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What a waste !!

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Rakesh jhunjhunwala is an eminent investor. He is one of the indian investors I follow closely. Recently I found the following interview

I typically read all his interview very closely. He is both an exceptional trader and investor. One of his key approaches to investing is to understand the business model of a company, identify the underlying trend and buy meaninful portions of the company (invest heavily). His investments in praj industries and Titan have been based on this approach.

There several other facets to his investing. He is also an exceptional trader. If you have followed rakesh closely and have of an idea of this brilliant investor, the interview above strikes as completely stupid. The interviewer keeps asking the man about where the market is headed, whether the market will go up or down. Now even an investor like warren buffett has stated that it is a foolish endavour to predict the market in the short term and in the interview rakesh seems to saying something on similar lines. He seems to have an opionion on which he trades, but even he cannot predict. His approach seems to be to trade opportunistically. At the same time he has a deep knowledge of various businesses, their business models and invests based on that knowledge.

Instead of trying to help the reader/ viewer to get behind rakesh’s thinking, the entire interview is about predicting the market. What a waste !!

In addition to rakesh jhunjhunwala, I follow these indian ‘super-investors’ closely

a. Chandrakant sampath
b. Rakesh damani (I may not have got his name right)
c. Chetan parekh (his website capitalideasonline.com is a must read)
d. Prof. Sanjay bakshi

I make it a point to read their interviews and listen to their views closely. I may not blindly follow them, but there is a lot to learn from these brilliant investors.

Searching for investment candidates – III

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In continutation of my previous posts (see here and here), I am posting a very rough analysis of a few more rejected and ‘in-process’ ideas. Again a disclaimer – I am not promoting or justifying any of these stocks. These stock may be injurious to your networth if you are looking for quick profits (if they come, no credit for me on that). With that out of the way, a few more ideas follow

No Go bucket

Motherson sumi systems – The company is priced at a PE of 25. Unlikely that the stock is undervalued. Just had a quick look at the financials and have no reason to believe that the stock could be undervalued.

Electrosteel – The company is into DI pipes and has a PE of around 7-8. The performance has been cyclical. The net profit reached a peak of 97 Crs in 2002-2003 and this performance was repeated only last year with a net profit of 108 Crs. The company raised capital via a GDR issue and has backward integrated into sponge iron. The economics of the business are ok and the performance has been a bit cyclical. The stock may be a bit undervalued, but I am not sure if the discount is more than 20-30% and hence I am not too excited by the stock. The company seems to be fine and the stock a bit undervalued, but I think there are better opportunities in the market.

Go bucket

Savita chemicals – A midcap chemicals company. Topline has grown from 250 crs to almost 700 odd crores. Netprofit in the same period has climbed from 11 crs to around 38 Crs. The company has a low debt on the balance sheet. The margins have held steady at 5% and the ROE is 20%+. The company may make a profit of 40-42 crs this year. At a market cap of around 350Crs the company seems to have a reasonable valuation of 7-8.

MRO-TEK – A small cap company into computer hardware. The topline has grown from 90 Crs to around 150 Crs and the net profit from 7 to around 17.5 Crs. This year could be lower at around 9-10 Crs. Net of cash the company seems to have a valuation of around 7-8. The margins have flucutated between 4-10% and the ROE has also fluctuated between 7-25 %. Cannot make up my mind on this stock. Will need to analyse further. However overall the stock does not look too exciting.

The Gut feel test of investing

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The gut feel test may sound totally illogical and irrational, but I have used it several times. I have posted my investment approach earlier here. As I wrote, I run various filters and do a 1-2 hour check on the basic financials of the company. That is followed by reading the Management discussion and analysis.

If the numbers do not look ok, I tend to give the idea a pass. There are no set rules for the numbers to look ok. Let me list a few cases

1. In case of aftek the acqusition of promoter held companies was a red flag for me. Clear case of conflict of interest
2. In case of Dr reddy’s and other pharma companies the valuation of the company seems to be high and I do not have the skills to evaluate the success or failure of ANDA filings
3. In case of JSW holding, more than 60-70% of the value is due to JSW steel. I do not have a specific insight into the steel business. As I could not evaluate whether JSW steel is fairly valued or undervalued, I decided to give JSW holdings a pass.
4. In 2004-2005, I felt bharat forge was fairly valued and could not project with confidence if the performance would continue. Hence gave the company a pass. Clearly a mistake, but a rational and acceptable one.
5. Indraprastha gas limited – Gas is available at a subsidy. Future margins may drop and hence the current price seems to be reflecting that. So no undervaluation although the stock appears to be so by past measures.

A lot of times, I have analysed the company and towards the end a few points keep nagging me. If I cannot evaluate those critical issues with confidence, I tend to give the stock a pass. The risk of this approach is that I tend to miss out on several good opportunities. I however do not agonize over it if the reason was related to my circle of competence, wherein I do not have the necessary knowledge to evaluate the company well.

In a few cases however, the level of undervaluation may be so great that I have a large margin of safety. In such as cases even if I have a few issues with the company, the downside risk is low and the risk reward equation seems to be fine. In such cases I may buy the stock and hold it till the undervaluation dissapears.

A few general points

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I have recieved Prof Bakshi’s interview via email. However i have yet to write to him and get his approval to forward the interview. In the meantime i have recieved a huge number of requests for forwarding the interview. I will try to email to all who have requested it (if prof bakshi is fine with it) , but please bear with me as the number of requests is huge.

I also recieve personal emails several times. I have attempted to answer them but i am not able to do justice to all of them due to personal time constraints. Hope those of you who do not hear me, will understand that i am time constrained and hence may not be able to reply some times. Leaving a comment would be a good idea in such a case. Some other reader on the blog may be able to respond to your query equally well.

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