing in them. As the subtitle in the name of the book suggests, this book truly ties to capture the author's quest for wisdom, enlightenment and through them, wealth. This book is more about getting wiser through self-reflection than about investing.

The book starts with his joining a Wall Street investment banking company D H Blair. His disillusionment with his education starts then. He starts to question the efficacy of an education which cannot help him make the right choices in life. He starts to hate his job and sometime during this period discovers Warren Buffett through a book (Buffett: The Making of an American Capitalist by Roger Lowenstein). This opens up a new world for him. A world of ethical living and value investing. He then goes ahead and makes dramatic lifestyle changes to "bring in Buffett into his life". 

During this period, he met Mohnish Pabrai, an event which again transformed and changed the course of his life. They developed a deep bond of friendship which amongst other things led them to jointly bid for a charity lunch with Buffett.

The book chronicles multiple things that he did to lead a life that was congruent to his beliefs. He moved away from the competitive madness of New York and settled in Zurich, stopped subscribing to his Bloomberg terminal. He started writing thank you notes to people everyday and other such things.

The book is fascinatingly intimate and authentic. Spier talks about his thought processes, his doubts, his shortcomings very openly. This is what drew me to the book. I could identify myself personally with a lot of it. I had, and continue to have similar questions, doubts and dilemmas, both in my life and in investing.

My biggest takeaway from the book is that it seeded the thought of transforming my life, one step at a time, by making small changes which can compound over a long time, by surrounding myself with the people I like, admire and respect, caring for people and doing small things everyday to help others and most importantly, setting up myself in an ecosystem which suits my inner self and helps me to lead a life congruent to my core beliefs. Just for this, this book is a must read.

Stock Update - Sintex Industries

Sintex has been part of my portfolio before and suffered a lot due to untimely acquisitions and foreign borrowings. They are still paying the price for that through  equity dilutions because of conversion of bonds to equity. The reason I started taking a re-look at the company is that it is uniquely placed to gain from the Narendra Modi government's thrust on Swacch Bharat and Clean Ganga projects. Additionally, the new mandate for CSR activities and the resultant push from corporates in making toilets and classrooms in rural areas will create a demand for the companies products.

Swacch Bharat, Clean Ganga & CSR thrust:
Sintex is a market leader in pre-fabricated toilets (90%-95% marketshare) where they manufacture and install toilets with water tank, soak-pit or bio-gas chamber. The total cost outlay by GoI for Swacch Bharat has been put around Rs 62,000 cr of which Rs 14,600 will be provided by the Central Government. Clean Ganga  proposes to spend Rs 51,000 cr to completely stop  discharge  of  untreated  sewer  and  waste  water  from small and medium industries and urban habitations into the Ganges. Under the mission, all villages along the river is to be made free from open defecation. This represents a huge opportunity for toilet blocks, waste management and package treatment  plants. Sintex is a market leader in this space.


Custom Moulding & Textiles to add to growth:
With a revival in the industrial activity, the custom moulding division has started picking up and is expected to improve its performance in the future. This quarter the growth was 24%. 

Textile is starting to get benefits of the capacity expansion that the compnay had undertaken. 100,000 spindles will start every quarter next year 2015-16. Incremental 200-250 cr of revenue will come in at 50-60% capacity utilization. At full capacity, the new capacity is likely to add 1700-2400 cr to the topline.

Negatives:

• The company has outstanding FCCBs which will result in equity dilution to the tune of 25-33% which will be a dampener for EPS growth.
• The company has been investing a lot on capex and is currently running a negative cashflow, though it has positive cash flow.
• Govt projects typically mean delayed payments and high working capital requirements.

My expectations of growth

FY15 - expecting EPS range of 11-12. At a PE of 12, price can be 132 - 144.

FY16 - Expecting growth of 30%. EPS 15-16. PE of 15-20. Price can be 225 - 320.

Disclosure: I am not an investment analyst. Stocks discussed in the blog should not be construed as buy / sell recommendations. This blog is a chronicle of my actions and thoughts in the markets. Please consult an accredited financial advisor before investing yourself.

Portfolio Update - 2014

Another year comes to an end - one which has been an eventful year for India, with a new government at the center, one which has a majority in the Lok Sabha, after decades of coalition politics. The stock markets have run up a lot on partly fuelled by overall global equity market rallies and partly by the hope of an economic revival in India under the new government.

2014 was also a great year from a return perspective. My portfolio returned 135% gains during the year as opposed to a 30.75% rise in the Sensex and 81.67% of the HDFC Equity Fund. (As I have explained above, I try to see my performance with respect to this fund just to make sure that I am not wasting my time picking stocks!!)

Most of the great return came from just sitting out on the picks that I had in the portfolio. That is the beauty of having a long term portfolio with good and stable businesses. I continue to hold on to nearly all my long term picks and remain convinced about their growth prospects in the future. 

During the year, some notable changes in the portfolio were as follows:
New additions - CCL Products, Sintex, Symphony 
Reduced holding - Mayur, Cera
Completely booked profits / losses - Selan Exploration, Finolex Cables, Page Industries

I have also updated the Portfolio page.

The case for Mayur was very interesting and I had to spend a lot of time to think through. It continues to be a business which I am most confident about in the long term and the stock performance over the years has been a 100+ bagger for me, so endowment effect was very strongly present. The only reason to sell was I decided to book some profits as it had grown above 25% of my portfolio and was creating risk that I was unwilling to take.

I wish all my friends a great, prosperous and rewarding 2015. 

May the Force be with you in 2015!

Disclosure: I am not an investment analyst. Stocks discussed in the blog should not be construed as buy / sell recommendations. This blog is a chronicle of my actions and thoughts in the markets. Please consult an accredited financial advisor for financial advice.

Weekend Reading - Curated Links of Interesting Articles - Dec 6-7th

Excellent compilation of Bharat Shah's investment philosophy

http://contrarianvalueedge.com/2014/11/28/bharat-shah-buy-quality-only-quality-at-fair-price-and-hold-for-lt/

How See's Candy changed the way Buffett invested in businesses

http://www.nasdaq.com/article/the-surprising-lessons-warren-buffett-learned-from-a-candy-company-cm418297

How to Dramatically Improve Your Investment Performance with Behavioural Economics
http://time.com/money/3604960/daniel-kahneman-thinking-fast-and-slow/

Snippets on the future of Indian markets from the Gurus

http://firstbiz.firstpost.com/money/wisdom-from-indias-wealth-masters-from-jhunjhunwala-to-other-stock-mavens-111452.html

Software product development with the help from business leaders and not by sitting and dreaming up great products

http://knowledge.wharton.upenn.edu/article/creating-great-software-is-about-taking-blockbusters-a-step-further/

James Montier talks about excessive valuations in the US markets and the need to hold cash during these times

http://www.fuw.ch/article/the-stock-market-is-hideously-expensive/

Weekend Reading - Curated Links of Interesting Articles

Here are my piled up list of weekend reading :-)

An interesting (and contrarian) take on short term view of markets from one of the best investment thinkers of our time, Michael Mauboussin - http://cdn1.valuewalk.com/wp-content/uploads/2014/11/document-1040753371.pdf

Dan Ariely's tips on managing time & being effecient - http://www.bakadesuyo.com/2014/10/how-to-be-efficient/

An interesting view of Snapdeal and the Indian ecommerce space - 

http://knowledge.wharton.upenn.edu/article/how-snapdeal-is-connecting-dots-between-supply-and-demand-in-india/

How IBM's Watson is changing the computing paradigm - http://knowledge.wharton.upenn.edu/article/ibms-brad-becker-on-the-promise-of-cognitive-computing/

Using leverage in a bull-market

In a bull market, a lot of people get enticed to use leverage to enhance their portfolio returns. Leverage comes in many forms, loans using existing stock as collateral, top-ups on home loans and using them to buy stocks, punting on stock futures etc. 

“Unquestionably, some people have become very rich through the use of borrowed money. However, that’s also been a way to get very poor. When leverage works, it magnifies your gains. Your spouse thinks you’re clever, and your neighbours get envious.

But leverage is addictive. Once having profited from its wonders, very few people retreat to more conservative practices. And as well learned in third grade – and some relearned in 2008 – any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a single zero. History tells us that leverage all too often produces zeroes, even when it is employed by very smart people.” - Warren Buffett, Berkshire Annual Report, 2010

In this context, let me recount the story of Rick Guerin - Buffett's contemporary and acknowledged by him as "Superinvestor of Grahamville". Guerin lost significantly and dropped out of the investment landscape after the steep crash of 1974 when he received margin calls because he was highly levered. He had to liquidate some of his best investments including Berkshire Hathaway stock. Today, everyone knows of Buffett and Munger but hardly anyone has heard of Guerin. (In fact, to be honest I was also not aware of Guerin's history before reading about it in one of Mohnish Pabrai's interviews).

As Buffett said in the quote above some people can become rich but in an alternate history (Taleb's definition) of events can become a pauper. So, keep away from leverage.

Don't Build Noah's Ark

We have been witnessing a very strong market sentiment that started with the run up to the general elections and then continued with the once-in-thirty-years win of a single majority by any political party in India. With a pro-reform mindset, the BJP government led by Narendra Modi has promised "acche din" to the people.

I have been bullish on the Indian market since last year and believe that this is just the beginning of a bull market in India. And it has a long way to go. I hear a lot of market players talking about steep corrections in the near future. As long as there is such healthy scepticism in the market, there is unlikely to be any major reversal. Also, intermediate corrections are healthy in a bull market and usually gives the opportunity to investors to get into good stocks of their choice.

A bull-market brings with its in-built  challenges for investors. Sell side analysts and brokerages start aggressively pushing their stock recommendations. Investors get such "multibagger ideas" daily in the inbox, whatsapp, facebook and other such groups & forums. Suddenly, "investment experts" come out of the woodwork and start making recommendations and touting up their "fantastic past records". And people get lured by the easy gains in the market and start "collecting" stocks. Their portfolio starts looking like what I call the Noah's Ark - having two of everything!! Stop. Think. And then only buy those companies which as an investor you are comfortable with; those stocks which are within your circle of competence.

And always remember sometimes the existing stocks in your portfolio and are as good (if not better) than the latest hot stock you are pursuing. So, focus on businesses, moderate return expectations (most errors occur when people try to chase incrementally higher returns) and cut out the noise.

Book Review - The Thoughtful Investor by Basant Maheswari

Over the last one month, other than the annual reports and other research reports, I have been busy reading two books, i) The Thoughtful Investor and ii) The Manual of Ideas. Today I am sharing my thoughts on the first one. I will post the review of the second book in a short while.

Firstly, The Thoughtful Investor is not a mere book on investment. It is more a description of an investment journey that the author Basant Maheshwari has undertaken. A lot of retail and HNI investors in India have probably visited the website/forum he started and moderates, theequitydesk.com, better known as TED amongst followers. 

The first thing that stands out is the exhaustive contents of the book. Very few things that a serious investor needs to thing about is left unaddressed in the book. It covers the psychological aspects of becoming a good investor, the pains of holding too long and the use and misuse of leverage. It gives a reasonable overview of fundamental analysis - though you will need to know the basics as that is not really covered here (and that is how it should be - this book is not really for beginners). It also has a very nice section on portfolio construction - a facet I have seen only very senior and serious investors focussing on, and something which is perhaps the most critical for overall returns than individual stock selection. The book ends with a checklist that can be picked up as-is or modified based on your individual experiences.

What is refreshing about the book is that it captures the passion of an equity investor through the struggles of making and losing money. There are very few good books on experiences of individual investors, specially Indian, and this is definitely one of them. 

The only improvement area for the book that I felt could have been better was the editing. There are quite a few typos and grammatical errors, which at times take away from the pleasure of reading a well-written book.

Every good book should provide atleast one takeaway. The main takeaway underlying theme that I felt coming out throughout was of making enough absolute returns to become financially free. I have heard a few folks complaining about the price of the book (it is priced at 999 rupees) and asking whether it is really worth that price. To me, if you are a serious investor investing in Indian equities, you should read the book, if for nothing else, than to just drill the key takeaway from the book in your heads. Being financially free is definitely worth much much more than the 999 rupees you pay.

Portfolio Update

Being a value investor is fun!! It gives one a leeway for being lazy and inactive while putting on a facade of being intellectually stimulated. 

The above is a disclaimer for delaying updating my portfolio at the end of July and doing it a month late :-)

The updated portfolio is on the Portfolio page of the blog.

The performance of the portfolio has been extremely satisfying to me. Luck does indeed catch up sometimes. For the first half of the year:
Portfolio - 89.3% 
Sensex - 21% 
HDFC Equity Fund - 40% 

HDFC Equity Fund is my benchmark mutal fund. My thesis is that if one can't perform better than a good fund over a period of time, then better invest in the fund and pursue other passions.

This time the returns were distributed and came from many of the portfolio stocks - Mayur contributed the most with a stellar rise, taking the price to an uncomfortable territory. Astral also has gone to a level which is making me uncomfortable, but not yet to the point of selling. Finolex Cables, Balkrishna, Ajanta, Alembic, PI Industries all contributed their fair share in the performance.

In the first half, I added Bajaj Finance, PTC India Financial Services, Kitex Garments and Selan Exploration and booked profits from Page & Atul Auto. 

I believe Bajaj Finance is on a very strong wicket and will do very well for a long period and is available at reasonable valuations (more I suspect due to the fact that they did not get a banking license). PTC Finance is also doing extremely well and has good visibility of earnings in the short and medium term though longer term is hazy. I need to do more due diligence on Kitex and Selan. 

Currently, I am relooking at some of my old favourites like Sintex, Shriram Transport and some others like Persistent Systems, Symphony Coolers to see if they fit into the portfolio.

In my opinion, we have just started a bull-market and we have a long, long way to go. So, good stock selection and portfolio weightage can give outsized returns even from these levels.

Happy Investing!

Stock Idea - Bajaj Finance

Bajaj Finance Ltd (BFL) (CMP - 2293, NSE:BAJFINANCE) is a financial lending company from the Rahul Bajaj group. The company is involved in multiple areas of lending in 3 verticals - retail (consumer), SME & Commercial with a split of 40:50:10 as of now. The company is looking to increase the commercial loan book to 20%.

The NBFC sector is growing consistently. Consumer finance is growing very fast. This is reflected in the growth of the company in the past as well as anecdotal experience at all consumer electronics stores and auto dealerships. With more and more consumption-driven culture and higher disposable incomes (specially in urban centers with double income families), consumer loans is likely to grow well for a very long period of time. Indian penetration of consumer loans / GDP is 11%, whereas it is 20% for China, 23% for Brazil, 54% for Germany and 99% for US. Even at the lower end of the spectrum, there is an opportunity to double the loan/GDP ratio.

In 2 wheeler finance, BFL has a 18% market share. It is the largest 2-wheeler lender in India focused on semi-urban & rural markets. Currently contributes to 30% of Bajaj Auto's 2 domestic wheeler sales. 

It has a 15% market share in consumer electronics finance in India and is the largest in India.

The market is very fragmented with other NBFCs and banks in the fray. BFL has a competitive advantage of being from the Bajaj group so will get a first shot at customers buying Bajaj 2-wheelers.

A lot of banks & NBFCs are in the space. Main competitor is HDFC Bank, followed by other NBFCs like Sundaram Finance, Shriram City Union etc. 

BFL has two major advantages - i) it is already entrenched in Bajaj Auto dealerships and gets an advantage in sourcing customers in the 2-wheeler business and ii) it is well entrenched in the large malls / electronic stores/chains for consumer electronics loans. It is not going to be easy to replicate the reach by others. 

• In FY2014, BFL’s total income was up 31% to 4,073 crore
• Profit before tax (PBT) increased by 25% to 1,091 crore
• Profit after tax (PAT) was up 22% to 719 crore
• BFL’s assets under management rose by 37% to 24,061 crore
• Loan deployment had risen by 34% to 26,024 crore. 
• Consumer lending grew by 36%
• Small and medium enterprise (SME) lending grew by 52%. 
• Commercial lending de–grew by 11% due to the company’s cautious stance on the precarious state of India’s infrastructure sector
• Capital adequacy as on 31 March 2014 was 19.14%, is well above the RBI norms
• BFL’s net NPAs were at 0.28% of total assets
• Present in 117 cities of India, BFL continued to be the largest consumer durables lender in country — and helped finance 15% of all consumer electronics sold in the year. 

The stock is available at a PE of 15 and a P/B of 2.7 which seems reasonable in an environment where all stocks have been bid up aggressively. BFL has good consistent profit growth of 87% over 5 years and a sales growth of 47% over the same duration, which has been rather difficult for the Indian economy. With any improvement in the economy and reduction of interest rates, BFL is well poised to outperform the industry and provide good growth over the longer term.

Note:- I am invested in the stock and thus have a vested interest. Please consult your financial advisor or do your own due diligence before investing.

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.