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Thursday 28 April 2016

My interview on Sharebazar

The sharebazar app has published my interview yesterday.

Part I - You can read it from the link here.

Part II -  You can read it from the link here.

You can 'continue as guest' on the app / site and read the interview without installing the app (in case you don't want to).

Saturday 9 April 2016

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

• 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

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%

  • 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
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.

Wednesday 17 February 2016

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!!"

Thursday 7 January 2016

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.

Sunday 18 October 2015

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.

Sunday 11 October 2015

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.

Monday 21 September 2015

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 ;-)