Value investor india

Sundaram Finance Spreadsheet

In Company analysis, Finance and Banking, Uncategorized

November 2, 2007

1 Min read

I have uploaded the spreadsheet for sundaram finance in valueinvestor india google group.

Please use link – http://groups.google.com/group/valueinvestorindia to download the file. Please also see the disclaimer, as I am not recommending this stock. The spreadsheet analysis (correct or wrong) is my personal analysis of the company.

You can find the sum of the part analysis of the company under the tab – sum of parts.

Please feel free to leave a comment if you find something wrong in the spreadsheet.

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Allahabad Bank

By Rohit Chauhan

In Company analysis, Investment ideas, Uncategorized

October 29, 2007

4 Min read

3 comments

My notes on Allahabad bank

About
Allahabad bank is one of the oldest banks in India with over 2000 branches. The bank’s branch network is predominant in UP, Bihar and other northern parts of the country. The bank also has 47 specialised branches for various business activities such as Industrial finance, Collection service, Treasury management etc. The Bank is a PSU bank
The bank was a basket case a few years back. I was reading a research report when the bank came out with an IPO in 2002. The bank had NPA of 10.5% which was actually a reduction from 15.1% in 1998. So technically the bank had a zero networth till 2002. The bank has improved its performance since then.

Financials
The Bank has improved its financials substantially in the last few years. The following Key parameters of the Bank have shown improvements from 2002 to 2007

ROE – 11.2 % to 22%
CAR – From 10.5% to 13%
Net NPA – from 10.5% to 0.9%
ROA – From 0.6% to 1.3%
Absolute Net NPA – from 1160 Cr to 315 Cr
Credit deposit ratio – from 48% to 65%

Income growth has been 15%+ for the last 5 years
Net profit has also grown by 20%+ per annum over the last 5 years

The following financial numbers have remained stable or not shown much of an improvement
Other income as a percentage of total assets
Provision ratio has dropped to 70%
Yield on asset – In line with fall in rates over the past few years.

Positives
– The key indicators such NPA, ROE, CAR, ROA, Credit deposit ratio, income and netprofit growth are good for the bank.
– The bank has been expanding its branch network and also getting into the international markets. In addition the bank has kept its NPA’s low in percentage terms and absolute level.
– The bank is also increasing the other income component. The other income which comprises of fee income, trading etc has grown at a much faster rate this year as compared to the Net interest income.
– Operating costs as a percentage of total income has dropped mainly due to reduction in manpower costs. The bank has thus become more efficient in the past few years.

Risks
The biggest risk for the bank is political interference. As the majority shareholder is our government, you can never be sure what hairbrained scheme they will come up with. In the past there have been loan melas, loan writeoff etc. This has reduced in the last few years, but you never know.
In addition the NPA are controlled. However the bank operates in UP, bihar etc. There is a small risk of the rise in the NPA.

Comparitive Valuation
The bank is currently selling at a PE of around 5 and a P/B of around 0.9. On a comparitive basis SBI sells for a PE of around 17 and P/B ratio of around 2.5. SBI is a bigger bank, but on Key parameters such as ROE (around 18% ) , Growth rates (net profit around 8% for last 5 years) etc is not much better than Allahabad bank.

The other top notch bank HDFC is priced at around 35 time PE and P/B of around 6.5. On certain parameters such NPA and growth the bank is ahead of Allahabad bank, however ROE is higher for Allahabad bank. Finally the market recognizes the qualilty of HDFC bank’s management and performance and has priced it accordingly

Conclusion
Allahabad bank is one those non-glamorous, dull stocks. However key to investing is not how sexy the stock is or how much sizzle it has, but whether you can buy a stock at a discount to intrinsic value.
Personally I feel the stock is a bit undervalued, however I have yet to make up my mind on it . I don’t see an immediate catalyst to unlock the value, however if management continue to perform as it has in the past 4-5 years, the returns should be decent.

Please see disclaimer

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The frustation with Value investing

By Rohit Chauhan

In General thoughts, Investment process, Uncategorized

October 23, 2007

5 Min read

8 comments

I received the following comment from amit and can completely empathize with his frustation. Instead of replying via a comment, I thought of posting it as my reply is rather long winded. My reply is after amit’s comment.

Hello Rohit,
In 2005 i passed from my engineering course and joined a software MNC.As there was too much hype about stock markets i too got lured into it and had my Demat account.

Confused why i am writing this story,please read on.The next part was to do some investing and for that i wanted to earn big and fast.My first trade was buying Reliance pre split at 830/- a share.Many said it was overvalued and i wont gain from split.I had other thoughts,i have always had a fascination for reliance and i thought i was perfectly right.In fact i was and today that 830/- has zoomed to 5000/-.

The next thing i heard was value investing.And i hate the day i heard about this whole value investing funda.I started to read blogs of value investors and plz dont take otherwise they are so sick people that right from 8000 level of sensex they are saying that the market is overvalued and market will crash and only value investors will have the final say.Today market stands tall at 17500 and value investors are as usual worried.

And after devoting so much time to value investing i feel i have missed the bus from 8000 to 17500 in a big way.Guys who had simply invested in sensex (famous) stocks have made much much more than what i have made.

May be all this value investing will come handy when the market actually crashes and go in a bear phase.Seems that is not going to happen anytime sooner.

I m sorry for myself and for most value investors i guess.Most have lost…..agree or disagree i hold my view………

Amit agarwal.

My response

Amit

I can understand your frustation. I will not try to ‘sell’ you the concept of value investing or justify it. I think that is something one has to decide for himself.

Let me first try to clarify (per my understanding) what value investing is not. It is not a system of predicting the market. I am not sure if anyone could have forseen this rise in the stock market from 3000 to 18000 (the market was at 3000 in May 2003). One can guess that the market will do well in broad terms, but it is very difficult to predict whether the market will be at 20000 or 25000 next year.

In addition, one can only estimate (probabilistically) how over valued or undervalued is the market . See my post on the same topic here. So if someone is sure that the market will tank soon or take off, take it with a pinch of salt (value investor or otherwise)

One important point to remember is that value investing does not work all the times. Over a 8-10 year period you can do well ( I am saying can and not will), but there will be phases when you will underperform the market, especially during bull markets. This is not a new phenomenon. Value investor got killed during the 1999-2000 dotcom bubble in the US. Warren buffett who is recognized as ‘the’ investor was assumed to have lost it and the press was writing him off. So if you want to follow value investing , be prepared to look like a fool sometimes. Also if you recommend an out of favor, value stock, your friends may smile (if they are polite and don’t want to laugh at your face).

Finally value investing is buying something for less than what it is worth. What can be more rational than buying something for less than it is worth…we buy all other stuff that way …except maybe stocks. The approach is simple but it is not easy. On the contrary it is emotionally very taxing. I have gone through the same phase myself. I started off in 1999-2000. I did not have experience then and saw my portfolio bleed as the market tanked. The stocks which I though were cheap, became cheaper …can you believe that concor sold at 5 times PE in 2003, blue star at 5 times and so on.

I was not able to understand the reason why the undervalued stocks I was holding were not appreciating then and why no analyst was even analysing or recommending them. It took 2-3 years for the stocks to be recognized and the value to be realised.

I have not regretted being a value investor over the last 10 years. I chased IT stocks in 2000 and lost money on that. I have found value investing to be a rational approach and from personal experience, a profitable one too.

I agree the last 3-4 years have been tough for value investors, where you may have lagged the market. Will it end soon and then everyone will convert to value investing and value investors will have the last laugh? I don’t know and frankly not concerned about it. I just prefer to follow a logical and rational approach, which is what value investing is about.

I would also recommend you to read this article by micheal mauboussin on process v/s outcome . See the matrix closely and I hope you realize that even when you follow a good process, the outcome will not always be favourable (but over time favourable)

One last suggestion – try to invest some portion of your portfolio in an index fund or a good mutual fund while you experiment with various investing styles and pick one eventually. Maybe that will reduce the regret.

please feel free to leave your response to amit’s points in the comments

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How to look at the market swings – Time horizon

By Rohit Chauhan

In Investment process, Uncategorized

October 21, 2007

4 Min read

7 comments

I have been re-thinking my time horizon for investments for some time and have made some changes to it. The corresponding impact on my investment decisions and how I look at the market swings has been dramatic. My earlier time horizon was on an average 2-3 years. However I have now increased my time horizon to 10 years for my SIP component. The active portfolio component still has a horizon of 2-3 years.

I cannot understate the impact of extending or changing time horizon has on how one looks at market volatility, current events, investment ideas etc. Let me illustrate

10 year or more horizon – If you are in you 20’s, 30’s or even 40’s this time horizon makes sense. For a time horizon of 10 years, short term market movements have no importance. Over a 10 year horizon, if you are looking at index funds or well managed mutual funds, a small amount of overvaluation does not matter. These overvaluations would even out as long as one has not bought extensively during the peak. At the same time if you are investing via SIP (systematic investment plan), then during a 10 year or more period, there will be periods of recessions, market bubbles and all kinds of fluctuations. However the portfolio should perform well (see my post on the power of SIP here)

If like me, you are investing a portion of your portfolio with the above horizon, the current circus on PN notes, subprime crisis in US, oil price etc etc will not hold too much importance. If you feel that Indian companies as a whole will do well in the next 10-15 years, then find an ETF, get into an SIP and get on with other things in life

2-5 years – This is my active portfolio horizon. I tend to look for undervalued companies selling at 50% discount to intrinsic value and if the gap closes in 2-3 years, I have a 20-25% return per annum. For this horizon, current market events make a difference in the sense they provide me opportunities to buy stocks which have been beaten down for no reason. The more the better. Beyond that, it doesn’t matter whether the market will open 1% up or 1% down.

1 year or less – This is the time horizon for the aribitrage component of my portfolio. I have written about a few likely opportunities earlier. Here some corporate action such as buy back, rights issue, spin offs create an opportunity. In this component, current market level or events should not matter. The company specific developments are more important. However I have seen that sometimes market events can suddenly throw off the entire calculations and result in a loss. I am still not heavily into arbitrage and would not have more than 10% of my portfolio in it in the future.

1 day – 1 month – I do not operate in this horizon. Profitable or not, it is not my cup of tea and I do not have the stomach for it. This where all financial websites, TV channels’ and several blogs focus. In this time horizon the current PN issue, subprime in US and whether the market will open higher or lower on Monday may matter. Question to ask yourself – are the returns you are making commensurate with the effort?

All I can say is that if you decide to play this game, have the stomach for it and don’t risk too much capital.

I have been reading on some websites and blogs, stories of people who got into the market near the top and are now suffering losses. I can empathise with them as I have gone through the same. The problem is that most of us think we can tolerate losses, but when they really happen it is gut wrenching. The worst thing to happen is that such people get scared from the market for ever and never return back. That is definitely not good in the long term if you want to build a decent nest egg.

I think it is important for us to understand our risk tolerance and see which time horizon we want to operate in and take investment decisions accordingly. That ofcourse is easier said than done.

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Sundaram Finance Spreadsheet

Allahabad Bank

The frustation with Value investing

How to look at the market swings – Time horizon

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