Infinite Comp: Value Investors' Delight

What would a value investor ask from his picks (at the time of deciding whether to buy or not)?

1) UNDERVALUATION

He would want his picks to be undervalued- i.e market price to be much less than the value of the stock. For a 100 Rs value, he would want market price to be Rs 40-50 or less.

2) CATALYST
To bring market price to intrinsic value, there should be some catalyst (in the future) to trigger the change.
Just because its very difficult to tell when & how the catalyst will come, value investors practice diversification. And in absence of that catalyst, we will end only with Value Traps (cheap stocks which will remain forever cheap).

Let me explain with a live example- Lets say I buy an NBFC stock selling at Rs 27/- each. Now, the book value is Rs 140/- per share. The business is making Rs 9-10 EPS per year. So, from this knowledge, with a P/B of 0.2 & P/E of 3, the stock seems undervalued. What if I say two more things-
1) The business did a buyback 2 years back at Rs 133 per share.
2) The promoters have injected their own money into the business at Rs 45 per share recently.

So this satisfies my criteria 1- It is undervalued. I will easily value it at 60-70 Rs per share.
But for it to move to its true value, it will need a catalyst- Earnings jump/ Dividend/ Buyback/ More visibility.
Till then it will remain undervalued & the opportunity cost will hurt me.

What if a stock satisfies both the criteria- Undervaluation & a Visible Catalyst?
That will be the time to say ALL IN for a poker player, I guess.

Years ago, Prof Bakshi found a hugely undervalued stock which he loaded & then he became his own catalyst. I guess with catalyst in sight you can afford to do that- ALL IN !!!  

Here is an undervalued business which comes with its own catalyst- Infinite Comp Solutions

Why is it Undervalued?
At 120 Rs per share, the stock is selling at 4.2 times FY12 earnings. The business is asset light, generates enough free cash flows & management has given a 20% growth guidance for FY13. Insiders are buying the shares from the open market. 1Q13 results were good.
In nutshell, a 20% growing business having good ROCE is cheap at 4 PE.

Where is the Catalyst?
The catalyst is the Dividend. The management has clearly announced a policy of giving 30% of net profits to shareholders as dividends.

At an EPS of 33-34 Rs for FY13, that would be Rs 10 as dividend per share. The dividend yield works out to be a whopping 8.33%. {Remember the business is doing well, management is positive about the business, insiders are buying.}

If one can find 10-15 dividend yields of this quality, who needs a Fixed Deposit???

Risks- The company caters majorly to Telecom sector & US based clients. If clients' business faces a slowdown, Infinite will feel the heat. However, risks are overhyped at current price, in my view.

Fair Value- I would value it at around Rs 230-260 (Rs 33 EPS * 7-8 PE). Hence, I expect it to double in next 4-5 quarters.

Biases that may have affected my thought process- Endowment Bias, Confirmation Bias. So, please do your own due-diligence.

BHARTI AIRTEL- At 6 Year Low.....

The once darling of Indian Markets, Bharti Airtel seems to be on a steady decline. The company posted 10th straight quarterly drop in Profits. And the stock has crashed to a 6 year low.

Have we reached the bottom?

Let’s answer with the help of some borrowed wisdom........

"In a business selling a commodity type product, it's impossible to be a lot smarter than your dumbest competitor. " ------------ Buffett on Airlines

"Producers of relatively undifferentiated goods in capital intensive businesses must earn inadequate returns except under conditions of tight supply or real shortage. As long as excess productive capacity exists, prices tend to reflect direct operating costs rather than capital employed." ----------- Buffett on Textiles

"In many industries, differentiation simply can’t be made meaningful. A few producers in such industries may consistently do well if they have a cost advantage that is both wide and sustainable. By definition such exceptions are few, and, in many industries, are non-existent. For the great majority of companies selling “commodity” products, a depressing equation of business economics prevails: persistent over-capacity without administered prices (or costs) equals poor profitability." ---------- Again on Textiles

So for a business to earn low returns, it needs (i) Undifferentiated Product (ii) Excess Capacity (iii) Low variable cost (for an additional customer) (iv) Low switching cost for customers.

So, where is Telecom in this? In my view, it satisfies all the above criteria & hence should earn low returns. Apart from that, it has the regulator, TRAI, which hurts the companies in whatever possible ways it can.

So, over the long term, there are going to be more losers than winners in Telecom Sector.

Now you may say- Airtel is the strongest. So it will definately be a winner (& not a loser).

But, there is no guarantee that there will be a few winners! What if all continue to earn below average returns?

So, Airtel is an AVOID in my view.

But there is a PRICE at which even the worst business becomes a great INVESTMENT.

Has Airtel reached that Price?

I Don't Know. And if you think that since price is 6 year low & hence its a good Investment now; then, I will say, Even you Don't Know.

FYI- Its still selling at 15+ PE.

Disclosure- No Plan to Invest. But there are some very good investors who are invested. So, I may be wrong also :-)

What, if Not Equities???

A lot of people don't like the idea of putting large sums of money into equities.
"Equities are risky" the saying goes.


Lets INVERT the situation & try to answer the question - "What then, if not equities?"

·       T he easiest option is Spend everything that you Earn. No Savings, no need to worry about where to put the savings. :-) But that's pretty much a stupid decision as you should have figured it already by now.

 ·       T he second choice is to "INVEST" in Savings/ Fixed Deposits & ensure "safety". However, there is one problem with this plan. It's not INVESTMENT, full stop.

      Buffett explains Investment in his 2011 letter as- " The transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power – after taxes have been paid on nominal gains – in the future. More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date."

      Now since Fixed Deposits fail to meet inflation & hence are unable to provide more purchasing power to the user, they are not INVESTMENTS according to world's best investor.

  ·      The case is nearly similar for Corporate Bond Buyers. For extra 3-4% return over inflation, you     face the risk of default. You get no share in the upside, but have to pay heavily for the downside.

 ·      Next in line is GOLD. Again the same problem... Not an Invesment. Either Gold is an Insurance against things falling apart (govt printing more money/ defaulting) or its a Speculation wherein buyer is betting on price going up just because it has gone up in the past.

·      Next is REAL Estate. The good thing about this is that its productive. You buy a house, rent it out & live with the rentals. You buy a farmland, produce some goods, sell them & get Money (Purchasing Power) in return.

         However, NO Asset Class classifies itself as an Investment AT ANY PRICE. 

           If you look around currently, the rentals are maximum around 4-5% of house values. ( i.e for a property of 1 crore, the rents that you can get per year are around 5 lakhs only).

      So, to consider Real Estate as an Investment at Current Prices, you have to strongly believe that Rentals will keep going UP in the future (I am skeptical about that). Now Rentals can go Up only if Salaries go Up (else who will have the money to pay those rentals). Salaries will go Up only if Business Profits go Up (else who will have the money to pay those salaries). If Business Profits go Up, will equity prices go Down???

Have I left any major asset class?

P.S-

·      So if everything other than Equities is not touchable, where should I go?

·      Since equities are volatile, don't put the money that you need in next 5 years into equities.

·      NO Asset Class classifies itself as an Investment AT ANY PRICE applies to Equities also.So, look at Price before buying Blindly.