Friday, November 18, 2011

AAA Stocks

I regret the fact that I did not write anything for sometime albeit with some valid reasons. Several stocks are at March 2009 levels (thanks to the European debt crisis) even though SENSEX and NIFTY are reasonably holding because of few good stocks. In my previous articles I have mentioned about 2011 being a year of opportunities and sure it turned out that way. If anybody had the feeling of missing out in 2009, here is another opportunity to buy some quality stocks at reasonable prices. Personally I made some grave mistakes of trying to find "Undervalued" stocks when the SENSEX was at 20000 levels and bought some ordinary stocks like Lakshmi Energy, IVRCL Infra, NCC etc. Its true that most of the stocks have crashed to 52 week lows, but the fall associated with some of these stocks like KS Oils, Educomp Solutions, Everonn Education etc. would have happened in any case irrespective of the market conditions.

The past 3 years have provided enough opportunities to learn a lot (though hard lessons) and one lesson that I learned for sure is not to invest in stocks with dubious corporate governance no matter what and how big the potential is. Most of the market participants including the Foreign Institutional Investors ignore the corporate governance in a bull market, but as soon as markets reverse direction and situation gets tough, governance issues comes to the light and stocks of the respective companies are dumped like a trash of worthless securities.

Mid caps and small caps of course offer multibagger opportunities but at the same time companies in this segment are the ones involved in illegal practices and we fall victim to these unfair practices whenever the news comes out. So it is better to invest in companies with good management, good corporate governance, low debt, no pledged shares and fundamentally strong business even if these stocks demand higher price. The reason is that we can confidently average on these stocks in times of market crash and expect to get a good return over long term. With this in mind, I have given AAA rating to selected stocks which I will share below.

I was not able to buy all of these stocks as these stocks traded at higher prices, but they are all available at reasonable prices now. Buying these stocks currently and accumulating more on every dip will be a good option for everyone who expect reasonable returns. One reader commented that I am giving here the list of stocks but a good analyst is the one who gives few multibaggers. My answer is very simple that those readers are welcome to listen to an analyst who give multibagger recommendations. If anyone can predict multibaggers that precisely, then he / she would have made millions already and would not be in the business of giving recommendations. I am neither suggesting to buy anything nor giving multibagger recommendations. All I am trying to do here is to share my experiences, learning, opinion and educate people who does not have enough knowledge in equity markets to get the basics in the process and get a decent return of about 15-20% CAGR.

Things I learned in 2011

1. Don't buy stocks which look cheap when the market is ruling high without extensive research.

2. Don't buy any company with dubious corporate governance.

3. Avoid companies with high debt and high percentage of pledged shares which are very bad combination's.

4. Avoid companies with fluctuating revenues unless they are industry leaders (Example: Infrastructure companies, Real Estate Companies).

AAA Stocks

I have assigned AAA rating to the following stocks because of their past history of good corporate governance, strong brand image, good fundamental business and future growth. All these stocks are trading at reasonable prices. If we buy these stocks now, then we should be prepared to average in case the prices come down. Of course there are many other AAA stocks but I am not listing them as they are trading at outrageously high valuations even now. (Example: HDFC Bank, Page Industries, Titan Industires, Asian Paints etc.).

Banks and Financial Companies

1. Axis Bank
2. ICICI Bank
3. State Bank of India
4. Yes Bank
5. Indusind Bank
6. Allahabad Bank
7. Andhra Bank
8. Shriram Transport Finance
9. GRUH Finance
10. Mahindra Finance
11. Indiabulls Financial Service (Excellent Dividend History)
12. Cholamandalam Finance

Pharmaceuticals / Chemicals

1. Torrent Pharmaceuticals
2. Cadila Healthcare
3. IPCA Labs
4. United Phosphorus
5. Gujarat State Fertilizer Corporation


2. Indraprasatha Gas
3. Petronet LNG
4. Gujarat State Petronet

Diversified / Others

1. Godrej Industries
2. Tube investments / EID Parry
3. Mundra Port
4. Essar Port
5. Adani Enterprises
6. Savita Oil Technology
7. Bajaj Finserv
8. Hindalco
9. Exide industries
10. Opto circuits
11. SRF Limited
12. Torrent Power
13. Larsen & Toubro
14. PTC India

By just looking at this list, most of the readers would understand where I am getting at. Quality of the management, corporate governance and the underlying business is what drives growth and all the companies that I have mentioned have shown good practices in the past and hope they continue to do so in future too.

Kumaran Seenivasan


Saturday, August 27, 2011

What Should Retail Investors do?

It has been more than a month since I posted in the blog. Oh boy I did not utter anything, otherwise whatever I wrote would have gone wrong. Markets have brought back the 2008 ghosts to remind us that the western debt will continue to haunt our life time. Only strong willed investors can survive these situations and emerge stronger than before. The rules are simple but very difficult to follow and with little bit of understanding, anyone can make up their mind to stay invested and buy more while the market continues to fall.

It’s true that the market has fallen and the portfolio of retail investors are down by 30% minimum. But some experts and analysts are trying to act very smart that they have predicted this long back. Actually it is not. The investments went down not only to retail investors but also the big businessmen like Mukesh Ambani and Kalanithi Maran. I will attempt to compare the real life investments made by Ambani and Maran recently and how we can learn from this to remain calm and come back stronger.

Investment by Mukesh Ambani - EIH Limited (Operates Oberoi Hotels)

Exactly in August 2010, Mukesh Ambani bought 5.54 crore shares (14.12% stake) in EIH Limited for 1,021 crore rupees that is to Rs. 184 per share. Immediately after he bought this stake, EIH announced the rights issue of 5 shares for every 11 shares held at Rs.65 per share. So, Ambani was eligible for additional 2.52 crore shares taking his investment to 1183 crores. The final price per share comes out to be Rs. 146 per share.

EIH Limited is trading at Rs.86 now (August 26, 2011) and his investment in down by 41%. Do you think a businessman like Ambani did not do his due diligence before investing? Of course he did. But the truth is, no matter who you are and how you analyze, uncertainty and stock market are inseparable. People often argue that some guys make money irrespective of the market. If that is true, why did great investors like Raj Rajaratnam (Founder of Galleon Group) and Rajat Gupta (Former Managing Director of McKinsey) were involved in insider trading? I agree some guys make money irrespective of the market, but only with the help of unscrupulous practices.

So the point I am making here is, you can be Ambani and still will not be able to predict what’s going to happen in the market. Do you think Ambani would have bought EIH Shares at Rs.146 if he knew market would fall? If he knew then, he would have of course waited for the market fall and bought the same stake for less than 800 Crores and might have saved 500 crores in the process. But what’s the lesson here? Even though his investment has declined in value, he remains calm and does not panic and sell. Once the market reverses the trend, he not only gets back his investment but generates decent return over investment as well. All he does is to remain invested and ride out the volatility. Why can’t a retail investor do the same thing? It is possible if you stop looking at your portfolio every day.

Investment by Kalanithi Maran – Spicejet Limited

Kalanithi Maran entered into an agreement in June 2010 to buy 37.75% stake in Spicejet Airlines at Rs.47.25 per share (16% discount to the market price of Rs.56 at that time) spending 940 crore rupees. He would not have bought it at that price, had he predicted the Western Debt problems or Inflation and interest rate issues in India or Market fall around the world. He invested as he honestly thought that it was a good investment at that point of time because 10 years down the line most of the people would be using Airlines for travel in India.

But Spicejet is trading at Rs.21 now and his investment is down by 55% in one year (His 940 Crore investment is worth 423 Crore now). But he does not react to these developments and remains invested. So retail investors also can remain invested during the market turmoil and can get back the money when the situation becomes normal as long as investment is in decent companies. If you happen to be very unlucky, then you can also lose money just like how Azim Premji lost Rs.230 crores in Subhiksha Retail.

Market Scenario as of August 26, 2011

I posted an article titled “2011 – Year of Opportunity or Disaster” on March 19, 2011 and suggested to keep accumulating stocks throughout this down turn. Market has become far more attractive now and this is definitely a great opportunity for the people who have missed out in 2008 – 2009 market crash. Forget about where SENSEX is trading now. Experts can say whatever they want (14 times EPS or 12 times EPS etc.). SENSEX is at 16000 because of few stocks that are trading at high valuations even now. But most of the midcaps are trading at life times lows or 52 week lows.

If you are not buying now and wait for bottom fishing, you will get only poor quality fish later on. Good stocks move up faster than others when the market recovers. Look at the following stocks for example. Most of them are trading at attractive valuations and can be bought now and can be accumulated at every fall for sure. But patience is the key here. One should not panic if the stock price goes down from your purchase price. Believe in your investment and keep averaging the good stocks. We need to take calculated risk in order to be successful in anything let alone the stock market.

Power Finance Corporation (Rs.133) – Trading at less than Book Value

Dhanlaxmi Bank (Rs.68) – Less than Book Value

Allahabad Bank (Rs.168) – One of the PSU Banks that came up with very good June 2011 quarter results, but trading at less than Book Value.

Rural Electrification Corporation (Rs.166) – Attractive valuation

United Phosphorus (Rs. 135)

ICICI Bank (Rs.820)

Axis Bank (Rs.999)

State Bank of India (Rs.1880) or Union Bank of India (Rs. 231) or Bank of India (Rs. 297)

GVK Power and Infrastructure (Rs.16)

Hindalco (Rs.140)

Jindal Steel & Power (Rs.462)

GIC Housing Finance (Rs.85) – Dividend itself 6% at current market price.

HCL Technologies (Rs.362)

Ess Dee Aluminium (Rs. 205)

I have just given few examples. You can pick any of the front line stocks now and you will get good returns in next 3 years time.


Stocks are available at very good valuation and investors who follow the disciplined investment process can reap rich rewards in next few years time. All you need to do is the following.

Select good stocks.

Don’t chase Multibaggers. Because, off late most of the so called “multibagger” candidates are involved in unscrupulous practices. Example: Educomp, KS Oils, IRB Infrastructure

Keep buying in batches

Don’t panic if the stock price goes below the purchase price

Follow the principle of rupee cost averaging

Believe in your investment

Kumaran Seenivasan


Friday, July 15, 2011

Graham Stock - Polyplex Corporation

Last post was all about Graham and his book "Security Analysis". In this post, I am taking one step further explaining methods which Graham recommended to unearth the so called "Undervalued" stocks with an example. In general Graham talks about the following rules.

1) Book Value of Less than 1

2) PE Ratio of Less than 10

3) Debt Equity Ratio of Less than 1

4) Good Dividend Policy

If the stock fits all the above said criteria, then Graham applies his famous "Margin of Safety" principle (Stock Price trading at a Huge Discount to Book Value) to decide if a particular stock is worth buying. Most of the articles that quote him throw some light on said rules. But what they have not written about is his strong views on "Net Current Assets". More than Book Value, Graham considers "Net Current Asset" value as the very important one to consider when analyzing a stock. This is due to the fact that Book Value lost its significance because of the following two things.

1) The Value of the Fixed Assets as stated bore no relationship to the actual cost.

2) Fixed Asset value bore no relationship to the figure at which they would be sold.

Net Current Asset

Net Current Asset is what we get if we deduct the Current Liabilities from Current Assets. Current Assets section consist of the following in most of the balance sheets.

1) Inventory (Goods not Sold)

2) Receivables or Sundry Debtors ( Goods sold but payments not received)

3) Cash and Bank Balance

4) Loans and Advances

Graham recommends to take Cash and Bank Balances as it is (100%), Receivables at 80% of what is stated in the balance sheet and Inventory at 50% of what is stated (Because it needs to be sold). Calculating the Current Assets by this revised rules will reduce the actual stated value in the balance sheet to a new "Current Asset" value. Then Current Liabilities stated in the balance sheet needs to be deducted from the newly calculated "Current Asset Value" to get the "Net Current Assets".

The next step is to calculate the "Net Current Asset" per share by dividing the "Net Current Asset" by total number of outstanding shares. If the current price is huge discount to "Net Current Asset" per share, then that particular stock is the one which he terms it as "Undervalued" because he sees no reason for a company to trade below the "Liquid" value. Market imperfections lead to undervalued stocks and Graham believes sooner or later, Market will value the stock at the original or fair price. One such stock I identified currently (July 15, 2011) is Polyplex Corporation and will explain why this stocks fits the Graham criteria.

Polyplex Corporation (Current Price : Rs. 194)

Polyplex Corporation is the Indian multinational Polyester film company having operations in India, Thailand, Turkey and USA. The products are used in Packaging, Industrial & Electrical applications, Magneteic Media and imaging applications.

Please download the latest (2010-2011) results and balance sheet from the following link in order to understand the explanations.

Lets calculate the usual Graham figures. (From Consolidated Figures)

1 ) Book Value (Reserves & Surplus + Capital / Total Shares) = Rs. 501 (1605 / 3.2)

2) PE Ratio = 1.5 ( 195 / 130)

Note: Removed Exceptional Item (630 Crores from Net Profit) to calculate the EPS.

3) Debt Equity Ratio = 0.48 (771 / 1605)

4) Continuous dividend from 1997. Rs. 14 in 2010 and Rs. 7 (As of now) in 2011.

So, Polyplex satisfies all the usual Graham stuff and in fact trading more than 60% discount to the Book Value. Lets take this further and calculate the "Net Current Asset" value in Graham Method.

1) Inventory = Rs. 218 Crores ( 436 * 0.50)

2) Receivables = Rs. 265 Crores (332 * 0.80)

3) Cash and Bank Balance = Rs. 860 Crores

4) Loans and Advances = Rs.171 Crores

Adding all this we get Rs. 1514 Crores. From the balance sheet we understand that the current liabilities are about Rs. 364 Crores.

Net Current Assets = 1514 - 364 = Rs. 1150 Crores.

Net Current Asset Value per Share = 1150 / 3.2 = Rs. 359

Current Market Price of Rs. 194 is 46% discount to the "Net Current Asset" value per share.

If you look at closely, you are in for a more shock. Cash and Bank Balance itself is Rs.860 Crores and that translates into Rs. 269 per share. So the current market price is 28% discount to the Cash and Bank balance per share alone. Even if we were to assume that they have decided to pay all the debt (Rs. 771 Crores), still we are left with Rs. 379 Crores of Net Current Assets apart from Rs.1500 Crore Fixed Asset Value.

So, from my point of view, this stock has no business trading at this price and (Market Cap of Rs. 620 Crores when the Cash in Book itself Rs.860 Crores) is "Undervalued". Considering the fact that they generated Rs. 2433 Crore revenue last year makes this stock all the more interesting. Only negative thing I see in this stock is, it is "Cyclical". But that does not warrant this huge discount and my belief is that market will recognize this sooner than later.

Kumaran Seenivasan


Friday, June 24, 2011

Security Analysis - Book Review

Security Analysis by Graham and Dodd is widely considered to be the best book on investment ever written and this is the second time I read this book (1934 Classic Edition). I got the feeling that more you read, more you like each and every sentence in the book. I don't know if I read it superficially in the first time, but I spent considerable amount of time this time around and I highly recommend that everyone who has aspirations to invest in stock market should read this before playing with your hard earned money.

The book offers timeless advice on investment principles, valuation methods, income statement analysis and balance sheet analysis. If you don't have an accounting or economics background / interest, this book could be bit of a hard read but for people who have basic understanding of economics / accounting / capital markets and instruments would find it relatively easy. The book extensively deals with the bond and senior security investments in the second and third chapter of the book and if you are someone racing against the time, then you can skip it. But all other chapters are very important ones and Graham discusses the mental and psychological aspect of stock investments at considerable length and to me that's where the success of this book lies. He has also allocated one chapter each for income statement analysis and balance sheet analysis where he explains each and every concept lucidly with real examples and tables. He has also touched upon corporate governance issues and various loopholes in accounting practices which we can easily correlate with present. Overall it teaches the reader to have very good understanding about the following;

1. Mental and Psychological aspect of stock investments
2. Established standards of Common stock investment
3. Corporate Governance and Loopholes
4. Income Statement and Balance sheet analysis
5. Asset valuation
6. Capital Markets

I have liked each and every sentence of the book but I want to give here some of the excerpts that I liked the most and hope that you will find it very useful as well.

Page 3 : "By mathematical law more speculators must lose than can profit".

Page 21 : "Security analysis must proceed on the assumption that the past record afford at least a rough guide to the future. The more questionable this assumption, the less valuable is the analysis."

Page 35: "Corrective forces are usually set in motion which tend to restore profits where they have disappeared, or to reduce them where they are excessive in relation to capital."

Page 54 : "An investment operation is one which, upon thorough analysis promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative."
My Example : Buying State Bank of India at current price (Rs. 2200 a piece) can be considered as an investment. Buying Jubilant Food works at Current price (Rs.800 a piece) can be termed as Speculative.

Page 303: "The function of analysis was to primarily search for elements of weakness in the picture. If the earnings were not properly stated; if the balance sheet revealed a poor current position, or the funded debt was growing rapidly; if the physical plant was not properly maintained; if dangerous new competition was threatening ; or if the company was losing ground in the industry; if the management was deteriorating or was likely to change for the worse; if there was reason to fear for the future of the industry as a whole – any of these defects, or some other one, might be sufficient, to condemn the issue from the standpoint of cautious investor."

Page 305 : "
Buying common stocks viewed as taking a share in a business."

Page 310 : "The notion that the desirability of common stock was entirely independent of its price seems incredibly absurd. Yet the new era theory led directly to this thesis. If a public utility stock was selling at 35 times its maximum recorded earnings, instead of 10 times its average earnings, the conclusion to be drawn was not that the stock was now too high, but merely the standard of value had been raised. Instead of judging the market price by established standards of value, the new era based its standards of value upon market price. Hence all upper limits disappeared, not only upon the price the stock could sell, but even upon the price at which it would deserve to sell."

Note : He refers 1931 as New Era.

Page 317 : Canon of common stock investment.

1. Purchase price must have rational basis

2. Past record of primary importance

3. Approximations to insurance principle and practice

4. Purchase of a single stock not an investment

5. Group purchase may constitute an investment operation

6. Price an integral part of every investment decision (In theory, you only need to follow the old and trite policy of buying when prices are low and selling out when prices are high. No advice could be easier to give or more difficult to follow. High prices and low prices are not marked with distinguished signals like red and green traffic lights. Not only “high” and “low” always relative terms, but in wall street their meaning is mainly retrospective)

7. Analytical techniques essential to intelligent common stock investment

Page 317. "Policy of withholding dividend questionable"

Note: Seems he thought not paying dividend every year out of profits was not a good corporate governance. Current corporate governance practices in India would make Graham roll over in his graveyard.

Page 432 : "Classical formula for “Beating the stock Market” – Obviously it requires strength of character in order to think and to act in opposite fashion from the crowd; and also patience to wait for opportunities which may be spaced years apart."

Page 453 : "People who habitually purchase common stocks at more than about sixteen times their average earnings are likely to lose considerable money in the long run."

Page 499 : "When a common stock sells persistently below its liquidating value, then either the price is too low or the company should be liquidated."

My Example : Temptation Foods or Country Club India. These companies are not offering any value to the shareholders. According to Graham, shareholders will be better off selling the business rather than running it.

Page 504: "Common stock which : a) are selling below liquid asset values; b) are apparently in no danger of dissipating these assets; and c) have formerly shown a large earning power on the market price, may be said truthfully to constitute a class of “Investment Bargains”.

Conclusion: If you read the book and follow the principles exactly as given, you will see the following happening automatically.

1. You will not buy stocks when you are not supposed to buy (100% sure) or you will not buy a stock which a sensible investor is not supposed to buy.

2. You will buy more often than not at a sensible or right price.

3. You will know the right time to exit.

What else you are looking for?

Kumaran Seenivasan


Friday, May 6, 2011

Portfolio Construction

It has been more than a month since I posted my last article and so much has happened in the market since then. I listed several stocks that were beaten down at that time in the last article and most of them went up by 15% – 25% within a month only to come down again. Short term investors who buy in every dip and sell in a pullback tend to make money when the market is moving sideways like this and over the long term, long term investors should match them in terms of returns if not beat them. But to remain invested for a long time, it is important to build a portfolio of stocks that will catapult your returns (20% CAGR) while protecting your capital. Though it looks simple, it is easier said than done. Constructing a good portfolio takes lot out of you in terms of time and money while precise understanding of market dynamics, changing environments and guts to make tough decisions are prerequisites. I have tried to construct a good portfolio and have done reasonably well although I made lot of mistakes along the way and I thought of sharing some of the finer points that I learnt in the process.
Long Term Portfolio
The reason that many leading investors recommend to keep stocks for a longer term is to allow the stocks enough time to create the kind of earnings that support your cost price plus expected returns. For example, if you have bought Axis Bank in the month of November 2010, you would have certainly paid Rs.1500 – 1600 a stock. Market has been declining since then and Axis Bank is down by 20-25% from that level. In order to recover your capital and make at least 25% of returns out of it, you need to allow enough time, may be a year or two, so that the earnings catch up the valuation at which you bought the stock plus the 25% of return you expected. Looks simple, isn’t it? Not so simple though. Not all the stocks recover in the expected lines let alone making returns. That’s where your skill in constructing a portfolio comes into play. It is not without a reason that fund managers are getting paid well.
There is a myth that you have to buy only midcap and small cap stocks to beat the index returns but it is far from the truth. You can in fact build a portfolio from SENSEX or NIFTY stocks and still beat the index returns hands down by a big margin. How? The most important thing in building a portfolio is not only the selection of stocks but also the proportion of money that you allocate to each and every stock in your portfolio. Let’s see how this works with some practical examples.
Assume you had 15 Lakhs to invest during the month of June 2010 and you constructed a portfolio selecting 15 stocks from the SENSEX scrip’s. Assume that you selected the following 15 stocks to form an Index and named the index as STAR15.
HDFC Bank, ICICI Bank, Mahindra and Mahindra, Tata Motors, Bajaj Auto, Hindalco, Bharti Airtel, Cipla, Hindustan Unilever, Tata Consultancy services, Reliance Industries, BHEL, NTPC, L&T, DLF
Even for the illustration purpose I have opted for the most diversified list of stocks to avoid any bias to a particular sector.
Let’s see three scenarios and how it would have made a difference in returns.
Scenario 1: You had 15 Lakhs and you allocated 1 Lakh each on the 15 stocks. From June 2010 to May 2011, the return would have just mimicked the returns of the Index STAR15 that you assumed.
Scenario 2: You had 15 Lakhs and you decided to allocate 10 lakhs for the following 8 stocks since you thought they would perform well.
Reliance Industries, L&T, BHEL, Cipla, ICICI Bank, Bajaj Auto, NTPC and DLF.
You have invested the rest 5 Lakhs in HDFC Bank, Tata Motors, Hindalco, Hindustan Unilever, Tata Consultancy services, Mahindra & Mahindra and Bharti Airtel.
What do you think your returns would be? The returns would be sub optimal and in fact lagged the Index (STAR15) by a considerable margin.
Scenario 3: You invested 10 Lakhs in HDFC Bank, Tata Motors, Hindalco, Tata Consultancy services, Mahindra & Mahindra, Bharti Airtel and Hindustan Unilever and another 5 Lakhs in Reliance Industries, L&T, BHEL, Cipla, ICICI Bank, Bajaj Auto, NTPC and DLF.
Result: Your returns would have beaten the Index (STAR15) by a big margin and in fact you could have got more than 50% returns if you have allocated more money to Hindalco, HDFC Bank, Mahindra & Mahindra and Tata Consultancy Services.
So the point I am making here is, proportion of money that we allocate to a particular stock is as important as the stock selection and in fact more important than the stock selection sometimes. I don’t think you could have gained 50% return either from the portfolio of midcap stocks or the complete list of Index stocks from the assumed period. The notion that only midcap and small cap stocks can give Index beating returns is far from the truth though there is an element of truth in it. For example if you have invested all 15 Lakhs in TTK Prestige, you would have gained 300% returns by now. But it is very difficult to take that kind of a risk in a single stock. We can only make educated guesses and rational decisions. May be we can take those decisions if we sit in the board like some other big investors.
Stocks for the Next Decade
I am tracking a list of stocks which is enough to create a good portfolio. I went with the safety first approach where I gave more importance to the fundamentals and future direction they might take. May be if interested, you can pick few from the list as well. The list contains good mix of established and emerging companies.
Axis Bank (Fast Growing and entered into investment banking through ENAM Deal Recently)
ICICI Bank (Has Fast Growing Subsidiaries and global presence)
State Bank of India (Largest Bank in India with unmistakable track record)
Canara Bank (One of the largest PSU banks available at good valuation)
Andhra bank (Very good midcap PSU with attractive dividends)
Indusind Bank (Fast Growing Bank with retail client focus)
Yes Bank (Fast Growing Bank with Corporate Client focus)
Non Banking Finance Companies
Rural Electrification Corporation (Focus on Power Infrastructure Financing)
LIC Housing Finance (Growth area of housing finance with a backing from LIC)
Indiabulls Financial Service (Housing Finance company with good dividend History)
Dewan Housing Finance (Growing Housing Finance company focusing middle and lower income)
Magma Fincorp (Growing NBFC Focusing vehicle loans)
Shriram Transport Finance (Established NBFC in Used Commercial Vehicle space)
Bajaj Finance (Turnaround NBFC in Consumer Loans)
Mahindra Finance (Strong Parent and Presence in all kind of loan segment)
Adani Enterprises (Next SENSEX Company)
L&T (Best Infrastructure Company)
BGR Energy (Growing EPC & BOP Service Provider in the power space)
IL&FS Transportation Networks (Very good road portfolio with good mix of annuity and toll projects)
IRB Infrastructure (Good road portfolio with huge order book)
Power / Energy
Coal India (Near Monopoly in Coal assets)
Adani Power (Growing Power Major with strong fuel security)
Torrent Power (Very good company present in the entire value chain of production & distribution)
Crompton Greaves (Excellent company in power systems space+consumer durables)
Diamond Power & Infrastructure (Growing small cap company in the power cable business)
Left out JSW Energy due to the fact that they have failed to get adequate fuel security amid falling merchant rates. If you are invested for 10 years in this stock, then it can give serious returns.
Left out Reliance Infrastructure due to the fact it is headed by Ambani scion and they get involved everything except business these days.
I have invested in both of these stocks, but will not make additional investment. Lesson learned. But both can give good returns over long term. It is just they don’t deserve to be in the core portfolio.
FMCG / Consumer Goods
ITC (Best in the FMCG Business if bought at the right price)
Godrej Consumer Products (Very good management & inorganic growth)
Titan Industries (Excellent performance in the past, Valuation is the concern)
Asian Paints (Leader in Paint Business)
Amar Remedies (Growing Small Cap FMCG Company)
Bajaj Corp (Very good fundamentals)
IFB Industries (Can tap the growing demand for consumer electronics)
McLeod Russel (Best Company in Tea Business)
Gitanjali Gems (Fast growing Jewelry Company)
Shree Ganesh Jewelry House (Undervalued)
Bajaj Auto (In best position to tap the two wheeler market)
Mahindra & Mahindra (Tractor & SUV Specialists and good management)
Tata Motors (Strong Performance off late)
Ahmednagar Forgings (Growing Small cap auto parts company)
Godrej Properties (Strong Management and good land bank)
Oberoi Realty (Zero Debt company with premium product)
Anantraj Industries (Low debt and Presence in National Capital Region)
JSW Steel
Sesa Goa
Pharma / Healthcare
Aurobindo Pharma (Good Pharma company available at reasonable valuations)
IPCA Labs (Evergreen Pharmaceutical Company)
Lupin (Strong performance in the past)
Apollo Hospitals (Largest Hospital chain and excellent brand value)
Jubilant Life Sciences (Reasonable Valuation)
Opto Circuits (Unique in its space)
Only problem in the Pharmaceutical space is the high valuation and it can go up from here or people might book profit sending the stock prices crashing.
Bilcare (Major Player in pharmaceutical packaging)
Ess Dee Aluminum (Growing Pharmaceutical and FMCG Packaging Company)
Parekh Aluminex (Good Business & Stable Customers)
SRF Limited
Rallis India (Strong Parent and best performance)
United Phosphorus (Very good fundamentals)
Jain Irrigation (Major Player in Micro Irrigation)
Gujarat State Fertilizer Corporation (Undervalued)
Coromandel International (Strong Presence in South India and good Capex Plans)
Left out Lakshmi Energy & Food because I don't really know why it is under performing in spite of good fundamentals. I have made investments but will not make additional investments.
Leather Products
Bata India (Strong Brand Image)
Mirza International (Very Good Small cap company with good brands)
Superhouse Limited (Good Fundamentals)
Relaxo (Good Product line)
We can definitely create a decent portfolio from the above list but it is not the rule either. If we spot a very good opportunity in other stocks, we should be ready to grab it as well. For example, if Muthoot Finance goes down to Rs.125 in a correction. There is no point wasting time. They are in very good business of gold loan and their future looks promising. So it makes sense to invest in that. Likewise there could be many other opportunities and we just need to have open mind.
Angel Broking is projecting FY13 EPS of Rs.1488 for SENSEX and the consensus SENSEX EPS for FY13 is Rs.1400. If that turns out true, the SENSEX can reach 25000 levels within next 2 years and investors who build a good portfolio this year will stand to benefit a lot.
Kumaran Seenivasan


Saturday, March 19, 2011

2011 – Year of Opportunity or Disaster

The first three months of this New Year 2011 has given enough headaches not only for retail investors but also for politicians and business men alike. The ruling congress government is one of the worst governments in recent times and in all probability should sit in the opposition benches if the electorates think prudently during the next general elections. The Congress government has failed in every aspect of governance and their only achievement so far seems to be signing the nuclear deal by buying MP’s and getting involved in scams almost every day. Congress is known for buying MP’s since the days of Narasimha Rao and it is no wonder they bought the MP’s again to save their face in Nuclear Deal. It is ridiculous on the part of prime minister to say that he did not authorize cash for vote to get the MP’s. No head of the government legally authorizes illegal acts and he has lost his credibility as a man of integrity. To make the matters worse, Wikileaks is releasing nasty information every minute and it seems US is just dictating how the governments are run around the world. I have never seen this many scams happening in such a short period of time and it looks like we need to either bribe officials or politicians to lead a normal life or become aborigines.

Impact on Market

Analysts blame Foreign Institutional Investors (FII’s) for whatever happens in stock market and it is high time they acknowledge the shoddy governance both at Government and Corporate level. No investor will invest billions of dollars confidently in such an environment and certainly not at a time when the companies in the western economies are doing well. FII’s started investing in emerging markets even though they knew how bad the corporate governance is just because the return in their own countries could not even beat the 1.5% inflation they currently experience. So for them it makes sense to invest and get out even with less than 10% gains in short durations and they don’t mind corruption or something else.

Nobody would have imagined these three months where governments in Arab nations are thrown around, Politicians are getting arrested in India, Businessmen are getting caught in scams, Oil and commodity cost is rising, Wikileaks is embarrassing all the governments, and even Mother Nature is causing damage in Japan. In fact markets have shown remarkable resilience for all these negative news flow because of the correction that has happened already.

Opportunity or Disaster

After spending significant amount of time reading financial news and expert ideas, I have come to the conclusion that the so called “Experts” are jokers or they act like jokers on the outset only to make huge money by misleading retail investors. If the market goes up, they all predict 22,000 or 25,000 SENSEX and if the market goes down 10%, they come up with crazy numbers like 12,000 SENSEX. They do not understand that no prediction can be accurate in stock market and more so when the sentiment is pathetically pessimistic. It is very hard for me to believe that they make bizarre Buy or Sell recommendation even after spending decades in stock market. So my take is that they (Experts and Brokers) do so only to make money and become rich. For example IRB Infrastructure has been recommended by almost all the brokers and experts as a good buy from Rs.270 levels and the stock has been going down all the time and still people are recommending. I do not know how many people shorted this stock and made millions.

But the silver lining amidst all the ruins is that these things existed in the past and still our markets have kept investors around the world interested and I do believe it will be the case in future too. In fact even worse scams could happen or fraud could be unearthed and nothing is ruled out in India. But one thing is sure that the country is remarkably resilient to withstand all these shocks and I believe we will continue to grow at a decent pace. In that sense I strongly believe that 2011 could be a year of opportunity for equity investors if they carefully construct a good portfolio and continue to invest if the market corrects more.

Why 2011 is Year of Opportunities?

If nothing bad is happening and everything is as optimistic as ever, then there is no reason for investors to sell equities and we will never get an opportunity to buy. Stock prices come down only at times like these and this has to be viewed as an opportunity. After all the mantra for even highly acclaimed investors is to buy and hold until you reach your target. When do the targets get reached? Only something bad happens. Markets are believed to reach the peak when the earnings become stagnant and earnings become stagnant because of something bad. It could be due to rising input costs, Oil crisis, recession or bankruptcy due to fraud and there are millions of reasons. If our idea is to buy the stocks when it is cheap, then why not now? If not now, then when? Of course people would say that the bottom has not formed yet and NIFTY will test 4800 or 4500 or whatever. But the prudent approach in front of us is to buy good stocks and create a portfolio now and continue to accumulate if the prices go down. This way investors will not feel that the market let them down in sudden uptick.

Markets usually discount all the bad news before everything happens and move up strongly before all the good things flow out. So waiting for the bottom is not a good option always and that too considering the fact that Indian companies have been coming up with decent results in spite of the bad environment, it is not the right thing to do. Almost all the mid caps have come down more than 35% from their peak and to go down from here, it would need an extraordinary situation for sure and the chance of happening that is remote though we can’t say it is not on the cards. Stock investment itself is a risky thing to do and if we have decided to be part of that, then these are some calculated risks that we need to take in order to be successful. So buying now and accumulating at lower levels will give good returns in the next 2-3 years time for sure. In fact personally I would be happy if the whole of 2011 pans out like this so that I can accumulate good stocks at fair prices and I will stand to gain when the market moves up who knows in 2012 or 2013.

Stocks List

As I said before, almost all the midcaps have come down more than 35% and some have corrected more than 50%. I am listing below some of the good stocks.

Yes Bank

Andhra Bank

Central Bank

Manapuram General Finance

Power Finance Corporation

Rural Electrification Corporation

Canara Bank

CanFin Homes

GIC Housing finance

BGR Energy

Reliance Infrastructure

SRF Limited

Shiv Vani Oil and Gas

United Spirits

Jain Irrigation

Bajaj Corp

ARSS Infrastructure


Pantaloon Retail

Mundra Port



IRB Infrastructure

IL&FS Transportation Networks

JSW Steel

And the list can go on.

Conclusion: This is the right time to buy stocks. Because you stand to gain If the markets go up from here and you stand to gain even more If the markets go down by way of accumulating at even greater prices.

Kumaran Seenivasan


Friday, January 28, 2011

Irrational Investors

The New Year 2011 has not started well for the Emerging Markets while opposite is the case with Developed Markets particularly US. For the last couple of year’s stock markets around the world were moving in the same direction but that seems to have ended for now. US Market has been moving up in the New Year while Indian Market has been declining giving sleepless nights for the domestic investors. While there are many reasons for this including inflation, interest rate hike and commodity prices, lot was dependent on FII’s booking profit to invest in Western Markets. FII’s have sold equities worth about 8000 crores since the start of the New Year. If 8000 crore sell-off can create this much mayhem in the Indian Market, I shudder to think what can happen if they offload all the 30 Billion dollar investments they have made in the year 2010. Unless our market is influenced more by domestic investors and institutions, this situation is unavoidable.
The market correction has given the much needed opportunity for many people who either want to enter now or re-align the portfolio with better stocks. I was looking at the prices of some of the stocks and found how irrational investors are and how the investor behavior forms the market sentiment. I will discuss this with 4 real world examples.
Bajaj Holdings and Investments
Whether it is land or Grocery or Stock, we all want to buy at a price lesser than its real value. For example, if someone sells an article worth about Rs.2100 for a price of just Rs.750, will people buy? I would think so. But it does not happen always at least in stock market. Bajaj Holdings and Investment is a holding and investment company and it has 31.49% and 38.55% stake in Bajaj Auto Limited and Bajaj Financial Services Limited and also 24% in Maharashtra Scooters Limited. Apart from these, they have a 100% subsidiary called Bajaj Auto Holdings Limited and 1% stake in ICICI Bank Limited plus other equity investments.
Lets Calculate the per share worth of this company.
Value of Bajaj Auto and Bajaj Finserv stake = Rs.16500 Crores
Other Equity Investments Including ICICI Bank = Rs.3100 Crores
Value of Fixed Income Securities =Rs. 2576 Crores

So total value of these investments is Rs. 22176 Crores. Bajaj Holdings has the total outstanding shares of about 10.58 Crore Shares.
If you divide the total investment value of Rs.22176 crores by the total outstanding shares, you get the per share value of Rs.2100. But the current market price of Bajaj Holdings and investment is just Rs.735 which is 65% lesser than the actual investment value. Also, the businesses they have invested in (Bajaj Auto and Bajaj Finserv) are doing extremely well and future is very bright too. Even if we assume 25% holding company discount, the stock still has about 40% upside. I am sure many market analysts know this but I do not know why the stock price is hovering around Rs. 735. One interesting thing, this stock did trade at Rs.3100 in December 2007 / January 2008 during the previous market peak. So, is this an opportunity or irrational behavior of investors? Only time can answer.
Indiabulls Real Estate
Indiabulls group is one of the shareholder friendly ones that we can see today. You can better understand this if you look at the dividend of group companies Indiabulls Financial Service and Indiabulls Securities. Indiabulls Real Estate is the real estate arm of this group and they went for the IPO in 2007. They did not have any visible projects or cash flow in 2007 and 2008 but the stock was trading at Rs.840 and thereabouts. If the investors had that much of a hope in this company, I do not know why the same investors do not have that hope when the same company is actually making profits?
The stock is currently trading at Rs.120. In fact the value of the company is several times higher than what it was in 2007 and 2008 but the stock is trading several times down from the 2008 peak. The projected FY12 EPS for the Indiabulls Real Estate is around Rs.15 and they also have 58.5% stake in another listed company Indiabulls Power. Their land value itself would be higher than their market cap and adding the indiabulls power stake, the stock is available at a cheaper price than its real value and the only reason I see for this is Market Sentiment and irrationality. Otherwise why would someone buy a company at Rs.840 when there were no visible projects and why someone would not buy when the company is actually making good profits in addition to other serious investments?
Reliance Infrastructure
This is another company available at a cheaper price and I do not know if that is because of Anil Ambani. There was a time where people looked upon Ambani’s for good returns. But time has changed since then and these days investors are ready to invest in any company sans ‘Reliance’. Coming to the Reliance Infrastructure business, they operate in very good sector and have very stable business of power distribution.
They distribute power to two of the most important cities in India, New Delhi and Mumbai in addition to Metro Projects, toll roads, Airports and power generation. They do have internal Engineering Procurement and Construction (EPC) team which generates serious cash flow and the trailing 12 month EPS is Rs.52. FY 2010 EPS was Rs.67. But the most interesting fact is yet to come which is their 44.96% stake in Reliance Power. Reliance Infrastructure’s investment value on the basis of Current Market cap of Reliance Power is Rs. 605 per share. But all these things are available for Rs.725 currently and I again have no answers to this. By all means of rationality it should be trading somewhere around Rs.1200 but market is a place where people get opportunities and I do not know if this is one of those cases. But I am sure Reliance Power will be a very big company in next 5-6 years and Reliance Infrastructure stands to gain a lot from this investment alone. May be by 2015, Reliance Infra’s Rpower stake itself could be valued around Rs.2000-2500.
Adani Enterprises
Adani Group is one of the fastest growing business groups in India and they have interests in port infrastructure, power, coal trading, oil & gas and agro processing. They have 70.25% stake in Adani Power which is planning to generate around 20000 MW Power by year 2020 and they also have 67% stake in Mundra Port. As we did for other companies, if we calculate the per share investment value of Adani Enterprises, it comes out to be around Rs.340. Rest of the Adani Enterprise Business (coal trading, Agro Processing, Oil & gas) is available for Rs. 240 based on the current market price of Rs.580. Again the businesses they are in have the opportunity to grow multifold and they only stand to gain in the future.
Another example would be Mahindra and Mahindra, but I will let the readers do the research. These are some of the examples that I wanted to share to give better understanding about irrational investor behavior. I am sure there are several better stocks out there with similar hidden values and if the investors are able to cherry pick them, they would be better off down the line.
Kumaran Seenivasan



This is a blog about stock market investments, investment strategies, and related topics. Any statement made in this blog is merely an expression of concerned authors opinion, and in no case should it be interpreted as an investment advice to buy stocks, sell stocks, or for that matter advice for any other issues be it money related or not. By using this blog you agree to (i) not take any investment decision, or any other important decisions based on any information, opinion, suggestion or experience mentioned or presented in this blog (ii) verify any information mentioned here, independently from your own reliable sources (for e.g. a registered investment advisor) and thereby check for possible inaccuracies. This blog is to create investment wisdom among general population and the authors are not responsible for
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