Anjani Portland Cement Ltd : Midcap Cement Player

                    Anjani Portland Cement Ltd : Midcap Cement Player

CMP : 140

BSE CODE : 518091

Market Cap : 352 Crore

LISTED ON : NSE AND BSE

History of the Company :

Anjani Portland Cement Limited was incorporated in the year 1983 at Hyderabad. In 2014, the company was taken over by Chettinad Cement Corporation Pvt Ltd which now holds 75% shares in the company. Starting with initial capacity of 0.30 million tonnes per annum the company has reached 1.20 million tonnes per annum at present of cement manufacturing.

Manufacturing facilities of the company has been graded ISO 9001:2008 , ISO 14001:2004 and BS OHSAS 18001:2007. Company has an integrated cement plant at Nalgonda, Telangana. Company has access to high quality limestone reserves and an established sales network in Andhra Pradesh, Telangana and Odisha.

Company has 16 MW captive power plant and majority of the units generated are consumed by the company for own use. 

Number of Employees on the roll of company was 287 as per the annual report.

Main Business Activities : 

• High Quality Premium Cement ( OPC 53 Grade, OPC 43 Grade, PPC, RHPC Etc.)

Financials of the Company : 

• Profit After Tax (PAT) for the year ended on 31st March,2019 has been reported  at Rs 23 Crore and turnover at Rs 437 Crore.
• As per the numbers as on 31st March,2019 the company has generated Return on Equity of approx. 10% , Return on Capital Employed of 15% and Return on Assets of 9%
• The company is a regular dividend paying company and has paid dividend for past 3 consecutive years.
• Company is Debt-free as on 31st March,2019
• Company has high Operating profit margins in range of 16-26% since past 5 years

Investment Rationale : Why to Invest in this Stock ??

• Shareholding of the promoters in the company is 75% as on 30th June,2019 which strongly indicates interest of promoters in growth of the company. Pledge of shares by the promoter is Zero.
• Market Cap to Sales Ratio : 0.77  is attractive for an cement company company and also provides a great margin of safety on investing at current rates
• Technically on chart the stock appears to be near support levels and in formation of bottom which is going on since past 1-2 months
• At current price of 140 Rs per share and EPS of 13 Rs on trailing basis , the stock is presently trading at an attractive P/E ratio of 11
• At a forward reasonable P/E of 20 and EPS of 15.00, the stock price may go to Rs 300 and higher levels in future

Disclaimer Note: The above is not a research report but information as available on public domain and it should not be treated as a research report. Registration status with SEBI: I am not registered with SEBI under the (Research Analyst) regulations 2014 and as per clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations.

Disclosure: It is safe to assume that I might have Anjani Portland Cement Limited  in my portfolio and hence my point of view can be biased. Readers should perform own due diligence before investing. We do not assume any responsibility or liability resulting from the use of information , judgments and opinions for Trading or Investment purposes on the Blog.

Biases Impacting Equity Investors

Biases Impacting Equity Investors

Introduction :

Fundamental analysis and technical analysis are initial and important aspects of investing in shares. However, they are not the only driving factors. Psychology of individual investor is also equally important in undertaking investment decisions. In fact overall Success or failure of an investor will have a major component of perception and psychology with which he/she approaches the markets involved. A bias is a faulty way of thinking that we have grown accustomed to. Bias is a disproportionate weight in favor of or against an idea or a thing, usually in a way that is closed-minded and normally leads to loss in investing environment. We will share with you a few biases which investors suffer from and have adverse impact on their overall investing performance :

(We have to view all the information just the way it is (without any form of distortion). In this image number appears 6 from one angle and 9 from another angle.However, the context in which the number has been written is very important to understand before deciding whether it is 6 or 9)

• Confirmation Bias : Confirmation bias is the tendency of people to pay close attention to information that confirms their beliefs and ignore information that contradicts it. Confirmation Bias tends to limit our ability to make rational investment decisions. Have you noticed that you put more weight into the opinion of those who agree with you ? Investors do this too. How often have you analyzed a stock and later looked for research reports supporting your thesis ? We all have done this. Solution from this type of bias is that if we come across contradicting information which does not support our investment thesis then instead of directly rejecting it, we can look at facts/information on the basis of which such opinion is generated. If the contradicting information makes sense then it is possible to get out of a bad investment at a small loss or avoid it altogether

• Recency Bias : Recency bias is tendency to overvalue the most recent information available to us, because that information is fresh in our minds. If we recently heard about a company doing really well or having trouble, we may over rate that information and ignore everything that happened before. Solution from  this type of bias is to not ignore the past information and assign equal weight to both old and new information for decision-making in investing

• Loss Aversion Bias : Loss aversion is a tendency where investors are so fearful of losses that they focus on trying to avoid loss than on making gains.Research on loss aversion shows that investors feel the pain of a loss more than twice as strongly as they feel the pleasure of making a profit. Many investors don't acknowledge a loss as being such until it is "realized". Therefore, to avoid experiencing the pain of a real loss , they will continue to hold onto a investment even as their losses from it increase. Negative effect of this is that investors often continue to hold onto investments much longer than they should and end up suffering much bigger losses than necessary. Solution from this type of bias is to have a stop-loss in place for investments are well as for trading

• Availability Bias : While researching a company, investors tend to focus on data and information which is easily available to them. This is called Availability Bias. Instead of looking for important piece of information which may not be easily available, investors having this type of bias formulate their investment thesis on the basis of information which is easily available but may not be actually relevant from decision-making standpoint. Solution from this type of bias is to identify list of important information at the beginning of research and then start looking for the same

Technical Analysis : Trend Following for Investment as well as Trading

Technical Analysis : Trend Following for Investment as well as Trading 

Technical Analysis : 

Technical analysis assumes that all information studied by fundamental analysis is already reflected in the PRICE of given stock. It is a method employed to evaluate stocks by analyzing statistical trends gathered from trading activity, such as price and volume.

• In technical analysis historical data of stock is used to understand pattern of price movement and to evaluate stocks strength or weakness on the basis of the same.

• Technical Analysis has 3 major assumptions :

1. Price moves in Trend
2. Patterns tend to repeat 
3. Everything is factored in the PRICE

• Technical analysis is of great assistance for timing the entry and exit in investment or trading decisions.

Trend Following : What is that ?

There are forces of nature which function with their own characteristics. Eg. Gravity. It is an invisible force which ensures that everything stays down on earth. Anything thrown up in the air simply falls down due to gravitational force. Similarly in investing and trading price trend is an important force. Surprisingly price trend is the cause as well as the effect impacting prices.

Movement becomes effortless or with least resistance when one goes in the direction and in sync with various forces at play. Stock prices move in trends. Trends can be majorly of 2 types : Uptrend and Downtrend. Sometimes when market is not trending it can be said to be flat.

It makes sense to follow something that works. That is why Trend Following !

           HH=Higher High                                                        LH=Lower High
           HL=Higher Low                                                         LL=Lower Low   

Trends can form on all time-frames namely Hourly , Daily , Weekly, Monthly. From an investor perspective it is important to analyse and study trends on higher time-frames like weekly and monthly charts. From a traders perspective as the horizon is smaller it will make sense to study hourly or daily time-frame charts. Price trends on higher time-frames have more impact on the stock prices in the long-run.

Uptrend :

In uptrend stock price tends to make a series of Higher High(HH) and Higher Lows(HL).

All the Lows are higher than the previous Lows indicating that there is constant demand at declines which eventually leads to higher prices in future.

As the natural momentum is upward the stock price which is in uptrend moves effortlessly on the higher side.  Investors must invest only in those companies which are in uptrend on higher time-frames of weekly and monthly charts.

Downtrend :

In downtrend stock price tends to make a series of Lower High(LH) and Lower Lows(LL).

All the Highs are lower than the previous Highs indicating that there is constant supply at upsurge which eventually leads to lower prices in future.

As the natural momentum is downward the stock price which is in downtrend moves effortlessly on the lower side.Investors must always avoid investing in those companies which are in downtrend on higher time-frames of weekly and monthly charts.

Trend is your friend until it bends !

Charts for stocks are available free for study on -> (Trading View)

Diversification : Don't Put all your Eggs in One Basket !

Diversification : Don't Put all your Eggs in One Basket !

"Don't put all eggs in one basket" is very well-known quote in the investing community. Objective of the statement is to distribute the risk so that failure of any single investment does not have material impact on overall return of the investor. Technical term for distributing risk is called "Diversification".

Diversification can be done across asset-class like equity, debt, commodity, real estate etc. If you invest in assets that do not move in the same direction at same time and same pace then one can get benefits of diversification. Eg. In 2008 when the stock markets crashed big time, equity portfolios delivered high percentage of negative returns but at the same time debt(bonds) delivered positive returns which mitigated negative return to a certain extent for an investor who held equity and debt both in his portfolio at the same time. In this post we will deal majorly with diversification in respect to equity.

Diversification from Equity Perspective :

Why is there a need for Diversification ? Investment in shares is done after performing the necessary analysis. Analysis may be either technical analysis or fundamental analysis. How much ever detailed analysis is done it is never possible to determine and understand each and every variable out there in the universe impacting share prices. There is always a possibility of analysis turning out to be wrong due to change in known variables, or unknown variables may have adverse impact on the share prices and thus create risk of loss for investor. To reduce the impact of such risk, diversification is done.

Investment in shares provide opportunity for higher growth in long term. However the return from investment in shares is very volatile in nature due to drastic fluctuations in the share prices.

Important Points in respect of Diversification : 

• What type of shares to chose in portfolio of stocks for diversification will depend upon the risk appetite of the investor (Aggressive/Moderate/Conservative). However, stocks from same sector can be avoided in single portfolio from diversification perspective

• As per our understanding not more than 10% of equity portfolio must be invested in a single stock. Maximum of 15 stocks may be held in any equity portfolio. Holding very few stocks will increase the risk whereas holding stocks in excess of 15 is likely to dilute the returns along with the risk

• Warren buffet once said that "Wide(Over) diversification is only required when investors do not understand what they are doing". Wide (Over)- Diversification is time consuming, inefficient and also leads to increase in transaction costs of investor, reducing the returns

• Total Risk in Investment = Systematic Risk + Unsystematic Risk

• Systematic risk is the risk which can impact adversely the entire stock market or financial system as a whole. Eg. Political Instability, Natural Disasters, Change in Tax laws, Economic crashes, Recession Etc. It is difficult to manage or mitigate systematic risk due to it's inherent nature

• Unsystematic Risk is the risk which can impact adversely shares of a specific company or a specific sector. Eg. Change in regulations impacting one industry, Financial Fraud in a company, strike by employees of an airline company etc. Unsystematic risk can be mitigated to an extent with the help of diversification

• Diversification is very important tool available to all the investors which helps them survive in the financial markets and maintain a balanced growth in the long term

Important Parameters for Stock Selection in Investing - FINAL Summary

Important Parameters for Stock Selection in Investing - FINAL Summary :

Preparing a tasty dish requires a perfect combination of ingredients for a good outcome. Similarly for identifying a multi-bagger stock or a stock with good upside potential requires a perfect combination of ingredients which will substantially increase probability of stock turning out to be a good one. Below stated are few major ingredients which will help any investor in identifying and understanding whether the stock has good investment potential or not. Detailed analysis has been done for each point and it is prepared in a very user-friendly language so that even a common man can understand the same. If an investor understands and follows below stated points in his due diligence then chances of failure in investment will be reduced. Further diversification and risk management will also help investor reduce risk to the portfolio even if somehow a bad stock has been selected in the process of evaluation. In future we are going to publish more articles on diversification and risk management. Summary of Important parameters in stock selection process are as below. CLICK HERE has been provided for detailed view of each point

1. Sector/Business -> CLICK HERE

2. Promoters -> CLICK HERE

3. Returns -> CLICK HERE

4. Valuation -> CLICK HERE

5. Expansion of Activity -> CLICK HERE

6. Operating Profit Margins -> CLICK HERE

7. Debt/Borrowing -> CLICK HERE

Returns and it's importance on Investing in Shares

Returns and it's importance on Investing in Shares 

Introduction

Average nominal GDP growth rate of India was around 12% for the past 5 years. 

(Nominal GDP includes both prices and growth, while real GDP is pure growth. Real GDP  is what nominal GDP would have been if there were no price changes from base year. As a result, nominal GDP is higher than real GDP)

A return on capital in excess of nominal GDP can be considered as a good return from investor perspective. Return on Capital Employed (ROCE) helps an investor understand what is the level of profitability with respect to total capital employed in the business. Return on equity (ROE) and return on assets (ROA) are also important ratios to asses the efficiency of the business with respect to owners fund and assets deployed respectively. The higher these ratios the better. Again these ratios are measure of efficiency of business. We want to invest in companies/shares which are most efficient and thereby will yield investor maximum returns

Investing activity is normally undertaken with objective of capital appreciation. Returns which the underlying business generates has a substantial and direct impact on the share prices of the company. Higher the return a business generates with consistency the better share price appreciation will be reflected. Investing in equity (shares) comes with it's inherent risks. When capital is invested in shares a return which is in excess of risk-free rate has to be generated otherwise there is no rationale of taking the risk.

Formula for calculating Return on Capital Employed (ROCE) : 

Return on Capital Employed (%) = Earnings before Interest & Taxes / Capital Employed

Capital Employed = Total Assets - Current Liabilities

Formula for calculating Return on Asset (ROA) : 

Return on Assets (%) = Profit After Tax / Average Total Assets

Average Total Assets = (Assets at beginning of year + Assets at End of Year) / 2

Important points in respect of Returns : 

• ROCE and ROA are two important return ratios for evaluating investment in shares of a company. Companies with lower ROCE and ROA must be altogether avoided. ROCE must be always greater than weighted average cost of capital employed.

• Return on Capital Employed (ROCE) is a better assessment ratio for returns compared to Return on Equity (ROE) because it is possible to inflate Return on Equity (ROE) by taking high levels of debt which may not be sustainable for business

• By using ROCE, investor can compare whether company is employing it's capital efficiently in comparison to peers in the sector as well as on standalone basis

• News and media normally talks about profit and turnover figures. However for an astute investor it is important to verify how much capital has been employed to generate the amount of profits. Eg. Business A and Business B both in same sector have generated profits of 40 crore for the year. But Business A has employed 250 crore of capital and Business B has employed 175 crore of Capital. With this data we can easily determine that investor will be willing to invest in Business B because it is more effective

• Return on asset (ROA) is higher for companies with asset-light business model rather than capital intensive businesses. Eg. Sectors like Steel, telecom, defense etc. have low ROA while consumption companies are likely to have higher ROA 

Quality of Promoters and Impact on Share price in Investing

Quality of Promoters and Impact on Share Price in Investing 

Introduction

A promoter is an individual or an entity who does the preliminary work incidental to the formation of a company, including its promotion, incorporation and flotation and solicits people to invest money in the company, which is being formed. The entire lot of people and other companies that control a company in this way is called its promoter group. Their combined shareholding is called promoter holding. Higher the promoter holding in a company,greater is the promoters control over it. Promoters exercise their control by taking key decisions of the company and appointing people in various positions of its management and board. They also provide the visions for the existence of the company. It is, therefore necessary that the promoters continue to hold a dominant shareholding position in the company. A large promoter group also provides stability to a company. Generally, promoters are in a fiduciary relationship with the company and its investors and shareholders, and must avoid conflicts of interests and exercise reasonable care in performing their duties. They must refrain from self-dealing or other types of abuse to take advantage of their position as a promoter. 

When money is invested in shares of a company, Quality of Promoters is the most important aspect. It is because promoters are the people who are going to be involved with the day to day activities of business and is at the foundation of success of entire business. If promoters carry out their duty with integrity and efficiency then every stakeholder of the business including shareholders can flourish and wealth maximization takes place.

In India a lot of companies which had corporate-governance issues have been the biggest wealth destroyer from shareholders perspective. In many cases it was not possible to identify the symptoms until it was very late for shareholders to exit. However, if few aspects are kept in mind while analyzing a company, shareholders can save their capital.All the mechanisms put in place by a company to protect stakeholder rights, in particular shareholders rights, is referred to as its corporate governance structure. It consists of policies, procedures and regulations that define how the management must deal with its stakeholders, and the remedies available to them in case of a violation. 

Important Points in Respect of Quality of Promoters from Investment Perspective :

• Educational qualification, age, experience in the sector or elsewhere, role assigned etc. are the important points to be checked to determine quality of promoters while investing in a company

• Shareholding of promoters group greater than 51% in the business shows the interest of promoters as well as it helps in proper implementation of business decisions due to majority ownership. Knowingly and willingly promoters are unlikely to take decisions which are not in the interest of the company in which majority of their personal wealth is invested

• Regularity of reporting to regulatory authorities and stock exchanges is very important. Failure in timely reporting of financial statements and necessary disclosures as required by stock exchanges can be considered as a red-flag on the part of promoters. Eg. If a company does not report it's quarterly results within time limit set by regulations it is a red-flag

• Avoid companies where promoters have pledged substantial part of their stake to raise funds. In case promoter makes a default, then banks/financial institution which has given loan will sell the pledged shares in open-market to recover it's loan which can lead to meltdown in share prices

• Integrity on the part of promoters is very important. Promoters remuneration for the time and energy they contribute to the business must be analysed thoroughly by investor to determine whether it is reasonable or not.

• Personal transactions of promoters or relative of promoter or any related entity  with the company shall be on fair terms. Investor has to ensure that related party transactions are not of such nature which exploit resources of company for personal gains

• Concept of "Independent director" was introduced by SEBI some 17-18 years back to ensure that board of directors also have people who are outsider (unbiased) and take decisions in the interest of stakeholders at large. Listed companies are compulsorily required to have one-third composition of board to comprise of Independent directors as per regulations. Investors have to ensure that independent directors are appointed and removed as per the policy and also check whether they are really independent or related to promoters

• Necessary information related to promoters remuneration, related party transactions and independent directors etc is available in the annual report of the company which is available on the website of the company as well as on the stock exchange website

• Violation of rules of stock exchanges, companies act, taxation act etc can be considered as a red-flag from investor perspective. Violation of internal policies,guidelines and procedures established by the company is also a red-flag from investor perspective

Sarveshwar Foods Ltd : Emerging Value Play in FMCG

                            Sarveshwar Foods Ltd : Emerging Value Play in FMCG

CMP : 39

ISIN: INE324X01018

Market Cap : 96 Crore

LISTED ON : NSE SME Emerge Platform

Lot Size : 1600

Time Frame : 18-24 Months 

History of the Company :

Sarveshwar Foods Ltd was incorporated in 2004 and is primarily engaged in the business of processing and marketing various types of Basmati and non-Basmati rice in the domestic and international markets. The operations are based out of the Jammu Region in the State of Jammu and Kashmir. 

The latest venture of the Company has been into organic farming where the Company does contract farming for rice, dry fruits, cereals, pulses in addition to a variety of superfoods and has 22,000 acres of certified organic farming land with the company.

The Company has presence in export markets such as the USA, Europe, Middle East, Australia etc. Company was listed on the NSE Emerge platform in March, 2018.

Company owns 2 USFDA and BRC approved manufacturing facilities in Jammu and Kashmir for the processing of rice that have recently also got requisite approvals from Chinese authorities

Well-known clients and distributors of the company include names like walmart, Ebro, Big Bazaar, Costco, Nifol, Veetee, Vaishnav Devi Shrine Board Etc.

Main Business Activities : 

• Food Processing/ Presence across entire Rice Value Chain

Financials of the Company : 

• Profit After Tax (PAT) for the year ended on 31st March,2019 has been reported  at Rs 18 Crore and turnover at Rs 566 Crore. (Consolidated Basis)
• As per the numbers as on 31st March,2019 the company has generated Return on Equity of approx. 16% , Return on Capital Employed of 15% and Return on Assets of 6%
• Debt to Equity ratio is below 2 and is reasonable in nature

Investment Rationale : Why to Invest in this Stock ??

• Shareholding of the promoters in the company is 74% indicating strong interest of promoters in the business as on 31st March,2019
• Market Cap to Sales Ratio : 0.20  is very attractive
• Book Value of Stock at present is 56 Rs per Share, which is 30% discount to current market price of the stock. Such a discount to book value provides a margin of safety to investors making investment in the company at current market price
• Technically on chart the stock appears to have completed the process of bottom formation
• At current price of 39 Rs per share and EPS of 7 Rs on trailing basis, the stock is presently trading at an attractive P/E ratio of 6
• At a forward reasonable P/E of 15 and EPS of 10.00, we expect the stock price to soar higher atleast to 150 and higher levels in coming time.

Attaching Investor presentation for more detailed analysis which is shared by the company in the investors section on it's website : CLICK HERE --> INVESTOR PRESENTATION 2018

Disclaimer Note: The above is not a research report but information as available on public domain and it should not be treated as a research report. Registration status with SEBI: I am not registered with SEBI under the (Research Analyst) regulations 2014 and as per clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations.

Disclosure: It is safe to assume that I might have Sarveshwar Foods Ltd  in my portfolio and hence my point of view can be biased. Readers should perform own due diligence before investing. We do not assume any responsibility or liability resulting from the use of information , judgments and opinions for Trading or Investment purposes on the Blog.

Operating profit margins and its importance in investing in shares

Operating profit margins and its importance in investing in shares

Introduction 

Operating profit margin (OPM) is derived when direct expenses are reduced from total sales. OPM in excess of 10-12% is considered to be good. Higher the OPM the better. In business environment lot of factors keep on changing in real-time which affects the margin of the business. If a company has higher OPM it will be able to withstand and sustain adversity due to change in business environment. Regulatory changes, demand-supply changes , currency fluctuations, commodity cycles, change in rate of interest etc. are some of the changes that can affect a business.

Business with very low operating margins shall be altogether avoided. Because even a slight change in business environment can hamper the growth of business negatively impacting shareholders value. To improve operating profit margin companies can focus on cost reduction steps or increase sales of products which have high margins by changing the sales-mix of products.

Operating Margin (%) = Operating Profit / Net Sales

Operating Margin Important points : 

• Businesses which are having high competition or which are approaching end of life cycle are likely to have lower operating profits and should be avoided. Eg. Wires Business or Computer hardware business

• Businesses which have monopoly or very high market share in a sector or some form of competitive advantage which cannot be easily replicated will normally have higher operating margins and shall be good for investment objective Eg. Alcohol industry due to barriers on entry of new players or Any Government enterprise having monopoly in a sector

• Operating margins of a sector can be altered substantially due to change in business environment which can make a new investment advisable or an old investment obsolete. Eg. Demand for Automobiles is slowing down due to rise of cab industry and is likely to go down further in future. So investment in auto sector may not likely be advisable.

• While evaluating an investment in shares, one has to ensure whether there is consistency in operating profit margins for a certain period of time to say like 3 or 5 years. Companies which have very volatile operating margins can have wild share price fluctuations regularly is unlikely to delivery good returns to shareholders

• To improve operating profit margins, company can eliminate or outsource products with low profit margins. Increasing proportion of products with higher margins or introducing newer products with higher margins can also help

• Cost-reduction program can be undertaken to improve operating profit margins. Reduction of cost can be done in various domains like packaging, transportation, raw material procurement, automation to replace costly labor etc.

• Operating profit margin of companies with similar size and similar business model can be compared to identify which one is efficient

Debt/Borrowing and it's Impact on Share Price in Investing

Debt/Borrowing and it's Impact on Share Price in Investing

Introduction

Debt or borrowed fund is used by companies for various purposes. It can be used either for expansion of business or repayment of higher rate debt or for working capital needs. Debt comes at a certain terms and condition and has implications on the business. It makes sense to borrow funds when company is capable to generate higher rate of return then the rate at which fund is borrowed. Eg. If Company generates return of 18% in it's business then it makes sense to borrow funds at rate lower than 18% and deploy it in business. Debt creates leverage which fuels growth of the business. Debt if used properly in business can help it grow multi-fold. However, if a company has excess debt then it can affect the cash flow as well as profitability of the company. Many instances have been observed where companies have gone into liquidation/insolvency due to excessive debt.

Major Uses of Debt :

1. Expansion of Business ( Capital Investment )
2. Working Capital Needs (Funding Debtors +Inventory )
3. Repayment of Existing Debt which has a High rate of Interest

Important Points related to Debt from Investment Perspective :

• Investors must check credit rating performed by various rating agencies in respect of the debt of the company. For listed companies it is available online. It can give investor an idea in respect of credit profile of the company. If credit rating of the company is good it can borrow fund at lower rate of interest. Companies with bad credit rating should be avoided for investment because its cost of borrowing will be higher and also possibility of default is higher so shareholder risk is increased in such case

• Debt to equity ratio upto 2 is considered to be safe for investing in a company. Many infrastructure companies in India borrow excess funds and when project gets halted due to any reason and there is cash-flow crunch it results in default and many other problems which ultimately and unfortunately erode share holder value

• Purpose for which a company borrows fund is very important to understand from investor stand point. When fund is borrowed for expansion of business then for initial period when the new unit is being setup only costs are recorded and so profit goes down initially. Once the plant is ready and starts generating sales then higher profits become visible and share prices are likely to go up

• When a company borrows fund for working capital one has to ensure that it does not have unusual high value of inventory(stock) or high debtor days than industry average. If it is so, it may indicate that inventory(stock) is not real and is being used to cover up some loss which is not being reported. Similarly high debtor days may indicate that some of debtors have turned bad debt but not being reported

• If a company borrows fund regularly to repay the old debt it is not a sign of healthy company. It may indicate that company is not able to generate enough cash-flow from the business in the longer run to make the repayment of principal value of debt

• Default in debt repayment is not a sign of healthy company. Due to extra-ordinary  circumstances or one time event if such thing happens then it can be ignored. But if proper justification is not available then investor must exercise caution while investing in such companies and should be avoided to the extent possible

• Investors must avoid companies with excessive debt. Companies which have debt to equity ratio in excess of 2 shall be totally avoided

• In case debt is raised from outside the country, then investor must check the annual report to ensure that proper hedging has been done for the same so that currency fluctuation does not have impact on the profitability of the company

Sector selection and Stock Selection for superior returns in Investing

Sector selection and Stock Selection for superior returns in Investing

Introduction 

Outcomes from the past if analysed thoroughly can help one arrive at various observations which can be used for better decision making in future. Sector selection is an important aspect in stock selection process for investing. Have you ever found any power company in the past that has provided extra-ordinary or superior returns to shareholder ? The answer from your end would be a NO in 99% cases for power companies. Similarly a lot of FMCG companies have provided multi-bagger returns in the past has been observed. So what is the fundamental difference ? Businesses which have natural demand, monopoly or some form of competitive advantage normally provide superior returns to shareholders in the longer run. Businesses like food products, alcohol, condoms, paint, pharma etc. fall in the above categories. Capital intensive businesses like energy, telecom, defense, steel, mining etc. generate relatively lower returns in their business and so shareholders value increases at a slower rate in such business. If one can understand these fundamental points than success rate in investing can be enhanced substantially.

"EFFICIENCY" is the driving Factor :

Stock selection process in investing is more or less revolving around Efficiency. Whether we are looking at returns or valuation or debt or any other factor. All we are looking for is to invest in an efficient business which can generate superior return with lesser capital and lesser risk.

Top-Down Approach : In this approach one identifies first the sector in which one wishes to invest and then looks for the best available companies in the sector.

Bottom-up Approach: In this approach one identifies first the stock in which one wishes to invest and then performs sector study to arrive at conclusion whether it is fit to invest.

Both the approaches are equally valid and effective. However, one point is to be kept in mind that investor must go across and understand primary information for all the sectors so that they can chose the best sectors and best stocks.

Sector Selection Important points : 

• Investing in sectors which have asset-light business model normally provides superior returns to Investor in the long-run. Eg. FMCG, service industry etc.

• Sectors which have natural demand for the products or services are attractive for investor. Eg. Pharma, consumer products etc.

• Sectors which are capital-intensive shall be avoided because larger capital is required for growth in such businesses and so the return on capital is lower for such stocks. Also as the technology keeps changing up gradations have to be made continuously on large scale basis so growth happens at a slower pace.

• Sectors which are highly regulated shall be analysed carefully before investing because change in government regulation can impact the returns in the stock. Eg. Insurance, real estate etc.

• Sectors which are unique or have some competitive advantage in the listed space can have potential for superior returns. Eg. Listed Art company or listed company manufacturing gas valves etc.

• Sectors which have a huge present and potential market size are good from investment perspective. Because as the market size is huge, the margins of such business is less likely to decline in future.

Fundamental Analysis or Technical Analysis ? Which is more effective to profit from Stock Market ?

Fundamental Analysis : 

Fundamental Analysis attempts to measure a stock's intrinsic value by examining related economic and financial factors, which can be both qualitative and quantitative in nature. End goal of fundamental analysis is to derive a value for a stock which can be used to determine whether presently stock is undervalued or overvalued for investment decision.

• Fundamental analysis uses revenues, earnings, return on equity, promoter share holding, profit margins and other data to determine a company's underlying value and potential for future growth

• Fundamental analysis may also use discounted cash flow models and various other models to arrive at intrinsic value. Comparison with peer companies in the same sector and macro analysis of broad economy is also sometimes included

• Fundamental analysis is subjective in the nature in the sense that every person may perceive VALUE differently for the same stock

• One of the limitation of fundamental analysis is that it takes into account only information in public domain and within the perception of person performing the same. Eg. If government of china enacts stricter environmental rules for chemical companies then the same can have favorable impact on chemical companies in India. Person performing fundamental analysis must have a wider perception to include most of the information that is likely to impact intrinsic Value

• Fundamental analysis assumes that markets are not efficient and there is possibility to derive profit due to mismatch between present value and intrinsic value. In spite of all the clarity that fundamental analysis brings in, it alone is not enough to arrive at the timing and extent of investment/trading decision

Technical Analysis : 

Technical analysis assumes that all information studied by fundamental analysis is already reflected in the PRICE of given stock. It is a method employed to evaluate stocks by analyzing statistical trends gathered from trading activity, such as price and volume. 

• In technical analysis historical data of stock is used to understand pattern of price movement and to evaluate stocks strength or weakness on the basis of the same.

• Technical Analysis has 3 major assumptions :

1. Price moves in Trend
2. Patterns tend to repeat 
3. Everything is factored in the PRICE

• Technical analysis is of great assistance for timing the entry and exit in investment or trading decision.

Intersection of Fundamental and Technical Analysis : 

For investment decisions it will make a lot of sense to COMBINE fundamental analysis and technical analysis. Fundamental Analysis will take care of the aspects which will help one arrive at intrinsic value and technical analysis will help one arrive at the timing at which entry and exit decisions can be made.

One must have observed or experienced that many a times you would have identified a very good fundamental company and taken a long position but the stock does not move at all for long periods of time. You may eventually exit and stock moves or stocks does not move for a few years and then suddenly moves. If support of technical analysis is taken then it is possible for one to know whether longer term trend of a stock is positive or not. Likeliness of a stock to move up is higher if stock is in uptrend and fundamentals are also good ! 

BDH Industries : Small Cap Gem

                                        BDH Industries : Small Cap Gem

CMP : 76-78

BSE CODE : 524828

Market Cap : 44 Crore

LISTED ON : BSE

TARGET : 150/175

Time Frame : 24 Months 

History of the Company :

BDH Industries started off as fledging unit in 1935. It has grown into a major facility and earned global acclaim. BDH industries is engaged in the manufacturing of therapeutic formulations covering a range of pharmaceuticals. Company offers a range of oral solid dosage (OSD) technologies. The company offers its products in various therapeutic classes, such as antifungal, antibiotics, anticancer, anti-diabetic, antidepressant, anti-ulcerant, antimalarial, anti-inflammatory, analgesic, antispasmodic, anti-tuberculosis, cardiovascular, dermatological, non-steroidal anti-inflammatory drugs, psychotropic, trichology, and vitamins and minerals.

Company has state of art manufacturing plant comprising of 42,500 square feet which meets WHO GMP standards. Fully automated manufacturing system gives company unique capability to go into wide range of dosage forms such as tablets, capsules, external ointment, small volume parenterals etc.

Company exports to over 60 countries across the globe and has won many awards for its performance in the business

Main Business Activities : 

• Formulations
• Speciality Formulations

Financials of the Company : 

• Profit After Tax (PAT) for the year ended on 31st March,2018 has been reported  at Rs 3.76 Crore and turnover at Rs 41.01 Crore.
• As per the numbers as on 31st March,2018 the company has generated Return on Equity of approx. 13%,Return on Capital Employed of 15% and Return on Assets of 10%
• The company is a regular dividend paying company and has paid dividend for past 8 consecutive years.
• Debt to Equity ratio is below 1 and is reasonable in nature
• The company has carried out a major expansion in 2017 and the impact of same is gradually visible on top and bottom line in this year

Investment Rationale : Why to Invest in this Stock ??

• Shareholding of the promoters in the company is 55% indicating strong interest of promoters in the business  as on 30th December,2018
• Market Cap to Sales Ratio : 0.78  is very attractive for a Pharma Company
• OPM (Operating Profit Margin) of the company is gradually improving since past 3 years
• At current price of 76 Rs per share and EPS of 9 Rs on trailing basis, the stock is presently trading at an attractive P/E ratio of 8
• At a forward reasonable P/E of 15 and EPS of 10, we expect the stock price to soar higher atleast to 150 and higher levels in coming time.

Disclaimer Note: The above is not a research report but information as available on public domain and it should not be treated as a research report. Registration status with SEBI: I am not registered with SEBI under the (Research Analyst) regulations 2014 and as per clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations.

Disclosure: It is safe to assume that I might have BDH Industries in my portfolio and hence my point of view can be biased. Readers should perform own due diligence before investing. We do not assume any responsibility or liability resulting from the use of information , judgments and opinions for Trading or Investment purposes on the Blog.