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The warren buffett of India

By Rohit Chauhan
In Notable value investors, Uncategorized
March 28, 2006
2 Min read
4 comments
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Chandrakant sampat is rightly called the warren buffett of india. See his profile here

I just read this interview with him where he has given his thoughts on the market. It’s a must read

A few excerpts from the interview

A few months back, I was looking at a table of 100 Indian companies ranked by return on capital employed (RoCE). At some point, these stocks were quoting at eight-year lows, which is strange. Look at Siemens. It did an eight-year low and now it’s quoting at Rs 5,000. Tata Steel was down at Rs 40-50 and now, after adjusting for bonus, it’s Rs 700-800. Of this set of companies, if investors pick up something quoting at a 10-year low, it appreciates 10 times.
Pick up good companies with good managements when their share prices are at an eight-year or 10-year low. Alternatively, if you still want to do something, buy good companies that are 40 per cent lower than their 52-week high. I will buy only those companies that…

• Are in a business that even fools can understand
• Have very little debt
• Have free cash flows
• Don’t have much capital expenditure, which is nothing but deferred cost

So, the companies you say are growing, are they really growing? The answer is ‘no’. They have to keep all deferred costs aside, they can’t declare hefty dividends, as the future costs. So, that’s another lesson — buy stocks that have minimal capital expenditure.

I have put a few more articles and interviews with chandrakant sampat below

Indiainfoline interview

Businessline interview

Rediff interview

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portfolio construction – Size of a bet

By Rohit Chauhan
In Investment process, Portfolio management, Uncategorized
March 27, 2006
3 Min read
5 comments
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My earlier tendency when adding a stock to my portfolio was to allocate an arbitrary amount of money to it. The actual bet or the size of the position was initially a fixed amount of money and later it became a fixed percentage of the portfolio (around 5 % usually).

However later I read several articles and charlie munger’s thoughts on investing and have modified my approach. After I have identifed a stock and am willing to commit money to it, I try to evaluate how confident I am about the stock. I try to quantify this confidence level in terms of the margin of safety, which is the discount at which the stock is selling from the intrinsic value of the stock. So if the intrinsic value of the stock (as calculated by me) is 100, and if the stock is selling at 60, then the discount is 40%. So higher the discount or margin of safety, higher my confidence.

In addition, I try to calculate the odds on the stock too. I use the following formulae to calculate the odds

Intrinsic value (under most optimisitic assumptions of growth, profit margins etc) – current price / (current price – intrinsic value (under most pessimistic conditions)

So my cut off in terms of odds is 3:1 and I typically look at stocks selling at a discount of 40% to intrinsic value. The above may seem to be very stringent criteria in terms of selecting stocks, especially under current market conditions. But this criteria has served me well, as I am able to build a huge margin of safety in my purchases. Ofcourse I am using the above criteria for my long term holdings.

My bet or size of the position is generally 2% or 5 % and a max of 10% if my level of confidence is very high. However I am not into portfolio balancing. So if my best idea has done well and is now say 20% of my portfolio and I think is still undervalued, I let it run and remain in the portfolio. The only time I would sell would be if the fundamentals of the company deteriorate or the company becomes highly over valued.


Side note : Just read that capital account convertibility may be introduced in india. That could have major implications for all of us as investors as it is possible that we may be allowed to invest out of india. I think currently we can do that with a limit of 25000 usd, but it is with restrictions. Lets see what kind of freedom the capital account convertibility brings in. I am however optimistic and excited about it.

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An investment idea (In process)

By Rohit Chauhan
In Investment ideas, Uncategorized
March 23, 2006
3 Min read
6 comments
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I generally run a simple screen in icici direct to list all the companies selling below a PE of 12. Why a below 12? Well, there is a certain logic behind it and I will expand on it in another post.

So with the market at 10,000+ levels, the list has become fairly short with quite a few banks and commodity companies. I analysed a two companies (one looks interesting, the other one does not) and here are my thoughts on the first one (micro inks) which looks promising enough for further analysis.

Micro inks

As the name suggests, this is a 900+ cr company with the main business in inks. It is a kind of an Indian multinational with around 57% turnover coming from overseas (US accounting for almost 34%) and is fairly vertically integrated.

The company has done well in the last 5 years with CAGR growth of 20% in revenue and average net margins of 8-10%. See P&L here

The company has a fairly conservative balance sheet with a low Debt to equity of 0.3. The ROE has been erratic but at a respectable 10% plus for a few years. Other Financial ratios look like Net margins, Operating margins have increased and are at healthy 10%+ and around 15-18 % for OPM. Account recievables are almost at 100 days, which is not healthy and a figure which needs to be watched closely. It is mainly at this level due to the type of marketing setup the company has (distributors, resellers etc)

The company has expanded its international operations through equity funding and moderate amounts of debt. This has a lower risk (for the company atleast) although the ROE is depressed now. Most of the investments seem to be in Subsidiaries and JV’s.

The company is valued at around 11 times last year PE. This year however has not been as good with profits declining due to raw material cost pressures. However the company still sells below 12-13 forward PE (Full year results are not yet in).

The numbers look fine (I need to read the annual report), but there some issues which I need to think through further

– How will the international strategy play out for microinks. Will the company be able to expand profitably in the international markets?
– What is the capital structure plan for the company. Will future expansion happen through equity (more dilution?)/ Debt or internal accruals?
– Competitior analysis

I have still not made up my mind on the above company, and will add to my analysis further as I read up on the company.I have done the basic checks on the company and nothing seems to be wrong on the face of it. In my case, it means that i will now be investing more time in understanding the industry dynamics, competitor analysis and try to understand the future economics of the company (mostly the soft stuff).

So typically i go through the annual report and the numbers as the first step and try to see if there is something off in terms of the numbers like high debt, excessive valuations or any other issues. If the investment idea passes the basic checks, i get into more detailed analysis which takes a few weeks for me.

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To invest or not to invest ?

By Rohit Chauhan
In Investment process, Uncategorized
March 21, 2006
2 Min read
2 comments
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I was looking at one of my first few posts

Market now offering 10:1 odds

And

Investing based on odds …Does it work ?

And saw that back in 2004, the market odds were 10:1

So what are current odds?

With a PE ratio of around 19, the current odds are around 1.4:1 . These odds are based on the last 6 years data. Its very easy to calculate the odds. Just export the nifty PE data from the their website here. The odds are basically the number of days the nifty closed at a PE of more than 19 to the total number of days.

Now the above calculation is very simplistic and one can argue, backward looking. So if you believe the earnings will continue to grow rapidly, interest rates would remain at the current level and the ROE of the indian industry would remain at the current level (around 24%) or increase, then maybe the odds are better. But frankly the margin of safety does not exist. In may 2004, the odds were 10:1 and the expected returns much higher. That’s not necessarily the case now.

The above does not mean that there no investment opportunities out there. Its just that there is no low hanging fruit now. Back in 2003 or 2004, just putting money into the index was good enough. Any PE or valuation screen was throwing up a huge number of stocks. But now, I am not finding too many companies. I am currently looking at Micro inks and Asahi glass and would be posting my analysis soon.

update 21st : saw this update on moneycontrol – With the Sensex touching 11K today, analysts told Moneycontrol that the benchmark is fairly priced at current levels and apart from fundamentals, liquidity is trying to find value in Sensex stocks.

see this table in the article for the valuation of the top sensex stocks

what is magical about 11k ? read this speech by warren buffett at wharton (question 3) where he talks of valuation in terms of band. So it may be possible to say that 10-11k is fairly valued with a certain set of assumptions. But giving a precise number is trying to bring a level of mathematical certainty to something (valuation in this case) where it may not be possible to do so

Do read this speech by warren buffett. I learnt a lot from it

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