Latest stories

You can be a stock market genius – Introduction

By Rohit Chauhan
In Arbitrage, Book review, Uncategorized
March 26, 2007
1 Min read
3 comments
Y

I am currently re-reading the book by ‘Joel Greenblatt’. I will post my thoughts and key points which catch my eye. It is not a book summary or review. Look at it more as running notes on the book (based on memory).

– 8-9 stocks can help one diversify almost 80-90% of the non-market risk. With 20+ stocks the non-market risk reduces by almost 95 % (quoting from memory)
– don’t depend on broker recommendations. They are baised on buy side as they make commision if you buy stocks. Also as there are always more stocks to buy (for an investor) than to sell (one’s holding is limited in comparison to the total universe of available stocks), brokers are more interested in generating buy recommendations. Have seen the same in india. As a result I tend to look at sell recommendations more closely than buy recommendations.
– small cap and midcap is a fertile ground to find undervalued stocks as these stocks are neglected by brokers and also by large investors due to various size, legal and other types of restrictions.

I will keep posting more notes as I continue reading the book

Read on3 comments

Indo nippon electricals a Value trap?

By Rohit Chauhan
In Company analysis, Investment ideas, Uncategorized
March 24, 2007
3 Min read
3 comments
I

I got the following comment on my previous post on Indo nippon electricals

Hi Rohit,
In the absence of latest annual reports, it is difficult to evaluate this.

What is the catalyst that you have in mind which will unlock the value or force the reevaluation?

Earnings are not growing significantly where they would make the market to take notice. In the absence of takeover attempt, it might be a long time (years!) for market to re-evaluate the price.

Some months ago, I had made a purchase of Kothari products (pan parag fame). Its book value is more than the market cap. Tobacco business is a cash minting machine. That’s all the analysis I did at the time of purchase hoping that somehow market will recognise the Graham bargain.

However, later I noticed that the promoters own more than 80% of outstanding shares. There is no incentive for the current owners to reward shareholders. There is no way for a hostile takeover. Ergo, the value trap stays as is. I have moved on in due course – hopefully, wiser.

Best Regards,Ravi

I decided to post my thoughts on ravi’s comment. I have posted on value traps earlier here

i agree, value trap is always a concern in such situations. i have also invested in kothari products in the past (see post here) with a clear understanding that the underlying business was at best stagnant and the value unlocking would happen if the management did something about the cash. After holding the stock for more than a year (with a small gain), I realised that the management was not interested in any value enhancing measures. On the contrary there was a lot of apathy towards investors. The management had not bothered to update its website with the latest results and there was no way to access their annual report. As a result, I bailed out.

Indo nippon electrical has similar risks. However there are some key differences

1. The underlying business for Indo nippon is healthy and has a small amount of growth
2. The management has been pro-shareholder in the past and has given bonus shares and decent dividends in the past
3. The management has been very rational and efficient user of capital and has kept the return on capital fairly high.
4. They have updated their website with the latest annual and quarterly results

Value unlocking can happen via various actions on part of the management. In case of Indo nippon electricals I expect continued decent performance and passage of time to unlock the value.

However due to the concern of value trap, I have classified this idea as a graham idea. The key approach in such kind of investing is to invest in a group of such stocks (more than 10-15) where the entire group could do well, with some indivdual stocks performing well and some performing poorly. In contrast, focus investing which involves investing heavily in a select few stocks would not work in the above kind of idea. However with valuations being high, I am not able to find too many good ideas in which I can invest heavily.

see here a post on value traps and critical thinking titled ‘Value Delusions and Strategic Thinking’ by rick. he discusses about value traps and how to avoid them towards the end of his post.

Read on3 comments

A graham idea

By Rohit Chauhan
In Investment ideas, Uncategorized
March 20, 2007
3 Min read
5 comments
A

I have come across a value stock – India nippon electricals limited. The investment thesis is as follows (my notes)

About (taken from their website)
INEL was incorporated in 1984 and converted into a joint venture in 1986 between Lucas Indian Service Ltd, a wholly-owned subsidiary of Lucas-TVS Ltd and Kokusan Denki Co. Ltd, Japan – a group company of Hitachi Japan, to manufacture Electronic Ignition Systems for two-wheelers, three wheelers and portable engines. Over the years the company has enlarged its customer base and now supplies to most of the manufacturers of two-wheelers, three wheelers and gensets. The Company’s net sales for the year ended March, 2006 was Rs.1678 Million (USD 37 Million). INEL makes the entire range of 2/3 wheelers, digital and analog ignition products.

Commencing its operation in Hosur (Tamil Nadu), over the years INEL has set up two more units one at Pondicherry and the other at Rewari (Haryana) to be nearer to customers and offer service such as just-in-time supplies and to improve response time for introduction of new products.

INEL’s product portfolio covers all custom-built ignition system parts for various applications for two wheelers, three wheelers or portable engines, offering Ignition System solutions to meet the needs of the whole range of OEM’s in the vehicle industry.

Currently, INEL’s range caters to two stroke / 4 stroke engine capacity of 30cc to 175cc. However, depending upon the needs of customers, INEL has acquired knowledge and capability to provide solutions for other applications also.
INEL specialises in offering ignition system solutions by design, development and manufacturing parts such as Flywheel Magneto, Digital / Analog CDI/TCI, Regulator/Rectifiers and Ignition Coils needed for application on various types of engines fitted on motorcycles, scooters, mopeds, 3 wheelers, portable gensets, lawn movers, wood saw cutters and other types of IC engines.

Financials
The company has grown from 122 Crs to around 168 Cr with a CAGR of around 7%. Net profits have grown by 17% in the same period (CAGR of around 3.5 %). Cash flow growth is higher due to low CAPEX needs and the evidence of cash and equivalents on the balance sheet of around 80 Crs. ROE has been consistently above 20%. The poor growth in topline and Net profit has been due to the pricing pressure from OEM and raw material increases in the last few years. Current year profits seems to be in the range of 20 Crs which would give a rough EPS of 25
In addition, the company has very low debt on the books and an investment portfolio of almost 77 Crs.

Positives
The company is a supplier to all the major 2 and 3 wheeler manufacturers in india (see here). In addition the management has been consistent and prudent in allocating capital and kept the Return on capital high, even when the margins were getting squeezed.

Risks
Further slowdown in 2/3 wheeler growth and additional pricing pressure due to metal price could hurt margins further. The company seems to be working on offsetting by developing new types of fuel injection systems and by exploring the export market

Valuation
At an EPS of 25 ( free cash flow being higher than that), the intrinsic value can be conservatively put at 350-400 Rs. This is low end of the valuation. If the company can grow the top line and maintain margins, then the valuation can be increased by 20-25%.

Open issues ( for me to explore – any inputs would be appreciated)
– long term growth prospects for the company
– Raw material pricing outlook for the company?
– Competitive scenario – any new competitors?
– How is the export plan working out?
– Plans for the cash on balance sheet?

Read on5 comments

The power of mindset

By Rohit Chauhan
In General thoughts, Uncategorized
March 16, 2007
2 Min read
5 comments
T

I came across this article on the blog galatime. It’s titled ‘The effort effect’. The article resonated strongly with me. I think the power of mindset mentioned in the article is extremely crucial if one is to become a good investor.

The growth mindset (see diagram here) mentioned in this article is crucial to become a good if not a great investor. In comparison a fixed mindset (which a lot of us see around us) leads to poor performance in the long run. The key points of the growth mindset in terms of challenges, obstacles, effort, criticism and success of others are extremely relevant for an investor. As an investor one has to learn how to deal with new challenges and obstacles (the market and businesses around us are constantly changing). Effort is crucial in terms of a desire to constantly learn and improve oneself. Self criticism and an honest one is crucial too. One should be able to accept mistakes and learn from them and then move on. Finally I look at the other successful investors and try to learn from them.

The attitude referred to in the article is relevant to us not only as investors, but is important in other walks of life too.

In addition I found another link on the same blog on the mark of greatness. I found a similar article on greatness in fortune some time back (see link). The article in fortune mentions the following
Reinforcing that no-free-lunch finding is vast evidence that even the most accomplished people need around ten years of hard work before becoming world-class, a pattern so well established researchers call it the ten-year rule.

I have read in some other articles that 10 year or 10,000 hours of work is essential to achieve proficiency in a field. All the above research encourages me to keep working hard on becoming a better investor. Even if I don’t become a great or super investor, if I keep working at it, I will defintely be a better investor. My definition of a good investor is one who can beat the market by 5-10% points over a ten year period. I have done that for the last 6 years. I definitely plan to continue working on extending this performance.

update : 03/23

see here for an earlier post on the same topic

Read on5 comments

Subscription

Enter your email address if you would like to be notified when a new post is posted:

I agree to be emailed to confirm my subscription to this list

Recent Posts

Select category to filter posts

Archives