Thursday, October 25, 2007

Installment #7 - Do the due diligence

Hi Frenz,

I continue to write though the low response levels (or) feedback from you guys have brought down my motivation levels.

This is what I would call it as a framework for due diligence. Before you invest in a company spend a few hours collecting all this information. Here is a sample "Due diligence" that was done by me for "Infosys".

The good thing about doing this is that you get to learn a lot of macroeconomic perspectives. Also, the information that you collect about the sector could be reused for other companies in the same sector

Tuesday, October 23, 2007

Installment #6 - Ask the right questions

Hi Guyz,

The last 15 days has been eventful to say the least for all those who closely follow the stock markets...And happenings include, SENSEX has soared up from 18000 to 19000 in just 4 trading sessions. ET termed it as "Stupendous Madness". The draft policy on the P- Notes as expected had both criticisms and appreciations. With Damodaran saying that the opaqueness of this instrument is the cause of this sudden policy change whereas our FM Chidambaram said that it is not about the "P – notes" but about the moderation of Capitals flowing into Indian Share market. Yes, this does seem to make sense...

Statistics shows that around 30 billion dollars (1 billion dollar = 4000 crores) have been pumped into into India through the FII channel in the last 45 days. This was one of the major causes for the rupee value to appreciate. Looking at these numbers SEBI's move on P-notes does not come as a surprise to all of us.

The very next day after this move by SEBI there was this disastrous fall ( of around 1500 points from 19000 to 17500 which is a circuit breaker which I believe is happening for the 4 th time in the history of Indian Share market) and then a remarkable recovery with SENSEX closing at around 18800 levels..

So, should it be the "economy that should be driving the market" (or) the other way around "market driving the economy". Few days before the P- Notes move, the proceedings indicated that it is the later statement that was true which anyways is not a encouraging sign for a growing economy such as India...

Let me cut short on this story and get into my mainstream business…Here is a comprehensive set of questions that I could think of (so far) to become a shrewd buyer of stocks. Having said that this list of questions is not complete per se and this will continue to grow as I read further.

Before you invest in your hard earned money in a particular scrip try and find out the answers to all/most of these questions. In my opinion this is a bare minimum homework that all of us have to do before investing if we are serious about this business. We can't rely on an analyst to do all this for us…Do a reality check for yourself on the confidence levels, before you have understood all this and after you have answered all these questions?

For all those who would want to "STAY INVESTED" this list of questions could provide a framework for making a rational decision.

  1. What is the sector to which the company belongs to?
  2. Do you understand about the business intricacies of this sector?
  3. What is the rate at which this sector is been growing in India for the last 5 years?
  4. What is percentage contribution of this sector to Indian GDP?
  5. How is the global demand for the product/service that they produce? (Or) in other words how is the global business outlook for this sector?
  6. Is this sector dependant on domestic markets (or) global markets? Essentially is it an export oriented business?
  7. Are the raw materials for producing the product/service imported?
  8. Do you foresee a sudden rise in the price of these raw materials?
  9. Are you aware of any government policies that might go against (or) in favor of this particular sector
  10. If it is an export oriented business, how does the rupee value appreciation (or) dollar value depreciation affects this particular sector?
  11. What is the growth rate of this company for the last 3-5 years?
  12. Is this company among the top 5 player in this sector in India?
  13. If there is a global competition in the business what is their global ranking?
  14. Has the growth rate of the company surpassed the sector growth rate in the last 3-5 years?
  15. Do you believe that this trend will continue for the next 3 years?
  16. What is the overall "revenues" of this company?
  17. What is their operating/net profit margin?
  18. Have this company maintained a consistent margin (OPM, NPM) in the last 3-5 years?
  19. What is the total number of outstanding shares (or) shares issued by the company to the public?
  20. What is their EPS?
  21. How is their EPS growth in the last 5 years?
  22. What is your projected EPS based on their future earnings?
  23. What is the sectoral P/E range?
  24. What is the P/E at which it is currently trading?
  25. Do you know how the news about the new order gets translated into the balance sheet and by when?
  26. What is the P/E for the CMP based on the future earnings?
  27. Do you know about the management of this company? What is you confidence level on their management?
  28. What is the 52 week High/Low for this scrip?
  29. Have you looked at the chart for this scrip (1 month, 3 months, 1 year, and 3 years)?
  30. Do you understand the support and resistance for this particular scrip?
  31. Do you know their debt to equity ratio?
  32. Are you aware of any M&A that they might happen in near future?
  33. Are you aware of any large orders that might get in the near future?
  34. Is this stock an A, B - B1, B2 category stock?
  35. Do you know of any other companies in this sector based on the above analysis where the numbers might be better than this?
  36. How has been the investor sentiment (or) how is the market hype on this stock in the past?
  37. Is this company listed in any other parts of the world other than BSE/NSE?
  38. How are the brokers'/analysts' rating on this particular scrip?
  39. Have you had a look at the 50 day/200 day moving averages for this scrip?
  40. Have you had a look at their last three years P/L statement and Balance sheet?
  41. Do you know the competitors for this company and their P/E?
  42. Do you know the face value of the scrip?
  43. Do you know about the dividend per share for the last 3 years?
  44. Do you know the market capitalization of this stock?
  45. Would you know of the other mutual funds that have invested in this company?
  46. What is the average momentum of this stock (no of shares traded) in a day/week/month?
  47. Is it a BLUE CHIP stock?
  48. Do you know of any bonus shares that this company had announced already?
  49. Do you know the split up of investors in this scrip like FII, retail, mutual fund etc.,
  50. Is it the right time to buy this scrip (say market is down for issues such as p Notes). You might feel that there will never be such a kind of good buying opportunity again.
  51. Have you observed any seasonal trends in the price fluctuation of this scrip? Like just before the day of the quarterly or annual results announcement the stocks price keeps soaring up.

GDP - Gross Domestic product
OPM - Operating Profit Margin
NPM - Net Profit Margin
EPS - Earnings Per share
P/E - Price to Earnings ratio
CMP – Current Market Price
BSE - Bombay Stock Exchange
NSE - National Stock Exchange
P/L - Profit and Loss
M&A - Mergers and acquisitions
FII - Foreign institutional Investors
YoY – Year on Year


Tuesday, October 09, 2007

Installment #5 - Rely on your reasoning than getting carried away with market sentiments

For all those who are still skeptical about my positive views on KPR mills (or in other words to all my friends who get carried away with the market sentiments and speculations rather than relying on our own sense of reasoning J - which is what differentiates humans from the rest of the “beings” in cosmos) and a buy strategy on KPR mills at Rs. 130

The reason why I say KPR mill is still not a bad bet at 130 levels based on my deep dive and the following findings...So, here is an analysts J pick based on the fundamentals… (still a novice who is on a fast paced learning ..)


KPR Mill reported sales of Rs 481.62 crore and net profit of Rs 58.42 crore for FY07. The company’s operating profit stood at Rs 120.27 crore and the operating margin was 24.97%. The net profit margin stood at 12.13%. On post issue diluted equity, KPR posted an EPS of Rs 15.5 for the year.


At the upper end of the issue price, the stock will discount its FY07 EPS of Rs 15.50 by 17.1x and 14.5x at the lower end.

So, @ the price of 225 the P/E works out to 14.5
@ the price of 130 the P/E works out to 8.3 – So, I believe that the share is trading @ a
comparatively cheaper price.

Look @ how it compares with its peers…( KPR is almost half the size of Gokaldas exports in terms of revenues and better than Gokaldas in terms of profit margins)

Take a look at the overweight stocks in textile listed in ICICI DIRECT.. If I do a comparison of this company with other companies in the same line of business (based on the revenue and the net profit) KPR will definitely be there in the TOP 5 slot…

My take:

Currently this stock is trading at a discounted price. All that is required is a hype in the market about this company…Patience is the name of the game as far as KPR is concerned…This stock definitely deserves more light than what it has got so far…170- 180 levels should bring in a fair P/E for this stock…

PS: take a look at the below links to understand more about the textile sector and why P/E could be an effective metric to evaluate if a stock is trading on an investment or speculative basis.

Saturday, October 06, 2007

Installment #4 - Numbers Don't lie

Hello knowledge workers,

I am a firm believer of this philosophy “earning comes along with (l)earning” atleast in a knowledge economy ( offcourse there are few exceptions, what say you, Kannappan :-) The coincidental connotation (not sure if it was coincidental or intentional) of these words (learning and earning) had intrigued me right from my childhood.

Nevertheless, I feel that there is a strong relationship between earning and learning in an industry such as share market. So, let’s take the first step towards earning which is learning.

Numbers don’t lie though people who give out these numbers may lieJ. In my opinion numbers (or) metrics helps us in different levels based on the need of the hour.

Level 1 – Understand an “object of study” better.
Level 2 – Evaluate if it is good or bad
Level 3 – Compare (both 1 & 2 are in its absolute sense) whereas level 3 is in a “relative sense”
Level 4 – Predict (In this level we all tend to feel as if we were astrologers).

Note: Sometimes it is very difficult to understand the thin line of difference between 2& 3. So for all practical purposes we could consider level 2& 3 to be the same.

Let’s see how these 4 levels works while we make an investment decision in share market.

Here are the stats for some of the most renowned IT companies that I had considered for my investment options.

Here is the definition for each of these metrics…

Face Value à Par value (or) stated value of the share. This is not an important metric when you want to understand the intrinsic value (and) market value of the share. However this is an important number when you want to understand how dividends are given out every year.

Current Market price: The current price at which a share is traded.

Revenue: Overall sales of the company

PAT: Profit after tax in other words net profit

Net profit Margin: Revenue/PAT say for eg., for HCL it is 1101.82/3768.62 which is 29%

EPS: Net Income/Number of outstanding shares (for the definition of outstanding shares refer to the earlier installment)

P/E ratio: Current traded price/ EPS say for eg., for HCL it is 305.55/16.6 which is 18.41.

52 week high and low à should be self explanatory

In my opinion the key numbers that are to be used while making an investment decision are EPS (the higher the better it is) and P/E (the lower the better it is). The best metric that could give us an indication regarding the intrinsic value of the share (and also to understand whether a stock is trading at a much higher price than it is ought to be) is this P/E.

Let me not spoon feed you too much… let your thoughts take wings... Look at these numbers for any stock where you want to invest money. Streamline your thinking based on the four levels explained above. Make a choice. I am sure that the chances of repenting later will be greatly reduced if we all understand the implications of these numbers (not to mention that it is our responsibility to ensure that these numbers are correct).

Even to buy a t-shirt @ 150 rs. We ask fundamental questions such as,

  • Is it worth buying at this price?

  • Is there any other shop where I could buy this @ a cheaper price?

  • Is there any shop where I could buy it @ a discounted price (say end of season sale)
Even to buy a product that is @ a price of 100 rs. We ask ourselves all these basic questions. Seldom do we ask the same questions while investing thousands of rs. in shares which is something that I had always failed to understand. Most often that not we tend to get carried away with the typical herd mentality...So, let’s get our basics right.

Have a nice weekend and many thanks for your patient reading,