Views on Midcap Stocks

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The mayhem in the market is continued. Midcap stocks have witnessed correction up to 50 percent. Though, market as a whole has not corrected much, midcaps and smallcaps have been ruthlessly butchered.

Dilip buildcon, a leader in road constructrion, has seen massive correction. Though,company has posted steller quarter. Unconfirmed rumours about auditors resigning and other issues went heavily on it.

There is, however, no difference in the fundamentals of the company. It’s a good opportunity to buy the company at this price.

Prakash Industry is not a great company, but its also at attractive price. International steel prices are still high and it will give a good return in 1 year.

Vakrangee, i accept my mistake, fell like a pack of cards. I promise to stay away from such stocks in future.

I added some stocks of Edelweiss at 299 and sure that its a high quality management. Also added Jindal Saw, Future Consumer Limited, TCS, Indusind Bank and Jindal Steel and Power.

Overall, I lost big money as DBL was 33% of my portfolio. I reziged my portfolio and reduced the weight of infrastructure,added some largecaps, consumer stocks.

 

Want to Benefit From the Nirav Modi Case : Must Read This Post

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Amit Jeswani is fast emerging as a sane and logical voice in the Indian equity market. Unlike other equity advisors who preach value investing, but prefer investing in the real estate and fixed deposits—he puts his own skin in the game by putting his own money in the same stocks. Recently, he shared his candid views on the possible impact of Nirav Modi fallout for Titan.

The fall of Nirav Modi and Mehul Choksy has created a storm of sorts in the country—but does this bring opportunity for Titan. Will more and more players start shifting to Titan because of the reputation it commands in the jewellery market?

Absolutely! tells Amit Jeswani in the Bloomberg Quint during the Hot Money programme. There are three types of risks—business risk, company risk and valuation risk.

75% of the jewellery industry is unorganized and only 25% of the industry is organized stores such as Titan, PC Jewellery and others. Since Nakshatra and Gitanjali Gems are out of business, the shift in the organized jewellery sector will start taking place and existing players like Titan will benefit the most.

Even after demonetization and GST, they are consistently growing at the rate of 35%-38%. But this stock is not cheap at all as it trades on 73 times of FY 18 earnings. So you can get into it after some correction into it.

Why You Should Pay Attention to Debt on the Balance Sheet

Investing

What is the most important thing in the stock market?

Earning money—isn’t it?

Wrong!

Saving your investment capital is the most important thing. Most often those who leave the stock market completely lose their hard earned money. That means they don’t have enough capital left to make money when the cycle turns.

Vishal Khandelwal, the ace investor and one of the most sensible voices in the Indian stock market has made it the mission of their life to guide investors so that they don’t lose money. This is the guiding principle of safalniveshak.com.

He pays a lot of attention to reading the balance sheet of the company since it tells a lot of things about the company in question.

So what does he see in the balance sheet?

‘Leverage’— he answered nonchalantly to Nikunj Dalmia of ET Now. You should keep away from the companies that borrow a lot of debt.

Let’s understand this example.

The Debt/Equity ratios of Ruchi Soya Industries=5.09. This means the company is 5 times more leveraged than equity!

That’s a bad sign, isn’t it?

The company must be borrowing to fund expansion from taking a lot of debt. For example, if you take a lot of loan to run your family or buy a new car—it’s a sure shot recipe to disaster. Ideally, you should do this from your own income.

Similarly, a company should be able to meet working capital expenses and growth plans from internal resources. No wonder the stock of Ruchi Soya industry fell from 69 Rs to 17 Rs in the last five years.

Most people in the stock market are enamored by growth. But ask yourself—at what cost the growth is coming? If a company is borrowing a lot of money, avoid that stock. In general, “one should avoid highly capital intensive stocks.” says Vishal Khandelwal to Nikunja Dalmia.

Similarly, you should avoid companies that need a lot of working capital to run the company.

Companies borrow funds from either shareholders or lenders. Excessive dependence on borrowings is risky. A company is considered financially sound only if a firm depends on its ability to repay principal and interest on borrowings even during bad times.

So how much debt on the balance sheet is permissible? The answer varies. Let’s see what Gods of investing think about it.

According to Benjamin Graham, long-term debt not to exceed current assets (current assets— current liabilities). Company’s cash plus inventory should be enough to pay its both short-term and long-term debt. However, many people consider it very strict.

Warren Buffett wants the company to have the ability to repay its long-term debt with no more than two years of its net earnings. He prefers a company with debt to equity ratio below 0.5.

So what happens if a company messes up by taking excessive debt? Take the example of JP Associates, which is on the verge of defaulting. Between 2006 and 2012, the group invested Rs.60,000 crore in real estate, power and cement by borrowing excessive amount of debt.

Jaypee, Rs.8, 000 crore 1,320MW Nigrie thermal power plant in Madhya Pradesh was funded by debt to the extent of 70%. Similarly the entire 1,000MW hydropower portfolio of Rs.7, 000 crore had a debt-equity ratio of 70:30.

If we apply Vishal Khandelwal’s views, he would simply avoid buying such stocks. Take another example of Bhushan Steel whose debt level started increasing fast.

Initially, company generated enough cash to repay debt but when financial capacity deteriorated its ability to pay debt decreased. It did the same mistake as that of JP Associates. The ratio of debt in the Odisha plant’s ₹19,400 crore expansion programme was funded by debt.

No wonder, it’s in such a mess!

In general, companies with a higher debt to capital ratio are financially vulnerable and they have greater chance of defaulting.

Hope you enjoyed the article. Please put your comments.

Both Rakesh Jhunjhunwala and Kishor Biyani Blindly Trust This Little Known Man:Do You Know Why?

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Utpal Sheth is the name to reckon with in the field of stock investing and analysis. He is the little known partner in the RARE Enterprises owned by the ‘Badshah of Dalal Street Rakesh Jhunjhunwala’. However, those who know him including the Badshah deeply regard him as one of the best investing minds in the Dalal street.

His ability to crunch numbers coupled with seeing things, which are beyond obvious separates him from the crowd of run of the mill analysts.

And he never comes on the television to share his opinions. So we should be thankful to Ramesh Damani, who took his rare interview on CNBC couple of years ago. Going through the interview, you get the glimpse of his investing thought process.

Every investor wants to create wealth, but this is not possible if companies don’t create value in the long term.  Therefore, it’s important to find management that has the leadership attribute and can take right decision at right time.

Cash is God

Very few people know it but Utpal has a role in saving Pantaloon retail when the company almost ran out of cash. He soon realized that the company is highly leveraged and if it does not raise capital, running company would be difficult. However, raising capital could not have been done overnight. So, he advised Kishor Biyani to opt for flash sale as there was a lot of inventory in the company.

Biyani realized the importance of having cash at that moment and did exactly the same. This helped the company to remain float for some time.  That’s why free-cash flow is an extremely important parameter for a company.

The Curious Case of Titan

The Badshah of Dalal street was mulling to buy this stock. It was 2 AM at night when he presented a mathematical model to Rakesh Jhunjhunwala.

He saw the calculation and said, “are you drunk?” Though he knew he was a teetotaler. However, he broadly agreed with the direction.

Even Titan management did not believe those figures. But five years down the line company achieved the topline figures and in the next one year they achieved the bottomline figures!

So what did he see in Titan?

After some back of the mind calculation he found that though Titan was deploying the best talent on its watch business, but the RoCE was significantly higher in the jewelry part of the business.

Secondly, sales were fast and the business was scalable.

          High Return on Capital Employed (RoCE) + Scalability = Magical Return

Pay Attention to the Capital Allocation

That’s of paramount importance. Even if a company is growing fast, a low RoCE will result inhibit free cash flow. In that case, if you’ll have to take either debt or dilute equity. However, at some point it has to end.

No wonder Essar, Suzlon and JP Associates suffers. Investors should deeply consider leadership attribute and structural changes in a company as confluence of these two creates the greatest value. T

When Titan moved from borrowing capital to buy gold to leasing gold, it significantly reduced the working capital requirement resulting in dramatic improvement in RoCE of the company.

Similar Trends in Real Estate

Similar trend can be observed in the real estate companies today. Earlier they used to buy land parcel, which required huge investment but now they have moved to Joint Development model. This reduces the requirement of huge capital.

So we can see dramatic improvement in the performance of real estate companies such as Godrej Properties and others will reap huge rewards compared to Oberoi Realty that depends on buying huge tract of land.

With land cost making up 30-50% of the total expenditure for any realty project, this will help in prompting land owners and developers looking for joint development model. Many Bangalore based developers are working in this model.

So opportunities are always there in the market and knowing the history helps you find the similar price patterns.

The best way to learn is to observe the investing methodology of great investors and try to emulate their investing style.