Hi,
I have tried to be conservative in my assumptions about the restructured assets turning into NPA.
Please let me know your views/comments.
Thursday, 10 May 2012
Wednesday, 13 July 2011
Bajaj Finance
Bajaj Finance came out with very good set of numbers today for Q1FY12. The stock went up by 8.5% as a result. The company is very attractively priced even now and is trading at around 1.4-1.5 times FY12 Book Value which is considerably lower than other NBFCs like M&M finance, Shriram Transport Finance and private sector banks.
The company is a very good play on the consumer finance business in India. It has some of the best strategy, technology and reach when it comes to financing of two wheelers and consumer durables. Recently it has moved into various other segments like vendor financing, sme financing, mortgages and construction equipment financing.
The reason why the company trades at such cheap valuations is the fact that the market perceives a lot of these financing segments as risky. However, I feel that the company after having suffered in the 2008 downturn has learned a lot of lessons and has improved all aspects of lending like risk and credit. Also there is no other player that is close to Bajaj Finance when it comes to financing of 2 wheelers and consumer durables as most of the competition had closed down this business after 2008. But seeing the company performing so well we can expect competition to come back into these segments this year. However, the company has twin advantages of being a group company of the Bajaj group and of having massive scale and reach across dealers when it comes to durable financing.
The company has AUM of Rs. 9025 crs now and the portfolio is very well diversified across various segments. The company is dependent entirely on the wholesale funding segment and thus will see pressure on NIMs this year. But the growth in business will make sure that the earnings remain on a high trajectory.
The company had a ROE of 19.3% in FY2011 and has started off very well this year as well.
The company is maintaining provisioning in excess of RBI requirements and thus should not see any big negative surprises on the NPA front this year. Net NPA ratio is very well contained at 0.80%. However, the same can go up in the current and the next year as the loan book increases and the company enters new financing segments.
Considering all factors, the company still looks like a good buy at current levels. I think the company can very well trade at P/B ratio of 1.75-2 times and should be able to maintain credit growth of 30% CAGR over the next few years.
The promoters have raised their stake in the company in the last half of 2010 and it is now a sub of Bajaj Finserv. The company is looking to do a QIP as well as a preferntial allotoment to promoters this year which should make sure that the CAR is adequate to meet the high pace of growth. Current CAR is at 19% against requirement of 12% as per RBI.
Look to buy on declines. The stock can easily deliver consistent returns of 20% in the years to come.
Views and opinions welcome.
The company is a very good play on the consumer finance business in India. It has some of the best strategy, technology and reach when it comes to financing of two wheelers and consumer durables. Recently it has moved into various other segments like vendor financing, sme financing, mortgages and construction equipment financing.
The reason why the company trades at such cheap valuations is the fact that the market perceives a lot of these financing segments as risky. However, I feel that the company after having suffered in the 2008 downturn has learned a lot of lessons and has improved all aspects of lending like risk and credit. Also there is no other player that is close to Bajaj Finance when it comes to financing of 2 wheelers and consumer durables as most of the competition had closed down this business after 2008. But seeing the company performing so well we can expect competition to come back into these segments this year. However, the company has twin advantages of being a group company of the Bajaj group and of having massive scale and reach across dealers when it comes to durable financing.
The company has AUM of Rs. 9025 crs now and the portfolio is very well diversified across various segments. The company is dependent entirely on the wholesale funding segment and thus will see pressure on NIMs this year. But the growth in business will make sure that the earnings remain on a high trajectory.
The company had a ROE of 19.3% in FY2011 and has started off very well this year as well.
The company is maintaining provisioning in excess of RBI requirements and thus should not see any big negative surprises on the NPA front this year. Net NPA ratio is very well contained at 0.80%. However, the same can go up in the current and the next year as the loan book increases and the company enters new financing segments.
Considering all factors, the company still looks like a good buy at current levels. I think the company can very well trade at P/B ratio of 1.75-2 times and should be able to maintain credit growth of 30% CAGR over the next few years.
The promoters have raised their stake in the company in the last half of 2010 and it is now a sub of Bajaj Finserv. The company is looking to do a QIP as well as a preferntial allotoment to promoters this year which should make sure that the CAR is adequate to meet the high pace of growth. Current CAR is at 19% against requirement of 12% as per RBI.
Look to buy on declines. The stock can easily deliver consistent returns of 20% in the years to come.
Views and opinions welcome.
Friday, 6 May 2011
Equity Investing
If you or anybody you know has any queries or doubts about investing in equities/equity mutual funds/managing their portfolio/reviewing their equity portfolio, please feel free to contact me on 9867588932 or vivekchaturvedi1981@gmail.com.
I would be more than happy to discuss and guide the person concerned. Please note that I have knowledge only about fundamentals and not technicals/short term trading.
Thursday, 21 April 2011
Supreme Industries Limited - Analysis
Business: Supreme Industries is a leading manufacturer of plastic products in India. The company has manufacturing sites at 19 locations throughout the country. The company manufactures wide range of products in the following 4 segments:
(1) Plastic Piping System: contributes about 45% to total sales
(2) Consumer Products: contributes about 25% to total sales
(3) Industrial Products: contributes about 20% to total sales
(4) Packaging Products: contributes about 10% to total sales
The company also has a 29.8% stake in a listed subsidiary called Supreme Petrochem Ltd.
Growth Prospects: India has one of the lowest per capita consumption of plastic in the world. In 2009, the per capita consumption of plastic in India was just 6 kgs as compared to the world average of 27 kgs. With the increasing growth and urbanisation in the country, the use of plastics can be conservatively expected to grow at least at the nominal GDP growth rate of 14-15% p.a. over the next decade.
The thrust of Indian Government on infrastructure development provides additional opportunities for a company like Supreme Industries since its products are used in many infrastructure activities like irrigation, commercial vehicles, water projects and real estate construction.
What is important from an equity shareholder point of view, is that the company has demonstrated its competence over the last decade in growing the business in a manner that benefits the shareholders of the company, which is reflected in the Average ROE going up from 19.86% in FY 2005-06 to 43.72% in FY 2009-10.The management has also indicated in recent media interviews that sales would grow at 25% in FY12 and the company would also be able to maintain operating margins at around 14-15% range.
Other Business: The Company has constructed a commercial complex for sale/lease purposes on its own land in Andheri (W), Mumbai and also holds a stake of 29.88% in the listed Supreme Petrochem Ltd.
Management: Management holds 49.62% stake in the company and has increased the same over the past year from 48.89%. The management is very competent based on past track record and management compensation as disclosed in the Annual Report also appears reasonable compared to the profitability of the company.
Dividend Policy: The Company has a consistent policy of paying dividend to the shareholders. In FY10, the company paid out 30% of the net profits as dividend. Also in FY11, the company has already paid out 19% of the profits made so far as interim dividend. I believe that this is a prudent policy as it precludes the company from doing unwarranted diversification and expansion and also helps to maintain high return ratios, in addition to providing regular cash flow stream to the investors. It also signifies the management confidence in the company’s free cash flow generation ability.
Institutional Holding: The institutional holding in the company is at just 5.32% which is good from an individual shareholder point of view as it reduces wild swings in the share price due to big bulk deals. Apart from this, Nalanda Capital, a PE firm also holds a stake in the company since a long time.
Risks: The company imports half of its raw materials requirements (PVC Resin) from abroad which subjects it to forex risk (depreciation in INR) and commodity price risk (the company however performed admirably even in the turbulence of FY 2008-09 and was able to maintain its profitability and return ratios). The recent spike in crude prices may impact the margins of the company by a couple of % points for the next few quarters and any weakness in the stock price due to the same can be used as a further buying opportunity, assuming normalisation of crude prices once the current political crisis gets over.
Financial Performance:
The company has earmarked a capex of Rs. 180 crs (almost 30% of current Net Fixed Assets) for the current financial year, to be funded mostly from internal accruals, to further increase the share of value added products and expand dealerships. This will bring down the return ratios in the current year.
Valuation:
This looks like a stock which will not zoom up but has the potential of giving good consistent returns of 20-25% over the years. Compared to other quality stocks with good cash flows and return ratios, this company is still available at reasonable valuations, even though not at a very mouth watering level.
Please let me know your thoughts/comments.
Disclaimer: I do not own this stock currently but can choose to buy at any time.
Tuesday, 19 April 2011
What makes a successful investor (cont.)?
Continuing from the last post on what makes a successful investor, I believe that the next important quality that is needed to succeed over the long term in equity investing is understanding the role played by various other visible participants in the market and how that impacts their opinions and actions, which in turn impacts your opinions and actions as an investor.
This is especially important if an investor is either new to the equity markets or gets interested in equities only when they are either going up fantastically in the recent past (actively looking to buy) or going down miserably in the recent past (actively looking to sell), as the chances of trying to see what the others are saying or doing and deciding our actions on that basis is the highest in such a situation, completely ignoring the slightly longer term picture.
I guess the main participants in the Indian Equity Markets can be categorized broadly as follows:
1. Indian Brokers
2. Foreign Brokers
3. Indian Institutional Investors
4. Foreign Institutional Investors/ Private Equity Investors
5. TV Analysts/Newspapers
6. Blogs like this one
7. Promoters acting in concert with market operators
6. Blogs like this one
7. Promoters acting in concert with market operators
1. Indian Brokers: Well what can we say about them. Almost every stock under the coverage of an Indian Broker is a buy and their reports need to be read with the utmost caution and mostly as a source of gathering some background on what a company does and is planning to do in the future rather than as a serious investment decision. Sure there are a few exceptions, but by and large their main motive of being in the market is to earn brokerage income from retail clients and investment banking mandates from the small and mid cap companies under coverage and thus every stock is a buy candidate. I sometimes think their research reports should contain statutory warnings like the ones we see on cigarette packets, thats how dangerous they are, especially in a bull market :)
2. Foreign Brokers: Their main reason for existence is to serve the FII. Their reports generally tend to be of a slightly better quality both in terms of research and appearance, but again the bias towards recommending a buy is just as high and thus the Caveat Emptor principle applies here as well.
A very interesting point to note is whether the analyst himself owns the stock that he is recommending as a buy. If not, I think he should point that out specifically so that we all know where he is coming from. Seriously think about it, if I am asking you to invest in a company and don't have the balls to do so myself, then there is something seriously amiss. Alas most of the reports do not have any such disclaimer on whether the analyst himself owns the stock or not.
One of the most important things to keep in mind while reading any research report is to look at the assumptions underlying the future projections and whether they are in touch with reality. Generally after a few quarters of favorable business environment for the company, this tends to be the biggest risk factor in a research report as an analyst will be making the same or even rosier projections for the next few quarters ignoring any possible risk factors to the growth going ahead. This is also where I believe the maximum money is lost for retail investors a a whole, especially the late comer types.
Another thing to note is that the analyst community, just like the investor community, suffers from group thinking and delusion, as they keep sharing ideas and opinions with each other and thus are very likely to miss even big changes happening within a company. For example, before the Infosys results last Friday, how many brokerages had a sell rating on the stock? I would think hardly any and all of them missed the big changes happening within the company just like the rest of the world.
3 Indian Institutional Investors: Generally includes MFs and Insurance Companies in India. From the POV of the individual investor, one needs to be careful about blindly buying into stocks that have been bought by big MF houses recently. Also one needs to be extremely careful of buying into an IPO/FPO or a company that has just come out with a QIP where big MFs have put in money, as in most of the cases the promoters dilute their stake to the public near the top. The MF manager may have various compulsions to invest in a company but an individual investor does not have any of those and should use that flexibility to pick and choose very very carefully. I am sure all of us remember examples like RPower and DLF.
4. Foreign Institutional Investors/Private Equity Investors: Can be of various kinds like ETF, SWF, Pension Funds, Long Only Funds, Hedge Funds, Institutional Trading Desks etc. They have the maximum impact in moving share prices due to their size. An investor should generally look to invest in companies where the FII holding is less so that in the future the share price has plenty of room to move up when a FII invests in the company, especially in the mid cap space. Higher the % of FII holding in a company, higher is the chance of wild swings in the stock price and in most cases on the downside. Prime examples of this are stocks like Onmobile Global and Educomp. Again in case of a new investment by a FII, please think for yourself if the company is suitable for you. A long only pension fund can easily have a five year horizon and can easily stomach a 30-40% drop in the share price after investment, but how many of us have that kind of time horizon, belief in our analysis and stomach for losses?
5. TV Analyst/Newspaper: An investor does the max. harm to his investments when he tries to listen to what is being said on TV/newspaper during sharp up moves and down moves in the markets. I have realised that if an investor just ignores the media and invests in companies that are sound fundamentally and available at the correct price (most likely the case in case of sharp drops in the broad markets), he/she will easily outperform majority of the investors over the long term.
What a fundamental long term investor needs to realise is that even though a TV anchor may sound very smart, his job is basically to report what has happened yesterday and not think about the future and remember equity investing is about the future. Also since their target audience is the traders who are glued to their TV screen for any small market moving event, it can only do you immeasurable harm if you base your decisions about your long term investments on what is said on TV/newspapers. And for heavens sake, pls do not base your decision to buy/sell a stock on the advice of technical analysts that are sitting on tv channels who basically are just price and trend followers and have negative knowledge about fundamental business valuation. Remember their time frame is the next week at max whereas your horizon should be the next couple of years at least.
I have been guilty of this in the past and the results are easily there for me to see.
6. Blogs like this one: Blogs and sms tips are the latest craze in the markets today. Please use the most severe form of skepticism while buying/selling on such an advice. Remember most likely the blogger is already invested or short the stock and wants you to act to further move the stock price in his direction. This is especially the case for illiquid small cap and mid cap stocks that trade less than 20-30K stocks per day. Also think about it, you start reading such blogs and acting on them only when the markets are going up furiously and everyone is looking to make a quick buck.
7. Promoters acting in concert with market operators: We only need to look at the sharp fall in many small and mid cap stocks since last November to realise this. I was recently told by a cousin, who has a friend in SEBI, that if they actually start clamping down on these market operators and promoters, a large number of such stocks would come crashing down.
I will give you an example of a recent case. Just look at the following chart of a company called Twilight Litaka Pharma. The CEO of this pharma company had come on CNBC in June 2010 and said all the right things which attracted me to the stock, after a check of the fundamentals of the company the story looked nice. The stock was at around 110 then and soon shot up to 195 in no time by October 2010.
And we can all see what happened after that.
Moral of the story: If a stock is up like crazy without any real change in fundamentals recently and has hit your fair value assumption in a very short time itself, stop admiring your genius and take your profits home. Even though the above example was of a small cap stock, we can be sure that a lot many other promoters in the mid cap and large cap space are doing this as well.
Please note that the objective of this article is not to belittle or criticise any of the people above. My only objective is to make the readers realise that just like in life, each and every person in the market also has an agenda and a lot of the times his/her agenda is not in the best interest of the investor.
It is almost certain that an investor from time to time will get sucked into investing in a stock based on one or more of the points mentioned above, but we can try and control our emotions better if we keep the above points in mind before taking any rash decision.
2. Foreign Brokers: Their main reason for existence is to serve the FII. Their reports generally tend to be of a slightly better quality both in terms of research and appearance, but again the bias towards recommending a buy is just as high and thus the Caveat Emptor principle applies here as well.
A very interesting point to note is whether the analyst himself owns the stock that he is recommending as a buy. If not, I think he should point that out specifically so that we all know where he is coming from. Seriously think about it, if I am asking you to invest in a company and don't have the balls to do so myself, then there is something seriously amiss. Alas most of the reports do not have any such disclaimer on whether the analyst himself owns the stock or not.
One of the most important things to keep in mind while reading any research report is to look at the assumptions underlying the future projections and whether they are in touch with reality. Generally after a few quarters of favorable business environment for the company, this tends to be the biggest risk factor in a research report as an analyst will be making the same or even rosier projections for the next few quarters ignoring any possible risk factors to the growth going ahead. This is also where I believe the maximum money is lost for retail investors a a whole, especially the late comer types.
Another thing to note is that the analyst community, just like the investor community, suffers from group thinking and delusion, as they keep sharing ideas and opinions with each other and thus are very likely to miss even big changes happening within a company. For example, before the Infosys results last Friday, how many brokerages had a sell rating on the stock? I would think hardly any and all of them missed the big changes happening within the company just like the rest of the world.
3 Indian Institutional Investors: Generally includes MFs and Insurance Companies in India. From the POV of the individual investor, one needs to be careful about blindly buying into stocks that have been bought by big MF houses recently. Also one needs to be extremely careful of buying into an IPO/FPO or a company that has just come out with a QIP where big MFs have put in money, as in most of the cases the promoters dilute their stake to the public near the top. The MF manager may have various compulsions to invest in a company but an individual investor does not have any of those and should use that flexibility to pick and choose very very carefully. I am sure all of us remember examples like RPower and DLF.
4. Foreign Institutional Investors/Private Equity Investors: Can be of various kinds like ETF, SWF, Pension Funds, Long Only Funds, Hedge Funds, Institutional Trading Desks etc. They have the maximum impact in moving share prices due to their size. An investor should generally look to invest in companies where the FII holding is less so that in the future the share price has plenty of room to move up when a FII invests in the company, especially in the mid cap space. Higher the % of FII holding in a company, higher is the chance of wild swings in the stock price and in most cases on the downside. Prime examples of this are stocks like Onmobile Global and Educomp. Again in case of a new investment by a FII, please think for yourself if the company is suitable for you. A long only pension fund can easily have a five year horizon and can easily stomach a 30-40% drop in the share price after investment, but how many of us have that kind of time horizon, belief in our analysis and stomach for losses?
5. TV Analyst/Newspaper: An investor does the max. harm to his investments when he tries to listen to what is being said on TV/newspaper during sharp up moves and down moves in the markets. I have realised that if an investor just ignores the media and invests in companies that are sound fundamentally and available at the correct price (most likely the case in case of sharp drops in the broad markets), he/she will easily outperform majority of the investors over the long term.
What a fundamental long term investor needs to realise is that even though a TV anchor may sound very smart, his job is basically to report what has happened yesterday and not think about the future and remember equity investing is about the future. Also since their target audience is the traders who are glued to their TV screen for any small market moving event, it can only do you immeasurable harm if you base your decisions about your long term investments on what is said on TV/newspapers. And for heavens sake, pls do not base your decision to buy/sell a stock on the advice of technical analysts that are sitting on tv channels who basically are just price and trend followers and have negative knowledge about fundamental business valuation. Remember their time frame is the next week at max whereas your horizon should be the next couple of years at least.
I have been guilty of this in the past and the results are easily there for me to see.
6. Blogs like this one: Blogs and sms tips are the latest craze in the markets today. Please use the most severe form of skepticism while buying/selling on such an advice. Remember most likely the blogger is already invested or short the stock and wants you to act to further move the stock price in his direction. This is especially the case for illiquid small cap and mid cap stocks that trade less than 20-30K stocks per day. Also think about it, you start reading such blogs and acting on them only when the markets are going up furiously and everyone is looking to make a quick buck.
7. Promoters acting in concert with market operators: We only need to look at the sharp fall in many small and mid cap stocks since last November to realise this. I was recently told by a cousin, who has a friend in SEBI, that if they actually start clamping down on these market operators and promoters, a large number of such stocks would come crashing down.
I will give you an example of a recent case. Just look at the following chart of a company called Twilight Litaka Pharma. The CEO of this pharma company had come on CNBC in June 2010 and said all the right things which attracted me to the stock, after a check of the fundamentals of the company the story looked nice. The stock was at around 110 then and soon shot up to 195 in no time by October 2010.
And we can all see what happened after that.
Moral of the story: If a stock is up like crazy without any real change in fundamentals recently and has hit your fair value assumption in a very short time itself, stop admiring your genius and take your profits home. Even though the above example was of a small cap stock, we can be sure that a lot many other promoters in the mid cap and large cap space are doing this as well.
Please note that the objective of this article is not to belittle or criticise any of the people above. My only objective is to make the readers realise that just like in life, each and every person in the market also has an agenda and a lot of the times his/her agenda is not in the best interest of the investor.
I am sure that most of us already know these points, but as Tony Robbins says "It’s not knowing what to do, it’s doing what you know".
It is almost certain that an investor from time to time will get sucked into investing in a stock based on one or more of the points mentioned above, but we can try and control our emotions better if we keep the above points in mind before taking any rash decision.
Friday, 15 April 2011
What makes a successful investor?
What in your opinion are the key qualities of a successful long term investor?
High intellect, interest in stocks, reading lots of Annual Reports and research reports, sound understanding of company valuations and superior stock picking skills, experience in the stock market?
Till a couple of years back, my answer would have been yes to all of the above. But today, I believe that the most important quality that is needed to succeed as a long term investor and to derive superior risk adjusted returns, is to first understand ourselves.
This I believe is one of the strongest points in favor of successful people in any walk of life. Take for example Warren Buffett. Why has he succeeded so well over so many decades? It's cause he knows himself and his strengths and weaknesses and always plays to his strengths. Or say, why inspite of being the greatest batsman in the world, Sachin Tendulkar was not a very successful captain?
Only when we truly understand ourselves and our individual personality and its strengths and weaknesses, can we expect to succeed in any endeavour that requires a fair degree of skill and discipline.
Most of us who start investing in stocks/equity mutual funds do so because we see and read about highly successful and rich people like Warren Buffett and Rakesh Jhunjhunwala and how they have made their billions by becoming successful investors and want to try and emulate them. Or we read the newspapers and watch TV which tells us investing in equity markets is the best investment option in the long term, especially in a growing economy like India. I know this happened to me and most of the people I know who are even marginally interested in investing in stocks/equity mutual funds. We start investing in earnest especially when the stock prices are going up and our friends and cousins are raking in the moolah.
Ask yourself some of the following questions:
1. What is my personality type? Am I a cool, calm thinker in my personal life or do I generally get flustered whenever anything happens that I don't like or expect?
2. Am I the kind of person who easily believes others or someone who thinks things thru himself?
3. Do I get easily influenced by whatever is the latest fad/opinion/hot product around?
4. Do I believe that the last brilliant speaker/writer I came across is correct and that I should change my philosophy/thought process completely to what he has suggested?
5. How many times in the last few years have I kept my New Year promises?
6. Do I give too much importance to what has happened in the recent past?
Is your investment style a fit for your personality style? If yes, your chances of earning high returns are higher.
I am not trying to say that since an investor has a very hyperactive personality style, he should keep jumping from one stock to the other and that such a strategy will make him big long term returns. What I am trying to say is that something like value investing may not be suitable for him and he may sell out from a small loss making stock too soon since he has no patience to see a temporary loss. In fact, such an investor may be well advised to have a long term mutual fund SIP plan, where he does not let his impulsive feelings affect his investing.
Many of us would think that the above questions are all HR bull shit that has no role to play in investing success. I used to think the same till a little while back, but not any longer. Till the time we do not have a fair degree of congruence in our personality and investment styles, we would struggle to make serious wealth in the long term. Sure we can have a few years of success, but I would be surprised if any investor with a mis-match in styles would succeed in the long term in generating wealth.
You know for a long time my personal answer to most of the above questions and my investing style was completely the wrong match. And the reason for the same was that I never understood this starting point properly and would get frustrated whenever I made mistakes.
If you have not given these points any serious consideration before, please take some time to do the same. I think it can help you immensely not only in your personal life but also in your investment life. Once we are better aware of our strengths and weaknesses, we can work on how we plan our investments so that we do not sabotage ourselves (like stopping a SIP in a market downfall) at exactly the wrong time.
Please let me know your thoughts/opinions on this topic.
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