Paying for growth – Symphony

We did post on Symphony in April taking a leap of faith by paying for growth and adding it to then our public portfolio. This is going to be a very short post as we examine how valuation changes in high growth companies

Flash back April 2014 – Symphony per share valuation on 2013 reported numbers

Our logic to add Symphony to model porfolio was simple , Sustainable growth basis per share value was calculated at 843 as per 2013 reported numbers (Note Symphony reports June to June FY) which was well below market price that time giving us an adequate margin of safety if company kept growing

Now lets come back to Symphony per share valaution based on 2014 reported numbers

Now pay close attention to per share instrnic value a whopping 50+% increase in sustainable earnings per share value, followed by a very close 47%+ increase in instrnic value per share on FCF basis
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October 25, 2014

All about CAP – Competitive advantage period

I am sure value investors would detest the idea of listening to What Mr Market is telling , however I think sometimes it does help to understand what Mr Market is telling us

All of last fortnight I have been engrossed in understanding few concepts ,this is my attempt to pen thoughts on them any meaningful consumption of them would require some work on your side so let’s start

Note this work is largely based on reading and understanding of this paper by Michael Mauboussin & Paul Johnson

First up is

CAP – Competitive advantage period

Competitive advantage period (CAP) is the time during which a company is expected to generate returns on incremental investment that exceed its cost of capital

To understand a company’s competitive advantages go through this

Now coming back to CAP.

A company’s CAP is determined by a multitude of factors, both internal and external.On a company-specific basis, considerations such as industry structure, the company’s competitive position within that industry, and management strategies define the length of CAP

What interested us was the use of CAP for security analysis , Michael Mauboussin & Paul Johnson slightly modified it and called it as … Read the rest

October 16, 2014

Imitation is the sincerest form of flattery

Recently got a chance to read this insightful paper – Imitation is the sincerest form of flattery : Warren Buffet and Berkshire Hathaway

What really interested me was this conclusion

“The market appears to under-react to the news of a Berkshire Hathaway stock investment since a hypothetical portfolio that mimics the investments at the beginning of the following month after they are publicly disclosed also earns significantly positive abnormal returns of 10.75% over the S&P 500 Index”

After reading this I was reminded of this advice by Mohnish Parbai

“Be a cloner… but clone the best”

I wanted to try this cloning exercise with an Indian investor, Unfortunately we don’t have a Warren Buffet in India. So I zeroed in on Radhakrishna Damani (RK) a respected value investor. As of March 31 , 2014 these were his key public holdings

3M India, Gati, Sterling Holiday Resorts, Sundaraman Finance, TV18 Broadcast, VST Industries

Back testing of cloning RK portfolio , this was our simple method

Hypothetically buy an investments one year after RK has bought to overcome any hangover effect of his entry in stock, therefore GATI can’t make the cut as it was brought by RK in December 2013
Get

… Read the rest

October 12, 2014

Ready to Shop stocks ?

Are you shopping stocks ?

My previous video post “Selection by Rejection” was inspired from the learnings in “Beating the Street” by Peter Lynch

Why retail stocks ?

Easy to understand business
You can wait for business to prosper before jumping the gun and buying. I will give you an example

Go watch this

From 1962 to 2010 Walmart opened – 0 to 4393 stores

Now Walmart was and is an exceptional company, however the point is people could have invested in Walmart in 1972,1982,1992 or even 1995 and still would have made multi bagger returns. See the chart below showing returns from as late as 1995

The stock has been a six bagger in last 19 years , even after story being completely known across internationally and I am discounting the huge dividends it pays each year

Where to find these stocks ?

The best place to go for shopping stocks especially retail stocks would be your nearest shopping mall. Many of the biggest gainers come from the places that millions of consumer visit all the times. Given this was not possible for me I started with BSE website and list of companies listed on BSE. I was … Read the rest

October 10, 2014

Select stocks by rejecting

Charlie Munger said Invert always invert, while selecting investments use powerful rejection criterias to remove unwanted research. In this video we show how by spending less than 30 minutes you can reject a lot of department stores companies to invest.

Watch this

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Unable to access link click here

I will update reasons for selecting thumb rules in my next post… Read the rest

October 5, 2014

Evaluating Moats through Floats

Firstly some disclosures the idea of evaluating moats through floats was inspired from this amazing post from Professor Sanjay Bakshi

Secondly the candidate chosen to be evaluated is borrowed from Amit Arora ‘s blog – Poddar Developers Ltd

Now lets begin, Poddar developers ltd is a small Mumbai based real estate developer interestingly the Group is focusing on the value housing segments in Mumbai, within the MMRDA region.
Value housing or Affordable housing as it commonly called has huge demand in India. Poddar developers have a significant presence in Mumbai suburban region through multiple projects, you can access details here

So much so for our candidate now lets quickly define FLOAT – It is other people’s money which company holds temporarily. Durable FLOAT is something which becomes a cost less revolving fund for the company. The common sources for FLOAT are

– Trade payables (Look for companies who buys at Credit but sell in Cash )

– Customer Advances

– Deferred taxes (Companies having advantageous tax situation – unlikely to be durable)

Durable FLOATS create higher ROE and ROCE for the companies, reason – they are using other people’s temporary money to run their operations

How to calculate FLOAT for … Read the rest

October 3, 2014

Learn to create an earnings line

Peter Lynch in his famous book “Beating the Street” talked about buying stocks when they are below earnings line and avoiding to buy when they are above earnings line.

No Indian website provides this information readily like US websites. However with some work you would be able to create this on your own

Go to Screener to get the ten yearly annual profit and loss , copy paste data it an excel

Now get the total number of outstanding shares from latest quarterly fillings or from money control – Calculate diluted EPS , make sure you take latest outstanding shares
Calculate 10 years , 5 year and 3 year EPS CAGR growth
Now choose a fair PE based on EPS growth for page we have taken PE of 38
Create an earnings line by multiplying fair PE and Diluted EPS
Plot actual share price as on 1^st may ( to avoid bias) for every financial year to compare earnings line with actual price

Convert this into graph to get an idea when to buy

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September 26, 2014

Don’t Trust Scary promises

“When one with honeyed words but evil mind
Persuades the mob, great woes befall the state.”
― Euripides

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Glossy stock predictions always makes me uncomfortable, but more than that are the false promises made by analysts. Download below to read two recent such scary ones. As I always say buyers be aware 🙂

Scary Promises

Image source

… Read the rest

September 22, 2014

How high dividend pay-out sets the floor for stock price

How can high dividend payment set the floor price for stock? Let’s look through an example

Noida toll bridge Company – The Noida Toll Bridge Company Ltd (NTBCL) has been promoted by Infrastructure Leasing and Financial Services Ltd (IL & FS) and New Okhla Industrial Development Authority (NOIDA), as a special purpose vehicle (SPV) to develop, construct, operate and maintain the DND Flyway on a Build Own Operate Transfer (BOOT) basis.

What is special about this company – Being a toll bridge company operating just one toll bridge there is no capex requirements for the company, apart from regular repairs and maintenance and finance charges the balance proceeds in theory should be paid out as dividend. The company was not able to pay dividend till FY10 as it was having high debt on its books and was referred to corporate debt restructuring scheme but from FY 11 it has started paying dividends, the pay out in FY14 was more than 70% look at the chart below

Source: icicidirect.com

As you can see the dividend has been steadily rising from FY 11 onwards.

Now if you are an average investor what is risk free return that you can earn today? Assuming … Read the rest

September 20, 2014

Suven Life Sciences – The Embedded Triggers

First of all pharmaceutical business is not my forte, this analysis was done to learn a new industry

About Company – Suven Life Sciences, in the business of design, manufacture and supply of Bulk Actives, Drug Intermediates & Fine Chemicals, catering to the needs of global Life Science Industry.

Business Segment

1. CRAMS – Contract Research And Manufacturing Services – This segment accounted for 95% of the Company’s top line in 2013-14; the business grew 20% CAGR over the 10 years leading to INR 514 crore. This is a very high margin business, reason company is having high ROCE, ROE

2. New Chemical entity – Cash guzzling unit of the company , 338 crore has been spent on drug discovery till 2014, the expected outflow in next 3-4 years is going be high as well as 1 molecule is entering phase 2 and three others in IND and phase 1. Important note no revenue realised till date

3.Formulations development – Suven is engaged in the development of formulations, an extension of its business model. The Company expects to develop and collaborate with a partner, out-license the product in exchange for royalties and revenues. The Company expects to focus on niche … Read the rest