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The Gut feel test of investing

By Rohit Chauhan
In Investing Philosophy, Uncategorized
June 12, 2007
3 Min read
7 comments
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The gut feel test may sound totally illogical and irrational, but I have used it several times. I have posted my investment approach earlier here. As I wrote, I run various filters and do a 1-2 hour check on the basic financials of the company. That is followed by reading the Management discussion and analysis.

If the numbers do not look ok, I tend to give the idea a pass. There are no set rules for the numbers to look ok. Let me list a few cases

1. In case of aftek the acqusition of promoter held companies was a red flag for me. Clear case of conflict of interest
2. In case of Dr reddy’s and other pharma companies the valuation of the company seems to be high and I do not have the skills to evaluate the success or failure of ANDA filings
3. In case of JSW holding, more than 60-70% of the value is due to JSW steel. I do not have a specific insight into the steel business. As I could not evaluate whether JSW steel is fairly valued or undervalued, I decided to give JSW holdings a pass.
4. In 2004-2005, I felt bharat forge was fairly valued and could not project with confidence if the performance would continue. Hence gave the company a pass. Clearly a mistake, but a rational and acceptable one.
5. Indraprastha gas limited – Gas is available at a subsidy. Future margins may drop and hence the current price seems to be reflecting that. So no undervaluation although the stock appears to be so by past measures.

A lot of times, I have analysed the company and towards the end a few points keep nagging me. If I cannot evaluate those critical issues with confidence, I tend to give the stock a pass. The risk of this approach is that I tend to miss out on several good opportunities. I however do not agonize over it if the reason was related to my circle of competence, wherein I do not have the necessary knowledge to evaluate the company well.

In a few cases however, the level of undervaluation may be so great that I have a large margin of safety. In such as cases even if I have a few issues with the company, the downside risk is low and the risk reward equation seems to be fine. In such cases I may buy the stock and hold it till the undervaluation dissapears.

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A few general points

By Rohit Chauhan
In General thoughts, Uncategorized
June 9, 2007
2 Min read
4 comments
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I have recieved Prof Bakshi’s interview via email. However i have yet to write to him and get his approval to forward the interview. In the meantime i have recieved a huge number of requests for forwarding the interview. I will try to email to all who have requested it (if prof bakshi is fine with it) , but please bear with me as the number of requests is huge.

I also recieve personal emails several times. I have attempted to answer them but i am not able to do justice to all of them due to personal time constraints. Hope those of you who do not hear me, will understand that i am time constrained and hence may not be able to reply some times. Leaving a comment would be a good idea in such a case. Some other reader on the blog may be able to respond to your query equally well.

Finally if you wish to subscribe to the blog via email , please enter your email id above the blog archives. You will recieve an email update whenever i post a new post.

Please feel free to leave a comment on how to improve the blog further and make it more useful.

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Searching for investment candidates – II

By Rohit Chauhan
In Investment ideas, Uncategorized
June 8, 2007
2 Min read
1 comment
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I have posted earlier a list of investment candidates which had passed through my investment filters. After doing a quick 20-30 min analysis, I slotted these ideas into the ‘Go’ bucket which are good for further analysis and into the ‘No-go’ bucket which are the rejected ideas.

A few more ideas in each bucket follows –

No Go bucket

Pricol – An auto ancillary midcap company. Topline has grown by 50% in the last 5 years and net profit has doubled in the same time. ROE is firmly above 20% and the valuation seems to be cheap at a PE of around 7-8. However the company has a high debt of almost 230 crores (DE ratio is more than 1 ) and the cash flow is poor too. Debtors have gone up by 400% and inventory has doubled too. The quality of earnings seem to be poor. I would this company a pass for the time being.

Navneet publications – A publishing company. The topline and bottomline has been stagnant for quite some time. The balance sheet does not look too good with inventories up 4 fold in the same period. The ROE and other numbers such as margins and debt equity ratio seem to be fine. However the free cash flows seem to be poor and the performance is erratic. Although the company seems to have some competitive advantage, the performance in the past has not been very good. Would give this company a pass.

Go bucket

Sarla polyester – A small cap company into textile processing. The turnover has grown from 30 Crs to 88 Crs in 2006. The netprofit has gone up to almost 11 Crs and this year could be almost 13-14 Crs. The company has a very low debt of 8-9 crs on books and a high ROE of 20%+. The valuations are fairly low at a PE of 6-7. Definitely worth a closer look

Investment and precision casting – A small cap casting and forging company. The net revenue has tripled in the last 5 years and the net profit has also tripled in the same period. Net margins have held steady at 15% and the ROE is 20%+. The company has a low debt partly offset by cash balance. The current year profit seems to be flat at 8 Crs and the valuation seem reasonable at 10 times current year earnings. Worth a closer look.

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Searching for investment candidates – I

By Rohit Chauhan
In Investment ideas, Rejected investment ideas, Uncategorized
June 4, 2007
3 Min read
1 comment
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Recently I shortlisted a few stocks which passed through the basic filters and did a quick 15-20 min analysis to sort them into two buckets – the ‘go bucket’ and ‘No go bucket’. The ‘no go bucket’ are the rejected stocks on which I will not be spending any more time for further analysis. I may have rejected some stocks which may turn out to be good ideas later, but I prefer the sin of ommision than commision. The ‘Go bucket’ has stocks which have to go through more detailed analysis before I commit money to them.

No Go bucket

Torrent pharma – A profitable pharma company into bulk drugs and formulations. Growing well and has a clean balancesheet. Have not looked into detail, but the valuation seems to be around 15-16 times latest earnings. Have scanned the financials very briefly and cannot find anything wrong. However it is in the No go bucket as the valuations are not too cheap. May come back later after I run out of ideas.

Diamines and chemicals – This is a very small company with turnover of 20-25 Crs and Net profit in the current year of 6-7 Crs. It sells for a market cap of 35 Crs and so it seems to be very cheap at a PE of around 6. The company had a negative networth till 2003 and seems to have turn around since then. Has a high Debt equity ratio of almost 0.7. Although looks cheap, I am not comfortable due to the small size of the company and inconsistent operating history. No further analysis on this company.


Go bucket

Poly medicure – A health care company into health care disposables. Currently growing in double digits with this years topline likely to be around 80-85 Crs and net profit to be between 7-8 Crs. The ROE is 20% plus range and the entire company is selling at around 75 Crs, with a PE of around 8. Had a brief look at their website and was unimpressed. No annual report or financial available on the company website. Worth further investigation for the time being

Ultramarine and pigments – A small company into dyes and pigments with an annual turnover of around 60-70 Crs which has been stagnant for the last 4-5 years. Net profits have zoomed from 4 Cr to almost 18 Crs (expected) for the current year. Capital invested in the business has come down in the meantime with investments on the balance sheet of around 25 Crs (FY 2005) and low debt of around 5 Crs. Capital requirements in the business seem to be low and hence the business seems to have good free cash flow and a return on invested capital of almost 50%. Definitely worth a closer look.

next post : i would be listing more ideas in both the buckets

ps : Please see my disclaimer. I would not want anyone to lose money based on my analysis

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