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Opinion on stocks of your choice

By Rohit Chauhan
In Uncategorized
July 8, 2008
2 Min read
17 comments
O

update : 9-Jul

I did not expect a flood of emails and several comments on this post. It was my mistake in not specifiying a limit on the numbers companies per email or comment. As a result i have a list of around 300 companies now to analyse and growing 🙂

To make it manageable for me, i would request you to limit the number of companies to 2-3 per comment or email. You can select your top 2-3 companies and hopefully i would be able to cover the entire list in 2-3 posts.

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I get emails and sometimes comments asking for my opinion on stocks. I am thinking of doing, twice a month post, analysing all such stocks sent to me via emails or comments.

Please feel free to leave the stock names through either an email to my id – rohitc99@indiatimes.com or via a comment. I will consolidate the names over 2 weeks and post a quick analysis on each one of them.

However you have to keep in mind the following filter criteria I use to analyse stocks. Stocks which don’t meet these criteria are generally rejected by me without spending too much time on them.

1.Debt/ equity ratio <= 1

2.ROE over a 3-5 year period of more than 12%

3.No losses for more than 1 year in the last 5-7 years

4.Mcap of more than 20-30 Crs (can be relaxed)

5.No obvious fraud by the management in the past

6.PE not more than 40

If the fundamentals are poor, or valuations too high I tend to move on and not spent too much time on it. If like me, you need 10-15 stocks in the portfolio, there is no need to spend time in figuring out a difficult idea when there are easier ones available. A lot of times stocks may have good fundamentals and may be slightly undervalued. In such cases I tend to put the stock on a watch list and would follow it till it becomes undervalued (50% of intrinsic value).

Some of the stocks you may mention may land in such a bucket. It does’nt mean that I don’t find value in the stock, just that it is not cheap enough for me. So please leave names of stocks you want me to look at. If I get sufficient response, I will try to make it a regular effort on the blog.

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Rapid fire analysis of multiple stocks

By Rohit Chauhan
In Investment ideas, Uncategorized
July 7, 2008
6 Min read
9 comments
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In the previous post, I was asked to give an opinion on several stocks. I have fairly broad filters when selecting stocks. As a result I drop companies pretty quickly. Once they make through my filters, I spend quite a bit of time analysing and mulling over them. Frankly I don’t need more than 10-12 stocks to build a decent portfolio, so I don’t spend time on companies which don’t catch my attention, either due to the fundamentals or due to valuations

So here is my opionion on the stocks listed in the comments (please note the word opinion as I have really not done a detailed analysis on them)

Please note that for a stock to excite me, the fundamentals have to be good and the stock has to be fairly undervalued (selling at 50% of intrinsic value). So you may find that I am not too enthusiatic of some stocks if they don’t appear to be undervalued to me even if the fundamentals are good.

Following stocks are from mumbai jurno

Punj Lloyd – The net profits have grown by 30 times in the last 4 years. The company has a debt equity ratio of more than 1 which is on the higher side for my comfort. The market has recognized the rapid growth and inspite of the recent drop, the company is valued at 30 times its recent earnings. I personally will not invest in this stock for two reasons – I am not confident if the company can continue this level of growth and the valuation are on the higher side for me.

Voltas – I was invested in bluestar from 2003 to 2006 (see here). I exited blue star last year as I found the valuations to be on the higher side. The company has shown a high profit growth ( 5 times in last 5 years) and has a high ROE of almost 50%. The company has very low debt. Though the valuation (PE of around 20) is a bit on the higher side, I would personally put the company on my watch list and analyse it a bit further to make a decision.

Amararaja Batteries – This is the auto components industry. Overall I am not too excited by the economics of this industry. If the auto industry is under price pressure, it is bound to pass on those cost pressures to their suppliers. As a result auto component companies over a business cycle do not enjoy high profits. Most the companies in the industry do not have a high competitive advantage due buyer power, poor pricing strenght etc. I had analysed exide some time back, but never pulled the trigger. This is from memory – I think exide enjoys more than 50% market share in the industry. In such an industry a distant no.2 such as amaraja may not have very high pricing strength and may see its profits dip when the cycle turns downwards. So although the stock appears undervalued, I would be careful jumping into it. Looking into the rear view mirror (last year’s profit) may not be the smart thing to do in this stock. It is critical to figure out how the company will do going forward.

Venus Remedies – Company appears undervalued and has shown very high growth in the last few years. I would have to analyse if the growth is sustainable or not to make a decision.
Kamat Hotels – 2007 Debt equity ratio is 2:1, with the company carrying a debt of 270 Crs in 2007 (have not seen 2008 numbers). This debt is almost 10 times 2007 net profit numbers. This stock would fail to pass my fundamental filters and I generally end up passing on companies with this level of debt

ICSA (India) – This company like Punj lloyd and amaraja has shown phenomenal growth in the last 5 years. On a personal level such growth makes me nervous (although the market gets all excited by it). Before I touch this stock I would want to analyse the reason behind the growth and the sustainability of this growth. Basic numbers do not give the complete story. So I will need to research far more to make a decision on the company. A high growth in the last few years is good thing, but I would not extrapolate that growth blindly and buy the stock.

Axis Bank – Fundamentally a good bank. The P/B ratio is around 3 and the ROE has been dropping for the last few years. ROE is now at 12% which could be due to the additional capital raised by the bank. The bank is doing very well and growing rapidly too. I would personally track the stock, but the price is not cheap enough for me.

Yes Bank – This stock is current sweetheart of a lot of people. If I say something bad, some of you will beat me up 🙂 . The bank has good fundamentals. However at the current P/B of 4-5, the valuation is still too high for me.

From hardtoget

Alok – 2007 AR shows a debt of 3300 Crs (Debt equity ratio of 4). Unless 2008 is drastically different, this company is not for me. A debt equity ratio of more than 1 is generally a no go decision for me. I am not comfortable at all with such a high debt equity ratio, especially in cyclical industry

From vivek

Balmer Lawrie – I hold this stock. See analysis here

Berger Paints – I worked in asian paints and have seen how berger operates fairly closely. If there is one company other than asian paints which is aggressive and does a good job, it is berger. The company has a fantastic sales organisation. The fundamentals of the company are good and the valuation looks attractive too. If I was not as baised towards asian paints ( I hold this stock), I would invest in Berger paints.

Tata Tea – The company seems to have good fundamentals, good brands and decent valuation. I will be analysing the stock further.

Glaxo Consumer – I hold this stock. See analysis here

Castrol – The company has great brands, a good distribution network, very high ROE and great fundamentals. The valuation seems to be a bit on the higher side for me to pull the trigger. My key concerns are management quality and impact of oil pricing on the company’s profits. A few years back, I think the management tried to buy out the domestic shareholders at a low price. As a result I am not too comfortable with the management. In addition need to see if their margins will be impacted drastically by the oil price changes.

Hindustan Sanitaryware – Fundamentals look good, although the 2007 debt is a bit on the higher side. The valuations are quite attractive. I think the company is worth a closer look.

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Wish I sold off my entire portfolio in Jan !!

By Rohit Chauhan
In Uncategorized
July 2, 2008
2 Min read
15 comments
W

No, I have not been wishing that or whining about it. I have heard several of my friends wish that they had done that. Short of knowing the future, it would have been impossible to time the market that well.

I too have losses due to the market drop. However I am not dissapointed or wishing otherwise. It has nothing to do with being brave and more to do with being rational based on my approach.

This is how I construct my portfolio. I typically start buying at or below prices, which are 50% of conservatively calculated intrinsic value. Ofcourse at the peak in Jan, most my holdings had gone up (in some cases too fast) . However they were still trading at a discount to their intrinsic value. Hence I saw no reason to sell my stocks. However as they were above 50% discount levels, I was not doing any major buying too. As a result, after creating a small position in some stocks, I was doing nothing and just twidling thumbs.

Now with the market crash several of my holdings are below the 50% discount mark. There are quite a few new opportunities coming up too. So I have now started accumulating stocks which I had analysed in the past, but the price was not attractive enough.

So the point is this – If you felt the stocks in your portfolio in jan were not overvalued enough to be sold then, they should even more attractive now. If you did not sell then, thinking that they were not overpriced, you should buying more now. Ofcourse this assumes that the fundamentals have not deterioated suddenly.

If however you are pessimistic about the stock after a 30-40% drop, then you need to do some honest thinking. Either your analysis was wrong or the current pessimism is getting to you.

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Where does the index stand ?

By Rohit Chauhan
In Market analysis, Uncategorized
June 27, 2008
4 Min read
7 comments
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Update 29th – I missed an important point when i posted on 28th. The data for the index is non-stationary. What it means that the underlying composition of the index is not fixed and the various other parameters such as interest rates, inflation are changing too. As a result the index of 1995 is not the same as the index of 2008. One must be careful from drawing too many conclusions from the data. It is good to analyse the data and have a perspective, but dangerous to make invest decision based on it alone. It easy to say the index is overvalued if the PE is above 30 or undervalued if it drops below 10. However it is not easy to arrive at a firm conclusion if the PE is 15 or 18 or similar such levels.

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I am not planning to make any forecast on where the forecast will be in the next few month. However I have done some analysis on the sensex and nifty index and uploaded it in the google groups. You can check here to download the file Quantitative calculation 2008.xls and check the first worksheet – market valuation.

The numbers for june 2008 are computed for both the sensex and the nifty. A few observations

1. The current PE for the sensex is around 16.8 and 17.7 for nifty. By historical standard ( history is few years back, not a few months) it is not too low. Just about towards the upper end of the PE band

2. The Return on equity (earnings/book) is still pretty high by historical standard. In the 90’s the numbers were generally low in 14-19% range. The last 3-4 years were actually an exception. We had a confluence of positive factors. Low interest rates, high demand growth and high capacity utilization all resulted in high returns. Companies had also re-structured and so net margins and ROE have been high in the past few years. The business cycle may be turning, with interest rates and inflation creeping up. We could revert to an average ROE of 18% (still higher by historical standards)

3. The Earnings growth has been 20%+ in the last few years. This has slowed down to around 10-12% in the current year.

Lets do some scenario analysis. For sake of assumption lets look at some probable scenarios on factors which are based on fundamentals

Book value is around 3540. An ROE of 18% which looks like a fair no. (look at the data for the entire 90s till 2003. I am still assuming a higher number). So normalized earnings is around 640 Rs which is lower than the current number of 820. What this means the earnings growth could slow down over the next few years as ROE reverts to the historical numbers. It is important to remember that ROE, unlike PE is not driven by market pschology. So the historical numbers do count in case of ROE.

For PE looks at the years 96-98. Interest rates were high and market PE ranged between 14-17.

Now for a juicy forecast – lets say earnings grow to around 900 in 2 years (book value will have to grow by 20% per annum and returns will drop to around 18% for that, so it is not impossible) and the PE is around 16-18, we are looking at a range of 14500- 16500.

Keep in mind that the assumptions in arriving at these numbers are still optimistic. We are still assuming reasonable growth in book values, moderate drop in ROE and fairly decent multiples. If things turn out better then we could have another bull market. But if we revert to historical levels, even on some variables such as ROE or PE or growth, then even the current market level is not too low.

Ofcourse other than the data, everything else in this post is a hypothesis. So my guess is as good as yours.

For an analysis of the index 2.5 years back see here

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