A happy new year to all the readers and thank you for reading and visiting my blog
Wishes for the new year
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Annual portfolio review – 2010
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It’s the time of the year when everyone looks at the year gone by and makes resolutions for the new year. My resolution for the new year? run a 5K marathon 🙂. Anyway, I digress. This blog is not about my attempts to get fit.
I did an annual portfolio review in 2009 here. I think the returns in 2009 were out of the ordinary as the stock markets were recovering from a huge shock. I did not expect the 2010 returns to be any close to it. That prediction turned out to be true.
How I evaluate performance
The most typical approach to evaluate performance is to look at the annual return and if it has met your expectations (which vary from individual to individual), then one can declare victory and move on. As you might suspect I don’t stop at that.
Annual returns are important, but not the sole indicator of performance. A year’s return is driven more by luck than skill. A few lucky picks can give a big boost to your portfolio and a few bad ones can ruin the year. One has to distinguish skill from luck. I look at the portfolio performance for the last 2-3 years and compare it with my objective – which is to beat the index by 5-8% per annum.
Now, there is no audit of my performance, so I can claim whatever I want – no one can verify it. So instead of trying to quote a number, let me state that I have achieved my goals by a wide margin in 2010 and for a 3 year period too
Is 5-8% outperformance not for the wimps?
Now some of you who would have dabbled in small, micro or no cap stocks may be thinking – what a sissy 🙂 . I can do far far better than this dude
My response – that’s absolutely true. My personal goal is not to achieve the highest possible return. My goal is to achieve decent returns at moderate to low risk. My own portfolio has around 15-20 stocks, with no stock more than 5% of the portfolio. I have structured my portfolio to achieve a decent level of outperformance, but ensure that a single bad idea will not ruin my networth.
Think of it this way – A 5-8% outperformance will give me a 19-22% annual return. That means 5-7 times my original capital in 10 years. If I achieve this I will be very pleased with my performance.
Additional parameters of evaluation
I have another parameter which I use to evaluate the attractiveness of my portfolio – let’s call it the ‘discount to fair value for the portfolio’. Let me explain
Let’s say I have two stocks in the portfolio (1 share each)
Stock A – fair value is 100, current price is – 60
Stock B – fair value is 100, current price is – 70
So for total portfolio (A+B) – fair value is 200, sum invested is 130.
The ‘discount to fair value of the portfolio’ is 35% (200-130/200). I generally focus on this number quite closely. This is a very useful number to make buy/ sell decisions and structure the portfolio (more on it in another post)
I am listing the actual discount below for a few years (end of year)
2008- 60%
2009 – 26%
2010 – 36%
The numbers are quite instructive. In 2008, as the market crashed I added stocks to my portfolio and saw this number rise. In 2009 as the stock prices rose, this number reduced (as the portfolio gained in value).
So in 2010, how did this number increase?
Quite simply, I reduced my fully valued positions and kept adding to the undervalued position. Although this is not a magic number, I have seen that if I have done my homework well then a large discount has typically led to a good performance over time.
My overall objective is to keep this number between 30-40% or more.
Specific performance
Let’s get from the abstract to the concrete (hopefully I have not lost you !)
The big winners for me were – Gujarat gas, Merck (finally !), LMW, grindwell Norton (which had not done well last year), Honda siel (surprise), Cheviot (some movement !) , Ashok Leyland etc. I have constantly been selling some of these stocks.
I have added some new positions, some of which are listed here.
I sold off these position or reduced these stocks substantially – NIIT tech, Patni, Infosys, Sulzer, ESAB india, Concor, Denso, VST and Ingersoll rand.
Ofcourse not everything was a winner – VST for one was a very average pick.
The new areas in 2010
I have started exploring several new areas – more from a learning standpoint. I have been experimenting on options and arbitrage.
Options have been a mixed bag and I plan to pursue it more as an insurance than to make money off it. I plan to focus more on arbitrage in the future as it is an interesting field and works well my investment approach.
Plans for 2011
I have no grand strategy for 2011. No hot sectors, must have stocks for next year. The strategy is going to be the same – keep looking for good and cheap stocks the old fashioned way – read and analyse.
Arbitrage – Kesar enterprise
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Now, before I start crowing, let me come clean on a few points. The Kesar enterprise arbitrage idea was brought to me by ninad (see his blog here). I was smart enough to get on the ride.
This deal was announced in March and it took around 9 months for the deal to complete. I have also listed some thoughts and analysis (which include substantial inputs from ninad) over the course of the deal at various points of time
Basic idea
Kesar enterprise is a sugar company with a division which was expanding into the warehousing and other port related infrastructure such as storage. The company announced in Dec 2009 that they would be demerging the infrastructure business. You can find the announcement here.
I am posting my personal notes on the deal below
De-merger evaluation – March 19th
Kesar enterprises has announced the de-merger of its Sugar biz from the Infrastructure warehousing biz.
The numbers for each biz is as follows (in crs)
Warehouse/ transport divison
Revenue: 16 Crs (2010 expected)
PAT: 7-8 crs
Return on assets – 30%+
Valuation – around 60-70 crs minimum
Sugar divison
Revenue – 285 crs gross including excise
PAT – 2-3 crs.
Over 10 years the company has made very small profits. So difficult to value based on profits.
Inverting the problem – Mcap of the company is 82 crs. So is the sugar biz atleast 20-30 crs?
Alternative valuations
Book value – 40-50 crs (after all debt). So liquidation value is higher
Comparative valuation – based on price / sales, most of companies in this sector are priced around 1-2 times. Due to poor profitability, we can price this company at 50% of sales – 100 crs?
On capacity basis, a comparable company like dhampur sugar (UP based company), sells for 0.011 Crs/ TCD. Kesar enterprise sugar business can then be valued at 80 crs.
So total conservative value is around 140-200 crs.
Action plan – create initial position at 120 levels
Negative case – March 30th
Sugar prices tumbling and market has caused the stock prices to drop by 30% in feb and march. Kesar has seen stock price drop by 10-15%.
2011 will see surplus sugar and hence the futures have started going down. Stock prices could drop
further – if that is the case, delay increasing the position, close to the ex-date as possible
Debt getting split – more to infra company: need to track this
Midcap discount – look at midcap futures to hedge?
How to hedge against drop in sugar industry – can use puts on Balrampur chini and Bajaj Hindustan
Stock goes ex-date – May 19th
The ex-date was 14-May. The sugar business has dropped to around 50 rs which gives a mcap of 30 crs. The sugar biz is in down cycle and hence the prices for all companies have crashed
Key mistake and learning – did not hedge on the down turn in sugar as I was thinking on 30-march.
Action plan – wait for upturn in sugar to exit the sugar biz. A sale at 60 and higher should work out in the deal. May have to sustain further drops before recovery.
Kesar enterprise stock recovers – Sept first week
Price now at 70 levels. Sell the stock!!
Kesar infrastructure yet to be listed – Dec first week
Was able to sell the sugar piece @65-70 prices. Deal which was expected to take 4-5 months at max has taken twice that amount – around 9 months already. No updates yet.
Stock finally listed – Dec 22nd
Kesar infrastructure finally listed at 99. A gain of 30% in nine months. May hold on to the stock
Key learnings
· Such arbitrage deals take longer than expected. Patience is the key here
· One cannot ignore short term implications on the stock price and treat it as a long term idea. If possible, options can be used to hedge the position only if the timelines are certain
· Build the arbitrage position over a period of time and not immediately after the announcement as the price drifts downwards once the buying/ selling pressure subsides
Short analysis – WIM plast ltd
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I typically look at 1-2 companies every week in some detail, to figure out whether they are attractive enough for further analysis. As I have said in the past – rejection is easy for me. It takes me 10-15 min or sometimes lesser than that to reject a company.
Investing into a company is like marrying or atleast a medium term relationship for me (unlike a one night stand) and as a result all the stars have to align themselves for me to commit my money to an idea.
WIM plast is one of those companies which has passed the initial filter phase and I am doing a little more detailed work on it.
About
WIM plast is in the business of plastic moulded furniture (brand – cello) and into extruded cello bubble guard sheets which have multiple applications such as false ceiling, signage etc.
The company has been in this business for the last 20+ years and is part of the cello group.
Financials
The company has had an erratic performance in the past. Most of the analysis you will find on the web and in broker reports talks about the great performance since 2007. These reports breathlessly report the doubling of the sales in the last 3 years and a 60% per annum growth in profits during the same time. This is a perfectly idiotic way of analyzing a company
One has to look at a much longer time period to analyze the performance of the company. I typically look at the last 10 years of performance (nothing sacred about that). A long term performance shows how the company has done during past slowdowns and gives a much better idea of the sustainability of the current performance.
The 10 year performance of WIM plast shows a very different view. The topline -sales dropped from 80 odd crores in 2000 to around 56 Crs by 2006. The profit also dropped during this period from 11 crs to around 2 Crs in the same period. I have not been able to find why the topline dropped over the span of 6 years. Most likely it looks like a combination of increasing competition in moulded furniture and slowing demand.
The company has since then been able to increase sales to almost 140 Crs in 2010 and had a net profit of around 16 Crs. During the current year, the company is likely to clock a topline of around 150-160 Crs and net profits of around 14-15 Crs (profits likely to stagnate due to rise in raw material cost which depend on petroleum prices)
The company came up with a new product – Cello bubble guard in 2004-2005 and completed the plant by 2006. The product seems to have started selling well from 2008 onwards. Again the company does not disclose the product splits, so I am guessing that this is the reason for the growth during the 2006-2010 period.
The positives
The company managed its balance sheet well during the down years. The company has been able to keep debt low (below 0.5 times equity) and is now debt free. In addition, the company has an above average ROE of 20%+, has been able to keep inventory and debtor levels low and improve the net margin during the 2006-2010 time period
The company has had a very good dividend policy and has kept the payout high even during the down years. The company has now started increasing the payout (dividend yield is around 2.5%) as its performance has improved.
The company is also investing around 100 Crs in its baddi plant for cello bubble guard to expand capacity and thus increase the turnover (see here)
Finally the company sells at a low valuation of around 6-7 times earnings
The questions
As I said earlier – I am still in the dating phase :). I have not made up my mind. There are still a lot questions in my mind
– Why did the performance drop from 2000-2006?
– How is cello bubble guard doing? What is the competitive situation for the product, its margins and what are the substitutes for this product?
If you or anyone has looked at this company or used its products or know someone who uses the products (cello bubble guard), please leave me a comment or email me on rohitc99@indiatimes.com
Conclusion
I need to do further research on the company. The key to the success of this idea is the future performance of the cello bubble guard product. If this product does well and can get a good margin, then the net profit will increase and the stock price will improve too.
disclosure – no postion in the stock as of today