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A few investment ideas and analysis

By Rohit Chauhan
In Company analysis, Investment ideas, Uncategorized
October 25, 2006
3 Min read
3 comments
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On running various filters in icicidirect, I was able to list a few companies which were worth further investigation.

My approach was to do a preliminary analysis and reduce the list further to a few more interesting opportunities.

I am listing the companies and my analysis. This analysis is a bit dated as I did this analysis during the aug/sept time frame and have not looked at the recent price for these companies

1. Merck : Indian subsidiary of the american MNC. The american parent has a 100% subsidiary too which could be getting all the new products from the parents portfolio (and I guess special treatment over the listed subsidiary).

The company is selling at approximately 5 times earnings after adjusting non operating income and cash on books. The company has a high ROE of 30 % and low growth of 4-5%. The actual ROE on tangible equity is 60% +.

The company has a Pharmaceuticals and chemicals business. It has recently sold its life sciences business and has approximately 3370 million on its books (Rs 200/ share).

The topline is expected to drop due to the sale of the life sciences business. The pharma business has a growth in single digits and the next years earnings could be 10-15 % over the earnings of 2005 (current year earnings are not comparable due to the sale of life sciences division)

This company is a value play. The management does not seem to be very shareholder friendly. It remains to be seen, what the management will do with the huge cash it has on its books . Will it try to buy out the indian shareholders at an unfair price like a few other MNC’s have done in past? Can happen.

I would estimate the intrinsic value conservatively at 700-800 Rs per share. However it is quite likely that the valuation gap may take a long time to close due to poor growth prospects and a management which may be indifferent to minority shareholders

2. Swaraj engines
The company showed up in my list as the PE seems to be 4-5. However after adjusting for the bonus issue, the actual PE is 14. Also the company has low growth, high debtors position and is mainly supplying to sister companies. It is a small cap company too. I do not see much value in this stock and decided to give it a pass.

The other stocks which I will detail in subsequent posts are

Grindwell norton
Revathi CP
Kirloskar oil engines
Hindustan inks
Tube investments
Neyvelli lignite
Gujarat gas

Please do not take the above list as a recommendation. This above post is just for analysis and I may or may not have invested in any of the above stocks

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A break in the posting

By Rohit Chauhan
In Uncategorized
October 16, 2006
1 Min read
1 comment
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Those of you who have visited this blog in the past , would have noticed a sudden drop in my posting.
I had consciously taken a break from posting on my blog. The break was mainly due to personal reasons and also because i felt, it was taking away too much of my spare time and distracting me from pursuing my interest in investing.
I have decided to resume my posts, although at a lower rate (may be once a week or more).

During the period from may to Oct (during my break), the market has swung from a crash to a new high of almost 13000. During that period, i was more or less inactive in terms of buying or selling. I ran a few screens and was able to find at best two decent ideas namely Kirloskar oil engines and Merck. More on these two ideas in subsequent posts.

Lastly thanks to Deepak Shenoy , for helping me fix my blog ( my line breaks had gone awry ).

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New ideas

By Rohit Chauhan
In Investment ideas, Uncategorized
July 25, 2006
1 Min read
2 comments
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Have been away for a while and not posted for quite sometime.
However i have been doing some research for new opportunities and have been finding some good ideas.

Two companies which i am analysing further are
– Kirloskar oil engines limited
– Merck limited

Will update my analysis of these two stocks on the blog once i am done. They are fairly underpriced and look good on a quantitative basis. However i need to analyse in more depth and come to a firm conclusion

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Analysing the assumptions

By Rohit Chauhan
In Investment process, Uncategorized
May 3, 2006
3 Min read
9 comments
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One approach to analysing stocks, bonds or even real estate is to look at the valuations and figure out the assumptions built into the price. It helps to analyse these assumptions and check if you buy into them. It also helps if one has a good sense of history and asset values in the past.
Let me take the example of the top tier IT companies like infosys, Wipro etc. These companies sell at a PE of 30+. So in effect the market seems to be ‘assuming’ the following
a) return on capital of 40%+ for the next 10 years
b) A compounded growth of 18%+ for the next 10 years
c) Maintenance of margins in the 20%+ range

Now it may be possible that these companies would achieve some of these expectations. But to justify their valuations they have to achieve all of them. Ofcourse the top tier IT companies are atleast doing fairly well and may even deserve a high valuation. One can find a number of mid-cap and small cap companies which are riskier, but valued at even higher valuations. The current earnings growth is being projected for quite a few of these companies well into the future. The same is being done for commodity companies like cement, steel too.
Lets take another example outside the stock market. Lets look at the current investment favourite ‘real estate’. Now if you believe like me that the value of any asset is the sum of all cash flows to eternity, an apartment selling at 60 lacs for an area of 2000 sqft would have the following assumption (3000 rs / sqft is not a very high rate these days)

a) 6% rental yields on the capital invesment of 60 lacs.
b) Growth in the yield (read rentals) at around 8-9% per annum
c) Terminal sale of the property after 30 years with a 9% appreciation per annum, with a discount of 10% for the older property.
What all of the above means is that
a) rental of Rs 30000 per month
b) A hike in the rental of around 8-9% per annum
c) The property will sell for 7.2 crs after 30 years (net present value is 95 lacs with an inflation of 7% per annum)

So for an apartment to justify a return of 8-9% total return at the current prices, the above should hold true. Whether it does or not, depends on ones view of the above ‘expectations’ in terms of rentals
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