Beginner's Luck

One of the first stocks I had put my hard-earned money in was Blue Bird (India) Ltd. My rationale for that investment was like this-

1) The company had applied for Debt Restructuring under CDR package which was approved. Without debt and interest (for some time, moratorium period i.e), company's profit was expected to swing back to black as it had operating profit in the past.

2) Price-to-Sales ratio, PSR, a very important ratio (for these kinda investments) was just about 6%. Hence, there was huge margin of safety.

3) About 93% of promoters shares were pledged. So, only way for promoters to make money was to run the company effectively. It was not possible to make money off minority shareholders now.

In fact, I was so positive that I placed order at 5% more price than the last day's closing.

Fast forward to today......... So, how did the stock and the company performed? Comp first.

1) Nothing good happened. CDR is taking a lot of time to materialize.

2) PSR proved to be a mirage. Quarterly sales were just not in same terms as annual sales. Probably they were cooking the books earlier.

3) Management seems to least bothered about the company. They are quite busy somewhere else.

And so stock should have nosedived.    

Yes, it was down about 95% of the time I was holding it. But briefly, rather strangely, twice it took U-turn and gave me an opportunity to exit. Couldn't exit first time. In fact, new shareholders gave me some profits also... strangely. See below-

Lessons Learned-

1) Don't invest all money in one go. Something which is cheap, can become even cheaper. Have patience. SIP.

2) Long term view is good. But don't completely ignore quarterly numbers. Do look for very large drops in numbers.

3) Good management can do no harm to your investments. Same can't be said about bad management.

4) Don't feel ashamed to take losses if things are not going well.

Comment Plz... :)

Hi,

Just realized that due to settings problem, it wasn't possible to comment on previous few posts.

Kindly share your comments now on this post. Thanks. :)

Asset-Liability Mismatch

In accounts classes, we are taught that Assets and Liabilities are always equal.
But we, middle class, can make any accounting principle look absurd.

Recently, a known brought a Four Wheeler.... A Car. Great. But.... 
Is it an asset or a liability? In my book, Asset is something which gives you cash flows in the future; while liability is something which eats cash in the future. ( I believe most financial advisers would agree on this). Robert Kiyosaki explains this difference beautifully in his book Rich Dad Poor Dad.

Now, Car will have have running expense, maintenance expense and depreciation.
Petrol is already touching sky and is not expected to come down... Hence running expense will be much higher as compared to a two-wheeler. Same can be said about maintenance. And Resale value of car will go only in one direction with time .... And you already know that direction.

So, in nutshell, car is a liability. Let me know if you disagree.

So, basically, we are purchasing a liability. To make matters worse, the concerned person has taken a loan for purchasing this liability. If you think a bit more, isn't it like taking a liability (loan) for taking another liability (car)? Asset= Liability. Ohh really????  Where is the asset??

What are the possible reasons for buying a liability (car)?
(1) Comfort (2) Social proof {Everyone is having one} (3) Pavlovian misassociation {Car= Status symbol} (4) Envy {big brother of social proof, in this case}.

So, should one never buy comforts? No, one should. But, first, one should add assets. And secondly, not by taking another liability, at least.

Plz share your views on the same.

A Graham kinda Stock...

I have just came across a cheap stock based on Graham's criterion. This stock passes the following Graham's tests-

• Cash Bargain
• Net net bargain
• Book Value Bargain

Current Stock Price= Rs 87/-

Let see each criteria in detail-

Cash Bargain- As of latest Balance sheet, Cash is 339 crs. Add investments of 92 crs. Subtract debt of 34 crs. And we get a Cash per share of 103 Rs/- (I have taken investments at 60% of Book Value to arrive at Cash/ share).

Net Net Bargain- Net Working Capital minus debt comes out to be Rs 225 per share.

Book Value Bargain- Being a financial stock, comparing Price with Book Value makes sense. Book Value stands at Rs 226 per share. Hence, P/B is less than 0.4

Hence, current stock price looks very low on Graham's scales.

Mr. Market should be having some reason for this low valuation. Yes, there is a reason. Some top executives are involved in a bribery case by CBI. Stock has fallen 90% from its highs due to that CBI case. But company has no liability due to that.

I would not like to name the stock here to avoid Endowment Bias. But I expect it to go up by 100%.
P/B less than 1 for a financial stock which is not a cash burn looks absurd to me!!!!

Dealing with Cash Bargains

One of Graham's famous theme was Cash Bargain. When market cap of company is less than net cash (cash minus debt), then essentially everything ( fixed assets, working capital, management, intangibles) is available for free. This strange situation is what he used to call as cash bargain.

But those times and location were different. Such companies were take-over and/or liquidation candidates and shareholders used to receive cash after liquidation (worst case scenario). But this is India.
Hardly any take-overs attempts (Exception- GESCO Corp. in 2000.). Hardly any liquidation..

So, we need to be skeptical even with cash bargains. Lets try to see the negatives. Why should a company deserves to be available at less than cash-

1. Cash is only on the books. Actual availability is uncertain. Market is basically saying- Show me the money!!!
2. Management is fraud. They are taking away the cash from the company.
3. Business is burning cash & is expected to burn cash for a long long time.
4. Cash in balance sheet is not cash of the business but is customer's cash (basically get money from customers in advance while giving to suppliers sometime later)
5. If company can't invest the cash to earn returns at rate more than WACC, then also they deserve to be valued less than cash. (They are not returning cash & are not investing it properly, either)

Plz share if i am missing something and there is some other logical reason for cash bargains!!

PS- As I write this, there are a few cash bargains that are available & I am trying to find whether they deserve to be cash bargains or not!! 

Sensex & Its Ingredients- Cause & Effect Relationship

Sensex and CNX Nifty are two of the most followed things in India. A lot of people actually know Sensex is at 20,000 (or 18,000) without knowing what is Sensex, what is the meaning of 20,000. Even there are people who think today Sensex has fallen, so all stocks have fallen today.
For these kinda people, I have one line to say- " Revise cause-effect relationship from your high school English book. Think whether Sensex is the cause or the effect."

Clearly, fall (or rise) in Sensex is the effect of fall (or rise) in prices of its 30 ingredients & not vice-versa.

But then nothing is black & white. Sometimes, Sensex becomes the cause... movement in underlying stock prices becomes the effect. Read This.

Think now... A lot of money follows Index funds... A number of MFs have restrictions to buy & sell only Index stocks. All these will have to sell RComm & RInfra and buy Sun Pharma & CIL.
Artificially high demand for Sun Pharma & CIL and low demand for RComm & RInfra. So Sun & CIL should go up till Aug 8th. While RComm & RInfra could well become bargains by Aug 8th.

PS- This is going to be my first experience of this kinda price behaviour. Reality may be different than my thinking. Lets observe!

Sezal Glass & Debt pay-down Theme

The developments in Sezal Glass makes an interesting case (if your own money is not involved). Sezal glass is in the business of processing glass since year 2000. It was making profits (small though) in the business. Then, they decided to manufacture glass. Came first indigenous float glass plant. Since it a was capital intensive plan, huge debt and IPO also came with it. CRISIL assigned a rating of 1/5 to this IPO. Read here.
Management, however, was highly optimistic of the business plan (Over-confidence bias, as it turned out).

Result- Huge debt and competition led to losses.. unsustainable losses. And hence, management is now selling float glass business for 686 crs which will make Sezal a debt free company with some free investable cash. This catalyst brings Graham's debt pay-down theme to the mind... Hugely leveraged company becoming debt free.. no interest cost will increase EPS.. & hence stock price. Lets see the positives and negatives of this situation.

POSITIVES-

• Since 2000 till last year, company was in positive. Hence, management seems to have technical know-how to operate in this business.
• After paying all the debt, cash left should be about 45 crs (686 crs from selling float business, total debt 623 crs, cash 2 crs). Market cap is 126 crs. Liquidation value of left over business should definately be more than 100 crs. Liquidation value should provide some comfort to the investor.
• Just 3 months ago, 2 crs shares have been alloted on preferential basis at Rs 10/- per share. With current stock price at Rs 4, some safety is there.

NEGATIVES-

• In current year, company has made operating losses even in left over business. So, if this situation prevails, even debt free nature won't help much.
• Even in previous years, company was earning average PAT of 2-3 crs only with poor ROCE. Even on net market cap basis (market cap- cash), PE is very high.
• Industry is highly competitive with MNCs having big brands. The possibility of some adverse development for Sezal in the future can't be ruled out.
• Insider selling in recent times doesn't gives much confidence either.

So, I think, risk reward ratio is not good in this case and hence I would like to give this a pass. Sorry Graham,don't mind... will apply your theme in some other situation in the future. :-}